Mr. WEAVER. In a bank, a capital note is considered part of the bank capital for the purpose of determining the maximum loan that bank can make, which is related to the bank's capital service, and that is all that is considered capital for. That is the only purpose for which it is considered capital.

In our case, considering it as capital could mean they could draw additional debentures, and actually receive more money from the Government.

Senator NUNN. There are two different standards?

Mr. WEAVER. Yes, sir.

Senator NUNN. No analogy?

Mr. WEAVER. There is an analogy, but not a complete analogy.
Senator NUNN. Senator Culver, any questions?

Senator CULVER. No questions, Mr. Chairman.

Senator NUNN. We could go into a lot more detail but we want to go as far as we can with our other witnesses.

Thank you all.

Mr. WEAVER. Thank you, Mr. Chairman.

Senator NUNN. We now have an SBIC panel.

Mr. Herbert Krasnow, president, Intercoastal Capital Corp.; Arthur D. Little, president, Narragansett Capital Corp.; Robert W. Allsop, executive vice president, MorAmerica Capital Corp.; and Nathaniel Gibbs, president, Capital Marketing Corp.

I will let you proceed as you deem best. Whoever wishes to lead off can go ahead.

A PANEL CONSISTING OF HERBERT KRASNOW, PRESIDENT, INTERCOASTAL CAPITAL CORP.; ARTHUR D. LITTLE, PRESIDENT, NARRAGANSETT CAPITAL CORP.; ROBERT W. ALLSOP, EXECUTIVE VICE PRESIDENT, MorAMERICA CAPITAL CORP.; AND NATHANIEL GIBBS, PRESIDENT, CAPITAL MARKETING CORP.

Mr. KRASNOW. I am Herbert Krasnow, president of NASBIC, also president of Intercoastal Capital Corp.'s SBIC program, with approximately 15 years in the program, and I would like very much to have included in the record both my written statement and also a copy of the SBA Task Force on Venture and Equity Capital, a committee chaired by William Casey, in which I concurred with the amendment.

Senator NUNN. That will be part of the record, without objection. Mr. KRASNOw. Thank you, sir.

[The information referred to follows:]

October 3, 1977

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

I am Herbert Krasnow, I am the founder of

and have been President of Intercoastal Capital Corporation,

a medium sized SBIC located in New York, for the past 15
years. For the current year, I am also President of
NASBIC, the industry's trade association which represents
over two-thirds of all licensed SBICS and MESBICS and
whose members control about 90% of all the assets committed
to the SBIC industry. Accompanying me today is Walter
Stults, NASBIC's Executive Vice President.

This is a propitious time for the Congress to
examine legislative proposals designed to buttress the
SBIC industry which was authorized by the Small Business
Investment Act signed into law 19 years ago. Such a
survey is appropriate now, because the SBIC industry,
and indeed the entire venture capital community, is at
Only recently, the SBIC industry became a

a crossroads.

billion-dollar industry with approximately $450-million in private capital and $550-million in borrowings from SBA and others. It has taken us a long time to reach that plateau with a number of detours delaying our ascent.

Even today, however, with much of the learning curve behind us, it is far from certain that the SBIC industry will continue to grow. The economic and public policy climates in 1977 contain serious threats to the existence of the entire venture capital undertaking. Unless basic changes are made in both areas, predict that the Nation will be fortunate if the SBIC industry remains at the $1-billion asset level; a gradual decline will be more likely than any growth.

Now let us explore my reasons for making such a pessimistic

forecast:

Under traditional economic theories, an industry thrives if the demand for its product is high and wilts if fewer people decide to purchase that product or service. So, am I bearish on the future of venture capital, because the supply has outstripped demand? By no means! As a matter of fact, I believe that the need for equity capital and higher-risk long term credit now stands at an all-time high. I believe that market domination by gigantic corporations has left gaps in goods and services which smaller firms are eager to exploit. I know that tens of thousands of potential entrepreneurs, many of them now managers locked within major companies, are eager to challenge big business with better products and lower prices. I am certain that hundreds of thousands of existing small businesses would choose to expand and compete more effectively if they could obtain the necessary dollars and counseling.

Even though no one has devised a method for calculating the effective demand for venture capital, all available evidence demonstrates that a high level of demand exists. Almost every SBIC is convinced that qualified investment opportunities outstrip its capacity. Under present ground rules, our industry probably disburses funds to only one out of every 50 or 100 applicants for financing. I can foresee no circumstances under which venture capitalists would ever approve a majority of applications, but I am convinced that the comprehensive program outlined in S.1815 would greatly increase the percentage of approvals by all SBICS.

Incidentally, in speaking of the demand for venture capital, it is worth noting that 548 small businesses (net worth under $5-million) went public for the first time in 1969 and raised a total of almost $1.5-billion. By contrast, in 1975, only 4 small

businesses were able to go public for the first time and they raised a total of a piddling $16-million. In 1976, the comparable totals rose to 38 smaller firms receiving $168-million, still only one-tenth the 1969 figures. Although the public offering data are not conclusive in showing an effective demand for equity capital on the part of qualified small business, they are surely good evidence that a demand for such funds existed in 1969 when the public markets were relatively open to small business. It would be hard to argue

that such firms needed only 10% as much in 1976.

If we may conclude, then, that the demand is present, what

about the supply?

After a rather intensive study, the blue ribbon

Force on Venture and Equity Capital

concluded:

"It is alarming that venture and expansion capital

for new and growing businesses has become almost invisible today." As one of the two SBIC industry executives on that 15-member Task Force, I agreed wholeheartedly with that statement when the Report was issued in January and I know that it is equally true today, eight months later.

During the first six months of this year, SBICS put

out just about $100-million, a rate well above those of the past three years, but that amount is still only a small fraction of the amount needed. Furthermore, I believe that the non-SBIC venture capital industry is disbursing far less than it did a decade ago or even five years ago. There is no definitive tabulation of the non-SBIC venture capital pools, but most observers believe this segment of the industry has shrunken greatly in numbers and in size during the past ten years and that the decline is continuing today. In a speech to the 1976 Annual Meeting last Fall, Mitchell Kobelinski, then SBA Administrator, estimated that American small business faced an annual equity gap of $7-billion to $8-billion. I cannot vouch for the accuracy of that estimate, but I am absolutely certain that the supply of venture capital funds falls far short of the amount which smaller firms could effectively utilize.

If the potential customers are out there, why hasn't the supply grown to meet the demand?

I shall merely mention the major deterrents to a growing supply of equity and venture capital at this point. Later, I shall refer to many of them in my explanation of the measures NASBIC has proposed to spur capital formation and to encourage investment in new and growing businesses.