Intersection of Regulation and Compliance from Investment Advisors to Small Investment Firms and Private Fund Advisors | before



A Small Business Investment Company (“SBIC”) is a private company that makes long-term investments in US small businesses and is licensed by the US Small Business Administration (the “SBA” or “Administration”). The SBA manages the SBIC program through its investment division, located in Washington, DC. The SBIC program encourages the establishment of SBIC funds to increase the flow of investment capital to small businesses and small businesses in the United States. A discussion of the application process and the requirements to become an SBIC is beyond the scope of this article. For more information on the application and licensing process, please visit the SBA website.

It is common for a private fund manager (“PF”) to own and manage one or more SBIC funds. The main reason that a PF management company obtains a license as an SBIC is the access to finance (leverage) provided by the SBA. Fund managers generally form SBIC funds as limited partnerships (“LPs”) managed by a general partner, and holdings in limited partnerships are offered to qualified investors. Additional benefits include:

  • Concentrating much of the funding in a single LP reduces fundraising costs and administrative / reporting requirements,
  • Improved search for offers through a network of SBICs, and
  • The SBA’s Financial Reporting Criteria help SBICs develop standardized and comprehensive investor relations processes.


U.S. Small Business Investment Act 1958

SBICs are regulated under the Small Business Investment Act of 1958 and licensed by the SBA. SBICs are subject to multiple investment restrictions and requirements, including prohibitions on certain types of investments and diversification requirements.

Investment Advisers Act 1940 (“Advisers Act”)

Under the Advisors Act, there are 3 exemptions from SEC registration available to SBIC advisers:

SBIC advisor exemption – An advisor who only provides advice to an SBA licensed SBIC is exempt from registration as an advisor and registration requirements (eg, reporting and record keeping).

Compliance Council – The SBIC advisor is required to have appropriate policies and procedures and is subject to a regulatory review at least every two years by the SBIC Examinations Office. These reviews are designed to ensure that SBIC funds are operating in accordance with SBIC regulations or to determine when they have not.

Exemption of private fund advisers – Available for advisor only for private funds that have less than $ 150 million in US assets under management, and one or more SBICs. Under this exemption, the assets of the SBIC (s) are excluded from the assets under management of the private fund manager. An advisor who has another type of client is not eligible for this exemption. The SEC refers to this type of adviser as an exempt reporting adviser (“ERA”).

Compliance Advice – An adviser who avails himself of the private fund adviser exemption must file an initial and annual report on Form ADV with the SEC and is subject to review. The other provisions of the Act and the rules of the SEC applicable only to registered advisers do not apply.

Exemption for venture capital fund advisers – Available for an advisor who advises only one or more “venture capital funds” as defined by the SEC rule (regardless of the amount of assets under management), and one or more SBICs. The SEC calls this type of advisor an IBA.

Compliance Advice – An advisor who avails himself of the venture capital advisor exemption must annually file a report on Form ADV with the SEC and is subject to review. The other provisions of the Act and the rules of the SEC applicable only to registered advisers do not apply.

Since venture capital and venture capital fund advisors that rely on the referenced exemptions are considered IBAs, these advisers must, in addition to meeting specific reporting requirements (i.e.

  • Fiduciary obligations,
  • Obligation to monitor,
  • Payment rule to play,
  • Fraud against investors in mutualized investment vehicles,
  • Insider trading policies and procedures, and
  • Protections for whistleblowers.

Overall, a PF manager advising SBIC funds is common and primarily presents ERA compliance risks until the manager registers with the SEC. Policies, procedures and controls should address the investing, business and operational activities of fund managers, including accounting for a separate compliance program for an SBIC fund.


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