The U.S. Small Business Administration, facing criticism for a slowdown in licensing times in the Small Business Investment Company program, is working on a series of fixes to improve the efficiency of the process.
The SBIC program, which provides government-backed leverage for GPs that invest in equity and debt of qualifying small businesses, has broad bipartisan support as a cost-effective way to help small businesses and spur economic growth.
But investment professionals have been frustrated by the recent administration of the program, complaining that long wait times for SBIC licenses have made the program less appealing to both GPs and their LP investors.
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The government’s small business investment company program is losing some of its luster among managers as long licensing times and the recent government shutdown hamper LPs’ ability to reliably deploy capital to government-backed small-business funds.
GPs and LPs alike complained to Buyouts about long wait times for SBIC licenses – and that was before the government shutdown worsened the backlog at the U.S. Small Business Administration. Most say SBICs still offer attractive opportunities for investment, but many are concerned that the program is trending in the wrong direction.
Attorney Mark Kromkowski, head of McGuireWoods’ SBIC Fund Formation and Transactional Group, said approvals that used to take six months now commonly take a year or more. While some delay should be expected whenever a presidential election leads to turnover of key SBA staffers, the transition between the Obama administration and the Trump administration had unexpected slowdowns, especially for a program that is popular with both Republicans and Democrats, Kromkowski said.
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A Small Business Administration rule finalized Friday says that fraudulently obtained small business contracts provide no value to the federal government, a change that will increase the number of enforcement actions by clearing the government to seek repayment for the entire contract.
The rule implements part of the Small Business Jobs Act of 2010, which says that when a company wins a contract by willfully misrepresenting its small business status, the government’s presumed loss is the value of the contract.
While the law already provided for criminal and civil penalties, including False Claims Act liability, the government had a hard time winning these cases because rulings like the one in Ab-Tech Construction v. United States had made it difficult to establish damages. In that 1994 case, the Court of Federal Claims limited the government’s recoverable damages because the contractor had provided the agreed-on services.
But the SBA regulation, which takes effect Aug. 27, will allow prosecutors and private relators to pursue fraud much more easily, under the assumption that contracts obtained through misrepresentation have no value to the government. This puts the entire value of the contract at stake.
“I expect to see a substantial uptick in prosecutions,” said Richard Oliver, a partner with McKenna Long & Aldridge LLP. “There have been very few prosecutions for false size certifications over the last 20 years. The only prosecutions we’ve seen have been extremely blatant situations.”
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