the executive branch, SBA is currently involved in a comprehensive reorganization study. Until the reorganization review and analysis are completed, however, I am not prepared to recommend strongly for or against this proposal. I would prefer to defer any definitive comment on this provision until I have the results of our reorganization study. Senator NUNN. You say you are not prepared to recommend strongly for or against this proposal. Can you tell us which proposal in the bill you are addressing? Mr. WEAVER. The person in charge of the investment program. Mr. WEAVER. Section 104 of the bill would amend section 301 (a) of the act to provide that SBA would recognize as part of an SBIC's private paid-in capital both (a) as noncash gains, and (b) the proceeds of capital notes with maturities of not less than 10 years. SBA strongly objects to the recognition of noncash gains as private paid-in capital. Our experience has clearly shown that recognition of noncash gains would open a Pandora's Box to speculation, capitalization created with mirrors, and the potential for outright fraudulent practices which would be extremely difficult, if not impossible to regulate. We would also strongly oppose the recognition of capital notes as part of the private capital base of an SBIC. In effect, capital notes are simply another form of long-term debt for an SBIC, and a more highly leveraged debt position is just the opposite of what is needed in the financial structure of an SBIC. In conclusion, let me repeat what I said at the outset of my testimony. The lack of equity, or venture capital, for small business is alarming for the country and for the future of our economic system. No single solution will solve the problem. A series of changes in Federal policies relating to taxation, securities markets, institutional investors and the SBIC industry are essential to correcting this imbalance in the capital markets. S. 1815 is an excellent beginning in the process of recapturing this capability for small business. We totally agree with the objectives of the bill and commend its authors for their broad perspective. We have made several recommendations which we believe will improve the bill, and we have pointed out areas where we believe there are serious problems. I am optimistic that, working together, we can make a significant start at finding a solution. Because I did not receive a copy of S. 2156, the Minority Enterprise Venture Capital Act of 1977, until last Friday, September 30, my staff has not had time to prepare a formal statement on the bill. I would like to ask that the record remain open so that at a later date I can submit for the record a formal statement on S. 2156. Senator NUNN. That will be done. [Statement follows:] At the Senate Small Business Committee hearing on October 3, 1977, on S. 2157, I advised the Committee that I would submit for the record a formal statement on S. 2156, the "Minority Enter prise Venture Capital Act of 1977." as SBA's statement on S. 2156. Please consider the following It would seem appropriate to point out initially that the several features of S. 2156 appear to have been designed to assure that a set of preferences would continue to exist for MESBICS if the benefits provided to regular SBICS by S. 2157 were enacted into law. Obviously, if S. 2157 becomes law, the existing advantages available to MESBICs would no longer be advantages, no incentives would exist to form MESBICs, and all new entries into the field would take the form of regular SBICS to the detriment of Minority Business Enterprise. We would make two points in this regard. First, we believe legislative changes in the MESBIC Program should be designed to meet the true needs of that industry, and should not be based on the presumption of changes in the reqular SBIC Program. More importantly, however, is the fact that in our testimony on October 3, 1977, we strongly objected to several provisions of S. 2157 and recommended several positive alternatives to those proposals. It would follow, therefore, that we would also object to extensive modifications of the MESBIC Program which are based solely on proposed changes to the regular SBIC program, to which we are opposed. On the other hand, I would like to make very clear my support for the objective of S. 2156, which is to increase the availability of equity capital to small business concerns owned by socially or economically disadvantaged persons. As I pointed out in my recent testimony before the House Small Business Committee on H.R. 4960 (which contains provisions similar to S. 2157), the lack of adequate venture capital is a critical problem facing small business, and nowhere is that problem more acute than in the minority, socially, and economically disadvantaged segment of our economy. In that testimony (on H. R. 4960) I recognized the structural problems of the MESBIC Program and recommended the following legislative changes to correct those problems. 1. Provide a second dollar of preferred stock leverage for MESBICs, provided that the proceeds for this securities. 2. Amend Section 303(c)(i)(iii) of the Small Business right to require the payment of the so-called "alternative divided rate," payable at SBA's election prior to any other distribution of dividends by a MESBIC, and 3. Eliminate the present requirement that a MESBIC be retroactively applied to existing MESBICS. We believe these new approaches will address the problem of costly leverage for MESBICS and will provide a substantial stimulus to equity investments in minority small business. Their specific application to S. 2156 would be as follows: 1. Under Section 4 (a) of the Bill, we would support 2. 3. a second tier of preferred stock leverage, provided it was used for true equity investments, but we would object to a third tier as being unjustified. We would concur with Section 4 (b) of the Bill which We would prefer conversion of the deferred interest Section 1 of the Bill would create a separate position of Associate Administrator for Investment within SBA, with the sole responsibility of administering the SBIC program. Without commenting on the merits of the proposals, I would simply point out that as part of President Carter's overall |