Small Business Investment Companies

Small Business Investment Companies

Small Business Investment Companies The economy depends on privately held businesses, and privately held businesses need capital to grow. The SBIC (Small Business Investment Company) lawyers at Foley Hoag help investors deliver needed capital and reap the returns by assisting in all aspects of private equity fund formation, including SBICs created through the U.S. Small Business Administration (SBA). SBIC Program Background History SBICs are privately formed and managed investment funds which, if licensed by the SBA, may borrow from SBA two times their privately-raised capital on very favorable rates and terms. The SBIC Program was created in 1958. Currently about 300 SBICs are operating. Foley Hoag has assisted over 200 applicants to obtain SBIC licenses. Overview SBIC s must invest their private and borrowed funds in small businesses, but small is large enough for most investment funds. SBICs can invest in most industries, except real estate development, certain large projects (e.g. oil wells), extractive industries, other financial intermediaries, holding companies, foreign companies (with certain exceptions) and casinos. SBICs can invest up to 30% of their private capital in any one portfolio company. Once licensed, SBA normally does not pre-review or approve the licensee s deals, and the fund operates much like a non-regulated fund. SBICs file quarterly reports to SBA and are examined for regulatory compliance (but not financial safety and soundness) each year on-site by SBA examiners. SBICs are usually structured as limited partnerships with an LLC General Partner -- both tax neutral. SBICs can be, and many are, subsidiaries of larger parent funds, including BDCs. How it works The current form of SBA Leverage is designed primarily for a debt fund, although some equity financing is allowed. The fund issues overlapping 10-year notes ( debentures ) to SBA which are bullets or balloon notes, with principal due only upon maturity. There is no prepayment penalty. Interest is payable twice a year. So, the licensee s largest (2/3rds) investor (SBA) provides inexpensive leverage, the profit on which goes only to the private investors and the fund managers, significantly magnifying their returns. Draw requests are a simple statements of intended investments, without submission of term sheets, financials, or other significant data. SBICs may charge a management fee of 21/2% times their private capital times 3, in each of the first five years, if private capital does not exceed $20 million. Foley Hoag SBIC Overview Foley Hoag, with offices in Boston, New York, Washington D.C. and Paris, has represented over 200 SBICs. We represent funds with buy-out, growth capital, venture capital, seed capital and credit investment strategies, including portfolios that are unleveraged, traditionally leveraged and Government leveraged. Our lawyers have experience in all aspects of investment manager representation, including fund formation; negotiation with institutional investors; fund combinations and portfolio purchases; management organization and reorganization; SEC and SBA regulatory compliance, and investment transactions. More specifically, our lawyers have represented hundreds of SBICs and their portfolio companies for more than four decades. Our former partner Arnold Zaff worked closely with SBA to produce the standard debenture SBIC Limited Partnership Agreement several decades ago, and subsequently our partner Mike Wyatt was General Counsel of SBA, in which position he sat on the Committee that licenses SBICs. We offer our SBIC clients a full range of services in the Debenture, Impact, SSBIC, and Early Stage Leverage programs. Our attorneys assist SBIC clients with initial structuring, fund formation, licensing, management organization, buyouts, post-licensure regulation, examinations, and investment transactions. Clients also seek the firm s expertise in related areas, such as non-sbic structures that satisfy the requirements of financial institutions sensitive to qualification under the Community Reinvestment Act (CRA), and to exemptions from the Volcker Rule. We participated in the first and to date only transfer of an SSBIC license to a regular SBIC licensee.

