[Title 13 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2000 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
13
Revised as of January 1, 2000
Business Credit and Assistance
Containing a Codification of documents of general
applicability and future effect
As of January 1, 2000
With Ancillaries
Published by:
Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
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U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2000
For sale by U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
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Table of Contents
Page
Explanation................................................. v
Title 13:
Chapter I--Small Business Administration 3
Chapter III--Economic Development Administration,
Department of Commerce 439
Chapter IV--Emergency Steel Guarantee Loan Board 551
Chapter V--Emergency Oil and Gas Guaranteed Loan
Board 575
Finding Aids:
Material Approved for Incorporation by Reference........ 601
Table of CFR Titles and Chapters........................ 603
Alphabetical List of Agencies Appearing in the CFR...... 621
List of CFR Sections Affected........................... 631
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 13 CFR 101.100
refers to title 13, part
101, section 100.
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EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
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parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
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The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
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Many agencies have begun publishing numerous OMB control numbers as
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Provisions that become obsolete before the revision date stated on
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INCORPORATION BY REFERENCE
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This material, like any other properly issued regulation, has the force
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What is a proper incorporation by reference? The Director of the
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the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
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(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
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(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
Properly approved incorporations by reference in this volume are
listed in the Finding Aids at the end of this volume.
What if the material incorporated by reference cannot be found? If
you have any problem locating or obtaining a copy of material listed in
the Finding Aids of this volume as an approved incorporation by
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the revision dates of the 50 CFR titles.
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REPUBLICATION OF MATERIAL
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Raymond A. Mosley,
Director,
Office of the Federal Register.
January 1, 2000.
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THIS TITLE
Title 13--Business Credit and Assistance is composed of one volume.
This volume contains chapter I--Small Business Administration, chapter
III--Economic Development Administration Department of Commerce, chapter
IV--Emergency Steel Guartantee Board, and chapter V--Emergency Oil and
Gas Guarantee Board. The contents of this volume represent all current
regulations codified under this title of the CFR as of January 1, 2000.
For this volume, Melanie L. Marcec was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Frances D. McDonald, assisted by Alomha S. Morris.
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TITLE 13--BUSINESS CREDIT AND
ASSISTANCE
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Part
chapter i--Small Business Administration.................... 101
chapter iii--Economic Development Administration, Department
of Commerce............................................... 300
chapter iv--Emergency Steel Guarantee Loan Board, Department
of Commerce............................................... 400
chapter v--Emergency Oil and Gas Guaranteed Loan Board,
Department of Commerce.................................... 500
[[Page 3]]
CHAPTER I--SMALL BUSINESS ADMINISTRATION
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Editorial Note: The Small Business Administration has asked the
Director of the Federal Register to inform users of this chapter that
parts 143, 145, and 146 are common rule regulations that cannot be
amended by the Small Business Administration unilaterally.
Part Page
101 Administration.............................. 5
102 Record disclosure and privacy............... 10
103 Standards for conducting business with SBA.. 21
105 Standards of conduct and employee
restrictions and responsibilities....... 23
107 Small business investment companies......... 27
112 Nondiscrimination in federally assisted
programs of SBA--effectuation of Title
VI of the Civil Rights Act of 1964...... 97
113 Nondiscrimination in financial assistance
programs of SBA--effectuation of
policies of Federal Government and SBA
Administrator........................... 102
114 Administrative claims under the Federal Tort
Claims Act and representation and
indemnification of SBA employees........ 111
115 Surety bond guarantee....................... 115
117 Nondiscrimination in federally assisted
programs of SBA--effectuation of the Age
Discrimination Act of 1975, as amended.. 131
120 Business loans.............................. 142
121 Small business size regulations............. 204
123 Disaster loan program....................... 234
124 8(A) Business Development/Small
Disadvantaged Business status
determinations.......................... 246
125 Government contracting programs............. 307
126 HUBZone program............................. 318
130 Small business development centers.......... 333
134 Rules of procedure governing cases before
the Office of Hearings and Appeals...... 345
136 Enforcement of nondiscrimination on the
basis of handicap in programs or
actitities conducted by the Small
Business Administration................. 361
140 Debt collection through offset.............. 369
142 Program Fraud Civil Remedies Act regulations 371
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143 Uniform administrative requirements for
grants and cooperative agreements to
State and local governments............. 381
145 Governmentwide debarment and suspension
(nonprocurement) and governmentwide
requirements for drug-free workplace
(grants)................................ 408
146 New restrictions on lobbying................ 427
Abbreviations Used in This Chapter:
SBA=Small Business Administration.
SBID=The Small Business Investment Division of SBA.
RFC=Reconstruction Finance Corporation.
Cross Reference: For regulations of the Securities and Exchange
Commission, see 17 CFR, Chapter II.
[[Page 5]]
PART 101--ADMINISTRATION--Table of Contents
Subpart A--Overview
101.100 What is the purpose of SBA?
101.101 Who manages SBA?
101.102 Where is SBA's Headquarters located?
101.103 Where are SBA's field offices located?
101.104 What are the functions of SBA's field offices?
101.105 Who may use SBA's official seal and for what purposes?
101.106 Does Federal law apply to SBA programs and activities?
101.107 What SBA forms are approved for public use?
101.108 Has SBA waived any of the public participation exemptions of
the Administrative Procedure Act?
101.109 Do SBA regulations include the section headings?
Subpart B--Employment of Private Counsel
101.200 When does SBA hire private counsel?
101.201 What are the minimum terms of private counsel's employment?
Subpart C--Inspector General
101.300 What is the Inspector General's authority to conduct audits,
investigations, and inspections?
101.301 Who should receive information or allegations of waste, fraud,
and abuse?
101.302 What is the scope of the Inspector General's authority?
101.303 How are Inspector General subpoenas served?
Subpart D--Intergovernmental Partnership
101.400 What is the purpose of this subpart?
101.401 What programs and activities of SBA are subject to this
subpart?
101.402 What procedures apply to the selection of SBA programs and
activities?
101.403 What are the notice and comment procedures?
101.404 How does the Administrator receive comments?
101.405 How does the Administrator respond to comments?
101.406 What are the Administrator's responsibilities in interstate
situations?
101.407 May the Administrator waive these regulations?
Authority: 5 U.S.C. 552 and App. 3, secs. 2, 4(a), 6(a), and
9(a)(1)(T); 15 U.S.C. 633, 634, 687; 31 U.S.C. 6506; 44 U.S.C. 3512;
E.O. 12372 (July 14, 1982), 47 FR 30959, 3 CFR, 1982 Comp., p. 197, as
amended by E.O. 12416 (April 8, 1983), 48 FR 15887, 3 CFR, 1983 Comp.,
p. 186.
Source: 61 FR 2394, Jan. 26, 1996, unless otherwise noted.
Subpart A--Overview
Sec. 101.100 What is the purpose of SBA?
The U.S. Small Business Administration (SBA) aids, counsels,
assists, and protects the interests of small business concerns, and
advocates on their behalf within the Government. It also helps victims
of disasters. It provides financial assistance, contractual assistance,
and business development assistance. For a more detailed description of
the functions of SBA see The United States Government Manual, a special
publication of the Federal Register, which is available from
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954.
Sec. 101.101 Who manages SBA?
(a) An Administrator, appointed by the President with the advice and
consent of the Senate, manages SBA. The Administrator--
(1) Is responsible to the President and Congress for exercising
direction, authority, and control over SBA.
(2) Determines and approves all policies covering SBA's programs to
aid, counsel, assist, and protect the interests of the nation's small
businesses.
(3) Employs or appoints employees necessary to implement the Small
Business Act, as amended, the Small Business Investment Act, as amended,
and other laws and directives.
(4) Delegates certain activities, by issuing regulations or
otherwise, to Headquarters and field positions.
(b) A Deputy Administrator, appointed by the President with the
advice and consent of the Senate, serves as Acting Administrator during
the absence or disability of the Administrator or in the event of a
vacancy in the Office of the Administrator.
Sec. 101.102 Where is SBA's Headquarters located?
The Headquarters of SBA is at 409 3rd Street, SW., Washington, DC
20416.
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Sec. 101.103 Where are SBA's field offices located?
