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New Markets Please choose a question and select or press the enter key to reveal/hide the answer. To view both question and answers in this area follow this link. 1. What is the New Markets Venture Capital Program? The New Markets Venture Capital (NMVC) program is modeled after the Small Business Administration’s extremely successful Small Business Investment Company (SBIC) program but has a specific mission of economic development in low-income (LI) areas. Through a combination of equity-type financing and intensive operational assistance to smaller businesses located in LI areas, the program seeks to assist local entrepreneurs, create quality employment opportunities for residents and build wealth within these communities. SBA intends to achieve these public policy objectives through financial assistance to newly formed NMVC companies and to existing Specialized Small Business Investment Companies (SSBICs). (see also link to NMVC program overview) 2. What is a New Markets Venture Capital Company (NMVCC)? An NMVCC is a privately managed, newly formed, for-profit investment company formed for the purpose of providing equity-type capital and hands-on operational assistance to smaller businesses located in specific rural and urban LI areas. SBA will designate NMVCCs through a competitive selection process: 1. Conditional Approval – based upon the merits of the application, how the application compares to other applications covering the same or proximate LI areas, and SBA’s objective of achieving nationwide and both rural and urban impact of the program. 2. Final Approval – based on whether conditionally approved NMVCCs, by deadlines established by SBA, raise the required amounts of regulatory capital and grant matching resources, and complete necessary legal documentation 3. What are the benefits of forming an NMVCC? 1. SBA Financial Assistance. SBA will supplement an NMVCC’s own capital through guarantees of debentures to be issued by the company in a face amount of up to 1.5 times its capital. The debentures will have a term of up to 10 years from the date of draw-down and be issued at a discount. Interest for years 1-5 is paid up front in the form of the discount, interest only is payable for years 6-10, and principal is due at the end of year 10. SBA will arrange “just-in-time” funding for the debentures under procedures similar to those utilized in the SBIC program. The debentures are expected to be priced at a current market rate for comparable U.S. Government Treasury securities plus a premium. The debentures are expected to be pre-payable without penalty after one year. There are no SBA fees associated with the debenture (see NMVC Debenture Calculator at http://www.fhlbc.com/sba/newmarketcalculatorpage.htm). Example: An NMVCC with $10 million of contributed capital would be eligible to issue debentures with a face amount of $15 million. If a 6.49 percent interest rate prevailed when the debentures were issued, the company would receive net proceeds of $10.62 million for the $15 million of debentures. No payments would be required for the first 5 years. Commencing with the sixth year, the NMVCC would pay interest on the $15 million at a 6.49 percent rate compounded semi-annually, and the entire $15 million of principal would be due at maturity. 2. SBA Operational Assistance Grants. SBA also will match the resources that the NMVCC has raised for operational assistance (whether in cash or in-kind) with an equivalent grant. The NMVCC must use the grant funds and matching resources to provide marketing, management and other operational assistance to the businesses in which it invests or intends to invest. 4. What are the benefits to the investor? A potential investor can benefit in at least the following five ways through its investment into an NMVCC or SSBIC participating in the NMVC program: 1. A reasonable rate of return: NMVC companies will be for-profit entities that will seek to provide returns to investors. Although there can be no guarantee of success, producing an attractive return on investment will be one of the NMVCC's objectives. 2. Benefits of operational assistance grants: The appropriate use of operational assistance grants should enhance opportunities for returns to the investors and add to the long-term economic success of the community by providing small businesses the help they need to become economically viable. 3. Giving back to one’s community: The NMVC program is designed to target the needs of the community in which the NMVCC or SSBIC operates. State and local economic and/or community development entities, local financial institutions (including thrifts), utility companies, business leaders and philanthropists can pool resources into one fund for maximum investing in their local economies. High profile investors also can benefit from the added visibility of their participation in an NMVC fund for marketing and outreach purposes. 4. Tax credits: Investors may be eligible to receive a New Markets Tax Credit, which the U.S. Department of Treasury will allocate through an annual competitive process. (See New Markets Tax Credit) 5. Community Reinvestment Act (CRA): Financial institutions that invest in NMVC firms or SSBICs may be eligible for CRA credit. Such institutions would be required to follow rules governing equity investments by Federal financial institutions. 5. What are the benefits to a small business? Small businesses located in the LI areas can receive: 1. No-cost operational assistance, for example: accounting, business, or marketing plans and engineering assistance. 2. Long-term risk capital. 3. Proactive investor with a stake in growing the business. The type, terms and conditions of individual investments will be up to NMVCCs and SSBICs, within guidelines set by the regulations governing the program. SBA will monitor this compliance through examinations and other oversight mechanisms. 