Subject: Determination of "Disadvantaged Small Business Concerns."

The purpose of this memorandum is to provide guidance to Section 301(d) and other licensees in their determination that a small business concern is socially or economically disadvantaged, and to outline minimum information for such determination.

I. STATEMENT OF POLICY

A disadvantaged small business is a business concern which is at least 50 percent owned, and controlled and managed by socially or economically disadvantaged individuals. No assistance may be provided by Section 301(d) licensees to small business concerns unless such concerns are socially or disadvantaged.

II. LEGISLATION RELATING TO 301(d) LICENSEES

Section 301(d) of the Small Business Investment Act of 1958 was added in 1972 to give legislative authority to a program of providing assistance to present or potential business persons whose participation in the free enterprise system is hampered because of social or economic disadvantages. Prior to the 1972 amendment to the Act, the Small Business Administration had licensed a special class of small business investment companies (MESBICs). These MESBICs were licensed solely for the purpose of rendering financial and management assistance to members of minority races and to those persons

Section 301(d) of the Act provides for the licensing by SBA of a small business investment company, "the investment policy of which is that its investments will be made solely in small business concerns which will contribute to a well-balanced national economy by facilitating ownership in such concerns by persons whose participation in the

III. REGULATIONS

Pursuant to this authority, SBA has defined a Section 301(d) license in Section 107.50 of the Regulations as a "licensee organized under a State business or nonprofit corporation statute and licensed pursuant to Section 301(d) of the Act" and having an investment policy limited to "making investments solely in the Small Concerns which will contribute to a well-balanced national economy by facilitating ownership of such concerns by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages." "Disadvantaged Concern" is defined in terms of the statutory language as one "owned by a person whose participation in the free enterprise system is hampered because of social and economic disadvantages." The regulations also make special provisions for investments in disadvantaged concerns by licensees other than Section 301(d) Licensees. See, for example 107.830.

IV. MEANING OF SOCIALLY OR ECONOMICALLY DISADVANTAGED

Except to recommend the elimination if any suggestion that only members of minority groups are eligble for assistance under this program and to specify that the program is to aid all who are hampered in achieving full citzenship in our economic system by virtue of their social or economic disadvantage, Congress has not fully defined the words "socially or economically disadvantaged." This lack of precise legislation definition suggests that a precise definition is inappropriate, and that flexibility is warranted.

V. PROCEDURES RELATING TO ELIGIBLITY DETERMINATIONS OF DISADVANTAGED BUSINESSES

If the business is a member of a desingated group specified in CFR 13 Section 124.105(b)(i.e., African American, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans), then he/she may be assumed to be socially disadvantaged, and no further information (including the financial status of the owner) will be considered.

In determining whether other owners of small business concerns are socially or economically disadvantaged, reliance should not be placed upon a single factor, but on a composite of such factors as social or economic background of the principal owners, controlling individuals and managers of the concern, along with the general pattern of their life, opportunities and education which have prevented them from obtaining financial or other assistance available to the average entrepreneur in the economic mainstream. Consideration may be given to such factors as contribute to a disadvantaged condition in the ordinary (dictionary) meaning of the word - lacking in basic resources or conditions necessary to an equal position in society - as well as to such specific factors as:

VI. DOCUMENTATION

The composite of forgoing factors and other pertinent information will establish a profile to be used as the basis for determing eligiblity. A seperate profile should be completed by the licensee with respect to each small business concern assisted, and maintained for the SBA's inspection.

Revised June 22, 1994