Small Business Investment Expansion Act of 2007

SMALL BUSINESS INVESTMENT EXPANSION ACT OF 2007 -- (House of Representatives - September 27, 2007)

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Mr. MANZULLO. Mr. Chairman, I rise in reluctant opposition to the Small Business Investment Expansion Act of 2007, H.R. 3567. The non-partisan Congressional Budget Office, CBO, estimates that this bill will cost $102 million over the next 5 years. Thus far this year, the CBO estimates that the Democrat-controlled House Small Business Committee has authorized $5.9 billion in new spending over the next 5 years--$1.55 billion in fiscal year 2008 alone. To put this massive spending increase in perspective, the Fiscal Year 2008 Financial Services Appropriations bill, H.R. 2829, provides $582 million in total spending on the SBA in FY 08.

In the past, legislation dealing with programs in the Small Business Investment Act operated under the assumption that the bill should not cost the taxpayer any new money. I am proud that the Republican-led Congress took the Small Business Investment Company, SBIC, program to ``zero-subsidy,'' funded solely by user-fees, first with the debenture program in 1996 and then the participating securities program in 2001. I regret that because of the downturn in the markets earlier this decade, the participating securities component of the SBIC program, which targeted equity investments in early stage small businesses, has become essentially insolvent and defunct since 2005. During the 109th Congress, I tried numerous ways in my capacity as chairman of the House Small Business Committee, to thread the needle to reopen the participating securities program while still keeping it at ``zero subsidy.'' However, H.R. 3567 abandons fiscal restraint by creating yet another new program to promote equity investments in early stage small businesses.

First, CBO estimates that the creation of the Angel Investment Program in Title III of H.R. 3567 will cost $57 million over the next 5 years. While there is a provision that requires an angel group repay any investment it receives, the repayment comes solely out of any profit the group receives. But what if the angel group makes no money? Then the taxpayer is left holding the bag. This is a departure from the regular SBIC program where upfront fees are also charged, in addition to retaining a share of the profits, to help offset the cost of the program.

The bill creates yet another new office and more bureaucracy at the Small Business Administration, SBA, to promote angel investments in early stage small firms. It also spends $1 million to create a Federal angel network to collect and maintain information on local and regional angel investors that is readily available over the Internet, e.g., www.bandofangels.com. H.R. 3567 also spends $1.5 million to create yet another grant program to increase awareness and education about angel investing, heaping potentially yet another mission upon the already stretched Small Business Development Center, SBDC, program. Earlier this year, the House passed three SBDC-related bills that created nine new programs for them to implement.

Last year, I held a hearing on the Small Business Committee to listen to the leading experts on the angel movement. At the time, the committee debated similar angel legislation, H.R. 4565, offered by Democrats to what is on the floor today. All the witnesses except the one called by the Democrats testified that because of the decentralized and informality of angels, a tax credit modeled after what exists in many states is far more preferable to creating yet another office and program at the SBA to promote angel investments. This is what the leading experts in the angel movement said about the ideas contained in H.R. 4565, which is now Title III of H.R. 3567, at the May 10, 2006, Small Business Committee hearing:

Dr. Ian Sobieski, founder and managing director of the Band of Angels: ``I would be wary of any kind of government interaction with angel groups because of the danger of perturbing a natural market process that is still good for it. The tax credit changes the environment in which capital decisions are being made ..... The danger in ..... data collection is the implied authority by which it is collected. If the Federal Government gets involved in collecting data (on angels) that has the imprimatur of the United States Government, that speaks with great weight.''

Susan Preston of Davis, Wright Tremaine LLP: ``..... the vast majority of investments by angels are done by individuals, not members of angel groups. These are highly independent autonomous anonymous individuals that don't want their name in databases and aren't interested, for the most part, in joining groups.''

I simply don't understand why this Democratic-led Congress ignores the advice of angel experts to direct the SBA to provide capital to extremely wealthy individuals to support investments they probably would make anyway. I'm also surprised that this Democratic-led Congress, which routinely criticizes the SBA for its alleged incompetence, would add another yet another mission to its responsibilities. That's why I was proud to join Representative EARL POMEROY of North Dakota in reintroducing the alternative to this government-run approach--the Access to Capital for Entrepreneurs, ACE, Act of 2007, H.R. 578--to keep decisions on angel investments at the individual and local level.

Second, I also have concerns about Title II of H.R. 3567 that dramatically expands the New Markets Venture Capital, NMVC, program and opens up the Federal Government to more exposure. The CBO estimates that Title II raises the subsidy or exposure rate to 17 percent and will cost the taxpayer $11 million over the next 5 years. The mission of the

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NMVC is to promote venture capital investments in economically distressed communities in both urban and rural America. However, I believe the NMVC program is already a triplicate of two other programs that already exists--the regular SBIC program and the Rural Business Investment, RBIC, program at the U.S. Department of Agriculture, USDA. Of the 2,299 U.S. small businesses that received SBIC financing in fiscal year 2005, 23 percent were located in Low- and Moderate-Income (LMI) areas of the country. Those LMI-district companies received $543 million or 19 percent of the total $2.9 billion invested by SBICs in FY 2005. Also,

30 percent of SBIC investments were made in small U.S. manufacturers. For the period FY 2001 through FY 2005, SBIC investments in small manufacturing companies totaled $4.3 billion. In addition, the USDA runs the RBIC program in cooperation with the SBA to promote equity investments in rural areas. Thus, I see no need expand a program to help small businesses that are already being assisted by two other government programs.

