5. There is a great amount of paperwork required of SBIC's by governmental agencies due to a duplication of regulations by both SBA and SEC, to which many reports and statements must be filed periodically.

Experience has shown that small SBIC's have difficult problems to overcome in their operations, especially if they wish to help the small businesses prosper and grow. Since financing of small businesses by SBIC's involves very high risks, it is urged that some form of a Federal insurance program for smaller SBIC loans of $20,000 or less, similar to FHA mortgage insurance, be developed by SBA for congressional approval. Congress recently made several amendments to the Small Business Investment Act which will be of some help to the small business investment program. The SBA has also been taking steps to facilitate the operations of SBIC's. And the National Association of Small Business Investment Companies has been building a better image of SBIC's and promoting the program to the general public. It is, therefore, to be hoped that with the cooperation of all, the SBIC program may have smoother sailing in the future.

I thank you.

The CHAIRMAN. A very nice statement, Mr. Tsui. Thank you for giving it. We can certainly agree with most of what you have to say. You mentioned that the reserve rate of 10 percent allowed by the International Revenue Service is insufficient to cope with the risk. Mr. TsUI. Yes, sir.

The CHAIRMAN. Can you tell the committee the loss reserve rate authorized for Federal savings and loan associations, and banks?

Mr. Tsui. I do not know; but I presume their loans are more secure. Our corporation takes in loans that the savings and loan associations, and banks, do not want, so our risk is much greater.

The CHAIRMAN. Do you have a specific figure to which this should be raised that you would recommend?

Mr. Tsui. Well, in our own instances we have built up a reserve of $30,000 since our commencement. However, in reviewing our portfolios, we find that the reserve is not sufficient.

The CHAIRMAN. You recommend something in the way of a Federal insurance program similar to FHA?

Mr. TsUI. Yes, sir.

The CHAIRMAN. This is interesting. Do you suggest it be operated by SBA or some other agency of the Government?

Mr. TsUI. I am quite sure SBA can take care of that.

The CHAIRMAN. You have 120 stockholders. Are they all small businessmen or bankers or financiers who comprise these?

Mr. Tsui. No, sir. We are all small stockholders, and that is our trouble. We have a very small company, but we have to register with the SEC. So we are under both SEC and SBA. That means we have to work much harder.

The CHAIRMAN. This is a complaint that is repeatedly made by everyone that appears before this committee, and this is a difficulty that I for one hope can be resolved to alleviate this constant uniformity of complaint by everyone in this area.

We have been told by SEC when they appeared before us at other times that it is only a minimum regulation when you propose to issue

stock. How we can get you exempt from advising the SEC when you go public I just do not know unless you can give us some

Mr. Tsui. In our case we go public just for the fact that we are two stockholders over the exemption. The SBA exempted us from registration when our stockholders were not more than 100. Unfortunately we are two over, so for those two stockholders we have to register with SEC.

Mr. MULTER. Why don't you buy back the stock of those two stockholders?

Mr. TSUI. We wish we could, now, thinking back.

The CHAIRMAN. What is the maximum interest rate you are permitted to charge under your license?

Mr. Tsui. It is not more than 15 percent under the SBA regulations. But our maximum is 12 percent.

The CHAIRMAN. Your company is minimum sized, and you are rendering a real service to truly small business individuals that are going into the restaurant business, and a number in the real estate business.

Mr. Tsui. Yes.

The CHAIRMAN. You are making some profit, declaring some dividends.

Mr. Tsui. We make profit mainly by cutting down our expenses, cutting down our own salaries. That is the way we are operating, because we want first to serve SBA. We want to meet all of our obligations to SBA, including the interest payments, and then we want to serve our stockholders. So in 4 years' time we made two 5-percent cash dividends because our stockholders are small investors that need cash income.

The CHAIRMAN. You mentioned the 9 out of 10 loan applications that are filed with you that are turned down, and you have given several reasons why 9 out of 10 have to be rejected.

Mr. Tsui. Yes, sir.

The CHAIRMAN. You must be a very sound, solid, stable, conservative, prudent organization.

Mr. Tsui. Well, we may say that at the beginning we were not too conservative because we were much more bold than we are now. At the present moment we are consolidating, so as to straighten out some of our former loans which are not in too good a condition.

The CHAIRMAN. Off the record.

(Discussion off the record.)

Mr. Tsui. We take in certain loans just on personal endorsement. The CHAIRMAN. Are you taking any equity stock in the small business companies?

