Direct Investment Venture Capital Program

Use of Proceeds

Each investee is required to certify the following to the investor:

• The loan or investment proceeds will be used solely for a business purpose. A business purpose includes, but is not limited to, startup costs; working capital; franchise fees; and acquisition of equipment, inventory, or services used in the production, manufacturing, or delivery of a business's goods or services, or in the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. SSBCI funds may be used to purchase any tangible or intangible assets except goodwill. The term "business purpose" excludes acquiring or holding passive investments in real estate; the purchase of securities except as permitted in certification 2.d below; and lobbying activities (as defined in Section 3(7) of the Lobbying Disclosure Act of 1995, P.L. 104-65, as amended (2 USC 1602(7)).
• The loan or investment proceeds will not be used to:
  • repay delinquent federal or jurisdiction income taxes unless the borrower or investee has a payment plan in place with the relevant taxing authority;
  • repay taxes held in trust or escrow (e.g., payroll or sales taxes);
  • reimburse funds owed to any owner, including any equity investment or investment of capital for the business's continuance; or
  • purchase any portion of the ownership interest of any owner of the business, except for the purchase of an interest in an employee stock ownership plan qualifying under section 401 of Internal Revenue Code, worker cooperative, or related vehicle, provided that the transaction results in the employee stock ownership plan or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business.
• The borrower or investee is not:
  • a business engaged in speculative activities that profit from fluctuations in price, such as wildcatting for oil and dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business or through the normal course of trade;
  • a business that earns more than half of its annual net revenue from lending activities, unless the business is (1) a CDFI that is not a depository institution or a bank holding company, or (2) a Tribal enterprise lender that is not a depository institution or a bank holding company;
  • a business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants;
  • a business engaged in activities that are prohibited by federal law or, if permitted by federal law, applicable law in the jurisdiction where the business is located or conducted (this includes businesses that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the business's intended market); this category of businesses includes direct and indirect marijuana businesses, as defined in Small Business Administration (SBA) Standard Operating Procedure (SOP) 50 10 6;2 or
  • a business deriving more than one-third of gross annual revenue from legal gambling activities, unless the business is a Tribal SSBCI participant, in which case the Tribal SSBCI participant is prohibited from using SSBCI funds for gaming activities, but is not restricted from using SSBCI funds for non-gaming activities merely due to an organizational tie to a gaming business.

Conflict of Interest

Each investee is required to certify that it is compliant with the venture capital program conflict of interest standards set forth in SSBCI Capital Program Policy Guidelines. Briefly, these standards provide that no SSBCI insider, or a family member or business partner of an SSBCI insider, has a personal financial interest in the investee unless an exception specified in the SSBCI Capital Program Policy Guidelines applies.

Definitions of "SSBCI Insider" can be found in the SSBCI Capital Program Policy Guidelines, Section VIII. f.

A "business partner" of an SSBCI insider is a person who owns 10 percent or more of any class of equity interest, on a fully diluted basis, in any private entity in which an SSBCI insider also owns 10 percent or more of any class of equity interest on a fully diluted basis.

A "family member" of an SSBCI insider means:

• Such person's spouse, domestic partner, parents, grandparents, children, grandchildren, brothers, sisters, stepbrothers, and stepsisters; and
• Any other relatives who live in the same household as the SSBCI insider.

Exceptions to the general prohibition are as follows:

• A governmental entity such as OIB may use SSBCI funds for follow-on investments in companies or venture capital funds if the entity has an existing ownership or voting interest resulting from a prior investment of SSBCI funds or non-SSBCI funds. Furthermore, in this circumstance, the entity may authorize investments if an SSBCI insider serves on the board of directors of the company or venture capital fund, if an SSBCI insider does not have a personal financial interest in the company or venture capital fund and the entity's prior financial interest is in compliance with all applicable laws and rules.

Socially and Economically Disadvantaged Individuals and Very Small Businesses

SSBCI funding includes specific amounts for Very Small Businesses (VSBs) and businesses that are owned by Socially and Economically Disadvantaged Individuals (SEDI-owned).

VSBs are defined as those businesses with fewer than 10 employees.

SEDI-owned businesses include the following:

• business enterprises that certify that they are owned and controlled by individuals who have had their access to credit on reasonable terms diminished as compared to others in comparable economic circumstances, due to their:
• membership of a group that has been subjected to racial or ethnic prejudice or cultural bias within American society;
• gender;
• veteran status;
• limited English proficiency;
• disability;
• long-term residence in an environment isolated from the mainstream of American society;
• membership of a federally or state-recognized Indian Tribe;
• long-term residence in a rural community;
• residence in a U.S. territory;
• residence in a community undergoing economic transitions (including communities impacted by the shift towards a net-zero economy or deindustrialization); or
• membership of an underserved community (see Executive Order 13985, under which "underserved communities" are populations sharing a particular characteristic, as well as geographic communities, that have been systematically denied a full opportunity to participate in aspects of economic, social, and civic life, as exemplified by the list in the definition of "equity," and "equity" is consistent and systematic fair, just, and impartial treatment of all individuals, including individuals who belong to underserved communities that have been denied such treatment, such as Black, Latino, and Indigenous and Native American persons, Asian Americans and Pacific Islanders and other persons of color; members of religious minorities; lesbian, gay, bisexual, transgender, and queer (LGBTQ+) persons; persons with disabilities; persons who live in rural areas; and persons otherwise adversely affected by persistent poverty or inequality);
• business enterprises that certify that they are owned and controlled by individuals whose residences are in CDFI Investment Areas, as defined in 12 CFR 1805.201(b)(3)(ii);
• business enterprises that certify that they will operate a location in a CDFI Investment Area, as defined in 12 CFR 1805.201(b)(3)(ii); or
• business enterprises that are located in CDFI Investment Areas, as defined in 12 CFR 1805.201(b)(3)(ii).13

The term "owned and controlled" means, if privately owned, 51 percent is owned by such individuals; if publicly owned, 51 percent of the stock is owned by such individuals; and in the case of a mutual institution, a majority of the board of directors, account holders, and the community which the institution services is predominantly comprised of such individuals.

Certification will be required with regard to items (1) to (3) above. Item (3) is intended to cover a business taking out a loan or investment to build a location in a CDFI Investment Area that the business will operate in the future. With regard to item (4), a jurisdiction may reasonably identify businesses located in CDFI Investment Areas based on the businesses' addresses from the relevant loan, investment, and credit/equity support applications without additional certification.

Reporting

Each investee will need to provide information to OIB for reporting to the U.S. Department of the Treasury. Required information will include:

• investee information:
  • name, EIN, street address of investee's main office or location that is primarily benefitting from the SSBCI funds, NAICS code, legal entity type
• primary and secondary sources of private capital
• primary and secondary purpose of investment
• whether the investment supports a business that makes climate-aligned investments
• whether the investment supports a business in a community facing local job losses or business revenue declines due to physical or transition impacts from climate change, including shifts in energy production
• investment information:
  • date funds were disbursed to the investee, dollar amount invested directly in a business through a fund, dollar amount of any other public funds invested at the same time, dollar amount of private financing that was caused by or resulted from the SSBCI-supported investment and that occurred around the same time as the SSBCI-supported investment
• investee's annual gross revenues and net income for the year prior to the investment and any years while the investment is outstanding
• number of investee's full-time equivalent employees at the time of investment, along with expected number of jobs created or retained
• whether and how the investee qualifies as SEDI-owned and controlled or will operate in a CDFI investment area
• subsequent private financing