Discretely tucked into the recently signed $1.9 Trillion federal Rescue Act of 2021 (the “Rescue Act”), are amendments to the existing State Small Business Credit Initiative Act of 2010 (the “SSBCI”). While news of the Rescue Act’s enactment has been heavily promoted nationwide, the SSBCI amendments have received little public notice.
The SSBCI
The SSBCI was enacted principally to expand State programs that encourage lending to small businesses. But several of the SSBCI’s provisions are designed to benefit what are defined as “State Other Credit Support Programs” (“SOCSPs”). A SOCSP is a State administered program that:
(i) uses public resources to promote private access to credit;
(ii) is not a State capital access program;1 and
(iii) meets the eligibility criteria in Section 3006(c) of the SSBCI.
An interesting feature of an eligible SOCSP is that while most provisions of the SSBCI address lending activities, SOCSPs include State programs that go beyond lending activities, and particularly include benefits for “State-run venture capital fund programs.” Venture capital activities generally refer to the business of making capital investments; and, as a result, the SSBCI opened the door to promotion of federally funded, State-supported small business capital investing programs.2
Under Section 3006(c) of the SSBCI, for a SOCSP to be approved for receipt of federal funds, the State must:
(i) meet the specified investment leverage criteria;3
(ii) demonstrate that such State programs can use the federal contributions to cause and result in specified minimum amounts of new small business “lending”;
(iii) for those SOCSPs that “provide their support through 1 or more financial institutions…. requires the financial institutions…to have a meaningful amount of their own capital resources at risk in their small business [activities],”4 and
(iv) target federal funds allocated to the SOCSPs for allocation to small businesses in maximum amounts as specified in the legislation.5
The overall goal of the SSBCI is to encourage national economic activity. But the specific considerations to be taken into account by the Secretary of the Treasury (the “Secretary”) in making allocations of federal funds to the SOCSPs are those which, hopefully, will allow such federal funding to be targeted to the expansion of economic opportunities for small businesses.
Another feature of the SSBCI is that the federal funds disbursed to a participating State are made available in 1/3 allocations. The aggregate allocation to a participating State is transferred 1/3 when the participating State is approved by the Secretary for participation in SSBCI programs. Each successive 1/3 is disbursed when the State has certified to the Secretary that it has “expended, transferred or obligated” 80 percent of the last transferred 1/3 for federal contributions to, or for the account of, State programs eligible to receive SSBCI funding.
New York State is a good example of a State that has supported, and benefited from, the SSBCI’s financing of SOCSPs. In 2012 New York launched its SOCSP -- the Innovate NY venture capital fund -- to receive funding under the SSBCI. Innovate NY is managed by New York Ventures, the venture capital investment arm of Empire State Development, an agency of New York State government. To date, rather than make its own direct investment in seed-stage companies, Innovate NY has taken a “fund of funds” approach by investing its SOCSP allocations in seven venture capital funds. These funds have been competitively selected to manage investment of New York State’s SOCSP allocations.
Innovate NY has awarded funding to these identified venture capital funds on a ratio of 2:1 private-public investment: every two dollars of funding received by such investment manages from private sources for seed stage investment is matched by New York State with one dollar of State SSBCI funding. In January 2019, in announcing that New York State had completed investment of the $45.9 million allocated to Innovate NY, New York State Governor Andrew Cuomo stated that “81 [New York State] companies have received more than $370 million in investment capital, leading to the creation of or retention of 2,250 jobs.” In that prese release, New York State revealed its own SSBCI success story.
The Rescue Act Amendments
As stated above, within the recently enacted Rescue Act of 2021 (the “Rescue Act”) are provisions that amend the SSBCI. These amendments create new SSBCI programs (the “Programs”) for the benefit of businesses owned and controlled6 by Socially and Economically Disadvantaged Individuals (the “SEDIs”) and Tribal Governments.
In order to participate in the Programs, an applicant business must be “a business enterprise owned and controlled by socially and economically disadvantaged individuals” (a “SEDI Business”). The definition of SEDIs is set forth in Section 8(a) of the Small Business Act (“SBA”)—which definition was not altered by the Rescue Act. Socially disadvantaged individuals are defined in the SBA as “individuals who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” Members of the following groups are deemed to meet the definition: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans and Subcontinent Asian Americans. Individuals not members of one of the listed designated groups may establish social disadvantage based on personal experiences of substantial and chronic social disadvantage in American society.7 For example, the definition for SEDIs has been interpreted to also include “gender” bias as part of the “cultural bias” provision of the definition, which can make the Programs available to women-owned and LGBTQ-owned businesses.
Section 8(a) goes on to define “economically disadvantaged individuals,” the other necessary characteristic for status as an SEDI, as “those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged.”8 For example, in the Assessment it states that to establish initial eligibility an applicant cannot have a net worth (as defined) of $250,000 or more, but applicants can be considered economically disadvantaged even if they have total assets (without adjustments for indebtedness) of as high as $4,000,000.9
In general, the Rescue Act expands the SSBCI in many ways. As part of the Programs, Section 3003(c)(4) of the SSBCI has been amended to allow for longer periods of time in which States can expend their allocations of funding. Before the Rescue Act, a State that participated in the SSBCI needed to allocate its full participation amount within 2 years following its acceptance into the SSBCI program (its “Acceptance Date”). The Rescue Act has extended that period to allow the second 1/3 of a State’s allocated amount to be expended within 3 years following its Acceptance Date and the third 1/3 of a State’s allocated amount to be expended within 6 years following its Acceptance Date.
