SMALL BUSINESS INVESTMENT PROGRAM TUESDAY, MARCH 17, 1964 HOUSE OF REPRESENTATIVES, SELECT COMMITTEE TO CONDUCT STUDIES AND Washington, D.C. The committee met, pursuant to notice, at 10:07 a.m., in room 356, Cannon House Office Building, Hon. Joe L. Evins, chairman, presiding. Present: Representatives Evins, Multer, Moore, Robison, and Harvey. Also present: Representative Secrest; Bryan Haskell Jacques, staff director; Richard L. Mitchell, general counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. The CHAIRMAN. The committee will come to order. We are going to begin this morning a review of the implementation of the small business investment company program which hasn't been reviewed since, I believe, as our friend Mr. Ruvelson reminded me, 4 or 5 years ago. So we think it is timely. We welcome all of you to these hearings today and tomorrow and the appearances of all of you are appreciated. The purpose of these hearings is to review the implementation of the Small Business Investment Act of 1958 and to ascertain to what extent small business is being assisted under this program-and to explore the problems relating thereto. The scope of this inquiry includes the entire small business investment program and the implementation of that program by small business investment companies and the Government agencies involved. When this committee was re-created, at the outset of the 88th Congress, the authorizing resolution provided: It shall be the duty of such committee to conduct studies and investigations of the problems of all types of small business, existing, arising, or that may arise, with particular reference to *** (2) the administration of Federal laws relating specifically to small business to determine whether such laws and their administration adequately serve the needs of small business; (3) whether Government agencies adequately serve and give due consideration to the problems of small business * * In pursuance of this, the committee has invited officials of the Small Business Administration and representatives of small business investment companies-companies of different sizes, from different areas of the United States, with diversified types of operations-to appear before the committee, to explore their operations, and to document for the committee what specifically is being done for small business in this field of long-term loans and equity financing. 1 The committee will look into the operations of the Investment Division of SBA. During the 88th Congress, the committee reviewed earlier the entire operations of the Small Business Administration except the Investment Division. At these hearings the committee expects to receive a complete report from SBA concerning the investment program, including the State and local development company loan programs which were established pursuant to title V of the Small Business Investment Act of 1958. In 1959, shortly after the small business investment company program was launched by Congress, hearings were held on the limited scope of the program. Only two or three companies had been licensed at that time. Today some 740 SBIC's have been licensed and over $600 million in capital reportedly is available to small business firms from these companies. It is felt that the program should be reviewed in order to determine what actually is being accomplished for small business under the act. The Congress has recently further amended and liberalized the act. We want to know if these tools are adequate to do the job intended by Congress. More Federal funds have been made available. The Treasury Department has announced that the SBIC's may now set up a 10-percent loss reserve, which appears to be highly favorable to the industry. There would appear now to be no reason why this program should not proceed to fill the credit and equity gap for which it was designed. The committee desires to determine to what extent this is being accomplished. In addition, the committee desires to determine to what extent small business is being aided. What type of small businesses are being helped under the program? Are the truly small businesses being assisted at the grassroots level? Or, is most of the assistance going to the larger small businesses in specialized industries? Some complaints have been received concerning self-dealing, wherein officials and owners of SBIC's do business with companies with which they are associated to the possible detriment of the program. The question of whether or not small SBIC's can fit properly into the program has been raised. Mergers and consolidation of investment funds in larger companies-sometimes unused-have raised the question as to whether the program is truly serving its intended purpose. These are all questions which are of immediate concern to the committee. It is hoped that the testimony to be received at these hearings will help delineate these problems and help the committee in arriving at some sound judgments and solutions. On the other hand, I must state that there is much evidence to indicate that this program is moving forward in the interest of small business-that his program established by Congress is beginning to bear fruition. The committee hopes that this is the case. We want to see this program work-and work successfully. We approach these hearings in an objective way with an attitude of cooperation. As I say, the committee welcomes all of you who are appearing here as witnesses. This committee and the Congress are vitally concerned with this program and want to see it function properly in the best interest of small business and the Nation. The other members of the committee are: Hon. Wright Patman, Democrat, of Texas; Hon. Abraham J. Multer, Democrat, of New York; Hon. Tom Steed, Democrat, of Oklahoma; Hon. James Roosevelt, Democrat, of California; Hon. John C. Kluczynski Democrat, of Illinois; Hon. John D. Dingell, Democrat, of