6. What is the difference between the purposes of the NMVC program and those of the Specialized Small Business Investment Company (SSBIC) program? NMVCCs target entire communities for business investments while SSBICs seek business investments in small businesses owned by individuals that are socially or economically disadvantaged. NMVCCs focus on the geographic location rather than on the ownership of small businesses. However, SSBICs are eligible to apply for grant funds under the NMVC program to provide operational assistance to businesses located in LI areas, if such SSBICs plan to raise additional capital and use it to make developmental venture capital investments in such businesses. 7. What are LI areas? LI areas are defined by statute, and include geographic areas that fall within the following descriptions: · census tracts or equivalent county divisions with a poverty rate of 20 percent or more; · census tracts or equivalent county divisions located within a metropolitan area, and that qualify for the Low Income Housing Tax Credit (i.e., in which 50 percent or more of the households have an income below 60 percent of the area median gross income); · census tracts or equivalent county divisions not located within a metropolitan area, and which have a median household income that does not exceed 80 percent of the statewide median household income; · a HUBZone; · an Urban Empowerment Zone (EZ) or Urban Enterprise Community (EC); or · a Rural EZ or Rural EC. 8. How many rural vs. urban locations is SBA targeting? SBA is not targeting a specific number of areas, either rural or urban. This diversity will be dictated largely by applications submitted to and selected by SBA. 9. If there is already an NMVCC, or an SSBIC with an NMVC operational assistance grant, serving the geographical area I wish to target, is it worth my time to apply? SBA would not discourage anyone from applying to the program, as there is no statutory provision preventing multiple NMVC program participants from serving the same geographical area. However, the selection process is a competition for a limited amount of resources, and SBA has a statutory requirement to select program participants so as to achieve nationwide impact. With that in mind, it is unlikely that SBA will have sufficient NMVC program resources to allow more than one program participant to focus on the same LI areas. 10. How do I apply for participation in the NMVC program? Interested applicants should continue checking the NMVC program website for updates on the second application round,, the rules and regulations for the program, and the new application forms and related exhibits. Currently, SBA plans to announce the second round in the Fall of 2002. Until then, interested applicants can look at the application materials from the first round to get an idea of the questions and time commitments that will be asked of them. They can be found at http://www.sba.gov/INV/venture.html. 11. Are there any fees associated with an application? NMVCC and SSBIC applicants must pay a one-time grant issuance fee of $5,000, due in advance at the time of application submission. SBA will refund the fee to applicants not selected. 12. What are the qualifications to apply for designation as a NMVCC? In order to be eligible to apply for designation as an NMVCC, an applicant must: Be a new for-profit entity formed after December 21, 2000. It may be organized as a partnership, a limited liability company, or a corporation. It may be a newly formed subsidiary of an existing for-profit, non-profit, or governmental entity. Have a management team with demonstrated experience in community development finance and/or relevant venture capital finance. Have a primary mission of economic development of one or more LI areas. Have specific LI areas identified in which it intends to direct its activities. Have management and ownership diversity. Commit to raising investment capital (minimum $5 million) from sources other than an agency of the Federal government. Commit to raising grant matching resources equal to at least 30 percent of its capital from sources other than SBA. 13. What are the qualifications for SSBICs to apply for NMVC operational assistance grants? In order to be eligible to apply, an SSBIC must: · Intend to raise new capital after December 21, 2000. · Intend to raise grant matching resources equal to at least 30 percent of its newly raised capital from any source other than SBA. · Have a viable plan for how it intends to use the requested grant funds to provide operational assistance to smaller enterprises located in LI areas. 14. Do the proposed LI areas have to be contiguous? No. However, there should be some common sense approach to the areas proposed (for example, defined by city or state boundaries, or regionally defined through common economic factors). Applicants should be as specific as possible in their reasoning for directing their activities to the specific group of LI areas they propose. Applicants should address the management team’s ability and the costs necessary to properly service investments in the proposed areas in the context of the overall economic viability of the fund. 15. How do I find the specific LI areas I want to target? SBA has developed some special mapping software to help you determine if an address or area is an LI area. The SBA LI locator allows anyone to type in an address, city, county or state and determine the LI area status and eligibility, and create maps that will be necessary for the application process. (See also Area Map) 16. Must low-income individuals fill jobs created by low-income investments made by NMVCCs and SSBICs? No. There are no requirements concerning the jobs that must be created by those investments. However, one of the purposes of the NMVC program is to encourage NMVCCs and SSBICs to make investments that, among other things, will result in sustainable jobs for residents of low-income communities. As part of its selection process, SBA will evaluate the potential economic and community development impact of an applicant's proposed investment and operational assistance activities on LI areas. 