On March 21, the U.S. Small Business Administration (SBA) published a Notice delaying for an additional 60 days the effective date of a recent Final Rule that modifies SBA’s regulations on the ability of a small business investment company (SBIC) to finance passive businesses. (See our previous Client Alert for a summary of this Final Rule).

The Final Rule was initially scheduled to take effect on January 27. However, on January 26, SBA pushed the effective date to March 21 and invited additional public comment on the Final Rule. SBA has now further delayed the effective date of the Final Rule to May 20, but unlike the previous delay, SBA did not reopen the comment period.

The initial delay and reopening of the public comment period was the result of a January 20 memorandum from the White House titled “Regulatory Freeze Pending Review,” which calls for agencies to temporarily postpone the effective date of any pending rules and to invite new public comment. These types of delays are fairly standard when there is a change in presidential administrations from one political party to another. Although there is no indication that SBA no longer thinks the Final Rule is appropriate, SBA stated that it will use the additional 60-day period to consider further the Final Rule’s impact on the SBIC program and its participants, and to make necessary determinations regarding the effects of the Final Rule on the examination and liquidation functions of the SBA’s Office of Investment and Innovation.

The Final Rule’s modifications to the passive business SBIC program regulations, along with two technical changes unrelated to those regulations, will not go into effect until May 20. However, the delay in implementing those technical changes does not impact their effect under the law. One change reflects SBA’s current oversight practices allowing for a reduction of the minimum $5 million regulatory capital and $2.5 million leveragable capital requirements for SBICs if the reductions are performed in accordance with an SBA-approved wind-up plan. The other change reflects congressional legislation that had an immediate effect on the increase in the maximum amount of SBA leverage available to SBICs under common control from $225 million to $350 million.

A more detailed description of the SBIC Program is available in the Pepper Hamilton publication “Description of the Small Business Investment Company Debenture Program.”