On May 1, 2012, the U.S. Small Business Administration (SBA) released a Federal Register Call Notice inviting fund managers to submit preliminary materials, in the form of the Management Assessment Questionnaire (MAQ), for consideration by the SBA to be licensed as part of the new Early Stage Small Business Investment Company (SBIC) program. The next deadline for beginning the process to become an early stage SBIC is June 19, 2012. Funds and management teams interested in being licensed as Early Stage SBICs should begin working now to submit the required materials by June 19.

Early Stage SBIC Program Background

The Early Stage SBIC program offers, for the first time, the opportunity for funds focused on investments in "early stage" companies to receive SBA leverage. An "early stage" business is one that has never achieved positive cash flow from operations in any fiscal year. This new program is designed to promote early stage investing to expand entrepreneurs' access to capital and encourage innovation in the U.S. economy. The Early Stage SBIC program is part of President Obama's Start-Up America Initiative, which committed up to $1 billion in SBA guaranteed leverage over a five year period, beginning in 2012. Of the $1 billion commitment, up to $150 million can be reserved for leverage commitments in 2012, up to $200 million in 2013 through 2015 and up to $250 million in 2016.

An Early Stage SBIC is generally subject to the same regulatory requirements as standard SBIC's, except that an Early Stage SBIC must invest in "early stage" businesses, must use the SBA's new Early Stage Model LPA (available on the SBA's website) and is subject to a modified licensing process.

Licensing Process

The Early Stage SBIC program consists of two tracks. The initial deadline for Track 1, for applicants with existing capital commitments of at least $15 million, was May 25, 2012. Edwards Wildman Palmer LLP submitted MAQs as part of Track 1 on behalf of three funds whose investment strategies target early stage investments. The initial deadline for Track 2 is June 19, 2012.

The initial step is to submit a MAQ to the SBA, which requires detailed information on the management team, the proposed strategy for the SBIC, the principal's investment track record and the proposed fund structure and economics. If, after a review of the MAQ, the SBA Investment Committee concludes that the fund may be qualified to be licensed as an Early Stage SBIC, it will invite the fund participate in the next step in the Early Stage SBIC licensing process, an interview with the SBA Investment Committee.

For funds that pass the interview process, the SBA will conduct further due diligence, and thereafter will issue "Green Light" letters to all funds meeting the Early Stage SBIC program's criteria, formally inviting the fund to submit a license application to the SBA. In order to be considered for licensure as an Early Stage SBIC, the fund must have a minimum of $20 million of Regulatory Capital (paid-in capital plus unfunded commitments from Institutional Investors, as defined under the SBA Regulations) when it files its license application.

Track 2 Applicants Must Submit MAQs by June 19, 2012

The MAQ submission deadline for the Early Stage SBIC program's Track 2 is 5 p.m. ET on June 19, 2012. Unlike Track 1 applicants, Track 2 applicants are not required to have a certain amount of existing capital commitments upon filing of the MAQ.

Interviews for Track 2 applicants whose MAQs pass the SBA's pre-screening process will take place between June 23, 2012 and August 3, 2012, with Green Light letters being issued by September 28, 2012.

License applications for Track 2 applicants are due by 5 p.m. ET on May 15, 2013, at which time the applicant must have signed commitments of at least $20 million in Regulatory Capital.

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