1 Covers administrative expenses for activities pursuant to the Small Business Investment Act (S. 3651). 1 Covers administrative expenses for activities pursuant to the Small Business Investment Act (S. 3651). SUMMARY OF PERSONAL SERVICES BY ORGANIZATIONAL UNIT SUMMARY OF PERSONAL SERVICES BY ORGANIZATIONAL UNIT EXPLANATION OF BUDGET ESTIMATE, FISCAL YEAR 1959 The Small Business Investment Act of 1958 (S. 3651), presently being considered by the Congress, would add new responsibilities to the Small Business Administration. The Small Business Administration would be authorized to license and regulate small-business investment companies, and give them financial assistance to facilitate their formation and growth. An investment company of this type could be started by a minimum of 10 stockholders, and would require $300,000 of paid-in capital and surplus before it could begin operations. SBA could provide up to one-half the required funds through the purchase of subordinated debentures issued by the company. In addition to purchasing company debentures, SBA also could make loans to an investment company. SBA loans outstanding to a company could not exceed 50 percent of the company's paid-in capital and surplus, including as part of its capital and surplus the funds the company has obtained through sale of debentures to SBA. Financing for small business The small-business investment company would finance small-business concerns in these ways: 1. It would provide equity to small concerns by purchasing from them debenture bonds which would be convertible, at the option of the investment company, into capital stock of the small concerns. 2. It would make available to small concerns loans of up to 20 years' maturity, with permissible extension of the maturity for an additional period of up to 10 years. These loans could be made by the company, either directly or in participation with other lenders. In order to build up investment of private funds in small-business investment companies, so that, eventually, they could operate without Federal Government participation, the small concern that obtains equity capital from a company would have to buy stock therein. The minimum stock purchase would be 2 percent, the maximum 5 percent, of the capital obtained. A small-business investment company would have to obtain SBA approval of the interest rate and other terms it proposes to set on convertible debentures purchased by it from a small concern. SBA also would determine the maximum interest rate the company could charge on a loan to a small business. Without SBA's approval, the total financing-including both investments and loans which a small-business investment company could have outstanding to any one small concern could not exceed 20 percent of the investment company's combined capital and surplus. Loans to State and local development companies The act also provides for SBA loans to State and local development companies, to assist them in meeting the long-term credit needs of small-business concerns in their areas. SBA would set the interest rate and other terms of these loans to development companies. There would be no dollar limit on an SBA loan to a development company but the agency's loans outstanding to a company could not total more than it has borrowed from all other sources. This general limitation would not apply, however, in the case of loans which are secured and which are to be used by development companies to assist specific small-business concerns. These loans, identifiable with specific small concerns, could be made to State and local development companies for plant construction, conversion or expansion, including the acquisition of land. The maximum maturity of the loans would be 10 years, with permissible extension of the maturity for an additional 10 years. The loans could be made by SBA either alone or in participation with other lending institutions. A State development company or other State-chartered investment company could be converted into a small-business investment company, upon the vote of owners of a majority of the company stock and SBA approval, and provided the conversion is consistent with State laws. By converting to small-business invest ment companies, State development companies and other investment companies would become eligible for sale of debentures to SBA, and for any tax benefits granted small-business investment companies. (Congress also has under considertion legislation to grant various tax advantages to small-business investment companies and investors in them, in order to attract private funds to the companies.) SALARIES AND EXPENSES In developing this estimate it has been assumed that tax features favorable to small business, which are now under consideration by the Congress (H. R. 8381, Technical Amendments Act of 1957), will be enacted, resulting in the formation of a substantial number of investment companies in the metropolitan and financial centers. While it is impossible to estimate precisely the magnitude of operations which may develop, inquiries currently being received by SBA indicate great interest in the program. It is our understanding that various congressional committees are also receiving a large volume of inquiries. It is essential that a staff be obtained promptly for the expeditious handling of such inquiries as well as for detailed planning, establishing procedures, defining policy, preparing and issuing regulations, designing adequate forms and necessary instruments, and counseling potential applicants. It is estimated that $1 million will be required in 1959, of which $678,000 is for personal services and $322,000 is for travel, equipment, rent, contributions to the civil-service retirement fund, etc. During the initial year of operations the functioning of the program will be handled largely through the Washington office. If experience dictates that it is more feasible to decentralize these functions to the regional offices, the changes will then be made promptly. Specific duties, responsibilities, and staffing requirements are: Washington The act would establish in the Small Business Administration a Small Business Investment Division to be headed by a Deputy Administator All powers which would be conferred by the act upon the Administration would be exercised by the Small Business Investment Division; and those powers which would be conferred upon the Administrator would be exercised by him through the Deputy Administrator. Operating under the Deputy Administrator would be the Investment Division headed by a director and three other employees. This small staff will direct and administer policies and programs which will be largely carried out through an Office of Finance and an Office of Compliance. The respective duties and responsibilities of these two offices will be: Office of Finance.