For lenders and intermediaries involved in SBA lending, the saga of Small Business Capital (SBC) and its CEO Mark Feathers provides more drama than the TV show The Housewives of New Jersey. SBC is a licensed SBA lender located in Los Altos, CA. The firm holds 1 of 14 non-bank SBA 7(a) licenses that allows the firm to make SBA loans and, more importantly, sell the guarantees associated with SBA 7(a) loans in the secondary market. SBA 7(a) loans are 75% guaranteed by the SBA, and in today’s market, the guaranteed portion of the loan can be sold at a substantial premium of up to 15% greater than its face amount (i.e., a $1-million guarantee will sell for upward of $1,150,000, providing an immediate profit of $150,000).
SBC was capitalized by private investors through an offering memorandum. The offering memorandum pitched two funds, the Investors Prime Fund and the SBC Portfolio Fund. It is likely that the SBC Portfolio Fund was structured to hold the unguaranteed portion of SBA 7(a) loans (25% of the total loan), thereby generating interest income for investors from mortgage payments. The Investors Prime Fund probably recorded the income from guarantee sales and was structured to share that income among SBC and investors in the Prime Fund. In addition, SBC collected management fees from both funds, which is not unusual.
On June 29, 2012, the SEC shut down SBC alleging fraud in a “Ponzi-like” scheme. The SEC claims that SBC and Mark Feathers were paying returns that partly came from fund profits and partly from other investors, typical of a Ponzi fraud.
“I am watching this one,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If you understand the structure of SBA loans, the two SBC funds conceptually make sense. The SEC alleges the returns on the Prime Fund that likely received the sales proceeds from SBA guarantee sales were “too good to be true,” but the market for SBA guarantees is indeed 115%, which is very high,” said Sneden. “Perhaps SBC is culpable, but I wonder if the SEC is not following how the business works; we shall see as the investigation unfolds.”