The word passive describes an intermediary's role, not a new permission to finance any investment vehicle. SBA's final rule, published December 28, 2016, retains the Small Business Investment Company program's general prohibition on passive-business investment. It expands defined exceptions that allow financing to reach eligible non-passive small businesses through specified structures, rather than abandoning the operating-business requirement. [2016-31291]

One exception covers pass-through financing to eligible subsidiaries under ownership conditions. Another permits qualifying partnership SBICs to form blocker entities: corporations or LLCs electing corporate tax treatment. The latter requires a specified tax-income basis, including unrelated business taxable income, effectively connected income for foreign investors, or certain nonqualifying income for an investor taxed as a regulated investment company. [2016-31291]

The distinction between stages matters. The October 2015 proposal's certification identified the first two income concerns; the final certification includes the regulated-investment-company category as well. Both documents pair expanded structural flexibility with oversight. They are records of the same SBA rulemaking, not independent confirmation that the new arrangements would increase financing or exempt investors from taxation. [2015-25232][2016-31291]

Under the final conditions, substantially all means at least 99 percent of proceeds after permitted fees and reimbursements. Aggregate fee limits and access to portfolio information constrain the arrangements. Separately, the rule conforms common-control leverage limits to a $350 million statutory maximum. Its stated effective date is January 27, 2017. Neither the percentage nor the leverage ceiling promises money to an individual applicant. [2016-31291]

Source documents

  1. Small Business Investment Companies: Passive Business Expansion and Technical Clarificationshttps://www.govinfo.gov/content/pkg/FR-2016-12-28/html/2016-31291.htm
  2. Small Business Investment Companies; Passive Business Expansion & Technical Clarificationshttps://www.govinfo.gov/content/pkg/FR-2015-10-05/html/2015-25232.htm