-The Office of Finance will direct licensing, equity capital, and lending activities. Licensing: This phase of the operations will involve the review and study of applications from proposed organizers of new investment companies, and such applications must be supported by financial statements, and the economic need for such a company in the area. All of the above must be verified and supplemented by a complete field investigation. It is anticipated that, in most instances, extensive counseling and guidance will be required in the initial phase of the organizing and licensing of such companies. It is estimated that 5 technical and 4 clerical positions will be required for this function. Provision of equity capital: The proposed legislation provides that this agency shail furnish equity capital to properly licensed companies through the purchase of subordinated debentures. This will require detailed financial analysis of the company which presumably will make public offerings of other types of securities, and also will require determinations normally made in the underwriting and investment banking fields. Counseling and assistance must be made available to assure the compliance with existing statutes relating to the issuance and sale of securities. Four technical and three clerical positions are proposed for this phase of the program. Loans Loans will be authorized to (1) licensed investment companies on an unsecured basis in an amount not in excess of 50 percent of the paid-in capital and surpluses of such companies; (2) State development companies, on an unsecured basis in an amount not in excess of the total amount borrowed by such company from all other sources, and (3) State and local development companies, on a secured basis to provide funds which the company may relend to an identifiable small-business concern. Loans made under this section shall be limited to $250,000 of each small-business concern. The estimate provides for 5 technical and 4 clerical positions for this function. Office of Compliance.—This Office will direct examination and servicing functious of the program. Examinations: Each small-business investment company will be subject to examination and required to submit such reports, as in the discretion of the administration, are considered necessary to evaluate the soundness of lending operations and compliance with applicable laws and regulations. Three technical and two clerical positions are estimated to be required for such purposes in 1959. Servicing: In order to protect the Government's investment in loans, periodic reviews must be made of the borrower's financial condition and operating methods. To make these reviews, it is estimated that 3 technical and 2 clerical positions will be required during the first year of operation. Miscellaneous staff.-Positions required for staff functions such as accounting, personnel recruitment and classification, legal assistance, and administrative services will be added to the existing organizational units within the Small Business Administration. Field The proposed field staff of 30 financial analysts will be distributed among the 15 existing regional offices of the Small Business Administration to furnish counseling, conduct investigations, and assist in examinations and compliance at the local level. The proposed staff of 10 attorneys will provide advice and legal assistance in connection with: existing State laws covering the formation, incorporation, capitalization and regulation of small-business investment companies contemplating operation under the act: existing State and local laws and regulations affecting the business of small business investment companies operating under the act; the conversion of State chartered investment and development companies to small-business investment companies under the act; and secured and unsecured loans to development companies. Miscellaneous objects of expenditure.-This item of expense, $322,000, will be higher than normally expected because of costs that will be of a nonrecurring nature. For example, this agency will be required to pay for rent amounting to $79,000 out of this budget in 1959 whereas such costs will be covered by the General Services Administration in succeeding years. It will be necessary to purchase equipment for 142 employees, at a cost of $50,000, and to provide for travel costs of $93,000 in connection with program operations and training new employees during the first year of operation. Contributions to the civil-service retirement fund are estimated at $44,000. Printing, communication services, supplies, etc. account for the balance of this estimate. A total of $1 million, estimated to be required for administrative expenses, covers only those costs directly chargeable to this program. Indirect costs such as those incurred by the Administrator and staff members assisting in the implementation of the program are covered under the regular SBA activities. If in the final enactment of this legislation, program changes are made which are not covered by these estimates, it may become necessary to submit a supple mental estimate. For example, no provision is made herein for grants to States for research activities. The Senate bill provides for such grants whereas the House Banking and Currency Committee has recommended elimination of the item. |