On Friday, Rep. Michael G. Grimm (R,C-NY) joined Rep. Nydia Velazquez (D-NY) in introducing the Next Steps for Credit Availability Act (H.R. 5929). This bipartisan bill helps Business Development Companies (BDCs) increase their capital pool, which in turn gives them more money to invest in start-up companies and small to mid-sized businesses. The objective is achieved by safely increasing leverage ratios, modifying reporting practices that give the appearance of greater debt, and simplifying redundant government-imposed filing requirements, making them consistent with requirements for similar entities in the industry.
"This bill helps turn a business idea into an achievable reality by providing start-ups and businesses with greater access to capital -- allowing them to remain innovative, expand, and create American jobs. Traditional funding options are not always available to start-up firms, so by modernizing the BDC regulatory framework, we can provide financial fuel for young, rapidly growing companies. If the United States wants to be the home of the next Apple or Google, passing this bill is another important step in the right direction," said Rep. Grimm.
A BDC is a publicly traded firm that acts in many of the same ways a private equity firm does. Namely, it provides funding to small and mid-size firms, as well as start-ups, that do not have easy access to more traditional capital markets. The Velazquez-Grimm bill makes several modifications to increase the lending capacity of BDCs, and thus increases access to capital by firms and start-ups.
First, the bill would amend the Investment Company Act of 1940 to permit BDCs to own investment adviser subsidiaries. Currently, the 1940 Act prohibits a BDC from making investments in a wholly owned subsidiary that is an investment adviser registered under the Advisers Act.
Secondly, H.R. 5929 allows reasonable leverage for reasonable investments. Currently BDCs have a leverage cap of $2 of assets for every $1 of debt (200%), meaning that for every $1 they borrow to lend to small businesses, they must hold $2. H.R. 5929 would increase their leverage slightly, allowing them to make $2 in loans for every $3 in assets. When compared to other financial firms, including commercial banks, this new leverage limit would still be very low and conservative.
H.R. 5929 also would allow preferred stock to be counted as equity rather than debt, freeing up more cap room for firm borrowing. This will increase their ability to raise funds and lend them to small and mid-size firms.
Finally, the legislation would streamline SEC registration and reporting so that more start-ups and mid-sized American companies can benefit from BDCs. Currently BDCs have a more onerous process for offering new securities than do other Exchange Act Registrants. Instead of continuing the current policy of registering their securities via form N-2, which does not allow the firm to cite by reference information that is regularly disclosed in their quarterly and annual filings, H.R. 5929 would allow these firms to instead using a filing similar to form S-3, which does allow filing by reference.
This will allow these firms to move quickly when opportunities arise to take a registration "from the shelf" and offer it to the capital markets - accessing windows of opportunity that they would otherwise miss. Making it easier for these firms to raise equity capital will increase their ability to fund other firms and help them fulfill their role in growing small and mid-sized business and creating U.S. jobs.