A list of SBA's field offices with addresses, phone numbers and
jurisdictions served is periodically published in the Federal Register.
You can also obtain the address and phone number of an SBA office to
serve you by calling 1-800-8-ASK-SBA or 1-800-827-5722.
Sec. 101.104 What are the functions of SBA's field offices?
(a) Regional offices. Regional offices are managed by a Regional
Administrator who is responsible to the Administrator and to the
Associate Administrator for Field Operations. They are located in major
cities and have geographical boundaries which cover multi-state areas.
Regional offices exercise limited authority over field activities within
their region.
(b) District offices. District offices are managed by a District
Director and are located in cities within a region. District offices are
responsible to Headquarters, the Associate Administrator for Field
Operations, and to a regional office. Within their delegated authority,
district offices have authority for--
(1) Conducting all program delivery activities within the district
boundaries;
(2) Supervising all branch offices located within the district
boundaries; and
(3) Providing subordinate branch offices with the technical
capability necessary to execute assigned programs.
(c) Branch offices. Branch offices are managed by a Branch Manager
and are located in cities within a district. Branch offices are
responsible to the district office within whose boundaries it is
located. Branch offices execute one or more elements of the business or
disaster loan programs and have limited authority for program execution.
(d) Disaster area offices. Disaster area offices are managed by Area
Directors and are located in cities within defined geographical areas.
Disaster area offices are responsible to Headquarters and provide loan
services to victims of declared disasters. Temporary disaster offices
are often established in areas where disasters have occurred.
(e) Responsibilities. Each field office has responsibilities within
a defined geographical area as periodically set forth in the Federal
Register.
Sec. 101.105 Who may use SBA's official seal and for what purposes?
(a) The SBA's seal shall be in a manner and form set forth as
follows:
[GRAPHIC] [TIFF OMITTED] TC08SE91.003
(b) The Administrator, Deputy Administrator, General Counsel,
Assistant Administrator for Administration, Assistant Administrator for
Hearings and Appeals, Associate Administrator for Minority Enterprise
Development, Regional Administrators, District Directors, Branch
Managers, the Inspector General, and Disaster Area Directors are
authorized to--
(1) Certify and authenticate originals and copies of any books,
records, papers, or other documents on file within SBA, or extracts
taken from them.
(2) Certify the nonexistence of records.
(3) Affix the Seal of SBA to all such certifications for those
purposes authorized by 28 U.S.C. 1733.
Sec. 101.106 Does Federal law apply to SBA programs and activities?
(a) SBA makes loans and provides other services that are authorized
and executed under Federal programs to achieve national purposes.
(b) The following are construed and enforced in accordance with
Federal law--
(1) Instruments evidencing loans;
[[Page 7]]
(2) Security interests in real or personal property payable to or
held by SBA or the Administrator such as promissory notes, bonds,
guarantee agreements, mortgages, and deeds of trust;
(3) Other evidences of debt or security;
(4) Contracts or agreements to which SBA is a party, unless
expressly provided otherwise.
(c) To the extent feasible, SBA uses local or state procedures,
especially for recordation and notification purposes, in implementing
and facilitating SBA's loan programs. This use of local or state
procedures is not a waiver by SBA of any Federal immunity from any local
or state control, penalty, tax, or liability.
(d) No person, corporation, or organization that applies for and
receives any benefit or assistance from SBA, or that offers any
assurance or security upon which SBA relies for the granting of such
benefit or assistance, is entitled to claim or assert any local or state
law to defeat the obligation incurred in obtaining or assuring such
Federal benefit or assistance.
Sec. 101.107 What SBA forms are approved for public use?
(a) SBA uses forms approved by the Office of Management and Budget
(OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.), as amended. You may obtain approved forms for use by the public
when applying for or obtaining SBA assistance, or when providing
services for SBA, from any field office (see Sec. 101.103). You may also
use forms which you have prepared yourself, or have obtained from
another source, if those forms are identical in every respect to the
forms approved by OMB for the same purpose.
(b) Any member of the public who has reason to believe any SBA
office or agent is in violation of the Public Protection Clause of the
Paperwork Reduction Act (44 U.S.C. 3512 and see 5 CFR 1320.6) should
notify SBA. Direct such comments to the Assistant Administrator for
Administration at 409 3rd Street, SW., Washington, DC 20416.
Sec. 101.108 Has SBA waived any of the public participation exemptions of the Administrative Procedure Act?
Yes. Despite these exemptions, SBA will follow the public
participation requirements of the Administrative Procedure Act, 5 U.S.C.
553, in rulemakings relating to public property, loans, grants,
benefits, or contracts.
Sec. 101.109 Do SBA regulations include the section headings?
Yes. All SBA regulations must be interpreted as including the
section headings.
Subpart B--Employment of Private Counsel
Sec. 101.200 When does SBA hire private counsel?
(a) Business loans. SBA may hire private counsel to represent it in
regard to business loans when the volume of activity in an area is not
sufficient to require a full-time SBA employee, or the area is too
remote for economical use of a full-time SBA employee.
(b) Disaster loans. SBA may hire private counsel in regard to
disaster loans when the disaster presents an emergency and a volume of
activity that cannot be promptly and economically serviced by available
SBA employees.
Sec. 101.201 What are the minimum terms of private counsel's employment?
(a) Private counsel must perform all requested work in compliance
with SBA's regulations, policies, and instructions, and take such action
as is legally required under the Small Business Act, the Small Business
Investment Act, and other laws applicable to SBA.
(b) Private counsel must adhere to the highest standards of
professional conduct and maintain confidentiality appropriate to the
attorney-client relationship.
(c) Private counsel acts under the supervision of the SBA General
Counsel (and designees).
(d) Private counsel usually is compensated at an hourly rate as
approved by SBA. Contingency fee agreements may be used if approved by
the General Counsel.
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(e) Either party may terminate the employment upon written notice.
Subpart C--Inspector General
Sec. 101.300 What is the Inspector General's authority to conduct audits, investigations, and inspections?
The Inspector General Act of 1978, as amended (5 U.S.C. App. 3)
authorizes SBA's Inspector General to provide policy direction for, and
to conduct, supervise, and coordinate such audits, investigations, and
inspections relating to the programs and operations of SBA as appears
necessary or desirable.
Sec. 101.301 Who should receive information or allegations of waste, fraud, and abuse?
The Office of Inspector General should receive all information or
allegations of waste, fraud, or abuse regarding SBA programs and
operations.
Sec. 101.302 What is the scope of the Inspector General's authority?
To obtain the necessary information and evidence, the Inspector
General (and designees) have the right to:
(a) Have access to all records, reports, audits, reviews, documents,
papers, recommendations, and other materials available to SBA and
relating to SBA's programs and operations;
(b) Require by subpoena the production of all information,
documents, reports, answers, records, accounts, papers, and other data
and documentary evidence;
(c) Administer oaths and affirmations or take affidavits; and
(d) Request information or assistance from any Federal, state, or
local government agency or unit.
Sec. 101.303 How are Inspector General subpoenas served?
(a) Service of subpoenas may be effected by any of the following
means--
(1) If by mail, a copy of the subpoena must be addressed to the
person, partnership, corporation, or unincorporated association to be
served at a residence or usual dwelling place, or a principal office or
place of business, and mailed first class by registered or certified
mail (postage prepaid, return receipt requested), or by a commercial or
U.S. Postal Service overnight or express delivery service.
(2) If by personal delivery, a copy of the subpoena must be
delivered to the person to be served, or to a member of the partnership
to be served, or to an executive officer or a director of the
corporation or unincorporated association to be served, or to a person
authorized by appointment or by law to receive process for the person or
entity named in the subpoena.
(3) If by delivery to an address, a copy of the subpoena must be
left at the principal office or place of business of the person,
partnership, corporation, or unincorporated association to be served, or
at the residence or usual dwelling place of the person, member of the
partnership, or officer or director of the corporation or unincorporated
association to be served, with someone of suitable age and discretion.
(b) Proof of service--
(1) When service is by registered, certified, overnight, or express
mail, it is complete upon delivery of the document by the Postal Service
or commercial service.
(2) The return Postal Service receipt for a document that was
registered or certified and mailed, the signed receipt for a document
delivered by an overnight or express delivery service, or the Return of
Service completed by the individual serving the subpoena by personal
delivery shall be proof of service.