Michigan; Hon. William M. McCulloch, the ranking minority member, Republican, of Ohio; Hon. Arch A. Moore, Jr., Republican, of West Virginia, who is with us today and is a very valuable member of this committee; Hon. William H. Avery, Republican, of Kansas; Hon. H. Allen Smith, Republican, of California; Hon. Howard W. Robison, Republican, of New York; and Hon. Ralph Harvey, Republican, of Indiana. We also have with us Congressman Secrest, of Ohio, who is interested in this subject and is appearing with us today. I might now take this opportunity to introduce the members of the committee staff who are present today. Mr. Bryan H. Jacques, staff director of the committee; Mr. Richard L. Mitchell, general counsel of our committee; Mr. John J. Williams, minority counsel of the committee; and Miss Myrtle Ruth Foutch, clerk of the committee. Now, our first witness this morning is to be our friend, Mr. Lee Davis, of Tennessee. We would like you to come around if you would, please. TESTIMONY OF LEE DAVIS, PRESIDENT, LEE DAVIS & ASSOCIATES, INC., NASHVILLE, TENN. The CHAIRMAN. We appreciate your coming before the committee. You can sit at the end of the table right there. It would be more convenient. Mr. Davis is a veteran and an oldtimer in this field and I know he has a wealth of knowledge and experience and the committee welcomes your testimony. We will be pleased to hear you, Mr. Davis. Mr. DAVIS. Thank you, sir. Mr. Chairman and gentlemen, I will read this to save some time because I might get off the track. It is indeed a pleasure for me to come before you again at this particular time to express my appreciation and the appreciation of the entire SBIC industry for the very recent enactment of Public Law 88-273, the Small Business Investment Company Act of 1964. I wish also to express my sincere appreciation to Senator John Sparkman and Congressman Wright Patman and our chairman, Joe L. Evins, for providing the leadership for this most important legislation. Since I have been a pioneer in this SBIC program, I know that the conscientious and hard-working staff of both Small Business Committees of the Senate and the House have contributed no small part in this success. May I also thank our national officers and Walter Stults and Charlie Noone, of our NASBIC organization, who have rendered untiring service to this end. We must never forget in writing the history of this great program that our former President, John F. Kennedy, and our President, Lyndon B. Johnson, were very active on the Small Business Committee of the Senate in laying the groundwork for his new financial system, the original bill being the Johnson-Patman Act. As the public learns of this new legislation it will greatly improve the image of the SBIC's. It has already given a shot in the arm and new encouragement to the management and operators of the SBIC's. In addition, a most important factor which came as a result of the hearings was the ruling by Internal Revenue providing for a 10-percent reserve for losses. May I also add a word of commendation for Administrator Gene Foley for his quick grasp of the purposes of this program and his forthright statement of his intentions. Our thanks should also go to John Horne, former Administrator, as well as the members of the SBA staff who labored hard on this program. Some background might help us. BACKGROUND I am proud to be one of the pioneers in this program. I have been glad to give my testimony at every opportunity because I believe it is important for the support of our free enterprise system and our national economy. Lee Davis & Associates, Inc., was the promoter, founder, and organizer of Tennessee Investors, Inc., in Tennessee, which received the first charter of any SBIC in the Nation, issued 1 week after the 1958 act was signed by the President. Our license was issued several months later on July 20, 1959, when our entire Tennessee delegation, including your chairman, joined me with SBA officials in receiving it. Our Tennessee bankers were so interested in this program that 54 banks and 20-odd businessmen invested the initial capital. I believe this is still the record for the largest number of independent banks investing in one SBIC. No SBA debentures were needed. As you gentlemen know, I spent more than 20 years with the RFC and understood the need for this type of program. Some have lost faith in the program because of some bad publicity, the depressed stock market and some early losses by some of the portfolio investments. I still believe, however, this SBIC industry provides the basis for the greatest boost for the growth of small business and the expansion of the free enterprise system than any legislation in my memory. In the summer of 1961 in negotiating with underwriters for a $6 million public offering for Tennessee Investors, Inc., the name was changed to Southeastern Capital Corp. The area of operation was expanded to the Southeast and our board of directors was increased to 17 for representation throughout the Southeast. The stock was well distributed in 44 States and several foreign countries. The average stockholder held about 200 shares which was offered at $12.50 a share to the public. Shortly thereafter the over-the-counter market on SBIC stocks took a nosedive and our stock went down below $5 and is now quoted around $6 while the book value is slightly under $11 a share. As chairman of the board and president of Southeastern Capital for the first 5 years, our first task was to assemble the staff of qualified people to assist in the investment of $6 million. As Tennessee Investors, Inc., we had already invested nearly half of our initial capital in small loans. In 20 months we had invested about $4 million of approximately $6.5 million in capital in about 20 investments, none of which exceeded a half million dollars each. The average interest rate was about 7 percent. |