He has been in Government service since 1939 and has served for a number of years with the Reconstruction Finance Corporation. He also was employed as a special assistant to the Secretary of the Treasury on pool loans and the disposal of the large loans at the time of the liquidation of the RFC.

Now, under this act there is a provision for loans to State and local development companies. There was a long history of this in the congressional hearings. There are a great many of these companies across the country-over 2,000 of them that we know of. Some of the people that are here today I know represent some of these companies, and I felt that they were entitled to have explained to them these particular sections of the act which may not be of such general interest, but then if you are in the investment business, who knows, you may some day be faced with these same problems.

Mr. Lauren Hart will explain loans to State and local development companies.

STATEMENT OF LAUREN B. HART, CHIEF, LOAN AND INVESTMENT SERVICING SECTION, INVESTMENT DIVISION, SMALL BUSINESS ADMINISTRATION

Mr. HART. I would like to assure you that the fact that I am end man at this table is not indicative of the importance that we attach to this particular segment, title V of the act.

This section of the act will now permit the Small Business Administration to make available on a much broader basis than has heretofore been the case, financial aid to State and local development companies. These companies, in turn, will make financial aid available to small-business concerns.

First of all, what are development companies?

In the Small Business Investment Act of 1958, they are defined as "Enterprises incorporated under State law with the authority to promote and assist the growth and development of small-business concerns in the areas covered by their operations." This definition, as you can imagine, leaves quite a bit of elbowroom. We have, therefore, carried it a step further, in line with our understanding of the congressional intent and have provided in our regulations that a State development company will mean an enterprise incorporated under or pursuant to a special legislative act to operate statewide in any of the States or in Hawaii, the District of Columbia and the Commonwealth of Puerto Rico, with the authority to promote and assist the growth and development of small-business concerns in their areas. But we have provided that such authority need not be exclusive, but may be part of an overall authority to assist the growth and development of business generally in their areas. Of course, when we lend the money, we will have to make sure that that money goes only to help the smallbusiness concerns.

A local development company must be a corporation with the same general purposes as those I just mentioned, but it may be incorporated under any applicable State law, not necessarily a special act, by parties interested in furthering the economic development of their communities and environs.

Development companies, whether they are State or local, may be either profit or nonprofit enterprises. Local development companies,

coming in under this act, must show us a broad base of ownership and, in addition, must furnish us a copy of their charter and bylaws so that we won't be fooled by some handsome-sounding name which might turn out just to be a cloak for a private operation for the benefit of a very few people. I don't want to imply that in any way we are against profit. We are 100 percent solidly for profit. But we want that profit in these cases to accrue to the small-business concerns, not to the pockets of some individuals who may be acting merely as financial intermediaries.

There are about 17 or 18 State development corporations in existence, of which perhaps a dozen are active at this time. However, there is scarcely a State where some preliminary legislation in this field has not, at least, been introduced.

On the local side, as you heard, there are about 2,000 development companies and they are all sizes, all descriptions, and all characteristics.

In going back to title V of the Small Business Investment Act, there are two ways in which these loans can be made. For purposes of convenience and we think that the names will become popular-we are calling them section 501 loans and section 502 loans.

Section 501 loans are limited. They can only be made to State development companies. And there are some interesting provisions in the act. The total of 501 loans outstanding at any one time to any one State development company cannot exceed the total outstanding borrowings of such company from other sources. It is rather a peculiar provision. If the development company hasn't borrowed any place, it cannot borrow from us, but, if it has borrowed, then it can borrow from us.

If, for instance, a State development company has borrowed and has outstanding, let's say, $500,000 from other sources, it may borrow from SBA no more than $500,000; and, of course, it can't borrow that much unless SBA determines that the amount is consistent with sound business practice and the purposes for which the loan is requested. Now, unless waived by SBÁ, the rate of repayment of a 501 loan will be at no lesser rate than other debts of the development company. For example, if the State development company has borrowed and has outstanding a loan for $10,000 which is to be repaid in 1 year and another loan for $10,000 which is to be repaid in 5 years, and then it comes in and borrows $15,000 from SBA, $10,000 of that loan from SBA must be repaid in 1 year and the remaining $5,000 will have to be repaid at the same rate as the 5-year loan which they had gotten elsewhere.

As indicated, we may waive this repayment schedule, but at no time will the total amount borrowed and outstanding by the development company from SBA be permitted to exceed the aggregate amount owed by the development company to other sources.

Also, unless waived by SBA under circumstances which would justify the waiver, 501 loans will be secured on a basis equal with other funds borrowed by the State company after August 21, 1958, which was the date, of course, when the Small Business Investment Act became law.

This equality, however, does not necessarily mean that all of an SBA loan must be secured to the maximum degree that every other loan of

the company is secured. SBA funds will be secured, if at all, on a ratable basis. Thus, if the development company has borrowed from other sources and has outstanding about $20,000, we will say, of which $10,000 may be secured by a first mortgage and $10,000 is unsecured, and it then comes in and borrows $15,000 from us, then our interpretation would be that $10,000 of the amount that they get from us must be covered by a first mortgage, and $5,000 of it could be unsecured.

A State development company can use the proceeds of section 501 loans to stimulate and supplement the flow of private equity capital and long-term-loan funds which small business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply. Maximum participation of private financing sources must be obtained. Furthermore, any financial assistance provided by SBA cannot result in a substantial increase of unemployment in any geographical area. This is the so-called antipirating provision. Section 501 loans will bear interest at 5 percent per annum, and they can run for periods up to 20 years.

Now, we are not going to worry about what a State development company may have used its own funds for. For all we know, they might be financing General Motors Corp. But when they get money from us, that money can be used only for the purpose of financing the small-business concerns.