Subpart D--Intergovernmental Partnership
Sec. 101.400 What is the purpose of this subpart?
(a) This subpart implements section 401 of the Intergovernmental
Cooperation Act (31 U.S.C. 6506 et seq.) which promotes
intergovernmental partnership and strengthens Federalism by relying on
state processes and state, area-wide, regional, and local coordination
for the review of proposed Federal financial assistance and direct
Federal development.
(b) While guiding SBA's management, this subpart does not create any
right or benefit enforceable at law.
[[Page 9]]
Sec. 101.401 What programs and activities of SBA are subject to this subpart?
SBA publishes in the Federal Register a list of programs and
activities subject to this subpart.
Sec. 101.402 What procedures apply to the selection of SBA programs and activities?
(a) A state may--
(1) Select any program or activity published in the Federal Register
under Sec. 101.401 for intergovernmental review (providing it consults
with local elected officials before doing so) and then notify the
Administrator of the programs and activities selected; and
(2) Notify the Administrator of changes in its selections at any
time. For each change, the state submits to the Administrator an
assurance that it consulted with local elected officials regarding the
change.
(b) SBA may establish deadlines by which states must inform the
Administrator of changes in their program selections.
(c) After receiving notice of a state's selections, the
Administrator uses a state's process as soon as feasible depending on
individual programs and activities.
(d) ``State'' means any of the 50 States, the District of Columbia,
the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, Guam, American Samoa, the U.S. Virgin Islands, or the
Trust Territory of the Pacific Islands.
Sec. 101.403 What are the notice and comment procedures?
(a) The Administrator provides notice to directly affected state,
area-wide, regional, and local entities in a state of proposed SBA
financial assistance or direct SBA development if--
(1) The state has not adopted a process under Executive Order 12372
(3 CFR, 1982 Comp., p. 197), as amended by Executive Order 12416 (3 CFR,
1983 Comp., p. 186); or
(2) The assistance or development involves a program or activity not
selected for the state process.
(b) Notice may be made by publication in the Federal Register or
other means as SBA deems appropriate.
(c) Except in unusual circumstances the Administrator gives state
processes or directly affected state, area-wide, regional, and local
officials and entities at least 60 days to comment on proposed SBA
financial assistance or direct SBA development.
(d) In cases where SBA delegates the review, coordination, and
communication authority under this subpart, this section also applies.
Sec. 101.404 How does the Administrator receive comments?
(a) The Administrator follows the procedures of Sec. 101.405 if--
(1) A state office or official is designated to act as a single
point of contact between a state process and all Federal agencies; and
(2) That office or official transmits a state process recommendation
for a program selected under Sec. 101.402(a).
(b)(1) The single point of contact is not obligated to transmit
comments from state, area-wide, regional, or local officials and
entities where there is no state process recommendation.
(2) If a state process recommendation is transmitted by a single
point of contact, all comments from state, area-wide, regional, and
local officials and entities that differ from it must also be
transmitted.
(c) If a state has not established a process, or is unable to submit
a state process recommendation, state, area-wide, regional, and local
officials and entities may submit comments to SBA.
(d) If a program or activity is not selected for a state process,
state, area-wide, regional, and local officials and entities may submit
comments to SBA. In addition, if a state process recommendation for a
non-selected program or activity is transmitted to SBA by the single
point of contact, the Administrator follows the procedures of
Sec. 101.405.
(e) The Administrator considers comments which do not constitute a
state process recommendation submitted under this subpart and for which
the Administrator is not required to apply the procedures of
Sec. 101.405 when such comments are provided by a single point of
contact directly to SBA by a commenting party.
[[Page 10]]
Sec. 101.405 How does the Administrator respond to comments?
(a) If a state process provides a recommendation to SBA through its
single point of contact, the Administrator:
(1) Accepts the recommendation; or
(2) Reaches a mutually agreeable solution with the state process; or
(3) Provides the single point of contact with a written explanation
of the decision in a form the Administrator deems appropriate. The
Administrator may also supplement the written explanation by telephone
or other means.
(b) In any explanation under paragraph (a)(3) of this section, the
Administrator informs the single point of contact that--
(1) SBA will not implement its decision for at least 10 days after
the single point of contact receives the explanation; or
(2) Because of unusual circumstances the waiting period of at least
10 days is not feasible.
(c) For purposes of computing the waiting period under paragraph
(b)(1) of this section, a single point of contact is presumed to have
received written notification 5 days after the date of mailing.
Sec. 101.406 What are the Administrator's responsibilities in interstate situations?
The Administrator is responsible for--
(a) Identifying proposed SBA financial assistance and direct SBA
development that have an impact on interstate areas;
(b) Notifying appropriate officials and entities in states which
have adopted a process and selected an SBA program or activity;
(c) Making efforts to identify and notify the affected state, area-
wide, regional, and local officials and entities in states that have not
adopted a process or selected an SBA program or activity;
(d) Using the procedures of Sec. 101.405 if a recommendation of a
designated area-wide agency is transmitted by a single point of contact
in cases in which the review, coordination, and communication with SBA
has been delegated; and
(e) Using the procedures of Sec. 101.405 if a state process provides
a state recommendation to SBA through a single point of contact.
Sec. 101.407 May the Administrator waive these regulations?
The Administrator may waive any provision of Secs. 101.400 through
and including 101.406 in an emergency.
PART 102--RECORD DISCLOSURE AND PRIVACY--Table of Contents
Subpart A--Disclosure of Information
Sec.
102.1 What does this subpart do?
102.2 How can I get records from SBA?
102.3 How long will it take for SBA to respond to my request for
records?
102.4 How will SBA respond to my request?
102.5 If SBA grants my request, which records will be supplied?
102.6 How will SBA respond to requests for business information?
102.7 What are the procedures for submitters of business information to
SBA after March 1, 1996?
102.8 What fees will SBA charge?
102.9 How may I appeal a denial of my request for information or a fee
determination?
102.10 How can I get the Public Index of SBA materials?
102.11 What happens if I ask SBA for a record that another Federal
agency generated?
102.12 What happens if I subpoena records or testimony of employees in
connection with a civil lawsuit, criminal proceeding or
administrative proceeding to which SBA is not a party?
Subpart B--The Privacy Act
102.20 What privacy rights does this subpart regulate?
102.21 How will SBA maintain records?
102.22 When will SBA disclose records?
102.23 Are there special rules about personnel and equal employment
opportunity files?
102.24 What is a record?
102.25 What is a system of records?
102.26 What does this subpart mean by ``person to whom a record
pertains'' or ``you''?
102.27 What records are partially exempt from the provisions of the
Privacy Act?
102.28 What about information compiled for a civil action?
102.29 Who administers SBA's responsibilities under the Privacy Act?
[[Page 11]]
102.30 How can I write to the Privacy Act Officer?
102.31 Who appoints Systems Managers?
102.32 What do Systems Managers do?
102.33 How can I write to a Systems Manager?
102.34 How can I see records kept on me?
102.35 How long will it take SBA to respond to my request?
102.36 How will SBA respond to my request?
102.37 How may I appeal a decision to deny me access to my records?
102.38 To whom should my appeal be addressed?
102.39 By when must I appeal to the Privacy Act Officer?
102.40 When will SBA respond to my appeal?
102.41 How will SBA respond to my appeal?
102.42 How can I get SBA to amend a record kept on me?
102.43 What should my petition say?
102.44 For what reasons will SBA amend my record?
102.45 Will SBA ask me for more information after I make my request?
102.46 When will SBA respond to my request?
102.47 How will SBA respond to my request?
102.48 How do I appeal a refusal to amend a record kept on me?
102.49 To whom should I address my appeal?
102.50 By when must I submit my appeal?
102.51 By what standards will the Privacy Act Officer review my appeal?
102.52 When will SBA respond to my appeal?
102.53 How will SBA respond to my appeal?
102.54 How can I obtain judicial review of an SBA Privacy Act decision?
102.55 What must SBA tell the individuals from whom it collects
information?
