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CDFA Spotlight:
New Markets Venture Capital and Rural Business Investment Programs
By Stan Provus |
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This article gives an overview of the New Markets Venture Capital (NMVC) and the Rural Business Investment (RBI) Programs.
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This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel.
New Markets Venture Capital Program
The New Markets Venture Capital (NMVC) program is modeled after the Small Business Administration’s 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 provides financial assistance to newly formed the creation of NMVC companies and to existing Specialized Small Business Investment Companies (SSBICs). Congress authorized the New Markets Venture Capital program for the 6-year period from FY 2001 through 2006. The program provides for $150 million in debenture funding and $30 million in technical assistance grant funds (i.e. “Operational Assistance Grants”—see below).
The Small Business Administration issued an RFP and conditionally selected seven New Markets Venture Capital Companies (NMVCC) to operate the program. To date, the SBA has entered into participation agreements with six of the seven NMVCC. These companies have invested $5.1 million in eligible companies and provided $1.4 million in Operational Grant assistance.
The NMVCCs, their locations and the states they will target for their investments are:
- Adena Ventures, L.P.; Athens, Ohio; Ohio, West Virginia, Maryland and Kentucky.
- CEI Community Ventures Fund, LLC; Wiscasset, Maine; Maine, New Hampshire and Vermont.
- Dingman New Markets Growth Fund; College Park, Md.; Maryland and the District of Columbia.
- Murex Investments I, L.P.; Philadelphia, Penn.; Pennsylvania, New Jersey and Delaware.
- Pennsylvania Rural Opportunities Fund; University Park, Penn.; Pennsylvania.
- Southwest Development Fund, LLC; Phoenix, Ariz.; Arizona.
- The Southern Appalachian Fund, L.P.; Oak Ridge, Tenn.;Tennessee, Kentucky, Alabama and Georgia.
The SBA does not expect to approve any new companies at this time, since there are no additional funding requests in the President’s budget.
How the SBA Funding Works
1. SBA Financial Assistance. SBA supplements a 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.
Example: An NMVC company 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 matches the resources that the NMVC company has raised for operational assistance (whether in cash or in-kind) with an equivalent grant payable over 4.75 years. The NMVC company must use the grant funds and matching resources to provide marketing, management and other operational assistance to the businesses enterprises in which it invests or intends to invest.
What are Low-Income (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 EZEmpowerment Zone or Rural ECEnterprise Community.
Rural Business Investment Program
SBA will also administer this program. The SBA and USDA have signed a cooperative agreement for the program. SBA expects to promulgate regulations and solicit New Markets Venture Capital type company participation this year. The Rural Business Investment Program will be modeled after the New Markets Venture Capital Program and the Small Business Investment Company programs.
Congress initially authorized $284 million in debenture funding and $44 million in Operational Assistance grants for this program. However, the President’s 2005 budget would reduce funding to $60 in debenture funding and $21 million in operational assistance grants.
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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