Now, the section 502 loans, a slightly different section-we can make those to both State and to local development companies. They are the only kind of loans that we can make to the locals. And, even then, we only have now about 22 years left to do it, because that authority expires June 30, 1961. Section 502 loans can provide funds to a development company only for the purpose of financing plant construction, conversion, or expansion, including, however, the acquisition of land, and they must be used to assist an identifiable small business concern in connection with a sound business purpose.

All section 502 loans must be secured, and they have a maximum limit-they cannot exceed $250,000 for each identifiable small business concern. Section 502 loans will not be made if the development company or the small business concern can obtain that financial assistance elsewhere.

To obtain a section 502 loan, a development company must show that a participation therein by another lending institution is not available. Also, we intend to require some sort of participation— we haven't figured out a definite percentage because it will depend on the individual circumstances but some financial participation by the development company itself will be required on each such loan.

The interest on the SBA's share of a section 502 loan will be 51⁄2 percent per year. That is exactly the same rate we are charging on direct loans in the financial-assistance program, and it was set at that rate because we consider these loans to be comparable in almost every respect to that authority.

The maturity of section 502 loans cannot be more than 10 years, plus the necessary period for construction and conversion, and so on. How

ever, they can be extended or renewed for an additional 10-year period if needed to aid in their orderly liquidation.

In brief, then, as to title V, SBA can provide construction loans to State and local development companies to assist an identifiable small business concern up to $250,000 for each such concern. Also, we can match other borrowings of State development companies to assist in carrying out the purposes of the act.

I should mention here that the definition of "small business" for the purposes of title V is the same as we are now using in our financial assistance program at this time. It is not the new definition that the small-business investment companies will be using.

Now, we have actually been in business for title V loans since early October. We have a number of applications now being processed for section 502 loans. We hope to be able to announce some approvals in the very near future.

As to section 501 loans, it is a little different story. It appears that some of the State development companies now in existence will have to have their charters amended before they can take advantage of this assistance. Most of them now have authority only to borrow from their own participating members. We hope that we will be able to help them. We feel that the State development and the local development companies are a good example of a community lifting itself by its own bootstraps, so to speak, and we are very anxious to help with that.

A word on procedures. All loan applications, whether for section 501 or 502 loans, should be submitted through our regional offices. However, we have to be frank in saying that we are in the beginning stages of the problems connected with the section 501 authoritythat is, the matching loans to the State companies and we shall welcome discussions with officials of any State development company or any State, for that matter, so as further to clarify our procedures and intents and the ways of making this money available. Thank you. [Applause.]

Mr. BARNES. Thank you, Lauren. Probably the first communication that any of you will have from the Small Business Administration regarding the formation of an investment company or financing of one will be through our field offices. We are geared to operate through field offices in all parts of the country. We have 15 regional offices, and then branch offices under the regions-in all, about 50 offices in the United States and its territories. And, like the British flag, the sun hardly sets on our activities. The office in Puerto Rico opens just after the office in Hawaii closes.

The men in New York City who will be the first point of contact with you will be our regional director here and his staff. He has a man on his staff that will be particularly trained in this activity. But I thought you would like to meet our regional director from New York City and have him briefly tell what the functions of the regional office will be in connection with this program.

Mr. Arthur Long is a graduate of Amherst and has been in charge of our programs here in New York for about 4 years now, one of our very able and successful regional directors.

STATEMENT OF ARTHUR E. LONG, REGIONAL DIRECTOR, SMALL BUSINESS ADMINISTRATION, NEW YORK, N. Y.

Mr. LONG. To continue Mr. Barnes' analogy of small-business investment companies to expectant mothers, roughly, our relationship with the Washington office will be that we will take care of the prenatal care, but all obstetrics will be done down there.

Now, the field offices in this program will remain intentionally in the background, to keep field staffs down and to get the maximum use out of personnel they will be concentrated in Washington. So, our staff in New York will be composed of two men, who will handle not only the investment company proposals, but also the section 501 and 502 loans. So that, to put it in a nutshell, what we can do for you is supply you with the forms, give you some advice, and check the forms for completeness before they go down to Washington. We will not enter into any policy discussions, except to transmit any requests you have to our Washington office for decisions there.

You have heard all the experts on the subject. I am not going to bore you with any repetition on this subject.

Thank you. [Applause.]

Mr. BARNES. Thank you, Arthur.

This concludes the SBA part of the program, or formal part. But, I thought I might close on a somewhat cultural note. In giving advice to a group that is intending to form an investment company, I turn to the English poet A. E. Housman, who had some very succinct words that I think are very applicable. He said, "Since the world has much more ill than good, I would face it as a wise man should, prepare for ill and not for good."

I think the one who follows that advice in making up his plans is likely to have a successful company.

Now, our last speaker is not an SBA employee, but is certainly a good personal friend. He has no official position with SBA, but I have called on him for personal advice and have found him to be one of the most knowledgeable people in the country that I have talked to on these general problems. I certainly intend in any way that I can to acknowledge the debt that I owe to him for some of the suggestions he has given us, objective suggestions in each case, and intend to appoint him to an appropriate advisory board in the near future.

Bernard Cahn is a graduate of the University of Chicago. He spent 10 years working for the SEC and is thoroughly conversant with their functions and their activities. Since 1946 he has been a practicing lawyer here in New York and probably has been involved in as many small-business financing transactions as any attorney that I know. He has also been a financial consultant for small-business concerns and has made a rather exhaustive study of the types of financing available to small-business concerns.

He is the author of an article that is appearing in the next issue of the Duke Law Review on the general subject of small-business financing and, perhaps, the relations of the Small Business Investment Act to small-business financing.

I have asked him to speak today, completely without editorial suggestions on my part, since I think that someone should represent the