102.56 Will SBA release my name or address?
102.57 Do I have to give SBA my SSN?
102.58 When will SBA show personnel records to a representative?
102.59 What fees will SBA charge me for my records?
102.60 May I be informed of disclosures made of my records?
102.61 Are there Matching Program procedures?
Authority: 5 U.S.C. 552 and 552a; 31 U.S.C. 1 et seq. and 67 et
seq.; 44 U.S.C. 3501 et seq.; E.O. 12600, 3 CFR, 1987 Comp., p. 235.
Source: 61 FR 2673, Jan. 29, 1996, unless otherwise noted.
Subpart A--Disclosure of Information
Sec. 102.1 What does this subpart do?
This subpart describes the procedures by which the SBA makes
documents available under the Freedom of Information Act (``FOIA'') (5
U.S.C. 552).
Sec. 102.2 How can I get records from SBA?
(a) You can go to the SBA office at which the records are kept, and
photocopy any final SBA decision, policy statement, or standard
operating procedure.
(b) For copies of all other records, you must send a letter request
to the SBA office at which the records are kept. The letter must
describe specific records you want. If you don't know which SBA office
keeps the records, you may send your letter to the nearest SBA District
Office. You may also send your letter to the Chief, FOIA & PA Office,
409 Third Street SW., Suite 5900, Washington DC 20416. The office
receiving your letter will forward it to the correct office.
Sec. 102.3 How long will it take for SBA to respond to my request for records?
(a) If you have met the fee requirements of Sec. 102.8, SBA will
respond within 10 working days after the correct office receives your
request, unless you have requested an especially large number of
records, the records are not located in the office handling the request,
or SBA needs to consult with another government office.
(b) If you make your request on behalf of another person, SBA will
respond within 10 working days after you present a document signed by
that person authorizing you to request information on his or her behalf.
If you make your request on behalf of another person without including
such signed authorization, SBA will inform you of the authorization
needed.
(c) If you send your request to the wrong office, that office will
send it to the correct office within 10 working days and will send you
an acknowledgment letter.
(d) If SBA determines that one of the circumstances described in
paragraph (a) of this section apply, it will respond within 20 working
days of the date upon which the correct office receives your request,
and will notify you that the extra time is required.
[[Page 12]]
Sec. 102.4 How will SBA respond to my request?
Within the time limit described in Sec. 102.3, SBA will either:
(a) Give you all the records you requested;
(b) Give you some or none of the records you requested, explain why
SBA has decided not to comply fully with your request, citing specific
exemptions where applicable, and explain how to appeal that decision; or
(c) Tell you that you will not receive a response until you have
either paid your fee or committed to the amount of fee you will pay, as
applicable.
Sec. 102.5 If SBA grants my request, which records will be supplied?
SBA will give you copies of all records or portions of records
requested which are in the processing office as of the close of the day
upon which that office received your request.
Sec. 102.6 How will SBA respond to requests for business information?
(a) Business information is a trade secret, or commercial or
financial information, contained in records provided to SBA by any
person and which may be protected from disclosure under Exemption Four
of FOIA (5 U.S.C. 552(b)(4)).
(b) The submitter is the business entity to which the business
information pertains and which submitted the information to SBA, either
directly or through an intermediary, such as a bank.
(c) SBA will disclose upon request business information that has
previously been released to the general public.
(d) If you request business information submitted to SBA prior to
March 1, 1996 which has not previously been released to the general
public, SBA will notify the submitter of your request upon SBA's receipt
of it if SBA intends to release that information. SBA will give the
submitter 5 working days to identify information the disclosure of which
would likely cause substantial competitive harm and why that harm would
occur unless SBA intends to deny your request in full.
(e) If you request business information submitted to SBA after March
1, 1996 which has not previously been released to the general public,
SBA will notify the submitter if it intends to release business
information which either the submitter has previously claimed or which
SBA believes to be confidential and the disclosure of which would cause
substantial competitive harm. The submitter will have 5 working days to
object to the disclosure, explaining why the harm would occur.
(f) Whenever a submitter objects to disclosure, SBA will consider
the submitter's objections, but will not be bound by it. If SBA
discloses information despite a submitter's objection, SBA will give the
submitter the maximum notice possible before disclosure without
violating the time constraints imposed by FOIA. In this notice, SBA will
tell the submitter when and what it intends to disclose.
(g) SBA will promptly notify the submitter of any suit filed against
SBA to compel disclosure.
Sec. 102.7 What are the procedures for submitters of business information to SBA after March 1, 1996?
Submitters may identify business information at the time of
submission which would likely cause them substantial competitive harm if
disclosed. The identification shall lapse after 10 years, unless renewed
in writing.
Sec. 102.8 What fees will SBA charge?
(a) Basic fees. (1) For manual record search. SBA will charge $18
per hour.
(2) For computer record searches. SBA will charge the actual costs.
(3) For review and disclosure determinations. SBA will charge $18
per hour.
(4) Duplication. SBA will charge 10 cents per page for photocopy
duplication, and the actual cost of reproduction for other methods.
(5) Certifying records. SBA will charge actual costs.
(6) For requested special types of delivery other than first-class
mail. SBA may charge the actual cost.
(b) If you are a representative of an educational institution, a
non-commercial scientific institution, or a member of the news media.
SBA will charge you only for the cost of duplication after the first 100
pages.
[[Page 13]]
(1) What is an educational institution? A state-certified preschool,
elementary or secondary school, an accredited college or university, an
accredited institution of professional education, or any accredited or
state-certified institute of vocational education which operates a
program or programs of scholarly research.
(2) What is a non-commercial scientific institution? An organization
which is operated solely for the purpose of conducting scientific
research, the results of which are not intended to promote any
particular product or industry.
(3) What is a representative of an educational or non-commercial
scientific institution? A requester seeking records on behalf of that
institution who is authorized by that institution to do so, and who is
seeking those records for scholarly or scientific reasons, as long as
there is no commercial purpose to the request for records.
(4) What is a representative of the news media? An individual who is
actively gathering news for an entity that is organized and operated to
disseminate information to the general public. To be considered ``news
media'', this organization may provide information by subscription and
may target its dissemination to a narrow section of the general public
as long as any member of the general public may purchase information
from it. If you are not employed by the news media, but have a
reasonable expectation that you will sell the information you obtain to
the news media, SBA may conclude that you are a representative of the
news media. SBA will not consider you to be a representative of the news
media if your request has a commercial purpose, beyond the commercial
purpose of selling information to the general public.
(c) Member of the general public. If you are a member of the general
public, SBA will not charge you for the first two hours of search time,
the first hundred pages of photocopy duplication, or for review and
disclosure determinations. The general public is anyone who is not a
representative of an educational institution, a representative of the
news media, or a commercial requester.
(d) Commercial requester. If you are a commercial requester you must
pay all the basic fees set forth in paragraph (a) of this section. A
commercial requester is anyone seeking information for commercial,
trade, or profit interests of the requester or someone he or she is
trying to help.
(e) How does SBA determine what category of requester I am? The SBA
office processing your request will determine the appropriate category.
If you are not a commercial requester, you must show us what category of
requester you are.
(f) Tell us how much you are willing to pay. To get the quickest
possible response, you must tell SBA how much money you are willing to
pay in fees when you make your request for records.
(g) If you don't tell us how much you are willing to pay and SBA
estimates that the fee will exceed $25.00, SBA will estimate the fee and
will not process your request until you tell SBA that you are willing to
pay the estimated amount, or until you narrow the request so that the
fee is less than $25.
(h) SBA will waive fees less than $25.
(i) If the fee is more than $250, or if you have a history of
failing to pay FOIA fees in a timely manner, SBA will ask you to remit
the estimated amount and any past due charges before sending you the
records.
(j) Who determines the fee? The SBA office which processes your
request.
(k) When do you pay the fee? SBA will bill you when it responds to
your request. You must pay within thirty-one calendar days.
(l) Failure to pay fees. (1) If you do not pay by the thirty-first
day after the billing date, SBA will charge interest at the maximum rate
allowed under Title 31 of the United States Code, section 3717.
(2) If you do not pay the amount due within ninety calendar days of
the due date, SBA may notify consumer credit reporting agencies of your
delinquency.
(3) If you owe fees for previous FOIA responses, SBA will not
respond to further requests unless you satisfy the amount due.
