Office of the CEO

Entrex Inc.

48th Floor

311 South Wacker

Chicago, IL 60606

 

November 10, 2009

 

The Honorable Congressman Mark Schauer
United States House of Representatives
1408 Longworth House Office Building Washington, DC  20515

Subject:   “Small Investors for Small Business”

Dear Congressman Schauer,

Thank you for voting in favor of HR 3854.    As discussed with your team; we at Entrex, experience a unique position having created a Capital Market for Private Companies.  As you have pointed out and attempted to solve in your revisions to the Bill, SBIC fund managers tell us that the existing fund size limitations of the SBIC program are indeed too restrictive.  At the same time, by increasing the fund size limitations as proposed, the numbers of smaller investors (called “Accredited Investors” by the SEC) are not able to invest because of limitations of the Investment Company Act of 1940.

It indeed is an interesting paradox.

The Investment Company Act of 1940 (the “’40 Act”) limits the number of investors of a fund (including SBICs) to 99 investors before requiring the fund to register with the SEC as an Investment Company under the Act and the fund managers as Registered Investment Advisors.  SBICs would be overwhelmed with having to comply with the Investment Company Act in addition to the SBA regulations, and have chosen to stay below the 99 investor limit by raising their capital from large institutional investors, and not the smaller private “Accredited Investors”.  As you can see, creating larger SBIC fund sizes without enlarging the number of investors allowed may not achieve the full intention of the proposed legislation..

Furthermore, the increase in fund size of the proposed Bill would require a fund made up of private investors to each invest an amount of $750,000. Not many private “Accredited Investors” allocate this much of their capital to one fund.  They are inclined, as are institutional investors, to diversify their portfolios across other asset classes while avoiding excessive concentration in a single fund.  A small change to the ’40 Act regulation allowing SBICs to be exempt from the 99 investor limit is where I believe there's an immediate opportunity to bring more capital at a greater pace to private companies and the resulting employment growth in small businesses in America.

We ask that HR 3854 amend that section of the Investment Company Act simply by adding after the reference to "one hundred persons" in 3(c)(1) the following:  "(which number shall be increased to four hundred ninety-nine if the issuer is licensed as a Small Business Investment company by the Small Business Administration, or is another type of entity designated by the Administrator of the Small Business Administration, whether or not a small business investment company)".

The intent of this change will allow “Accredited Investors” to have the ability of investing in SBICs in amounts as low as $150,000.  

I await your follow up and am available at your discretion.

                                                                        Sincerely,

Stephen H. Watkins

Entrex Inc.

CEO