Southeast Capital Partners, formerly known as the TennesSeed Fund, has been denied access to a federal Small Business Administration program and an associated $20 million for investment in start-uptechnology companies.

The denial was directly linked to fund manager and president of Southeast Community Capital Corp. Don Welty, who resigned last week, said Tom Rogers, president of Oak Ridge-based Technology 2020, an economic development organization under which the 2-year-old fund and Southeast Community Capital operate.

“These events are certainly a setback for the fund,” Rogers said, saying that the denial came as a surprise and disappointment to the fund’s managers and investors, which include private individuals as well as institutions such as the University of Tennessee, SunTrust Bank and UT-Battelle.

Rogers said because of market difficulties since Southeast Capital received initial approval to begin investing, SBA guidelines for approving funds have become more stringent. Several months ago the agency requested additional paperwork regarding the fund and its management.

Earlier this month, the SBA denied Southeast Capital’s request for a license to participate in the agency’s Small Business Investment Company program, which provides $2-for-$1 federal matches when private venture dollars are invested.

Participation was expected to raise the fund’s investment pool to about $30 million.

The SBA specifically cited Welty as the reason for denying the proposal.

Welty resigned May 12.

Rogers wouldn’t cite the SBA’s specific issues regarding Welty. An SBA spokesman said the agency wouldn’t comment on reasons for the denial.

Rich Plumley, a fund investor and manager, said he understood the application was turned down because of Welty’s lack of experience managing such funds. He said Welty had worked with others to help obtain SBIC status but had never gotten an application approved on his own.

“We had hired Don with an expectation that he would guide us through the process of getting an SBIC license,” he said. “That was his greatest asset or perceived value to the fund. Accountability ultimately, appropriately, gets allocated to one person. There was no other course of action.”

The $10 million fund was set up with preliminary approval from the U.S. Small Business Administration and the expectation that it would benefit from the SBIC program.

With a dearth of early-stage investment capital in the region, the fund was hailed as the door to development of high-technology start-ups, particularly those emerging from Oak Ridge National Laboratory.

The fund already has made two investments totaling $1.57 million in Abingdon, Va.-based ThinOptX and Metatomix, which has headquarters in Memphis and Massachusetts. Rogers said the SBIC denial will not affect the fund’s current investments.

Fund managers, however, recently signed a term sheet with another company, the details of which Rogers would not disclose. At this point, officials are trying to determine whether Southeast Capital Partners is fully committed to the investment, Rogers said.

The license denial also has resulted in a reduction in the management fee Southeast Community Capital receives to manage the fund, Rogers said.

SBA guidelines required that the organization receive a percentage of the total potential amount of the fund, or $30 million. Now that the fund has been reduced to $10 million, that management fee has dropped considerably, he said, and probably will result in the loss of two to three jobs.

Rogers and Plumley said some investors had expressed dissatisfaction with investments made by the fund to date because of a lack of local representation and because the investments have been made in later-stage companies.

Those sentiments will play a role in where the fund’s managers and investors decide to go from here, they said.

Several options for the fund exist, Rogers said:

* Hiring a new fund manager with appropriate experience to begin the SBIC application process again.

* Merging with another regional SBIC-approved fund.

* Maintaining a local fund with the $10 million already committed and making fewer investments.

* Closing the fund altogether.

Plumley said in his conversations with about half of the fund’s investors, most are leaning toward either merging with another SBIC fund or keeping the fund private and local.

A decision, which will include a written vote of all of the fund’s investors, should happen by July 1, Plumley said.

Lee Martin, who helped launch the TennesSeed fund and serves as an investor and member of the advisory board, called the SBA’s decision a “serious disappointment.”

But, he said, “my hope is that we will figure out our next strategy quickly and get this thing down the road.”

Business writer Larisa Brass may be reached at 865-342-6318.