Third, I object to reinstating taxpayer funding for the surety bond program. This program is important to help small businesses, primarily small construction firms, win federal government contracts by offering a bond to guarantee that the work will be completed. To cover the costs of those guarantees, fees are paid to the SBA by both the contractor receiving the guarantee and the surety or insurance company that issues the bond for the contractor's performance. In fiscal year 2006, the SBA provided guarantees under the surety bond program for about 5,000 small businesses and collected about $7 million in fees. Section 405 of H.R. 3567 eliminates fees that are currently charged to contractors and sureties. That's why the CBO estimates Section 405 will cost the taxpayer over the next 5 years.

Mr. Chairman, there is no need to do this. During my tenure as chairman of the Small Business Committee, I never heard from a small business complaining about fees charged in the surety bond program. This could develop into a problem for the Federal Government when small businesses, which have no financial stake in their surety bond and thus have nothing at risk if they default, do not complete the contract. I predict that there will be more broken contracts and uncompleted work. Section 405 also sets a precedent to do away with the ``zero'' subsidy policy in other SBA programs, such as in the 7(a) loan guarantee program.

But the most egregious provision in H.R. 3567 is the revamping of small business size standards in Title V. This provision allows companies not independently-owned and operated but controlled by venture capital, VC, investors to still be considered as a small business in the eyes of the Federal Government. Title V will allow large businesses and universities that establish a VC to potentially game the system to benefit from not just various SBA technology programs but every other SBA loan and procurement assistance program. It could even complicate the Regulatory Flexibility Act, which requires Federal agencies to take into account the interests of small businesses during the development of new regulations. When I was chairman of the Small Business Committee, I was proud of the bipartisan support I received in eliminating big businesses from participating in various federal small business programs. This led the SBA to finally clamp down on this abuse and issue new regulations and policies to do away with this practice. However, I fear that many of my colleagues have not fully thought through the implications of this provision. Title V would undo all the bipartisan work done on this issue over the past five years.

In particular, I spent a lot of time and effort trying to solve the specific problem of the eligibility of some small businesses with venture capital investments to participate in the Small Business Innovative Research, SBIR, program at the National Institutes of Health, NIH. The SBIR program guarantees that at least 2.5 percent of Federal research and development, R&D, dollars must go to small businesses. After the Defense Department, the NIH is the second-largest spender of R&D funding in the Federal Government.

Title V tries to solve a problem that is grossly exaggerated. It is a myth that small businesses with VC investments are unable to participate in the SBIR program at NIH because of a misinterpretation of the law by the SBA. In an impartial Government Accountability Office, GAO, study that I requested, they discovered that 17 percent of NIH SBIR awards, accounting for 18 percent of the dollar value, went to small business with VC investments in fiscal year 2004. These small firms had no problem in complying with SBA guidelines. Nevertheless, I tried to proffer a compromise that would have established a 2-year pilot program to set-aside 0.5 percent of NIH R&D funding, over-and-above the 2.5 percent currently set-aside for small businesses, for these firms that receive a preponderance of their funding from VCs and do not own or control their company. Unfortunately, my compromise was rejected by NIH and by the biotech and VC industries. However, the solution contained in Title V is a dramatic overreach in the effort to solve this specific problem with NIH.

The amendment offered by my good friend and colleague, Representative STEVE CHABOT of Ohio, is a good step forward. It prohibits any one single VC from owning a small business that wishes to benefit from a SBA program. However, I can easily envision a situation where two VCs with common ownership but with different board of directors could game the system and still be eligible for SBA programs. Because even the largest VCs have less than 500 employees, Title V--even as changed by the Chabot amendment--would open up SBA programs to large businesses and universities.

In particular, I am concerned about the future of the SBIR program. It's important to remember that when the SBIR program was created 25 years ago, it was because of the frustration that federal research and development dollars went only to large businesses and universities. Even under current law, only 2.5 percent of all Federal R&D dollars is set-aside for small business. But Title V allows large universities that establish a VC to participate in the SBIR program. This provision will further decrease Federal R&D dollars going to independently owned and operated small high technology firms.

Mr. Chairman, I enclose for the record the Statement of Administration Policy in opposition to this bill plus two letters from the oldest small business association in America--the National Small Business Association; a letter from the nation's only association that represents small high technology firms--the Small Business Technology Council; and a letter from the world's largest business federation--the U.S. Chamber of Commerce. I urge my colleagues to heed the recommendations of the administration and these business associations by voting against H.R. 3567.

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