In creating the Programs, the Rescue Act also sets aside Ten Billion ($10,000,000,000) Dollars to be expended:
(i) “to provide support to small businesses responding to and recovering from the economic effects of the COVID-19 pandemic”;
(ii) “[to] ensure business enterprises owned and controlled by [SEDIs] have access to credit and investments”;
(iii) “[to] provide technical assistance to help small businesses applying for various support programs”; and
(iv) “to pay reasonable costs of administering such Initiative”—which amount includes the overall funding for the Programs”.
These funds are required to be expended by September 30, 2030.
The Secretary is specifically directed to make special allocations to the Programs for fiscal 2021. The basic process by which States can apply for individual allocations under the SSBCI does not seem to have changed except as described below, and the individual State allocations under the SSBCI are not identified in the Rescue Act. The Rescue Act does make a few changes in how the State allocations are meted out, however.
In creating the Programs under the Rescue Act, Section 3003 of the SSBCI is amended by creating a new Section (d) entitled “ADDITIONAL ALLOCATIONS TO SUPPORT BUSINESS ENTERPRISES OWNED AND CONTROLLED BY SOCIALLY AND ECONOMICALLY DISADVANTAGED INDIVIDUALS.” In that Section, One and One-half Billion ($1,500,000,000) Dollars of amounts allocated under the Programs for the 2021 fiscal year is set aside (the “Set Aside”) to be allocated to the States by taking away the requirement that the funds be allocated in accordance with the strict formula set forth in subsection (b) of Section 3003 of the SSBCI. The new language specifies that from the Set Aside the Secretary “shall allocate such amounts to States based on the needs of business enterprises owned and controlled by [SEDIs], as determined by the Secretary, in each State, and not subject to the allocation formula described under subsection (b).” This provision allows the Secretary to make allocations under the Programs based upon the real needs of each State—as demonstrated by each State—rather than simply based upon the existing formulaic construction.
In addition, a new Section (e) has been added to Section 3003 of the SSBCI as a further incentive for State performance under the Programs during fiscal year 2021. Pursuant to this new section, the Secretary is directed “to set aside One Billion ($1,000,000,000) Dollars for an incentive program under which the Secretary shall increase the second 1/3 and last 1/3 allocations for States that demonstrate robust support, as determined by the Secretary, for business concerns owned and controlled by [SEDIs] in the deployment of prior allocation amounts.” This incentive is clear indication that a State will be rewarded and recognized for the quality of its performance under the Programs with additional Program allocations beyond that originally set aside for a particular State.
The Rescue Act also created additional smaller programs that augment the Programs. New Section (f) was added to Section 3003 of the SSBCI to benefit “Very Small Businesses”, which are defined as “business[es] with fewer than 10 employees” and which businesses “may include independent contractors and sole proprietors”. To fund this new program, the Secretary is obligated to allocate at least Five Hundred Million ($500,000,000) Dollars out of the $10 Billion Dollars allocated to the new Programs, to be payable to the States subject to the requirement that the States use such funds for Very Small Businesses.
Finally, under the Rescue Act a new Section (e), “TECHNICAL ASSISTANCE”, was added to Section 3009 of the SSBCI (the “Technical Assistance Program”). Under this provision, in order to carry out the Programs, up to $500,000,000 of 2021 fiscal year funding may be allocated by the Secretary:
(i) to the States to carry out technical assistance plans under which a State will provide legal, accounting and financial advisory services, either (x) directly to SEDIs or (y) through contracts with legal, accounting, and financial advisory firms-- with priority given to business enterprises owned and controlled by SEDIs10--to very small businesses and business enterprises owned and controlled by SEDIs that are applying for benefits under state and federal programs that benefit small businesses;
(ii) to the Minority Business Development Agency; and
(iii) directly to legal, accounting and financial advisory firms (with priority given to business enterprises owned and controlled by SEDIs, under direct contract with the federal government to provide technical assistance to business enterprises owned and controlled by SEDIs that are applying for benefits under the Programs or under other state and federal programs that benefit small businesses.11
The Technical Assistance Program is novel in that it recognizes the importance of professional advisory services to the SEDI Businesses served by the Programs, and provides a potential means for the provision of those valuable services to SEDI Businesses without depletion of the funds actually disbursed to such SEDI Businesses themselves. Although any professional advisor, or professional advisory firm, is potentially eligible to receive funding under the Technical Assistance Program, the Rescue Act specifically addresses the priority to be given to advisors and advisory firms which themselves are SEDIs or owned and controlled by SEDIs, respectively. Unlike other aspects of the Programs, the funding for the Technical Assistance Program does not need to be allocated through State government programs (with advisory services being provided either directly through state-sponsored organizations or through private advisors or advisory firms selected through State programs). But such funding can be allocated directly by the Secretary to eligible advisors and advisory firms. Under either scenario, the Programs will potentially lead to a “gold rush” for qualified professional advisors and advisory firms that seek to compete for the funds to be made available under the Technical Assistance Program.