Mr. Tsui. Yes; but we find it quite difficult. As I said in the statement, six borrowers gave us options to buy into them. As we are dealing with small businesses, good small businesses do not want others to interfere in their ownership. So they do not want to give away. Those poor businesses, they want to give you everything which of course we hesitate to take.

The CHAIRMAN. Well, that shows you are a good businessman.
Mr. Multer?

Mr. MULTER. May I go off the record?
(Discussion off the record.)

Mr. MULTER. Mr. Tsui, I think you are running the typical kind of an operation that I for one had in mind when we set up this SBA. Mr. TsUI. Thank you.

Mr. MULTER. I think you are helping the truly small businessman. At the same time, I think you have done pretty well for yourself, and I do not find fault with that.

Mr. TsUI. Thank you.

Mr. MULTER. Now, your $202,000 original capital as subscribedMr. Tsui. Yes. That is our present capitalization. The original was $159,000.

Mr. MULTER. Presently $202,000 was the par value paid in by these stockholders.

Mr. Tsui. Yes.

Mr. MULTER. And what is your capital; what is your surplus in undivided profits today?

Mr. Tsui. We do not have much undivided profit today. Since the last 2 years, we have put all our profits into reserve. So, for the time being, I think we have only about $60 as undivided profit.

Mr. MULTER. How much are your reserves?

Mr. Tsui. Our reserve is $30,000, a little over $30,000.

Mr. MULTER. And that $30,000 came out of profits.

Mr. TsUI. Came out of the profits, yes, sir.

Mr. MULTER. And over and above that and also out of profits you paid your stockholders $17,000.

Mr. TsUI. Yes.

Mr. MULTER. A total of $47,000 net earnings after taxes.

Mr. Tsui. That is right. Of course, we paid income taxes, too.

Mr. MULTER. Of course.

Mr. Tsui. About $10,000 in total taxes paid.

Mr. MULTER. Incidentally, I am not sure whether Mr. Harvey and the chairman have done so, but I have introduced a bill which would give the SBA authority to insure loans to small businessmen.

Mr. Tsui. I see; that is fine.

Mr. MULTER. I do hope one of these days the appropriate committees will call those bills up for hearing, and we can then move forward. I think this committee has indicated their support of that principle. I think the details have yet to be worked out.

Thank you, Mr. Chairman. Thank you, Mr. Tsui.

The CHAIRMAN. Mr. Harvey?

Mr. HARVEY. Mr. Tsui, I note in just a brief résumé of your loan activities that most of your loans are in the area of service business. Mr. TsUI. Quite true.

Mr. HARVEY. Obviously, in a growing community like this, there must be a good area for prospects for this type of loan.

Mr. Tsui. Partly, sir, and partly it is because of our ability. We know our limits, so we made loans to the companies which we know of. Mr. HARVEY. It is just interesting by way of observation. This is the point I started to make with you, Mr. Tsui, though: The witness who just preceded you, who is from Florida, indicated that most of his were in the area of urban development utilities, so the areas of investment vary a great deal from one community to another. I am sure you can understand that. I am just saying that it seems to me that you have made a very good start with your organization.

Mr. Tsui. Thank you.

Mr. HARVEY. Now let us assume Congress makes no change insofar as the operation of the SBA is concerned. Do you then anticipate (a) continuing in business, and (b) an expansion of your business?

Mr. Tsui. Yes, sir. If you ask me whether I would start all over again, then on this question I would say I am not too sure. However, at the present moment without any further amendments to the act, et cetera, certainly we will keep on. We will maintain the way that we have been doing, very slowly and steadily. Naturally we have also made plans of expansion. That is why we have registered with SEC because we hope that we eventually can expand to other cities in which Chinese-American residents are numerous and we can sell our stocks there. Under our SEC registration, we can sell another quarter million dollars in capital stock.

Mr. HARVEY. I want to commend you. I think you certainly have given us a very forthright statement here, and I want to compliment you, not only on the presentation you have made but upon the policy of your company.

That is all, Mr. Chairman.

The CHAIRMAN. Mr. Mitchell, our counsel.

Mr. MITCHELL. Mr. Tsui, going into a question the committee is dealing with with all the witnesses, we would like your opinion concerning affiliated transactions. Has your firm been involved in any affiliated transactions where you had to get clearance from SBA?