17. Is there any requirement that the capital invested in an NMVCC come from investors located in the same geographic area in which the NMVCC is located or where the NMVCC intends to focus its activities? No, there is no requirement concerning the geographic source of capital or of matching resources for operational assistance grant funds. 18. Can banking institutions invest capital in an NMVCC or SSBIC, and if so, would those investments be eligible under the requirements of the Community Reinvestment Act (CRA)? The NMVC legislation authorizes national banks, member banks of the Federal Reserve System, insured nonmember banks, and Federal savings associations to invest in NMVC companies. Federally insured institutions that are required to meet CRA standards currently can receive CRA credit for investments in NMVCCs and SSBICs. 19. Does the NMVCC management team have to have prior SBIC experience? No. SBA will evaluate the quality of the management team's prior investment experience regardless of when and where it was obtained. 20. Can the partners of an NMVCC also apply for an SBIC license? Yes, side-by-side funds would be permissible, but the management team of each would have to be able to focus on the investment and administrative demands of each of the respective funds to ensure that the public policy objectives of each program are met. SBA would consider any such application for an SBIC license separately, under existing procedures, policies, and regulations governing the SBIC program. SBA's selection of an NMVCC managed by a particular group of partners will have no affect on whether or not SBA grants an SBIC license to an applicant managed by that same group of partners. 21. What limitations are imposed on an NMVCC's investment activities? At least 80% of the businesses in which an NMVCC makes investments must be smaller enterprises located in LI areas and must have received equity capital investments. In addition, 80% of the investments an NMVCC makes (in total dollars) must be equity capital investments in smaller enterprises located in LI areas. A "smaller enterprise," as defined in 13 CFR 108.50, is a small business concern that: · has $6 million net worth and an average after-tax income not exceeding $2 million for the preceding 2 years, or · meets SBA's size standards based on revenue or employment criteria. "Equity capital investments," as defined in 13 CFR 108.50, are investments in the forms of: · common or preferred stock · limited partnership interests · options, warrants, or similar equity instruments · subordinated debt with equity features as long as the debt is not amortized and provides for interest payments contingent upon and limited to the extent of earnings A smaller enterprise located in an LI area is a concern whose "principal office" is located in an LI area. · The "principal office" of a small business concern, as defined in 13 CFR 108.50, is that office of the portfolio company, as of the date the investment is made, where the greatest number of the concern's employees at any one location perform their work. When determining the principal office of businesses in the service and construction industries, exclude from consideration the concern's employees who perform the majority of their work at job-site locations. 22. What limitations are imposed on an SSBIC's investment activities? An SSBIC receiving an operational assistance grant must use 100% of its increase in regulatory capital, raised in connection with its application for that grant, to make equity capital investments in smaller enterprises located in LI areas. 23. Can a current venture capital fund be rolled over into an NMVCC? No. An NMVCC must be a new entity formed after December 21, 2000. Cash from previously formed funds may be contributed to the NMVCC, but non-cash assets may not be contributed and be considered capital. 24. How much time does a conditionally approved NMVCC have to raise its capital and grant matching resources? To become a finally approved NMVCC, a conditionally approved NMVCC has 18 months from the date on which it is designated as such to raise its required regulatory capital and operational assistance grant matching resources. 25. May an NMVCC applicant or an SSBIC applicant raise more or less regulatory capital and/or grant matching resources than originally requested in its application? NMVCC applicants and SSBIC applicants may raise only the amounts of regulatory capital and grant matching resources proposed in their applications. SBA will be selecting applicants for conditional approval based on SBA's consideration of the applications as submitted, including the amounts of regulatory capital and grant matching resources stated in the application. Applicants will not be allowed, in effect, to change their applications after initial submission, by changing the amounts of regulatory capital and grant matching resources they raise. If an applicant raises more or less regulatory capital or grant matching resources than stated in its application, SBA will not finally approve that applicant. The NMVC regulations do not preclude applicants from using additional capital it wishes to raise for a separate fund, which could be a co-investor, side-by-side fund, and/or SBIC. 26. How does SBA provide leverage once a NMVCC decides to make an investment? NMVCCs will draw down leverage in the same fashion as an SBIC would through a mechanism referred to as "just-in-time" funding. Bimonthly, SBA will consider applications submitted by NMVCCs for draw. If SBA approves a company's draw application, the company then can obtain funds upon 24 hours advance notice to SBA. SBA will require the NMVC firm to use its private capital in tandem with leverage. 27. Can an NMVCC invest in a passive business? NMVC regulations generally do not allow NMVCCs to make investments in passive businesses or pass-through investments. SBA may approve a pass-through of investment proceeds to a subsidiary under certain circumstances. 