A small business is not necessarily the first company to receive an investment intended for it. SBA's December 28, 2016 rule allows specified passive intermediaries within the Small Business Investment Company program while preserving the general prohibition on passive investments. Its public-interest safeguard is concrete: eligible non-passive businesses must remain the destination, subject to the applicable ownership and financing conditions. [2016-31291]

The rule defines substantially all proceeds as at least 99 percent after permitted application fees, closing fees and expense reimbursements. It also limits aggregate fees across passive and operating businesses in the same financing to what direct financing would permit. That combination matters when assessing how much of a financing reaches business activity rather than supporting additional layers of charges. [2016-31291]

The October 5, 2015 proposal had sought wider use of blocker corporations and removal of prior SBA approval, paired with reporting safeguards. Its proposed certification focused on unrelated business taxable income and effectively connected income for foreign investors. The final also recognizes a specified nonqualifying-income concern for regulated investment companies. These are changes within one proceeding, not evidence of more jobs or financing. [2015-25232][2016-31291]

Eligible partnership SBICs may use corporations or LLCs electing corporate taxation as blockers under the stated conditions; the rule does not offer blanket tax relief. Reporting and SBA access to information remain. The final names January 27, 2017 effectiveness and a $350 million common-control leverage ceiling, not an award to each business. The question for small employers is what financing arrives, not merely which structures become permissible. [2016-31291]

Source documents

  1. Small Business Investment Companies: Passive Business Expansion and Technical Clarificationshttps://www.govinfo.gov/content/pkg/FR-2016-12-28/html/2016-31291.htm
  2. Small Business Investment Companies; Passive Business Expansion & Technical Clarificationshttps://www.govinfo.gov/content/pkg/FR-2015-10-05/html/2015-25232.htm