(m) Unsuccessful searches. If SBA's search for records is
unsuccessful, it will still bill you for the search.
(n) Multiple requests. If you make multiple requests at or about the
same
[[Page 14]]
time, SBA will aggregate your requests for records. In no case will SBA
give you more than the first two hours of search time, or more than the
first 100 pages of duplication without charge.
(o) Reduction of fees in the public interest. If SBA determines that
disclosure of the information you seek is in the public interest because
it is likely to contribute significantly to public understanding of the
operations or activities of the government, and that you are not seeking
the information in your own commercial interests, SBA may waive or
reduce the fee.
Sec. 102.9 How may I appeal a denial of my request for information or a fee determination?
(a) You must write to the Chief, FOIA & PA Office at 409 Third
Street SW., Suite 5900, Washington, DC 20416.
(b) The Chief must receive your written appeal within 45 calendar
days of the date of the SBA determination from which you are appealing.
(c)(1) If you are appealing a denial of your request for
information, the appeal must contain the following information:
(i) What records were denied.
(ii) The name and title of the individual who denied the request and
the address of his or her office.
(iii) Any other information you deem appropriate.
(2) If you are appealing a fee determination, the appeal must
contain the following information:
(i) The address of the office which made the fee determination from
which you are appealing.
(ii) The fee that office charged.
(iii) The fee, if any, you believe should have been charged.
(iv) The reasons you believe that your fee should be lower than the
fee which the Agency charged.
(v) Any other information you deem appropriate.
(d) The Chief will decide your appeal, unless the Chief originally
made the determination you are appealing. In that case, SBA's Assistant
Administrator for Hearings and Appeals will decide your appeal.
(e) SBA will decide your appeal within 20 working days from the date
of its receipt. SBA may have an additional 10 working days if unusual
circumstances require.
(f)(1) If you are appealing a decision to deny your request for
records, SBA will either:
(i) Give you the records you requested; or
(ii) Decline to give you the records you requested, tell you why SBA
has concluded that the records were exempt from disclosure under FOIA,
and tell you how to obtain judicial review of SBA's decision.
(2) If you are appealing a fee determination, SBA will either charge
the fee you request or charge another fee and explain why SBA has
concluded that the fee it has decided to charge is appropriate.
Sec. 102.10 How can I get the Public Index of SBA materials?
(a) The Public Index is a document which provides identifying
information about official documents which SBA has issued.
(b) SBA has administratively determined, as permitted by FOIA, that
periodic publication and distribution is unnecessary and impracticable.
(c) The Public Index is set forth in Appendix 3 of SBA Standard
Operating Procedure 40 03. You can obtain the Public Index from any SBA
office.
Sec. 102.11 What happens if I ask SBA for a record that another Federal agency generated?
Such a request is a request directed to the wrong office, as that
term is used in Sec. 102.3(c). SBA will forward your request to the
generating agency.
Sec. 102.12 What happens if I subpoena records or testimony of employees in connection with a civil lawsuit, criminal proceeding or administrative proceeding
to which SBA is not a party?
(a) The person to whom the subpoena is directed must consult with
SBA counsel in the relevant SBA office, who will seek approval for
compliance from the Associate General Counsel for Litigation. Except
where the subpoena requires the testimony of an employee of the
Inspector General's office, or records within the possession of the
Inspector General, the Associate General
[[Page 15]]
Counsel may delegate the authorization for appropriate production of
documents or testimony to local SBA counsel.
(b) If SBA counsel approves compliance with the subpoena, SBA will
comply.
(c) If SBA counsel disapproves compliance with the subpoena, SBA
will not comply, and will base such noncompliance on an appropriate
legal basis such as privilege or a statute.
(d) SBA counsel must provide a copy of any subpoena relating to a
criminal matter to SBA's Inspector General prior to its return date.
Subpart B--The Privacy Act
Sec. 102.20 What privacy rights does this subpart regulate?
This subpart establishes SBA's policy and procedures safeguarding an
individual against an invasion of personal privacy.
(a) Except as otherwise provided by law or regulation, SBA will
permit you to do the following:
(1) Determine what records pertaining to you are collected,
maintained, used, or disseminated by SBA;
(2) Object when records pertaining to you are obtained by SBA for a
particular purpose and are proposed to be used or made available for
another purpose without your consent; and
(3) Gain access to information pertaining to you in records, have a
copy made of all or any portion of those records, and correct or amend
such records as appropriate.
(b) SBA will collect, maintain, use, or disseminate any record of
identifiable personal information in a manner that assures that such
action is for a necessary and lawful purpose, that the information is
current and accurate for its intended use, and that adequate safeguards
are provided to prevent misuse of such information.
(c) SBA will permit exemptions from the requirements of 5 U.S.C.
552a (Privacy Act of 1974) (``PA'') only where an important public
policy need for such exemption has been determined pursuant to or under
specific statutory authority.
Sec. 102.21 How will SBA maintain records?
SBA records will:
(a) Contain only such information about an individual as is relevant
and necessary to accomplish a purpose required of SBA by statute,
regulation, or by Executive Order of the President.
(b) Be comprised, to the maximum practical extent, of an
individual's own statements when the information may result in an
adverse determination about an individual's rights, benefits, or
privileges under a Federal program.
Sec. 102.22 When will SBA disclose records?
SBA will not disclose to anyone any record which is contained in a
system of records, except that it will disclose a record:
(a) To the person about whom the record is maintained, or to that
person's agent, within the limits discussed in this subpart;
(b) To those SBA employees who have a need for the record to perform
their duties;
(c) When required under 5 U.S.C. 552 (FOIA);
(d) For a routine use of the record compatible with the purpose for
which it was collected;
(e) To the Bureau of the Census for purposes of planning or carrying
out a census, survey, or related activity pursuant to Title 13, United
States Code;
(f) To a recipient who has provided the Agency with advance adequate
written assurance that the record will be used solely as a statistical
research or reporting record, where the record is transferred in a form
that is not individually identifiable;
(g) To the National Archives of the United States as a record which
has sufficient historical or other value to warrant its continued
preservation by the U.S. Government, or for evaluation by the
Administrator of General Services or his or her designee to determine
whether the record has such value;
(h) To another agency or to an instrumentality of any governmental
jurisdiction within or under the control of the United States for a
civil or criminal law enforcement activity if:
(1) The activity is authorized by law; and
[[Page 16]]
(2) The head of the agency or instrumentality has made a written
request to the PA Officer specifying the particular portion desired and
the law enforcement activity for which the record is sought;
(i) To a person showing compelling circumstances affecting the
health or safety of an individual. Upon disclosure, SBA will notify such
individual at his or her last known address;
(j) To either House of Congress, or, to the extent of matters within
its jurisdiction, any committee or subcommittee thereof, or any joint
committee of Congress or subcommittee of any such joint committee;
(k) To the Comptroller General, or any of his or her authorized
representatives, in the course of the performance of the duties of the
General Accounting Office;
(l) Pursuant to the order of a court of competent jurisdiction; or
(m) To a consumer reporting agency in accordance with 31 U.S.C.
3711(f).
Sec. 102.23 Are there special rules about personnel and equal employment opportunity files?
(a) The provisions of parts 293 and 297 of title 5 of the Code of
Federal Regulations govern all SBA files which the Office of Personnel
Management determines are personnel files.
(b) The provisions of part 1611 of title 29 of the Code of Federal
Regulations govern all Equal Employment Opportunity complaint files.
Sec. 102.24 What is a record?
A record is information which SBA maintains on an individual and
which includes either his name or an identifying symbol (such as a
fingerprint, a social security number (``SSN''), or a photograph).
Sec. 102.25 What is a system of records?
A system of records is one or more records which SBA routinely keeps
for official purposes, and from which SBA can retrieve records by using
a name or personal identifier.
Sec. 102.26 What does this subpart mean by ``person to whom a record pertains'' or ``you''?
When this subpart refers to the ``person to whom a record pertains''
or uses the pronoun ``you'', it refers to a United States citizen or a
lawfully admitted alien. It does not refer to a corporation,
partnership, or sole proprietorship.
Sec. 102.27 What records are partially exempt from the provisions of the Privacy Act?
