percent of the money. It is interesting to note there has been some decline in the average size of SBIC disbursements. In the quarter ended December 31, 1962, the average disbursement was $43,029. In the quarters ended March 31, 1963, and June 30, 1963, this figure was, respectively, $34,804 and $37,821.

On the basis of these figures, I feel it is safe to say that the size of small business concerns receiving SBIC financing and the size of the SBIC investments are not showing a striking concentration in the upper limits.

I am not surprised to find a few SBIC's which do not conduct their operations in accord with the spirit of the act. However, the great bulk of SBIC investments are made in line with Congress' intent, and the $475 million of outstanding investments represents substantial and valuable financial support for the small business community.

Incidentally, that $475,000 is our estimate of the present level of outstanding investments. The previous figure was at September 30. In my opinion, it represents an achievement that all who are interested in the success of the program can view with satisfaction.

I also want to point out that we have a very active compliance program. We are looking for, and finding, those SBIC's which violate the act and regulations. Necessary corrective action is taken. I intend to eliminate any willful and regular violators from this program as rapidly as possible.

The committee has asked about the role of the small SBIC and whether SBIC mergers will impair the effectiveness of the program in small communities. Many small, locally oriented companies are performing a valuable service to small firms in their communities. On the other hand, an SBIC has to be a good deal larger than minimum size before it can operate as an independent firm and support full-time management. An SBIC can grow to a size much larger than the minimum and still be oriented to the needs of a particular community. We believe that the minimum size for a self-sustaining SBIC that is really making itself available to small business as a source of venture capital is in the neighborhood of $2 million in assets.

There are a number of reasons for this. Of major importance is the cost of full-time management. We have had enough experience with the program by now to know that providing venture capital to small business in the spirit of the act is a difficult and demanding job. It simply cannot be done very effectively, either from the point of view of the small business concern receiving financing or from the point of view of the SBIC's stockholders, without full-time manage

ment.

I think some people tend to assume that the principal task facing an SBIC is the selection of investments and once the decision to invest in a particular company has been made and satisfactory terms have been negotiated, that nothing remains to the job except the collection of payments and the performance of some minor paperwork. Nothing could be further from reality. Once a small business concern becomes a portfolio company of an SBIC the work has only begun. The financial health of the small firm must be watched constantly. Frequently, the management assistance furnished by an SBIC is at least as important, if not more so, than the financial assistance.

The amount of an SBIC's resources obviously limits the amount of financial assistance it can furnish to small business concerns. An SBIC of minimum capitalization is unlikely to have investable funds

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in excess of $450,000, the sum of its private capital of $150,000 and the maximum borrowings from SBA. If a firm of this size pursues a course of actively investing its funds in the local small business community, it will be a relatively short time a few years at the mostbefore it exhausts its resources. A merger may be the only means of expansion readily available to such a company.

The size of an SBIC affects both the quantity and quality of the SBIC's investments. Smaller resources tend to result in fewer companies in the portfolio. This concentration of risk dictates a more conservative investment policy, because one bad investment will affect a greater proportion of the SBIC's capital. Also, when an SBIC is trying to bring a small business through a crucial growth period, the chances are that a followup infusion of capital will be required before the small business has developed to the point where it can tap other sources of financing. This type of support is more difficult for the smaller SBIC because of the lower limit on the size of its investments as well as the possible unavailability of funds.

An SBIC's ability to make such followup investments is of crucial importance in growth situations. The SBIC's inability to provide support at a critical moment can be disastrous for the portfolio company and damaging to the SBIC.

Thus, we regard mergers, especially among smaller SBIC's, as a healthy development and make no effort to prevent or discourage them. The 1964 amendments to the act may well cause increased activity in this area by raising the dollar limit on an SBIC's indebtedness to SBA under section 302 (a) of the act. Mergers where the resulting 302 funds exceed $400,000 are now facilitated.

I would now like to touch on some complaints about the program that are sometimes heard in the small business community. One commonly heard complaint is that SBIC's demand large pieces of the equity of small business concerns and often take controlling interests.

With regard to this question, it is pertinent to recall the nature of an SBIC's business. If it is operating as Congress intended, it is making equity capital or long-term loans available at some considerable risk. The favored investment vehicle of the venturesome SBIC is a debt security which conveys a right to acquire some portion of the portfolio company's equity; a convertible debenture or a note with warrants. This device affords the SBIC some protection for its money, and, in theory, anyway, a steady income during the portfolio company's development. For significant earnings, the venture capital SBIC looks to the chance to participate in the growth of successful small business concerns. Losses are anticipated and the interest income is not expected to do much more than cover expenses.

Through this type of investment, the interests of the SBIC and the small business concern are much more closely identified than in the case of a straight loan. The SBIC becomes fully committed to the overall success of the small business concern. It becomes far more to the small business than just a lender of money, as a bank or insurance company would be. It becomes a source of advice and assistance and of additional funds in case of need.

Interest rates on this type of investment are usually lower than on straight loans. The median stated interest rate on loans under section 305 of the act is between 8 and 9 percent. The median rate on debt securities with equity features acquired under section 304 of the act is between 7 and 8 percent.

