Employee Equity Investment Act of 2023

II 118TH CONGRESS 1ST SESSION S. 1618 To amend the Small Business Investment Act of 1958 to establish an employee equity investment facility, and for other purposes. IN THE SENATE OF THE UNITED STATES MAY 16, 2023 Mr. VAN HOLLEN (for himself, Mr. RUBIO, Ms. BALDWIN, Mr. YOUNG, Mrs. SHAHEEN, and Mr. BRAUN) introduced the following bill; which was read twice and referred to the Committee on Small Business and Entrepre- neurship A BILL To amend the Small Business Investment Act of 1958 to establish an employee equity investment facility, and for other purposes. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Employee Equity In- 4 vestment Act of 2023’’. 5 SEC. 2. EMPLOYEE EQUITY INVESTMENT FACILITY. 6 (a) DEFINITIONS.—Section 103 of the Small Busi- 7 ness Investment Act of 1958 (15 U.S.C. 662) is amend- 8 ed— 9 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 2 •S 1618 IS (1) in paragraph (19), by striking ‘‘and’’ at the 1 end; 2 (2) in paragraph (20), by striking the period at 3 the end and inserting a semicolon; and 4 (3) by adding at the end the following: 5 ‘‘(21) the term ‘covered investment’ means, 6 with respect to an investment in a covered small 7 business concern— 8 ‘‘(A) the provision of capital to finance the 9 sale of an ownership interest of a covered small 10 business concern, including a covered small 11 business concern created as a result of a cor- 12 porate divestiture, to an employee stock owner- 13 ship plan or eligible worker-owned cooperative if 14 such sale results in— 15 ‘‘(i) the employee stock ownership 16 plan or eligible worker-owned cooperative, 17 respectively, holding a majority interest of 18 the outstanding stock of the covered small 19 business concern; and 20 ‘‘(ii) with respect to such a sale to an 21 employee stock ownership plan, the ap- 22 pointment of an independent trustee for 23 the transaction; or 24 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 3 •S 1618 IS ‘‘(B) the provision of capital to finance a 1 covered small business concern if— 2 ‘‘(i) an employee stock ownership plan 3 or eligible worker-owned cooperative holds 4 a majority interest of the outstanding 5 stock of the covered small business con- 6 cern, prior to and immediately following 7 the provision of capital; and 8 ‘‘(ii) the provision of capital does not 9 reduce the percentage of stock of the cov- 10 ered small business concern held by the 11 employee stock ownership plan or eligible 12 worker-owned cooperative (as applicable), 13 excluding any synthetic equity; 14 ‘‘(22) the term ‘covered small business con- 15 cern’— 16 ‘‘(A) means a small business concern; and 17 ‘‘(B) with respect to an employee equity 18 investment company that is not a Protege 19 EEIC, includes an entity that is not more than 20 300 percent larger than the size standards es- 21 tablished for categorizing a business concern as 22 a small business concern under section 3(a) of 23 the Small Business Act (15 U.S.C. 632(a)); 24 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 4 •S 1618 IS ‘‘(23) the term ‘eligible worker-owned coopera- 1 tive’ has the meaning given that term in section 2 1042(c) of the Internal Revenue Code of 1986; 3 ‘‘(24) the term ‘employee equity investment 4 company’ means a small business investment com- 5 pany— 6 ‘‘(A) that identifies at the time of applica- 7 tion for licensure under section 301 an intent to 8 be licensed as an employee equity investment 9 company; and 10 ‘‘(B) for which— 11 ‘‘(i) not less than 75 percent of the 12 total capital managed by the investment 13 firm shall be invested in covered invest- 14 ments; 15 ‘‘(ii) not less than 50 percent of the 16 total capital managed by the investment 17 firm shall be invested in covered invest- 18 ments described in paragraph (21)(A); 19 ‘‘(iii) covered investment returns are 20 obtained from debt, synthetic equity, or a 21 combination thereof, including returns ob- 22 tained from cash interest, payment-in-kind 23 interest, and stock warrants; and 24 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 5 •S 1618 IS ‘‘(iv) any investment that is not a cov- 1 ered investment is an investment in a 2 small business concern; 3 ‘‘(25) the term ‘employee stock ownership plan’ 4 has the meaning given that term in section 4975(e) 5 of the Internal Revenue Code of 1986; 6 ‘‘(26) the term ‘independent trustee’ means a 7 trustee that— 8 ‘‘(A) is in the profession of serving as a fi- 9 duciary for employee stock ownership plans; 10 ‘‘(B) has never— 11 ‘‘(i) performed services