SEC Reduces Regulatory Burdens for Advisers of RBICs

On March 2, the U.S. Securities and Exchange Commission took two important steps to alleviate red tape for investment advisers who provide capital to and work with Rural Business Investment Companies (RBICs).

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Licenses for RBICs are provided by the Rural Business Investment Program (RBIP), a service authorized by the Food, Conservation and Energy Act of 2008 (2008 Farm Bill) to help promote venture capital investments in smaller enterprises in rural areas. The RBIP is the result of a collaborative agreement between the U.S. Department of Agriculture (USDA) and the U.S. Small Business Administration (SBA).

Before the onset of the current COVID-19 pandemic, rural areas in the U.S. had lagged urban centers in terms of recovery from the Great Recession of 2008.

Communities of less than 50,000 people grew by only 0.3 percent from 2008-2018 while the overall U.S. population increased by 8 percent over the same time period. Rural areas have continued to lose jobs, despite 11 percent job growth in the U.S. from 2007-2019.

 

SEC Amendments

The two amendments adopted by the SEC were made to implement congressionally mandated exemptions from registration for investment advisers who advise RBICs. The exemptions were enacted as part of the RBIC Advisers Relief Act of 2018, which amended the Investment Advisers Act.

Most notably, the two amendments include RBICs in the definition of the term “venture capital fund” and exclude their assets from the definition of the term “assets under management” for purposes of the private fund adviser exemption.

 

RBIC License Qualifications

Eligible investment advisers seeking an RBIC license as a for-profit entity or as a subsidiary of an entity must meet certain federal requirements.

Investment advisers must have relevant experience in venture capital or community development financing and must raise a minimum of $10 million in private equity capital. Applicants may be structured as limited partnerships, limited liability companies (LLCs), or corporations. Applications are accepted on an annual basis. Additional information may be found here.

While there are no restrictions on the location of firms seeking an RBIC license, the concept was designed to help fill the need for business and development capital in rural areas. As an example, a minimum of 75 percent of funds raised for an RBIC must be invested in rural areas with populations of 50,000 or less. At least 50 percent of the funds raised must be invested in smaller companies with a maximum net worth of $6 million and net income of $2 million in the prior two years. In addition, no more than 10 percent of RBIC investments may be made in urban areas.

Interested investment advisers should note that the USDA focuses on whether prospective management teams have demonstrated a history of positive realized track records of superior returns to investors. The USDA also looks for strong experience in managing private equity funds in order to help protect taxpayers against poor fund performance.

Applicants also must submit detailed information concerning its community or economic development experience, including how the advisory firm will work with community-based organizations.

 

How Core Compliance Can Help

RBICs and other private equity funds have unique regulatory requirements and risk management matters. To learn more, contact us today online or at (619) 278-0020.