An investor's tax treatment can influence the structure through which capital reaches a business. SBA's December 28, 2016 final SBIC rule broadens a qualified blocker route for partnership licensees. A blocker can be a corporation or an LLC electing corporate taxation. Its sole purpose under this exception is financing eligible unincorporated small businesses, not creating an unrestricted passive-investment portfolio. [2016-31291]

The October 2015 proposal's certification covered unrelated business taxable income and effectively connected income for foreign investors. The final also includes certain income that would not qualify for an investor taxed as a regulated investment company. That addition is a specific expansion of the qualifying rationale. Neither document establishes a universal tax exemption or makes every investor's preferred structure eligible. [2015-25232][2016-31291]

Removing prior SBA approval may change transaction procedure, but the final retains certification, reporting and information access. Eligible non-passive businesses must receive the financing through permitted routes and ownership relationships. Where substantially all proceeds must pass through, the threshold is 99 percent after allowed fees and reimbursements. Aggregate fee caps prevent extra entities from multiplying the permissible direct-financing fee total. [2016-31291]

The final sets January 27, 2017 effectiveness and conforms the common-control leverage ceiling to $350 million. That ceiling is neither an investment return nor a promise of capital access. The proposal and final show one agency changing transaction options. The market hypothesis is that workable structures can accommodate more investors; these records alone do not demonstrate that participation or small-business funding actually increased. [2016-31291][2015-25232]

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