B-197439(2),L/M, JUN 3, 1981, OFFICE OF GENERAL COUNSEL

B-197439(2),L/M: Jun 3, 1981

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THE BLOCK GRANTS HERE INVOLVED ARE GRANTS FOR COMMUNITY DEVELOPMENT MADE BY THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) UNDER TITLE I OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1974. REQUIRES SBICS AND MESBICS TO HAVE A MINIMUM AMOUNT OF PRIVATE CAPITAL AS FOLLOWS: "THE COMBINED PRIVATE PAID-IN CAPITAL AND PAID-IN SURPLUS OF ANY COMPANY LICENSED PURSUANT TO SECTION 301(C) 15 U.S.C. WE HAVE FOUND NO PROVISION OF LAW THAT PERMITS BLOCK GRANT FUNDS TO BE CONSIDERED PRIVATE FOR PURPOSES OF MEETING MINIMUM CAPITAL REQUIREMENTS. SUGGEST THAT SECTION 105(A)(15) WAS INTENDED TO AUTHORIZE BLOCK GRANT MONEY TO BE CONSIDERED PRIVATE FOR THE PURPOSE OF MEETING MINIMUM CAPITAL REQUIREMENTS.

B-197439(2),L/M, JUN 3, 1981, OFFICE OF GENERAL COUNSEL

DIGEST: COMMUNITY DEVELOPMENT BLOCK GRANT FUNDS MAY NOT BE INCLUDED IN THE MINIMUM PRIVATE CAPITAL NEEDED TO FORM A SMALL BUSINESS INVESTMENT COMPANY OR A MINORITY ENTERPRISE SMALL BUSINESS INVESTMENT COMPANY.

JOSEPH JAMES, EXECUTIVE DIRECTOR, PHILADELPHIA CITYWIDE DEVELOPMENT CORPORATION:

THIS RESPONDS TO YOUR INQUIRY WHETHER, IN LIGHT OF OUR DECISION IN 60 COMP.GEN. (B-197439, JAN. 30, 1981), THE MINIMUM PRIVATE CAPITAL REQUIRED TO FORM A SMALL BUSINESS INVESTMENT COMPANY (SBIC), OR A MINORITY ENTERPRISE SMALL BUSINESS INVESTMENT COMPANY (MESBIC), CAN BE SATISFIED IN PART FROM BLOCK GRANT FUNDS. IN CONNECTION WITH YOUR EFFORTS TO DEVELOP A MESBIC, SBA OFFICIALLY INFORMED YOUR MESBIC APPLICANT THAT BLOCK GRANT FUNDS IT RECEIVED FROM YOU COULD NOT BE INCLUDED IN THE MINIMUM "PRIVATE" CAPITAL REQUIRED IN ITS FORMATION. YOU INFORMED US THAT CONVERSATIONS WITH SBA INDICATED THE SAME WOULD BE TRUE FOR YOUR SBIC APPLICANT. THINK SBA'S POSITION REPRESENTS A REASONABLE EXERCISE OF ITS DISCRETION UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED.

THE BLOCK GRANTS HERE INVOLVED ARE GRANTS FOR COMMUNITY DEVELOPMENT MADE BY THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) UNDER TITLE I OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1974, AS AMENDED. IN OUR DECISION IN 60 COMP.GEN. (B-197439, JAN. 30, 1981), WE HELD THAT SUCH FUNDS INVESTED IN ALREADY FORMED MESBICS MAY BE CONSIDERED PRIVATE FOR THE PURPOSE OF SBA LEVERAGING (MATCHING). THE MESBIC THERE INVOLVED PROPOSED TO USE SBA FUNDS LEVERAGED AGAINST THE HUD GRANT FUNDS THEY HELD; HOWEVER, THEIR INITIAL CAPITAL REQUIREMENTS HAD BEEN SATISFIED WITH FUNDS FROM THE PRIVATE MARKET. YOU INQUIRE IF THE SAME HUD GRANT FUNDS MAY BE CONSIDERED PRIVATE FOR PURPOSES OF FORMING A MESBIC, I.E., AS A CONTRIBUTION TOWARD THE INITIAL CAPITAL REQUIRED TO FORM A MESBIC.

SECTION 302(A) OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. SEC. 682(A), REQUIRES SBICS AND MESBICS TO HAVE A MINIMUM AMOUNT OF PRIVATE CAPITAL AS FOLLOWS:

"THE COMBINED PRIVATE PAID-IN CAPITAL AND PAID-IN SURPLUS OF ANY COMPANY LICENSED PURSUANT TO SECTION 301(C) 15 U.S.C. SEC. 681(C) - SBIC AND (D) 15 U.S.C. SEC. 681(D) - MESBIC OF THIS ACT (TITLE) SHALL NOT BE LESS THAN $150,000 ($500,000 AFTER OCTOBER 1, 1979)."

SBA HAS A SIMILAR PROVISION IN ITS REGULATIONS. SEE 13 C.F.R. SEC. 107.101(D)(1)(I).

ALTHOUGH THE BLOCK GRANT MONEY IN QUESTION COMES FROM A PRIVATE SOURCE - PHILADELPHIA CITYWIDE DEVELOPMENT CORPORATION - AND NOT DIRECTLY FROM THE FEDERAL GOVERNMENT, SBA DOES NOT CONSIDER THE MONEY PRIVATE FOR THE PURPOSE OF MEETING MINIMUM CAPITAL REQUIREMENTS. SEE 13 C.F.R. SEC. 107.101(D)(2)(II).

