For years, the Small Business Administration (SBA) has run a program for Small Business Investment Companies (or SBICs) to, in part, allow for “low-cost, government-backed capital that you can use to increase private investments in U.S. small businesses.” For small business federal contractors, there is also an affiliation benefit that applies to SBICs. But, we have often heard from clients and others that it is not straightforward to work with an SBIC. Today, we look at a rule recently proposed by SBA that aims to make the SBIC program more flexible and easier to work with, entitled “Small Business Investment Company (SBIC) Regulatory Amendments.”
The proposed rule would overhaul some aspects of the SBIC program. The rule was proposed on July 7, 2025, with comments due September 5, 2025.
Background
As noted in the proposed regulation, the SBIC program was designed to help small businesses gain access to capital by “stimulating and supplementing the flow of private equity capital and long-term loan funds” to small businesses which had been unavailable in adequate amounts. The program specifically aimed to stimulate the small business segment of the larger national economy by creating SBA licenses for privately owned and managed investment funds. Normally, a small business might have trouble securing equity financing from more traditional venture capital firms or similar private investment funds, as SBA’s affiliation rules could cause concerns based on ownership or negative control issues. This could make the business other-than-small and ineligible to compete for small business set-aside contracts. The SBIC program essentially allows SBA to sanction this kind of capital injection into small businesses, wherein SBA would review applicant funds and license those meeting certain criteria as SBICs. These SBICs are then allowed to invest certain amounts on SBA-regulated terms into small businesses without invalidating those firms’ eligibility for government contracts.
According to SBA, since the inception of the program through December 31, 2024, SBICs have invested approximately $132.9 billion in approximately 198,199 financings to small businesses (without taking into account business size, industry, geographical region, stage of investment, or any other factors, a simple average of those numbers comes out to $670,538 per financing). In fiscal year 2024, SBICs invested $7.26 billion in 1,014 small businesses. As of September 30, 2024, there were a total of 318 licensed and operating SBICs with a total Regulatory Capital (SBA’s term for the capital raised from private investors by SBICs) of approximately $25.7 billion.
Even given these numbers, it’s likely there could be more SBICs and more small business investment, if the process was more flexible. We have talked to folks who would consider using an SBIC, but there are just not that many out there. To that end, the newly proposed rule may help improve access to funds as well as increasing the number of successful applicants to the SBIC program. The rule proposes to modify or remove regulations that SBA considers obsolete, inefficient, or that generally impede the licensing of SBICs. Many of the proposed removals concern regulations that apply to repealed statutory requirements, and to several types of SBICs that SBA no longer licenses. The regulations applicable to subsequent fund applicants are also in line to be amended. Finally, the proposed revisions seek to remove barriers to investment in critical mineral extraction and processing, as well as other “designated critical technologies.” All of this is intended to simplify the regulations and streamline the licensing process.
SBA Affiliation Exception for SBICs
The SBA affiliation rules include the following exception for SBICs:
Business concerns owned in whole or substantial part either by investment companies licensed, or by development companies qualifying, under the Small Business Investment Act of 1958, as amended, or by investment companies to which a Reinvestor SBIC (within the meaning of 13 CFR 107.720(a)(2)) has provided a meaningful percentage of Equity Capital are not considered affiliates of such investment companies or development companies.
So, SBA has applied this rule to say that, when a licensed SBIC owns another company, there is no affiliation between the SBIC and the subsidiary company. Kihomac, Inc., SBA No. SIZ-6133, 2021 (Dec. 15, 2021).
But, if it’s difficult to become an SBIC, this affiliation exception will not be applicable for very many companies. So, the regulatory changes may see this affiliation exception applied in more circumstances. This proposed change does not make any edits to the SBIC affiliation exception, however.
Regulatory Changes
What follows are just a few examples of the proposed removals and revisions in the newly proposed rule.
Overall, SBA proposes to remove seventeen regulations from the CFR that reflect repealed statutes, have no current or future applicability, or are otherwise inefficient/unnecessary. SBA also proposes to remove or revise thirty regulations and four definitions that are redundant or unnecessary, as well as non-substantive amendments to thirteen other regulations that would remove internal references to removed regulations. Finally, SBA proposes to remove three eligibility requirements for subsequent fund applicants—effectively making it easier for already-licensed SBICs to apply for subsequent funds. It is also worth noting that the rule responds to Executive Orders 14241 and 14272, which stress the importance of “critical minerals, rare earth elements, and their derivative products” to the US economy and national security. In compliance with these orders, the proposed rule creates some exceptions to the finance restrictions in the SBIC regulations for companies involved in these industries.
- 13 C.F.R. § 107.50 — SBA proposes to revise the definition of “Debenture Rate” to reflect that the interest rate for Debentures issued by SBICs will be published on the SBIC website, consistent with SBA’s historical practice and hopefully providing greater program transparency
- Section 107.300 — SBA proposes to clarify that applicants meeting certain criteria in Section 107.305 are entitled to an “Expedited Subsequent Fund Evaluation Process” and that SBIC applicants currently managing an active SBIC may be permitted to file a complete “Short-Form” Subsequent Fund MAQ application (SBA notes that it would still retain the right to require an applicant to submit the full standard MAQ form in the event that it cannot adequately evaluate the SBIC applicant)
- Section 107.305 — SBA proposes to modify and streamline the criteria for license applicants to be eligible for the expedited subsequent fund evaluation process while ensuring that SBA has appropriate benchmarks in place to properly evaluate such applicants
- Section 107.720 — SBA proposes to clarify that this regulation, which governs small businesses that may be ineligible for financing, does not prohibit investment in small businesses engaged in long-term projects that involve the extraction, conversion, or processing of “critical minerals”
- Sections 107.830, 107.835, and 107.840 — All three of these sections address the term of financing permissible in the SBIC program (the minimum and maximum term, respectively, and the exceptions thereto). SBA believes that three regulations all addressing the same concept is inefficient, so it proposes streamlining them by moving the substance of all three into 107.830 and removing the other two
- Section 107.1810 — This section lists default events and SBA’s remedies for a licensee’s noncompliance with the terms of debentures. SBA proposes to remove subsection (f)(9) entirely, which is an event of default based solely on the failure to satisfy investment ratios required in another regulation that SBA is proposing to remove elsewhere in the rulemaking
These are only a few of the proposed removals and revisions, but they help to demonstrate the general flavor and function of the new rule. SBA, like much of the federal government, seems concerned with a general lack of clarity in its regulations, and the subsequent inefficiencies stemming from that perceived confusion. The stated goal is to increase access to funds for small businesses, and that is being pursued in the above manner—removing redundant or obsolete language, consolidating language where possible, and lowering barriers to entry for certain favored industries. Hopefully, this can have the effect of increased participation in the SBIC program or easier access to funds for small businesses, so make sure to keep checking in here at.
Editor’s Note: Special thanks to our wonderful legal clerk Will Orlowski for putting together this blog post.
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