28. Is there a separate application process for NMVCCs to apply for operational assistance grants? No. However, as part of the application, NMVCC applicants will be required to provide budget information and related documentation reflecting the anticipated expenditures of the grant funds. (For more information, see OA Grant Guidance). 29. Can potential investors provide additional capital for the purpose of meeting an NMVCC applicant's or an SSBIC applicant's required match for operational assistance grants? SBA's regulations provide that a portion of private capital may be designated as matching resources if such funds are used to purchase an annuity or are otherwise segregated in a manner acceptable to SBA. Investors should be made aware that monies designated for operational assistance will not be invested in small businesses for a return. 30. Who are the acceptable types of operational assistance grant matching resources? NMVCC and SSBIC applicants are allowed to raise the required matching resources for operational assistance grants in the form of in-kind contributions, cash contributions, binding commitments for cash or in-kind contributions, and annuities from any source other than SBA. Any matching resources not in the form of cash must be documented 31. Are cash resources preferable to in-kind contributions? Cash resources are important, because the NMVC legislation requires that at least 50% of the overall operational assistance grant matching resources be in the form of cash or commitments for cash. However, applicants may raise up to 50% of their required grant matching resources in the form of in-kind contributions. These resources can take the form of services contributed by other entities focusing on economic and community development in LI areas (for example, institutions of higher education, job training facilities, and local and state government agencies). 32. Does SBA prefer to see certain types of operational assistance proposed in the application? SBA will not give preference to any particular types of operational assistance. SBA expects different areas of the country and different investment objectives to need different types of operational assistance, and it is up to the applicant to describe in detail its understanding of those needs. 33. What are acceptable and unacceptable uses of operational assistance grant funds? As a general rule, anything that could be attributable to the normal costs associated with running a concern would be an inappropriate use of operational assistance grant resources. For instance, if a concern in which an NMVCC invests or expects to invest needs the professional assistance of an accountant to set up a suitable accounting system, the NMVCC could pay for that short-term need with grant funds. However, maintaining the accounting system once it is in place would become the financial responsibility of the concern, and the NMVCC could not use grant funds to pay for that long-term need. 34. Does SBA view association with incubators as an appropriate use of operational assistance grant money? Incubators may be a viable option for assisting young businesses with growth potential through the NMVC program. SBA will review both the proposed uses of the grant money and the structure of the relationship between the NMVCC and the entity housing or sponsoring the incubator. Applicants should be as specific as possible regarding the roles to be assigned when proposing to work with incubators, keeping in mind acceptable uses of operational assistance grant funds. 35. Are companies that SBA selects as NMVCCs automatically eligible for New Markets Tax Credits? No. The U.S. Department of Treasury (Treasury) has statutory authority to certify entities as Community Development Entities ("CDE") and to allocate New Markets Tax Credits to such entities. Treasury plans to conduct an annual competitive process for allocating the New Markets Tax Credits to eligible CDEs. For further information, visit the Treasury web site at www.cdfifund.gov/applications/index.asp. 36. Are SSBICs automatically eligible for New Markets Tax Credits? By law, SSBICs are presumed to be CDEs. CDEs automatically are eligible to apply for the New Markets Tax Credits. However, all CDEs must go through a competitive application process to receive an allocation from Treasury of those tax credits. Disclaimer: Please note that this document is not an official policy statement about the NMVC program. SBA continues to develop its policies and procedures for the NMVC program. Accordingly, these FAQs are subject to change and are not binding on any SBA decision. 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Please choose a question and select or press the enter key to reveal/hide the answer. To view both question and answers in this area follow this link.
SBA will designate NMVCCs through a competitive selection process:
1. Conditional Approval – based upon the merits of the application, how the application compares to other applications covering the same or proximate LI areas, and SBA’s objective of achieving nationwide and both rural and urban impact of the program.
2. Final Approval – based on whether conditionally approved NMVCCs, by deadlines established by SBA, raise the required amounts of regulatory capital and grant matching resources, and complete necessary legal documentation
Example: An NMVCC with $10 million of contributed capital
would be eligible to issue debentures with a face amount of $15 million. If a 6.49 percent interest rate prevailed when the debentures were issued, the company would receive net proceeds of $10.62 million for the $15 million of debentures. No payments would be required for the first 5 years. Commencing with the sixth year, the NMVCC would pay interest on the $15 million at a 6.49 percent rate compounded semi-annually, and the entire $15 million of principal would be due at maturity.