Mr. Tsui. Yes, sir. When we first started, we had two directors whose companies applied to us to borrow. Before we made the loan, we cleared with SBA first. After SBA gave us its approval, we made the two loans. After the loans were made, the two directors resigned on account of personal reasons. So after that, we have no more loans of that sort, no self-dealing at all.

Mr. MITCHELL. What is your opinion concerning SBA's present regulations on affiliated transactions? Do you think they are sufficient when they incorporate the full disclosure provisions of the new law?

Mr. Tsui. Well, as a person of Chinese-American origin, I always believe in the principle of compromise. I am quite sure some companies need certain affiliations, but some companies may not. Naturally, as a general principle, there should not be any self-dealings. Mr. MITCHELL. That is all.

The CHAIRMAN. Mr. Williams?

Mr. WILLIAMS. No questions, thank you.

The CHAIRMAN. Mr. Tsui, you have given us a fine statement. It has been very helpful and we commend you and thank you very much. We want to recall Mr. Lee Davis again.

Mr. Mitchell, do you have another witness? Iowa Growth Investment Co., Mr. Bezanson.

Will you be seated, please, and tell us the name of your company and what position you hold and

Mr. HARVEY. Mr. Chairman, this gentleman I understand is a constituent of Mr. Bromwell of Iowa, and he had hoped and expected to be here but unfortunately was unable to do so. On his behalf I would like to express Mr. Bromwell's welcome to youMr. BEZANSON. Thank you.

Mr. HARVEY (continuing). And appreciation of your interest in coming to be a witness. That is all, Mr. Chairman.

Mr. BEZANSON. Thank you.

The CHAIRMAN. You may proceed as you wish. The committee will be pleased to hear you.

TESTIMONY OF PETER BEZANSON, PRESIDENT, IOWA GROWTH

INVESTMENT CO., CEDAR RAPIDS, IOWA

Mr. BEZANSON. I probably should preface the comments that I will read from my prepared statement that the Morris Plan Co. of Cedar Rapids is the parent company of the Iowa Growth Investment Co. Our company operates similar to the SBIC of Norfolk, Va. Their company is owned by an industrial loan company and so are we. I would like to offer this additional exhibit, consisting of a consolidated balance sheet of all companies, if I may.

(The exhibit can be found at p. 95 of this record.)

The CHAIRMAN. You may proceed.

Mr BEZANSON. Thank you.

Following the statement as prepared, I am Peter F. Bezanson, president of Iowa Growth Investment Co., 128 First Avenue NE., Cedar Rapids, Iowa, a licensee under the Small Business Investment Act of 1958.

Mr. Chairman, members of the committee and staff members of the committee, I thank you for this opportunity to appear before your committee on the implementation of the Small Business Investment Act of 1958, as amended.

Our company received its license September 30, 1959. Iowa Growth has always been considered a "minimum sized" SBIC conducting its operations from Cedar Rapids, Iowa, the largest city in Iowa except for the capital city of Des Moines. The founding stockholders were the Morris Plan Co. of Cedar Rapids, majority stockholders, and Merchants National Bank, both of Cedar Rapids, Iowa. Charter capital consisted of $152,000 to which was added $150,000 by issuance of a subordinated debenture to Small Business Administration under the Small Business Investments Act of 1958. Additional funds were acquired by issuing a note for $150,000 to SBA pursuant to section 303 of the act. The Morris Plan Co. of Cedar Rapids later purchased $250,000 in additional stock and purchased the stock held by Merchants National Bank of Cedar Rapids. The Merchants National Bank of Cedar Rapids recently indicated its interest to participate in the 303B loan guarantee program by providing $250,000 subject to a bank takeout plan by SBA. With capitalization and surplus of $400,000 and borrowed funds of $300,000 from SBA, we applied for and received $250,000 upon issuance of our subordinated debenture under the 302 provision of the act. We have thus had about $950,000 to supply loans and equity financing to small business concerns. Of the later amount, $800,000 is considered statutory capital and surplus as allowable under the act. Upon receipt and disbursement of $250,000 from SBA under the 303B loan program, we will have outstanding loans and debt securities of $1,200,000. I want to emphasize that $800,000 of these funds require payment of interest at 5 percent per annum to SBA or a total annual cost of $40,000. These funds together with our invested capital and surplus are expected to produce a sufficient return to allow us to pay interest, operating cost, with allowance for a reserve for losses and to operate at a profit. We concluded after our initial operation that