SSBICs: Investing in the Socially or Economically Disadvantaged

Small Business Investment Companies (SBICs) are set up through the Small Business Investment Act of 1958. These are privately owned and managed investment firms that partner with the Small Business Administration to provide capital and long-term financing to small business. Within the Small Business Investment Act now is Section 301(d) which allows for the creation of Specialized Small Business Investment Companies. These investment firms also provide capital and long term financing to small businesses with the added qualification that the investments are in firms operated by individuals who have been hindered socially or economically.

SSBIC investments are guaranteed by the SBA for a term up to 10 years. Individuals wishing to participate as an SSBIC investor must meet several qualifications. The SSBIC must be structured as a corporation, limited partnership, or limited liability company (LLC). The SBA exercises final judgment on geographical need, the business reputation, and management track record of the SSBIC applicant. Applications and information can be requested from the SBA’s Investment Division and approval generally takes about six months.

The benefit in investing in SSBICs is that substantial tax breaks can be realized. Investors who buy into an SSBIC are able to defer capital gains tax payments of up to $50,000 provided the proceeds from the realized capital gains are reinvested into an SSBIC within 60 days. The second tax break kicks in when SSBIC interests are sold by the investor. These proceeds are taxed at a lower capital gains rate. If the interest is held for 5 years the capital gains tax rate is 14%. So, by placing proceeds from publicly traded stock sales into SSBICs, investors can pay a net 6% less in taxes.

Finding the right SSBIC can be the toughest hurdle for the prospective investor. Lists of these companies are not readily available but can be found through making contacts. The National Association of Investment Companies (NAIC) does represent SSBICs but does not provide referrals. It does sell its entire membership directory for $35. Another option is to make contact through the National Association of Small Business Investment Companies (NASBIC) web site here.

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