(a) The following systems of records are exempt from certain
provisions of the PA: Audit Reports (system of records #SBA 015),
Litigation and Claims Files (#SBA 070), Personnel Security Files (#SBA
100), Security and Investigations Files (#SBA 120), Office of Inspector
General Referrals (#SBA 125), Investigations Division Management
Information System (#SBA 130), and Standards of Conduct Files (#SBA
140).
(b) The provisions of the PA from which these systems of records are
exempt are subsections (c)(3) (Accounting of Certain Disclosures), (d)
(Access to Records), (e)(1), 4G, H, and I (Agency Requirements), and (f)
(Agency Rules).
(c) The systems of records described in paragraph (a) of this
section are exempt from the provisions of the Privacy Act described in
paragraph (b) of this section in order to:
(1) Prevent the subject of investigations from frustrating the
investigatory process;
(2) Protect investigatory material compiled for law enforcement
purposes;
(3) Fulfill commitments made to protect the confidentiality of
sources and to maintain access to necessary sources of information; or
(4) Prevent interference with law enforcement proceedings.
(d) In addition to the foregoing exemptions in paragraphs (a)
through (c) of this section, the systems of records described in
paragraph (a) of this section numbered SBA 015, 100, 120, 125 and 130
are fully exempt from the Privacy Act to the extent that they contain:
[[Page 17]]
(1) Information compiled to identify individual criminal offenders
and alleged offenders and consisting only of identifying data and
notations of arrests, confinement, release, and parole and probation
status;
(2) Information, including reports of informants and investigators,
associated with an identifiable individual compiled to investigate
criminal activity; or
(3) Reports compiled at any stage of the process of enforcement of
the criminal laws from arrest or indictment through release from
supervision associated with an identifiable individual.
(e) The systems of records described in paragraph (d) of this
section are fully exempt from the PA to the extent described in that
paragraph because they are records maintained by the Investigations
Division of the Inspector General, which is a component of SBA which
performs as its principal function activities pertaining to the
enforcement of criminal laws within the meaning of 5 U.S.C. 552a(j)(2).
They are exempt in order to:
(1) Prevent the subjects of Office of Inspector General (OIG)
investigations from using the PA to frustrate the investigative process;
(2) Protect the identity of Federal employees who furnish a
complaint or information to the OIG, consistent with section 7(b) of the
Inspector General Act of 1978, 5 U.S.C. App. I;
(3) Protect the confidentiality of other sources of information;
(4) Avoid endangering confidential sources and law enforcement
personnel;
(5) Prevent interference with law enforcement proceedings;
(6) Assure access to sources of confidential information, including
that contained in Federal, State, and local criminal law enforcement
information systems;
(7) Prevent the disclosure of investigative techniques; or
(8) Prevent the disclosure of classified information.
Sec. 102.28 What about information compiled for a civil action?
No individual shall have access to any information compiled by SBA
in reasonable anticipation of a civil action or proceeding. In the event
of a question as to disclosure, the Systems Manager for the system of
records involved will rely on the opinion of the General Counsel or
designee, and will also consult with the PA Officer.
Sec. 102.29 Who administers SBA's responsibilities under the Privacy Act?
The PA Officer has overall responsibility for administering the PA
for SBA. A Systems Manager is responsible for administering the PA as to
systems of records within an SBA Office.
Sec. 102.30 How can I write to the Privacy Act Officer?
You can write to the PA Officer at 409 Third Street SW., Suite 5900,
Washington, DC 20416.
Sec. 102.31 Who appoints Systems Managers?
The senior official in each field office and each Headquarters
program area designates himself or herself or appoints another as the
Systems Manager for that office.
Sec. 102.32 What do Systems Managers do?
Systems Managers have the following responsibilities, among others,
for the offices for which they are appointed:
(a) Acting as the initial contact person for individuals seeking
access to or amendment of their records.
(b) Responding to requests for information.
(c) Discussing the availability of records with individuals.
(d) Amending records in cases where amended information is not
controversial and does not involve policy decisionmaking.
(e) Informing individuals of any reproduction fees to be charged.
(f) Assuring that their systems of records contain no record
describing how any individual exercises rights guaranteed by the First
Amendment unless expressly authorized by statute or by the individual
about whom the record is maintained, or unless pertinent to and within
the scope of an authorized law enforcement activity.
[[Page 18]]
Sec. 102.33 How can I write to a Systems Manager?
You can write to a Systems Manager by writing to the SBA Office
which maintains the record you are seeking. If you do not know which
office that is, or you do not know the address of that office, you can
write to the PA Officer at 409 3rd Street SW., Suite 5900, Washington,
DC 20416, who will forward your request to the proper Systems Manager.
Sec. 102.34 How can I see records kept on me?
(a) You may look at any information pertaining to yourself contained
in any SBA system of records unless some law or regulation prohibits it.
(b) In order to see this information, you must ask for it in
writing, identifying what records you want. The writing should be
addressed to the Systems Manager overseeing the system of records
containing the record you wish to see.
(c) The Systems Manager (or, when appropriate, the PA Officer) may
ask for more specific information about the system of records in which
the document you are seeking is kept, and may ask you for
identification. The Systems Manager may ask you for your social security
number but you are not obliged to present it and your request will not
be denied simply because you do not provide it. The Systems Manager may,
however, deny your request if he or she cannot determine that you are
the person to whom the information pertains.
Sec. 102.35 How long will it take SBA to respond to my request?
The Systems Manager will respond within 10 working days.
Sec. 102.36 How will SBA respond to my request?
The Systems Manager will inform you that:
(a) Your request is denied, in which case he or she will set forth
the reasons for denial and your rights to appeal; or
(b) Your request is granted and you may view your record, in which
case he or she will set forth the time and date for you to review your
record in the presence of an SBA employee; or
(c) Your request is granted and, unless you object, SBA will mail
you a copy of your record. SBA will mail you your record only if it
determines that there are no other reasonable means for you to obtain
access to your record.
Sec. 102.37 How may I appeal a decision to deny me access to my records?
Your appeal should be in writing and should set forth any
information you think would show that you should have access to your
records.
Sec. 102.38 To whom should my appeal be addressed?
(a) Denial of a personnel file. Address an appeal of a denial of a
request for a personnel file to the Office of Personnel Management, 1900
E Street NW., Washington, DC 20006.
(b) Denial of an Equal Employment Opportunity Complaint File.
Address an appeal of a denial of a request for an Equal Employment
Opportunity Complaint File to the Equal Employment Opportunity
Commission, 1801 L Street NW., Washington, DC 20036.
(c) All other appeals. Appeal the denial of any other record to the
PA Officer. See Sec. 102.30.
Sec. 102.39 By when must I appeal to the Privacy Act Officer?
Your appeal must reach the PA Officer on or before 30 calendar days
after the date the denial was issued. If your appeal is based on the
failure of the Systems Manager to answer your request, your appeal must
reach the PA Officer on or before 90 calendar days after the date by
which the Systems Manager should have responded under Sec. 102.35.
Sec. 102.40 When will SBA respond to my appeal?
The PA Officer will respond to you within 30 working days of the
date when your appeal was received.
Sec. 102.41 How will SBA respond to my appeal?
The PA Officer will inform you that:
(a) Your request is denied, in which case the reasons for denial
will be set forth along with your rights to judicial review of SBA's
decision; or
[[Page 19]]
(b) Your request is granted and you may view your record, in which
case the time and date for you to review your records in the presence of
an SBA employee will be set forth; or
(c) Your request is granted and, unless you object, SBA will mail
you a copy of your record. SBA will mail you your record only if it
determines that there are no other reasonable means for you to obtain
access to your record.
Sec. 102.42 How can I get SBA to amend a record kept on me?
You can petition to have records kept on you amended by writing to
the Systems Manager who oversees the system of records in which the
record you wish amended is kept. If you are unable to determine who that
Systems Manager is, you may send your petition to the PA Officer, who
will forward it to the right Systems Manager. See Sec. 102.30.
Sec. 102.43 What should my petition say?
Your petition should include the following:
(a) In what system of records the record you want amended is kept.
(b) What record you want amended.
(c) What specific information in that record you want amended.
(d) Why you want the record amended.