for or on be- 12 half of any party selling an ownership in- 13 terest in the covered small business con- 14 cern to the employee stock ownership plan 15 involved in the transaction the trustee is 16 considering; or 17 ‘‘(ii) been a director, officer, or em- 18 ployee of the covered small business con- 19 cern; 20 ‘‘(C) has not performed services for or on 21 behalf of the covered small business concern at 22 any time during the 5-year period ending on the 23 date of execution of the transaction the trustee 24 is considering, unless such services solely con- 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 6 •S 1618 IS sisted of acting as a fiduciary of an employee 1 benefit plan (including an employee stock own- 2 ership plan) under the Employee Retirement 3 Income Security Act of 1974 (29 U.S.C. 1001 4 et seq.); 5 ‘‘(D) has not performed services related to 6 the transaction the trustee is considering, for or 7 on behalf of— 8 ‘‘(i) the employee equity investment 9 company that is preparing to or has al- 10 ready allocated capital to the covered small 11 business; or 12 ‘‘(ii) any other entity that is struc- 13 turing or financing the transaction for any 14 party other than the employee stock owner- 15 ship plan; and 16 ‘‘(E) does not have a familial or corporate 17 relationship (such as a parent-subsidiary rela- 18 tionship) to any person or entity described in 19 subparagraph (B), (C), or (D); 20 ‘‘(27) the term ‘independent financial advisor’ 21 means a financial or valuation advisor that— 22 ‘‘(A) is in the profession of serving as a fi- 23 nancial or valuation advisor for transactions in- 24 volving employee stock ownership plans; 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 7 •S 1618 IS ‘‘(B) has never— 1 ‘‘(i) performed services, including a 2 preliminary valuation, for or on behalf of— 3 ‘‘(I) any party selling an owner- 4 ship interest in the covered small 5 business concern to the employee 6 stock ownership plan involved in the 7 transaction the advisor is evaluating; 8 or 9 ‘‘(II) the covered small business 10 concern, unless the services were pro- 11 vided solely to an existing employee 12 stock ownership plan sponsored by the 13 covered small business concern; or 14 ‘‘(ii) been a director, officer, or em- 15 ployee of the covered small business con- 16 cern; 17 ‘‘(C) has not performed services related to 18 the transaction the advisor is evaluating, includ- 19 ing a preliminary valuation, for or on behalf 20 of— 21 ‘‘(i) the employee equity investment 22 company that is preparing to or has al- 23 ready allocated capital to the covered small 24 business; or 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 8 •S 1618 IS ‘‘(ii) any other entity that is struc- 1 turing or financing the transaction for any 2 party other than the employee stock owner- 3 ship plan; and 4 ‘‘(D) does not have a familial or corporate 5 relationship (such as a parent-subsidiary rela- 6 tionship) to any of person or entity described in 7 subparagraph (B) or (C); 8 ‘‘(28) the term ‘non-EEIC company’ means a 9 small business investment company that— 10 ‘‘(A) is licensed under section 301; 11 ‘‘(B) is selected to receive leverage from 12 the facility established under section 321; and 13 ‘‘(C) is not an employee equity investment 14 company; 15 ‘‘(29) the term ‘outstanding stock’ means 16 shares of stock, including synthetic equity; 17 ‘‘(30) the term ‘Protege EEIC’ means an entity 18 licensed under section 301 as an employee equity in- 19 vestment company and selected in accordance with 20 section 322(c)— 21 ‘‘(A) for which the managers of the firm 22 have a documented record of successful busi- 23 ness experience; and 24 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 9 •S 1618 IS ‘‘(B) that has an investment track record 1 that does not meet the requirements to be li- 2 censed under section 301; and 3 ‘‘(31) the term ‘synthetic equity’ has the mean- 4 ing given that term in section 409(p)(6) of the In- 5 ternal Revenue Code of 1986.’’. 6 (b) EMPLOYEE EQUITY INVESTMENT FACILITY.— 7 Part A of title III of the Small Business Investment Act 8 of 1958 (15 U.S.C. 681 et seq.) is amended by adding 9 at the end the following: 10 ‘‘SEC. 321. EMPLOYEE EQUITY INVESTMENT FACILITY. 11 ‘‘(a) DEFINITION OF FACILITY.—In this section, the 12 term ‘facility’ means the facility established under sub- 13 section (b). 14 ‘‘(b) ESTABLISHMENT.