SBIA and the mistaken donations

The Small Business Investor Alliance (SBIA) operates at the intersection of industry and public policy, acting as a voice on Capitol Hill for dozens of mid-market private debt and direct lending firms in the US.

In that capacity, the SBIA lobbies members of Congress to act on regulatory and legislative issues facing the industry, pushing legislation that would exempt private equity firms from US Securities and Exchange Commission registration and increase the leverage limit for SBIC funds, among other issues.

One of the tools the SBIA utilises in this effort is its political action committee (PAC), which collects political contributions from industry professionals and directs them to the campaign committees of Senators and Representatives who support the industry. To date, the SBIA’s PAC has collected more than $97,000 in contributions for its 2014 Election coffers, according to Federal Election Commission (FEC) filings. 

On at least three occasions, the SBIA mistakenly attributed political contributions received by its PAC to investment funds managed by firms within its membership, Private Debt Investor confirmed. The contributions were actually made by professionals at the firms that manage those vehicles.

In its FEC filings, the SBIA listed the donations as having come from Founders Equity SBIC, GMB Mezzanine Capital II and NewSpring Mezzanine Capital. Executives at all three firms confirmed that investment professionals made the donations, rather than the funds. 

“Our donors were always 100 percent legally compliant and did not make any errors. The transcription errors that were made by the PAC were immediately corrected with Election Commission using the normal correction forms,” SBIA President Brett Palmer told PDI in a statement.

Although the errors are considered relatively minor and easily amended, the distinction between contributions sourced from individuals versus those sourced from investment funds is significant. The purpose of an investment fund is to allocate capital in a manner that will generate a return, and sources contacted by PDI indicated that using investment capital sourced from third parties for political donations would be considered inappropriate. 

Three fund lawyers contacted by PDI indicated that they had never seen firms use investment funds to make political donations.

“In my experience, it tends to come more from the partners, rather [than] from the firms themselves,” one attorney told PDI. “There are a lot of laws that apply to political contributions, so if the partner makes the contribution, you have to be very careful that you’re complying with all of those.”

Even if the funds had been used to make political donations, it is unclear how regulators would respond.

NewSpring Capital’s mezzanine fund was one of the vehicles that mistakenly listed by the SBIA. Last May, the US Securities and Exchange Commission did inquire about the listed donation in an advisor review.

“It was presented to me when the SEC was in here, and they asked, ‘Hey, what’s this?” says Jon Schwartz, partner and chief financial officer of NewSpring Capital. “They happened to write down the name of the fund. They shouldn’t have.”

Schwartz also pointed out that the SBIA’s error did not lead to any issues with the SEC, and that NewSpring will likely continue to work with the association moving forward.

“They’ve worked terrifically with all different groups on tax issues, registration issues, bills on small business and increasing the leverage level on certain funds,” says Schwartz. “They’re trying to work on important issues for a program that doesn’t cost taxpayers money. We provide a return.

“We’re more than happy to help the association forward our cause,” he added.