(e) Any information you have, including copies of evidence, which
you think will persuade the Systems Manager to amend the record.
(f) What the record should say.
Sec. 102.44 For what reasons will SBA amend my record?
SBA seeks to maintain only accurate, complete, and up-to-date
records which are relevant to accomplish some purpose required by law,
regulation, or Executive Order of the President. There are four grounds
for amending a record. They are:
(a) The record is not accurate.
(b) The record is not relevant to any legitimate SBA concern.
(c) The record is out-of-date. For example, there may have been
events since the date of the record which have affected some of the
information contained in the record.
(d) The record is incomplete. There may be additional information
relevant to the material contained in the record.
Sec. 102.45 Will SBA ask me for more information after I make my request?
Perhaps, in which case the procedures of Sec. 102.34(c) shall apply.
Sec. 102.46 When will SBA respond to my request?
The Systems Manager will acknowledge receipt of your request within
10 working days and issue a written response within 30 working days.
Sec. 102.47 How will SBA respond to my request?
The Systems Manager will:
(a) Make the amendment you request, and send all individuals who had
previously received a copy of that record a copy of the amended record;
or
(b) Amend the record, in a different manner, sending all individuals
who had previously received a copy of that record a copy of the amended
record and, in addition, telling you why your request was not granted in
full and what appeal rights you have; or
(c) Decline to amend the record, explaining why your request was not
granted and telling you of your appeal rights.
Sec. 102.48 How do I appeal a refusal to amend a record kept on me?
Your appeal should be in writing and include the following:
(a) All of the information contained in your original request to
amend the record;
(b) Any response of the Systems Manager, including any reasons for
denying your request; and
(c) Any information you wish to submit in response to the Systems
Manager's findings.
Sec. 102.49 To whom should I address my appeal?
(a) Personnel file. Address your appeal to the Office of Personnel
Management, 1900 E Street NW., Washington, DC 20006.
(b) Equal Employment Opportunity Complaint File. Address your appeal
to the Equal Employment Opportunity
[[Page 20]]
Commission, 1801 L Street NW., Washington, DC 20036.
(c) All other appeals. Address your appeal to the PA Officer. See
Sec. 102.30.
Sec. 102.50 By when must I submit my appeal?
Your appeal must be received by the PA Officer within 30 calendar
days of the date the Systems Manager declined to amend your records, or
within 90 calendar days of the date the Systems Manager should have
responded under Sec. 102.46 if the Systems Manager did not so respond.
Sec. 102.51 By what standards will the Privacy Act Officer review my appeal?
The PA Officer will decide your appeal using the criteria of
accuracy, relevance, timeliness, and completeness described in
Sec. 102.44. The PA Officer will review all relevant information and may
seek the views of other SBA personnel. The PA Officer may review
information not available to or not used by the Systems Manager.
Sec. 102.52 When will SBA respond to my appeal?
The PA Officer will respond to your appeal within 30 working days of
its receipt, unless the Administrator determines that unusual
circumstances exist, in which case the PA Officer will notify you of the
presence of these unusual circumstances within 30 working days of the
date upon which he or she received your appeal, and will respond to your
appeal within 60 working days of the date of receipt.
Sec. 102.53 How will SBA respond to my appeal?
The PA Officer will:
(a) Make the amendment you request, sending all individuals who had
previously received a copy of that record a copy of the amended record;
or
(b) Amend the record in a different manner; or decline to amend it
at all:
(1) Sending all individuals who had previously received a copy of
that record a copy of the amended record;
(2) Telling you why your request was not granted in full and that
you can seek judicial review; and
(3) Marking the areas of dispute, including your statement of
disagreement in the file, and, if appropriate, a concise statement of
why SBA refused to amend the record as you requested, sending this
material to all individuals who had previously received a copy of that
record.
Sec. 102.54 How can I obtain judicial review of an SBA Privacy Act decision?
You may bring a civil action against SBA in a United States district
court if the SBA:
(a) Makes a final determination not to provide you with access to or
to amend your record in accordance with your request;
(b) Fails to maintain your records with such accuracy, relevance,
timeliness and completeness as is necessary to assure fairness in any
determination relating to the qualifications, character, rights,
opportunities of, or benefits to you that may be made on the basis of
such records, and consequently a determination is made which harms you;
or
(c) Fails to comply with any other provisions of the PA (5 U.S.C.
552a) or the implementing regulations in this subpart, in such a way as
to cause harm to you.
Sec. 102.55 What must SBA tell the individuals from whom it collects information?
When SBA collects information from an individual, it must, either on
the form which collects the information or on a separate form which the
individual may keep, state:
(a) Whether disclosure of the information is voluntary or mandatory;
(b) By what authority SBA is collecting the information;
(c) For what principal purpose or purposes SBA is collecting the
information;
(d) What routine uses might be made of that information; and
(e) What will happen if the information isn't supplied.
Sec. 102.56 Will SBA release my name or address?
No, unless compelled to by law.
[[Page 21]]
Sec. 102.57 Do I have to give SBA my SSN?
(a) No. You need not give SBA your SSN, even if SBA asks for it.
(b) If SBA asks you for your SSN, it must tell you under what
authority it seeks your SSN, and for what purpose.
(c) SBA cannot withhold a benefit solely because you refuse to tell
it your SSN.
Sec. 102.58 When will SBA show personnel records to a representative?
(a) If you go to where the records are kept, SBA will permit one
person of your choosing to inspect the records with you.
(b) If you want your representative to inspect the records without
you, you must give SBA a written authorization.
(c) SBA will mail a copy of the record to your representative if you
direct SBA to do so in writing.
(d) You may inspect the records of a minor if you present evidence
that you are the custodial parent (including joint custodial parent) or
legal guardian of that minor. An affidavit or declaration, signed by you
under penalty of perjury, is normally sufficient evidence unless SBA has
information to the contrary.
(e) You may inspect the records of an adult incompetent if you
present evidence that you are the legal guardian of that person. A
guardianship order is sufficient evidence of your guardianship. Other
evidence may be considered.
Sec. 102.59 What fees will SBA charge me for my records?
SBA will charge you only for photocopying at the rate of 10 cents
per page. SBA will not charge you for finding or reviewing your records.
Fees less than $25 will be waived.
Sec. 102.60 May I be informed of disclosures made of my records?
SBA will tell you what disclosures it made of your records if you
ask, except that SBA will not tell you about disclosures it made to
another federal agency or government entity for law enforcement
purposes.
Sec. 102.61 Are there Matching Program procedures?
(a) SBA will comply with the Computer Matching and Privacy
Protection Act of 1988 (5 U.S.C. 552a, 552a notes). This Act establishes
procedures federal agencies must use if they want to match their
computer lists.
(b) If SBA adopts any procedures to supplement its compliance with
the Computer Matching and Privacy Protection Act of 1988 which are not
mandated in that Act, SBA will publish those procedures in Standard
Operating Procedure (SOP) 40 04. You can get a copy of SOP 40 04 at any
SBA Office.
(c) If SBA enters into an agreement with any federal agency,
contractor of any federal agency, state or local government, or agency
of any state or local government to disclose records for purposes of a
computer matching program, SBA will make a copy of that agreement
available to the general public. You can get a copy of any such
agreement by writing to the Privacy Act Officer.
PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA--Table of Contents
103.1 Key definitions.
103.2 Who may conduct business with SBA?
103.3 May SBA suspend or revoke an Agent's privilege?
103.4 What is ``good cause'' for suspension or revocation?
103.5 How does SBA regulate an Agent's fees and provision of service?
Authority: Secs. 5, 13, 72 Stat. 385, 394 (15 U.S.C. 634, 642).
Source: 61 FR 2681, Jan. 29, 1996, unless otherwise noted.
Sec. 103.1 Key definitions.
(a) Agent means an authorized representative, including an attorney,
accountant, consultant, packager, lender service provider, or any other
person representing an applicant or participant by conducting business
with SBA.
(b) The term conduct business with SBA means:
(1) Preparing or submitting on behalf of an applicant an application
for financial assistance of any kind, assistance from the Investment
Division of
[[Page 22]]
SBA, or assistance in procurement and technical matters;
(2) Preparing or processing on behalf of a lender or a participant
in any of SBA's programs an application for federal financial
assistance;
(3) Participating with or communicating in any way with officers or
employees of SBA on an applicant's, participant's, or lender's behalf;
(4) Acting as a lender service provider; and
(5) Such other activity as SBA reasonably shall determine.
