In the wake of several high-profile bank failures over the past week and the turmoil surrounding the larger banking industry in general, it is important to review the permissible uses of idle funds (i.e., funds not actively invested in small businesses) by SBIC funds under the Small Business Investment Company (SBIC) program.
Under 13 CFR 107.530, leveraged SBIC funds (and those that have applied for SBA leverage) must maintain idle funds in at least one of the following:
- Direct obligations of, or obligations guaranteed as to principal and interest by, the United States, which mature within 15 months from the date of the investment.
- Repurchase agreements with federally insured institutions, with a maturity of seven days or less. The securities underlying the repurchase agreements must be direct obligations of, or obligations guaranteed as to principal and interest by, the United States. The securities must be maintained in a custodial account at a federally insured institution.
- Mutual funds, securities, or other instruments that exclusively consist of, or represent pooled assets of, investments described in (1) or (2).
- Certificates of deposit with a maturity of one year or less, issued by a federally insured institution.
- A deposit account in a federally insured institution, subject to a withdrawal restriction of one year or less.
- A checking account in a federally insured institution.
- A reasonable petty cash fund.
A leveraged SBIC fund may deposit idle funds in excess of the insured amount at a financial institution and still comply with 13 CFR 107.530 only if the institution is “well capitalized” in accordance with the Federal Deposit Insurance Corporation regulations. An insured depository institution is “well capitalized” if it significantly exceeds the required minimum level for each relevant capital measure.
For an SBIC fund to maintain its active status, under 13 CFR 107.590, idle funds may not exceed 20% of an SBIC fund’s assets, subject to limited exceptions.
Please note that the above restrictions on idle funds do not apply to unlevered SBIC funds.
If you have any questions about the permissible uses of idle funds under the SBIC program, please contact the authors.