NMVC

General

 

What is the New Markets Venture Capital Program?

 

The New Markets Venture Capital (NMVC) program is modeled after the Small Business Administration’s successful Small Business Investment Company (SBIC) program but has a specific mission of economic development in low-income (LI) areas. Through a combination of equity-type financing and intensive operational assistance to smaller businesses located in LI areas, the program seeks to assist local entrepreneurs, create quality employment opportunities for residents and build wealth within these communities.  SBA intends to achieve these public policy objectives through financial assistance to newly formed NMVC companies (NMVCCs) and to existing Specialized Small Business Investment Companies (SSBICs).  (see also NMVC program overview)

 

What is a New Markets Venture Capital Company (NMVCC)?

 

An NMVCC is a privately managed, newly formed, for-profit investment company formed for the purpose of providing equity-type capital and hands-on operational assistance to smaller businesses located in specific rural and urban LI areas.

 

SBA will designate NMVCCs through a competitive selection process:

  1. Conditional Approval – based upon the merits of the application, how the application compares to other applications covering the same or proximate LI areas, and SBA’s objective of achieving nationwide and both rural and urban impact of the program.  
  2. Final Approval  – based on whether conditionally approved NMVCCs, by deadlines established by SBA, raise the required amounts of regulatory capital and grant matching resources, and complete necessary legal documentation

What are the benefits of forming an NMVCC?

 

  1. SBA Financial Assistance.  SBA will supplement an NMVCC’s own capital through guarantees of debentures to be issued by the company in a face amount of up to 1.5 times its capital. The debentures will have a term of up to 10 years from the date of draw-down and be issued at a discount.  Interest for years 1-5 is paid up front in the form of the discount, interest only is payable for years 6-10, and principal is due at the end of year 10.  SBA will arrange “just-in-time” funding for the debentures under procedures similar to those utilized in the SBIC program. The debentures are expected to be priced at a current market rate for comparable U.S. Government Treasury securities plus a premium.  The debentures are expected to be pre-payable without penalty after one year.  There are no SBA fees associated with the debenture (see NMVC Debenture Calculator at http://www.fhlbc.com/sba/newmarketcalculatorpage.htm).

    Example: An NMVCC with $10 million of contributed capital would be eligible to issue debentures with a face amount of $15 million. If a 6.49 percent interest rate prevailed when the debentures were issued, the company would receive net proceeds of $10.62 million for the $15 million of debentures. No payments would be required for the first 5 years. Commencing with the sixth year, the NMVCC would pay interest on the $15 million at a 6.49 percent rate compounded semi-annually, and the entire $15 million of principal would be due at maturity.

     

  2. SBA Operational Assistance Grants. SBA also will match the resources that the NMVCC has raised for operational assistance (whether in cash or in-kind) with an equivalent grant. The NMVCC must use the grant funds and matching resources to provide marketing, management and other operational assistance to the businesses in which it invests or intends to invest.

What are the benefits to the investor?
A potential investor can benefit in at least the following five ways through its investment into an NMVCC or SSBIC participating in the NMVC program:

  1. A reasonable rate of return:  NMVC companies will be for-profit entities that will seek to provide returns to investors.  Although there can be no guarantee of success, producing an attractive return on investment will be one of the NMVCC's objectives. 
  2. Benefits of operational assistance grants:  The appropriate use of operational assistance grants should enhance opportunities for returns to the investors and add to the long-term economic success of the community by providing small businesses the help they need to become economically viable.
  3. Giving back to one’s community:  The NMVC program is designed to target the needs of the community in which the NMVCC or SSBIC operates.  State and local economic and/or community development entities, local financial institutions (including thrifts), utility companies, business leaders and philanthropists can pool resources into one fund for maximum investing in their local economies.  High profile investors also can benefit from the added visibility of their participation in an NMVC fund for marketing and outreach purposes.  
  4. Tax credits:  Investors may be eligible to receive a New Markets Tax Credit, which the U.S. Department of Treasury will allocate through an annual competitive process. (See New Markets Tax Credit) 
  5. Community Reinvestment Act (CRA):  Financial institutions that invest in NMVC firms or SSBICs may be eligible for CRA credit.  Such institutions would be required to follow rules governing equity investments by Federal financial institutions.  

What are the benefits to a small business?
Small businesses located in the LI areas can receive:

  1. No-cost operational assistance, for example: accounting, business, or marketing plans and engineering assistance.
  2. Long-term risk capital.
  3. Proactive investor with a stake in growing the business.

The type, terms and conditions of individual investments will be up to NMVCCs and SSBICs, within guidelines set by the regulations governing the program.  SBA will monitor this compliance through examinations and other oversight mechanisms.

 

What is the difference between the purposes of the NMVC program and those of the Specialized Small Business Investment Company (SSBIC) program?

NMVCCs target entire communities for business investments while SSBICs seek business investments in small businesses owned by individuals that are socially or economically disadvantaged.  NMVCCs focus on the geographic location rather than on the ownership of small businesses.  However, SSBICs are eligible to apply for grant funds under the NMVC program to provide operational assistance to businesses located in LI areas, if such SSBICs plan to raise additional capital and use it to make developmental venture capital investments in such businesses.

 

What are LI areas?
LI areas are defined by statute, and include geographic areas that fall within the following descriptions:

  • census tracts or equivalent county divisions with a poverty rate of 20 percent or more;
  • census tracts or equivalent county divisions located within a metropolitan area, and that qualify for the Low Income Housing Tax Credit (i.e., in which 50 percent or more of the households have an income below 60 percent of the area median gross income);
  • census tracts or equivalent county divisions not located within a metropolitan area, and which have a median household income that does not exceed 80 percent of the statewide median household income;
  • a HUBZone;
  • an Urban Empowerment Zone (EZ) or Urban Enterprise Community (EC); or
  • a Rural EZ or Rural EC.

How many rural vs. urban locations is SBA targeting?

SBA is not targeting a specific number of areas, either rural or urban.  This diversity will be dictated largely by applications submitted to and selected by SBA.

 

If there is already an NMVCC, or an SSBIC with an NMVC operational assistance grant, serving the geographical area I wish to target, is it worth my time to apply?
SBA would not discourage anyone from applying to the program, as there is no statutory provision preventing multiple NMVC program participants from serving the same geographical area.  However, the selection process is a competition for a limited amount of resources, and SBA has a statutory requirement to select program participants so as to achieve nationwide impact.  With that in mind, it is unlikely that SBA will have sufficient NMVC program resources to allow more than one program participant to focus on the same LI areas.