Foley Hoag Finance Practice for SBICs In addition to our SBIC fund formation and licensing work, Foley Hoag lawyers have extensive experience representing SBIC and non-sbic funds in structuring, negotiating and documenting portfolio investments. This work is handled by Foley Hoag s Capital Markets and Debt Finance groups. Our lawyers regularly represent investors and companies in complex debt and equity financing and securities matters and have extensive experience representing lenders and borrowers in secured and unsecured debt financings, including syndicated senior bank credit facilities, first and second lien financings, asset-based (ABL) credit facilities, mezzanine and other subordinated debt financings, acquisition financing transactions, financings of management buy-outs, tender offers, and other leveraged acquisitions, bridge financings, portfolio purchases and sales, debtor-in-possession financings, public and Rule 144A debt offerings, and convertible debt transactions. We also regularly represent private equity firms and their portfolio companies in M&A transactions, recapitalizations and restructurings drawing on the resources and expertise in related practices such as partnership, tax, securities, employment, benefits, energy and environmental law. Our Capital Markets and Debt Finance lawyers experience includes the following: $9.9 million Secured Note and Preferred Stock financing of privately held semiconductor company Private Equity Fund $20 million Secured asset-based credit facility to rigging and transportation services company Lease-to-Own Payment Company $6 million Secured second-lien asset-based loan $14.3 million Senior debt, mezzanine debt and preferred equity recapitalization SBIC Fund Mezzanine Fund $6.25 million Mezzanine debt, preferred stock and warrant investment in Katahdin Industries, Inc BCA Mezzanine Mezzanine debt, preferred stock and warrant investment in Thermacore, Inc Mezzanine debt and preferred stock investment in Merrill Industries, LLC $8.75 million Secured mezzanine debt and preferred stock investment in a designer, developer, and marketer of tableware serving high-end hospitality and retail customers $325 million Senior secured asset-based credit facility Debt financing leveraged buyout of Skullcandy involving $85 million term loan and $40 million asset-based credit facility $7.35 million Secured Note and Preferred Stock financing of Unidine Corporation $28 million Mezzanine financing with Capital Royalty L.P. $5.75 million Secured mezzanine debt and warrant investment by CapitalSouth $30 million Agent and lead lender in syndicated ABL revolver and term loan senior credit facilities Variety of secured term and revolving loan credit facilities ranging from $5 million to $15 million for companies in industries ranging from renewable energies to security alarm services Public Life Sciences & Biological Products Company $20 million Senior revolver and term loan credit facilities Aerospace Manufacturer Acquisition of aerospace supplier financed by a private equity-sponsored leveraged recapitalization involving new equity investments, a $36 million senior syndicated loan facility funded by major bank lenders and a $25 million subordinated debt facility provided by several mezzanine funds Major Bank $100 million Syndicated senior revolving credit facility to retail marketing company Manufacturing Company Leveraged buyout involving $80 million first lien credit facility, $20 million second lien credit facility and $40 million ABL credit facility Major Defense Contractor $590 million Syndicated senior secured revolver and term loan credit facilities to finance acquisition and provide working capital

Our Key SBIC Attorneys Michael K. Wyatt 202.261.7320 mwyatt@foleyhoag.com Michael Wyatt is a Private Equity and SBIC partner at Foley Hoag, specializing in U.S. Small Business Administration (SBA) matters. Michael has extensive experience representing SBICs in a variety of structuring, fund formation, licensure, regulatory, operational, taxation, transactional, restricted operations, liquidation, receivership and other matters affecting SBICs and their portfolio companies. Prior to joining Foley Hoag, Michael served as General Counsel to the SBA, managing over 300 lawyers and staff, representing the agency on all matters of operations and policy and handling over 6,000 active litigation matters. In this role he was also responsible for clearing all Agency regulations, policy statements, proposed legislation and official correspondence. Bruce A. Kinn 617.832.1137 bkinn@foleyhoag.com As Co-Chair of the Private Funds practice, Bruce Kinn focuses his practice on domestic and international private equity funds and private equity transactions. Bruce represents international and domestic venture capital, buy-out and later stage, mezzanine and other private equity funds in connection with fund formations, fund management arrangements and restructurings, and general advice. He also counsels private equity investors in connection with investments in early and later stage companies, including both domestic and cross-border transactions, leveraged buy-outs and recapitalizations, investment vehicles, and transactional structuring. Malcolm Henderson 617.832.1276 mhenderson@foleyhoag.com Malcolm Henderson is a partner in Foley Hoag s Business Department. His practice focuses on corporate finance and bank lending. Malcolm has extensive experience representing lenders and borrowers (including SBICs) in secured and unsecured debt financings, including syndicated senior bank credit facilities, first and second lien financings, asset-based (ABL) credit facilities, mezzanine and other subordinated debt financings, debtor-in-possession financings, public and Rule 144A debt offerings, and convertible debt transactions. He routinely handles debt and equity financings for acquisitions and leveraged recapitalizations. He has also advised lessees in leveraged equipment lease transactions. Robert G. Sawyer 617.832.3071 rsawyer@foleyhoag.com As a Partner in the firm s Business Department and Co-Chair of the Private Funds practice, Robert Sawyer s practice focuses on investment advisers and private investment funds, including SBICs and other private equity funds, venture capital funds and hedge funds. He assists advisers with a range of regulatory compliance and licensure matters, including compliance with SBA regulations, formulation of policies and procedures for compliance with securities laws and regulations, advice and assistance with respect to current regulatory developments and compliance with registration and reporting requirements. In addition, Robert represents funds in structuring and negotiation of a range of debt and equity portfolio company investments and other financing transactions. Jennifer V. Audeh 617.832.3016 jaudeh@foleyhoag.com Jennifer Audeh is a Partner in the firm s Business Department and focuses her practice on small business investment companies, corporate finance, and securities law. Jennifer represents small business investment companies in connection with fund formation and licensing, portfolio transactions and regulatory compliance matters. She also advises clients on general corporate and transactional matters including representing buyers and targets in mergers and acquisitions; representing borrowers and lenders in secured and unsecured debt financings; representing companies and investors in private equity and venture capital financings; advising private equity funds in connection with fund formation and general advice; and advising companies on federal and state securities laws and corporate governance. Jennifer also assists public companies comply with SEC and Securities Exchange regulatory requirements.

BOSTON NEW YORK PARIS WASHINGTON FOLEYHOAG.COM