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As the 108th Congress prepares to leave town for the last time, it has left dozens of venture capital firms scrambling for new sources of financing. As part of a $388 billion omnibus spending bill, lawmakers authorized $4.2 billion for the Small Business Investment Company program, which the Small Business Administration operates. But the SBA cannot tap the funds because the SBIC program is not financed from the general treasury. Rather, it is supposed to be self-sustaining. That means the SBA must come up with a way to offset its expected losses from new investments before it can invest the funding in SBIC participants. “The program is not dead — Congress voted to authorize it — but we have to find a way to restructure it so an appropriation is not required,” said Lee Mercer, president of the National Association of Small Business Investment Companies, a Washington-based trade association. SBICs are private venture capital funds that make loans to or equity investments in small businesses with their own money and in funds guaranteed by the SBA. Through the program venture capital firms may draw up to $2 in government funds for every dollar raised from private sources. Unaffected by the debate over the program’s funding are financing commitments to SBICs that the SBA approved before the current budget expired Sept. 30. Any restructuring of the SBIC funding system must meet the requirements of the budget and the Credit Reform Act, which requires SBA to estimate on a per dollar basis the amount the government will lose on these investments. That estimate is the subsidy rate, which the law says must be covered by a reserve account funded by fees and profit sharing. Financing for the SBIC program dried up as investments by the funds soured during the technology downturn. The higher than expected losses cleaned out the reserve account. According to the Office of Management and Budget, fees in the current participating securities structure are not sufficient to cover the SBICs’ losses, which are projected at nearly $2 billion. NASBIC and the SBA are working to come up with a new way to replenish the reserve account without tapping taxpayer dollars or making the program too expensive for venture investors. The trade group devised an alternative funding structure last year, but the SBA rejected the plan after concluding that it would not raise sufficient financing. NASBIC now plans to submit a restructured version of the program when the 109th Congress convenes in January. Mercer said he is confident a solution will be found and the program will be back in place next year, although he declined to discuss the latest changes his trade group expects to propose to lawmakers. “We hope to start right off at the beginning of the year with hearings, and if we are successful, we are hopeful legislation will move quickly and pass by the end of June,” he said. The issue is likely to get political. Democrats already are upset over the Bush administration’s failure to adequately fund the SBA. “Republican leaders in Congress have rubber-stamped a proposal by President Bush that makes it even harder for small businesses to borrow money in America,” said Sen. John Kerry, the ranking Democrat on the Small Business and Entrepreneurship Committee, which oversees the SBIC, in a statement after lawmakers passed the omnibus spending bill. “That is simply wrong.” Copyright �2004 TDD, LLC. All rights reserved.

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