—The Administrator, acting 15 through the Associate Administrator of the Office of In- 16 vestment and Innovation of the Administration, shall es- 17 tablish and carry out a facility to provide leverage to li- 18 censed employee equity investment companies and non- 19 EEIC companies for the purpose of encouraging covered 20 investments. 21 ‘‘(c) APPLICATION.— 22 ‘‘(1) IN GENERAL.—An investment firm desir- 23 ing to participate in the facility shall submit to the 24 Administrator an application— 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 10 •S 1618 IS ‘‘(A) to be licensed to participate in the fa- 1 cility as an employee equity investment com- 2 pany (including as a Protege EEIC); or 3 ‘‘(B) to be selected to participate as a non- 4 EEIC company. 5 ‘‘(2) ROLLING BASIS.—The Administrator shall 6 accept applications under paragraph (1) on a rolling 7 basis. 8 ‘‘(3) ELECTRONIC SUBMISSIONS.—The Admin- 9 istrator shall allow an applicant under this section to 10 electronically submit any document required by this 11 section and to provide an electronic signature for 12 any signature that is required on such a document. 13 ‘‘(4) APPLICATION PROCESS.—An investment 14 firm shall identify an intent to be licensed as an em- 15 ployee equity investment company at the time the in- 16 vestment firm applies to be licensed as a small busi- 17 ness investment company under section 301. 18 ‘‘(d) PROVISIONAL APPROVAL.—The Administrator 19 may provide provisional approval for a license to partici- 20 pate in the facility as an employee equity investment com- 21 pany for a period not to exceed 1 year to an investment 22 firm submitting an application under subsection (c)— 23 ‘‘(1) that does not meet the minimum private 24 capital requirements under section 302 necessary for 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 11 •S 1618 IS licensing under section 301 at the time of applica- 1 tion; 2 ‘‘(2) that states an intent to more effectively 3 raise capital commitments in private markets with a 4 license; and 5 ‘‘(3) that states an intent to more precisely re- 6 quest the desired amount of leverage contingent on 7 securing capital from private market investors. 8 ‘‘(e) COMBINED LEVERAGE.—The Administrator 9 may not provide leverage to employee equity investment 10 companies and non-EEIC companies under the facility in 11 a total amount that is more than $5,000,000,000 for a 12 fiscal year. Not more than 20 percent of such total amount 13 may be provided to non-EEIC companies. 14 ‘‘(f) TRANSACTION REQUIREMENTS.— 15 ‘‘(1) IN GENERAL.—With respect to a covered 16 investment described in section 103(21)(A) involving 17 a sale to an employee stock ownership plan, an inde- 18 pendent trustee for the employee stock ownership 19 plan shall be appointed before the execution of the 20 covered investment for a period of time that is suffi- 21 cient for the independent trustee to fully evaluate 22 the proposed transaction. 23 ‘‘(2) FAIRNESS OPINION.—An independent 24 trustee appointed under paragraph (1) shall obtain 25 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 12 •S 1618 IS a fairness opinion on the proposed covered invest- 1 ment from an independent financial advisor, which 2 shall evaluate whether the price, terms, and cost of 3 financing of the proposed covered investment are fi- 4 nancially fair to the employee stock ownership plan. 5 ‘‘(g) PROHIBITIONS.— 6 ‘‘(1) FINANCING.— 7 ‘‘(A) IN GENERAL.—An employee of a cov- 8 ered small business concern may not provide 9 personal financing of any kind for a covered in- 10 vestment, including through a wage concession 11 or rollover of a retirement plan. 12 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 13 shall not apply to— 14 ‘‘(i) financing provided by an em- 15 ployee for the sale of an ownership interest 16 held by the employee in a covered small 17 business concern; or 18 ‘‘(ii) employee capital contributions or 19 membership fees paid by members of an el- 20 igible worker-owned cooperative, if such 21 amounts are reasonable and customary 22 and not used for the purchase of the cov- 23 ered small business concern. 24 VerDate Sep 11 2014 00:47 May 31, 2023 Jkt 039200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\S1618.IS S1618 kjohnson on DSK79L0C42PROD with BILLS 13 •S 1618 IS ‘‘(2) CONTROL.—An employee equity invest- 1 ment company or non-EEIC company shall not exer- 2 cise control over a covered small business concern in 3 which the employee equity investment company or 4 non-EEIC company, respectively, has made a cov- 5 ered investment. 6 ‘‘(h) EMPLOYEE ALLOCATIONS.—With respect to a [Text truncated for display. 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