OF COURSE, THE FUNDS IN QUESTION MAY BE CONSIDERED "PRIVATE" IF ANOTHER LAW SO PROVIDES. 59 COMP.GEN. 635 (1980). HOWEVER, WE HAVE FOUND NO PROVISION OF LAW THAT PERMITS BLOCK GRANT FUNDS TO BE CONSIDERED PRIVATE FOR PURPOSES OF MEETING MINIMUM CAPITAL REQUIREMENTS. OUR EARLIER DECISION, REFERRED TO ABOVE, HELD THAT THE PROPER INTERPRETATION OF SECTION 105(A)(15) OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1974, AS AMENDED, 42 U.S.C. SEC. 5305(A)(15), PERMITS BLOCK GRANT MONEY INVESTED IN EXISTING MESBICS TO BE CONSIDERED PRIVATE MONEY SO AS TO BE ELIGIBLE FOR SBA LEVERAGING. WE SAID IN THAT DECISION THAT ALTHOUGH SECTION 105(A)(15) APPEARED TO DO NO MORE THAN AUTHORIZE BLOCK GRANT MONEY TO BE USED FOR MESBICS, I.E., USED WITHOUT LEVERAGING, THE LEGISLATIVE HISTORY INDICATED OTHERWISE. THE LEGISLATIVE HISTORY DID NOT, HOWEVER, SUGGEST THAT SECTION 105(A)(15) WAS INTENDED TO AUTHORIZE BLOCK GRANT MONEY TO BE CONSIDERED PRIVATE FOR THE PURPOSE OF MEETING MINIMUM CAPITAL REQUIREMENTS. INDEED, THE LEGISLATIVE HISTORY, WHILE PERTINENT ONLY TO THE ISSUE OF WHETHER CERTAIN FUNDS COULD OR COULD NOT BE LEVERAGED, MADE EXPLICIT REFERENCE TO MESBICS WHICH ALREADY WERE "VIABLE". SEE 123 CONG.REC. 14117 AND 17851 (1977). OUR EARLIER DECISION INVOLVED ONLY THE ISSUE OF LEVERAGING AND IS NOT APPLICABLE TO THE FACTS OF THIS CASE.

ALTHOUGH SBA'S REGULATIONS DO NOT PERMIT THE BLOCK GRANT MONEY IN QUESTION TO BE CONSIDERED PRIVATE FOR MINIMUM CAPITALIZATION PURPOSES, HUD'S IMPLEMENTING REGULATIONS FOR SECTION 105(A)(15), 24 C.F.R. SECS. 570.204(A)(2)(III) AND 204(C)(2), PROVIDE THAT ENTITIES SUCH AS THE PHILADELPHIA CITYWIDE DEVELOPMENT CORPORATION MAY PROVIDE BLOCK GRANT FUNDS FOR CAPITALIZATION OF A MESBIC "REQUIRED TO QUALIFY FOR ASSISTANCE UNDER OTHER FEDERAL PROGRAMS." WE HAVE NO INFORMATION ABOUT THE INTENT OF THIS REGULATION. WERE IT INTERPRETED TO MEAN THAT HUD HAS NO OBJECTION TO ITS BLOCK GRANT MONEY BEING CONSIDERED PRIVATE FOR MINIMUM CAPITALIZATION PURPOSES, IT MAY CONFLICT WITH SEC. 302(A) OF THE SMALL BUSINESS INVESTMENT ACT, SUPRA, AND IN ANY EVENT COULD NOT BE IMBUED WITH AUTHORITY TO DICTATE THAT SBA IMPLEMENT THE SMALL BUSINESS INVESTMENT ACT TO ALLOW THIS MONEY TO BE INCLUDED IN MINIMUM PRIVATE CAPITAL REQUIREMENTS.

AS LONG AS AN AGENCY'S INTERPRETATION OF A LAW IT IS PRIMARILY RESPONSIBLE FOR IMPLEMENTING IS A REASONABLE ONE, IT SHOULD NOT BE DISTURBED. UNEMPLOYMENT COMPENSATION V. COMMISSION OF ALASKA ARAGON, 329 U.S. 143, 153 (1946); UDALL V. TALLMAN, 380 U.S. 1 (1965). REGULATIONS ISSUED BY AN EXECUTIVE AGENCY UNDER A LAW IT IS TO ADMINISTER ARE PRESUMED VALID, UNLESS ARBITRARY AND UNREASONABLE OR PLAINLY INCONSISTENT WITH LAW. EDWARDS V. MADIGAN, 281 F.2D 73, 77 (9TH CIR. 1960); BOSKE V. COMINGORE, 177 U.S. 459, 470 (1900). NO REASONS HAVE BEEN ADVANCED TO SUGGEST THAT SBA'S INTERPRETATION IS UNREASONABLE, NOR DOES IT APPEAR INCONSISTENT WITH THE SMALL BUSINESS INVESTMENT ACT. IN THESE CIRCUMSTANCES, WE MUST CONCLUDE THAT THE MINIMUM PRIVATE CAPITAL REQUIRED TO FORM A SBIC OR MESBIC CANNOT BE SATISFIED WITH HUD BLOCK GRANTS FOR COMMUNITY DEVELOPMENT UNDER TITLE I OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1974.