The phrase “nothing gets done in an election year” sums up what most onlookers think about Washington when the presidency is on the line.
When nothing else is getting done, it might be hard to imagine something like business development companies getting their regulations modernized. But Brett Palmer, president the Small Business Investor Alliance, thinks it can happen.
Congress created business development companies, or BDCs, in 1980 as alternative sources of debt and equity capital for small and medium-sized companies. They are required to have at least 70 percent of their total assets invested in privately issued securities, cash, office equipment and real estate interests controlled by companies that do not have any securities listed on a national exchange.
Investors are likely attracted to BDCs, which are traded openly on exchanges, because of their tax advantages and yield -- the IRS treats them as registered investment companies, the same as ETFs and most mutual funds, but in return they are required to distribute at least 90 percent of their income to shareholders to avoid paying a corporate-level tax.
Similar to venture capital funds, they provide investors with the chance to invest in smaller, growing companies, but allow a larger pool of investors to purchase shares. Because they have to pay out most of their income to shareholders, capital is raised in continual private offerings, similar to non-traded REITs.
One nagging problem, says Palmer, is that BDCs are overseen with regulations written during the Jimmy Carter administration and have many of the bureaucratic requirements of an operating company (for instance, they must file periodic 10-Q and 10-K reports with the SEC). These companies are also required to control or to provide significant managerial assistance to the small companies they invest in, and are limited in the amount of assets they are permitted to invest into any single name.
Palmer’s association argues that these rules place heavy burdens on firms offering a BDC, including voluminous paperwork, extended filing times for offering registration and limits on communication and information-sharing between BDCs, analysts and investors.
This year, Palmer is promoting the passage of the Small Business Credit Availability Act of 2015 in the House of Representatives and Senate. While the reforms have previously faced headwinds from regulators, advocacy groups and politicians uncertain about expanding opaque and illiquid products, this year the Small Business Investment Association is attempting to overcome partisan politics.
“Washington’s dysfunction is not overblown, but there are moments of progress,” Palmer says. “We’ve been able to take advantage of those to get some things across the finish line. In an election year, it’s going to be hard, but we’ve got a decent shot.”
The most controversial element of the association’s proposals is the possible expansion of the amount of money BDCs would be able to borrow to make investments. The bill would expand the amount of leverage available to BDCs from a 1:1 debt-to-equity ratio to a 2:1 ratio, and it would streamline some of the offering requirements for BDCs.