Naturally, many small businessmen are reluctant to sell any part of their firms. They prize their independence and are fearful of any possible dilution of their control of their companies. However, such businessmen must view their situations realistically. Nobody can force them to sign away rights to part of their companies, but if they seek risk capital, they must realize that the venture capitalist will want to be rewarded for his risk by the chance to share in future growth.

We have a firm policy with respect to the acquisition by an SBIC of a controlling interest in a small business. Control is permitted only where it is necessary for the protection of the investment. We insist that such control be relinquished when the necessity for it has passed. Generally, situations where control is warranted arise in two ways. First, an SBIC may furnish the majority of the funds to start up a new business, the small businessman's contribution consisting largely of his ideas and his skills. In such cases, we feel that the SBIC is justified in obtaining a controlling interest, at least until substantial earnings have been made. At that point control should be relinquished. The second type of case in which control may be justified arises when an SBIC's investment becomes endangered through inadequacy of management. In such cases the SBIC is forced to take control to protect its investment. Here, again, we require that control be relinquished when it is no longer necessary.

The statistics on this point are hardly alarming. In 88 percent of the outstanding investments involving equity, the SBIC's actual or potential share of equity is less than half. In 44 percent of such investments, the SBIC's equity position, actual or potential, is less than 10 percent. In 7 percent of the outstanding investments, the equity share is exactly 50 percent, and in only 5 percent of them does it exceed 50 percent. I might point out that taking rights to more than 50 percent of the stock does not imply control even in these instances there may be voting and nonvoting shares.

There is another common complaint about SBIC's I would like to touch on, and that is the subject of interest rates.

SBA's policy is a ceiling of 15 percent on the effective cost of money to the borrower. This includes all charges imposed by the licensee at the time of financing. To some of you, perhaps, this may seem to be a high ceiling. We do not think so. Again, we emphasize that SBIC's are privately owned concerns, operating for a profit in the riskiest area of financing. Our ceiling is only 3 percent more than that charged by many banks on 2- and 3-year loans secured by machinery. And the risks are hardly comparable. The best policy seems to be one which gives plenty of latitude to the SBIC's and lets the marketplace determine the cost of money. Any attempt to artificially depress SBIC interest rates would be self-defeating.

Our statistics on interest rates show that they fall well within the ceiling we have set and justify our basic policy of letting rates find their own level.

As of June 30, 1963, 62 percent of all outstanding loans and debt securities had a stated interest rate of less than 9 percent. This represented 76 percent of the money SBIC's had out in loans and debt securities at that time; 49 percent of SBIC money invested in small business debt was in securities with a stated rate of less than 8 percent; 27 percent of such money was in securities with a stated rate of less

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than 7 percent. It is noteworthy that the loans with highest rates tend to be the smaller ones.

In conclusion, it is my conviction that the SBIC program is doing the job that Congress expects of it, and doing it well. In qualitative terms, I think it has already achieved a very significant impact. The man with ideas and little money now has a place to go for capital where the people will let him in the door and listen to his story. If he can sell his story, he gets a chance to realize his ambitions, to turn his ideas into a product or service to offer in the market place. The fastgrowing small business that reaches a point where additional capital makes the difference between stagnation or real growth has a financial institution to turn to where before there was none. With the importance of fast-moving technological innovation in our highly competitive economy, this has tremendous significance for future growth. Now, with your permission, I would like to turn my attention to title V of the Small Business Investment Act. Mr. Foley has given you the highlights of the State and local development company programs. I would like to add to his comments a few items which I think would be of interest to this committee.

Too often the potential of existing local business is overshadowed by the view that economic development depends entirely upon seeking and attracting new industry into the community. This agency has a firm policy against relocation or pirating since these activities would result in substantial unemployment in another area. We are emphasizing the aspects of the local development company program which deal with modernization and expansion of existing businesses and are encouraging those responsible for industrial development to inventory their existing potentials before seeking new industry. We are cooperating with Federal, State, and local agencies in a program to acquaint both the agencies and the community of the potential of this program. We have encouraged maximum utilization of this program for the benefit of small business concerns located in areas of substantial unemployment. In this connection, the agency has liberalized its size standards and provided for interest rates of 4 percent in these areas. Even though we are all concerned with pockets of poverty, there are areas that do not fall quite within this description but still are in need of economic assistance. This program can and will help all communities throughout the United States to achieve their goal of economic expansion.

The committee has indicated its desire to have statistics available on these programs. For the record, I am providing you with the statistical information on the accomplishments of these programs, broken down into regional and State activities. These statistics show cumulative activities over the short life of these programs.

I appreciate this opportunity to give the committee my views on the investment and development company programs. I will be happy to try to answer any questions you may have.

The CHAIRMAN. Well, thank you, Mr. Kelley; a very comprehensive, very fine statement.

Without objection, the statistical information which Mr. Kelley has provided for the committee will be received for study by the committee and staff, and appropriate portions will be included in the record of the hearings.

(The statistical information follows:)