Suppose a small private company—say, a $10 million company—wants to get funding for an acquisition without doing a public offering. What would be a possible source?

One possible source can be SBICs, which are like investment companies but have special privileges under the tax code (and so are thought of as “government venture capital” although they are owned and controlled privately). SBICs may make loans and charge interest or take equity positions (either directly or via stock options or warrants enabling them to buy stock at predetermined prices for a predetermined period of time.

• Companies that meet the SBA’s definition of small (or, better yet, smaller) are eligible for SBIC financing, with certain restrictions. An SBIC must invest all its capital in “small” businesses, currently defined as businesses with a tangible net worth of $24 million and average net income after Federal income taxes for the preceding two completed years of less than $8 million (or, the industry size standard covering the industry in which the applicant is primarily engaged).
   
• Within that category, SBICs must invest  at least 25 percent of their capital in “smaller” businesses, defined as those with net worth less than $6 million and average net income after Federal income taxes for the preceding two years of less than $2 million (or, the size standard for the industry in which it is primarily engaged). 

Most SBICs concentrate on a particular stage of investment (i.e., start-up, expansion, or turnaround) and identify a geographic area in which to focus. Securities SBICs typically focus on making pure equity investments but can make debt investments as well. Debenture SBICs focus primarily on providing debt or debt with equity features. Debenture SBICs will typically focus on companies that are mature enough to make current interest payments on the investment.