Small Business Size Protest on Control, Small Business Investment Companies, and Present Realization of Unexercised Options

By: Christine V Williams on 01/17/2022

In December of 2021, the SBA’s Office of Hearings and Appeals (OHA), decided during a protest whether or not a Small Business Investment Company (SBIC) owned enough unexercised options (unexercised voting stock or equivalent) of a small business to become affiliated with that small business.  In its decision, OHA found that even if the unexercised options were presently exercised (13 CFR 121.103(d)(1)) that the SBIC could not control the small business as such options were approximately 1 percent of the overall stock value.

The Area Office found and OHA Affirmed the rules regarding affiliation and SBICs as another basis to deny affiliation even if the unexercised stock were exercised.

Business concerns owned in whole or substantial part by investment companies licensed, or development companies qualifying, under the Small Business Investment Act of 1958, as amended, are not considered affiliates of such investment companies or development companies.  (Id., quoting 13 C.F.R. § 121.103(b)(1).)

That is, SBICs are licensed by the SBA in order for the affiliation exception to apply to investment companies that invest in small businesses.  As this SBIC was licensed with the SBA, pursuant to 13 CFR 107.835, the exception would apply, and affiliation would not be found.

Additionally, because the voting block of the stock of the SBIC was so small, it would not be found to be in control of the small business.  For more information, here is the link: SIZE APPEAL of KIHOMAC