Section 504 & 505 of the small business act of 1958 authorized the formation of Certified Development Companies (CDCs). CDCs are intended to assist communities, both urban and rural, by stimulating the growth and expansion of small businesses primarily through financial assistance. CDCs may issue debentures, guaranteed by the SBA, to fund loans to small businesses for fixed assets. The SBA issues trust certificates which indicate interest in a pool of 504 debentures. These certificates may be securitized and sold in the secondary markets. Following are terms and conditions under which CDCs must operate:
CDCs must cover a geographic area, either county, region or entire state. If applying for statewide coverage, there must not be another statewide CDC.
Applicants must provide a budget and prove that they have adequate funding for operating the CDC. At least one full-time staff person must be dedicated to operating the CDC.
The Board of Directors must be comprised of at least five people. They must: 1) Be involved in the economic development of the geographic area (state), 2) Chosen by a majority of the stockholders (members), and 3) must include the following types of individuals:
--A lending officer with experience in small business lending
--A representative of a community organization
--A representative of a business organization
--A representative of the governmental body covered (state)
The stockholders (members) must be comprised of at least 25 people. None of the stockholders may own more than 10% of the stock, if a corporation. The stockholders must also represent the four types above.
A CDC may provide the following services:
--Packaging loans and debentures
--Providing management assistance
--Participate in 501 or 502 financings