2. SBA Operational Assistance Grants. SBA also will match the resources that the NMVCC has raised for operational assistance (whether in cash or in-kind) with an equivalent grant. The NMVCC must use the grant funds and matching resources to provide marketing, management and other operational assistance to the businesses in which it invests or intends to invest.
1. A reasonable rate of return: NMVC companies will be for-profit entities that will seek to provide returns to investors. Although there can be no guarantee of success, producing an attractive return on investment will be one of the NMVCC's objectives.
2. Benefits of operational assistance grants: The appropriate use of operational assistance grants should enhance opportunities for returns to the investors and add to the long-term economic success of the community by providing small businesses the help they need to become economically viable.
3. Giving back to one’s community: The NMVC program is designed to target the needs of the community in which the NMVCC or SSBIC operates. State and local economic and/or community development entities, local financial institutions (including thrifts), utility companies, business leaders and philanthropists can pool resources into one fund for maximum investing in their local economies. High profile investors also can benefit from the added visibility of their participation in an NMVC fund for marketing and outreach purposes.
4. Tax credits: Investors may be eligible to receive a New Markets Tax Credit, which the U.S. Department of Treasury will allocate through an annual competitive process. (See New Markets Tax Credit)
5. Community Reinvestment Act (CRA): Financial institutions that invest in NMVC firms or SSBICs may be eligible for CRA credit. Such institutions would be required to follow rules governing equity investments by Federal financial institutions.
1. No-cost operational assistance, for example: accounting, business, or marketing plans and engineering assistance.
2. Long-term risk capital.
3. Proactive investor with a stake in growing the business.
The type, terms and conditions of individual investments will be up to NMVCCs and SSBICs, within guidelines set by the regulations governing the program. SBA will monitor this compliance through examinations and other oversight mechanisms.
· census tracts or equivalent county divisions with a poverty rate of 20 percent or more;
· census tracts or equivalent county divisions located within a metropolitan area, and that qualify for the Low Income Housing Tax Credit (i.e., in which 50 percent or more of the households have an income below 60 percent of the area median gross income);
· census tracts or equivalent county divisions not located within a metropolitan area, and which have a median household income that does not exceed 80 percent of the statewide median household income;
· a HUBZone;
· an Urban Empowerment Zone (EZ) or Urban Enterprise Community (EC); or
· a Rural EZ or Rural EC.
Be a new for-profit entity formed after December 21, 2000. It may be organized as a partnership, a limited liability company, or a corporation. It may be a newly formed subsidiary of an existing for-profit, non-profit, or governmental entity. Have a management team with demonstrated experience in community development finance and/or relevant venture capital finance. Have a primary mission of economic development of one or more LI areas. Have specific LI areas identified in which it intends to direct its activities. Have management and ownership diversity. Commit to raising investment capital (minimum $5 million) from sources other than an agency of the Federal government. Commit to raising grant matching resources equal to at least 30 percent of its capital from sources other than SBA.
· Intend to raise new capital after December 21, 2000.
· Intend to raise grant matching resources equal to at least 30 percent of its newly raised capital from any source other than SBA.
· Have a viable plan for how it intends to use the requested grant funds to provide operational assistance to smaller enterprises located in LI areas.
A "smaller enterprise," as defined in 13 CFR 108.50, is a small business concern that:
· has $6 million net worth and an average after-tax income not exceeding $2 million for the preceding 2 years, or
· meets SBA's size standards based on revenue or employment criteria.
"Equity capital investments," as defined in 13 CFR 108.50, are investments in the forms of:
· common or preferred stock
· limited partnership interests
· options, warrants, or similar equity instruments
· subordinated debt with equity features as long as the debt is not amortized and provides for interest payments contingent upon and limited to the extent of earnings
A smaller enterprise located in an LI area is a concern whose "principal office" is located in an LI area.
· The "principal office" of a small business concern, as defined in 13 CFR 108.50, is that office of the portfolio company, as of the date the investment is made, where the greatest number of the concern's employees at any one location perform their work. When determining the principal office of businesses in the service and construction industries, exclude from consideration the concern's employees who perform the majority of their work at job-site locations.
The NMVC regulations do not preclude applicants from using additional capital it wishes to raise for a separate fund, which could be a co-investor, side-by-side fund, and/or SBIC.
Disclaimer: Please note that this document is not an official policy statement about the NMVC program. SBA continues to develop its policies and procedures for the NMVC program. Accordingly, these FAQs are subject to change and are not binding on any SBA decision.
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