(c) Applicant means any person, firm, concern, corporation,
partnership, cooperative or other business enterprise applying for any
type of assistance from SBA.
(d) Lender Service Provider means an Agent who carries out lender
functions in originating, disbursing, servicing, or liquidating a
specific SBA business loan or loan portfolio for compensation from the
lender. SBA determines whether or not one is a ``Lender Service
Provider'' on a loan-by-loan basis.
(e) Packager means an Agent who is employed and compensated by an
Applicant or lender to prepare the Applicant's application for financial
assistance from SBA. SBA determines whether or not one is a ``Packager''
on a loan-by-loan basis.
(f) Referral Agent means a person or entity who identifies and
refers an Applicant to a lender or a lender to an Applicant. The
Referral Agent may be employed and compensated by either an Applicant or
a lender.
(g) Participant means a person or entity that is participating in
any of the financial, investment, or business development programs
authorized by the Small Business Act or Small Business Investment Act of
1958.
Sec. 103.2 Who may conduct business with SBA?
(a) If you are an Applicant, a Participant, a partner of an
Applicant or Participant partnership, or serve as an officer of an
Applicant, Participant corporation, or limited liability company, you
may conduct business with SBA without a representative.
(b) If you are an Agent, you may conduct business with SBA on behalf
of an Applicant, Participant or lender, unless representation is
otherwise prohibited by law or the regulations in this part or any other
part in this chapter. For example, persons debarred under the SBA or
Government-wide debarment regulations may not conduct business with SBA.
SBA may request that any Agent supply written evidence of his or her
authority to act on behalf of an Applicant, Participant, or lender as a
condition of revealing any information about the Applicant's,
Participant's, or lender's current or prior dealings with SBA.
Sec. 103.3 May SBA suspend or revoke an Agent's privilege?
The Administrator of SBA or designee may, for good cause, suspend or
revoke the privilege of any Agent to conduct business with SBA. Part 134
of this chapter states the procedures for appealing the decision to
suspend or revoke the privilege. The suspension or revocation remains in
effect during the pendency of any administrative proceedings under part
134 of this chapter.
Sec. 103.4 What is ``good cause'' for suspension or revocation?
Any unlawful or unethical activity is good cause for suspension or
revocation of the privilege to conduct business. This includes:
(a) Attempting to influence any employee of SBA or a lender, by
gifts, bribes or other unlawful or unethical activity, with respect to
any matter involving SBA assistance.
(b) Soliciting for the provision of services to an Applicant by
another entity when there is an undisclosed business relationship
between the two parties.
(c) Violating ethical guidelines which govern the profession or
business of the Agent or which are published at any time by SBA.
(d) Implying or stating that the work to be performed for an
Applicant will include use of political or other special influence with
SBA. Examples include indicating that the entity is affiliated with or
paid, endorsed or employed by SBA, advertising using the words Small
Business Administration or SBA in a manner that implies SBA's
endorsement or sponsorship, use of SBA's seal or symbol, and giving a
``guaranty'' to
[[Page 23]]
an Applicant that the application will be approved.
(e) Charging or proposing to charge any fee that does not bear a
necessary and reasonable relationship to the services actually rendered
or expenses actually incurred in connection with a matter before SBA or
which is materially inconsistent with the provisions of an applicable
compensation agreement or Lender Service Provider agreement. A fee based
solely on a percentage of a loan or guarantee amount can be reasonable,
depending on the circumstances of a case and the services actually
rendered.
(f) Engaging in any conduct indicating a lack of business integrity
or business honesty, including debarment, criminal conviction, or civil
judgment within the last seven years for fraud, embezzlement, theft,
forgery, bribery, falsification or destruction of records, false
statements, conspiracy, receiving stolen property, false claims, or
obstruction of justice.
(g) Acting as both a Lender Service Provider or Referral Agent and a
Packager for an Applicant on the same SBA business loan and receiving
compensation for such activity from both the Applicant and lender. A
limited exception to this ``two master'' prohibition exists when an
Agent acts as a Packager and is compensated by the Applicant for
packaging services; also acts as a Referral Agent and is compensated by
the lender for those activities; discloses the referral activities to
the Applicant; and discloses the packaging activities to the lender.
(h) Violating materially the terms of any compensation agreement or
Lender Service Provider agreement provided for in Sec. 103.5.
(i) Violating or assisting in the violation of any SBA regulations,
policies, or procedures of which the Applicant has been made aware.
Sec. 103.5 How does SBA regulate an Agent's fees and provision of service?
(a) Any Applicant, Agent, or Packager must execute and provide to
SBA a compensation agreement, and any Lender Service Provider must
execute and provide to SBA a Lender Service Provider agreement. Each
agreement governs the compensation charged for services rendered or to
be rendered to the Applicant or lender in any matter involving SBA
assistance. SBA provides the form of compensation agreement and a
suggested form of Lender Service Provider agreement to be used by
Agents.
(b) Compensation agreements must provide that in cases where SBA
deems the compensation unreasonable, the Agent or Packager must: reduce
the charge to an amount SBA deems reasonable, refund any sum in excess
of the amount SBA deems reasonable to the Applicant, and refrain from
charging or collecting, directly or indirectly, from the Applicant an
amount in excess of the amount SBA deems reasonable.
(c) Each Lender Service Provider must enter into a written agreement
with each lender for whom it acts in that capacity. SBA will review all
such agreements. Such agreements need not contain each and every
provision found in the SBA's suggested form of agreement. However, each
agreement must indicate that both parties agree not to engage in any
sharing of secondary market premiums, that the services to be provided
are accurately described, and that the agreement is otherwise consistent
with SBA requirements. Subject to the prohibition on splitting premiums,
lenders have reasonable discretion in setting compensation for Lender
Service Providers. However, such compensation may not be directly
charged to an Applicant or borrower.
PART 105--STANDARDS OF CONDUCT AND EMPLOYEE RESTRICTIONS AND RESPONSIBILITIES--Table of Contents
Standards of Conduct
Sec.
105.101 Cross-reference to employee ethical conduct standards and
financial disclosure regulations.
Restrictions and Responsibilities Related to SBA Employees and Former
Employees
105.201 Definitions.
105.202 Employment of former employee by person previously the
recipient of SBA Assistance.
[[Page 24]]
105.203 SBA Assistance to person employing former SBA employee.
105.204 Assistance to SBA employees or members of their household.
105.205 Duty to report irregularities.
105.206 Applicable rules and directions.
105.207 Politically motivated activities with respect to the Minority
Small Business Program.
105.208 Penalties.
Restrictions on SBA Assistance to Other Individuals
105.301 Assistance to officers or employees of other Government
organizations.
105.302 Assistance to employees or members of quasi-Government
organizations.
Administrative Provisions
105.401 Standards of Conduct Committee.
105.402 Standards of Conduct Counselors.
105.403 Designated Agency Ethics Officials.
Authority: 5 U.S.C. 7301; 15 U.S.C. 634, 637(a)(18) and (a)(19),
642, and 645(a).
Source: 61 FR 2399, Jan. 26, 1996, unless otherwise noted.
Standards of Conduct
Sec. 105.101 Cross-reference to employee ethical conduct standards and financial disclosure regulations.
In addition to this part, Small Business Administration (SBA)
employees should refer to the Uniform Standards of Ethical Conduct for
Executive Branch employees at 5 CFR part 2635, the SBA Supplemental
Standards of Ethical Conduct at 5 CFR chapter XLIV, and the Uniform
Financial Disclosure regulation for Executive Branch employees at 5 CFR
part 2634.
Restrictions and Responsibilities Related to SBA Employees and Former
Employees
Sec. 105.201 Definitions.
(a) Employee means an officer or employee of the SBA regardless of
grade, status or place of employment, including employees on leave with
pay or on leave without pay other than those on extended military leave.
Unless stated otherwise. Employee shall include those within the
category of Special Government Employee.
(b) Special Government Employee means an officer or employee of SBA,
who is retained, appointed or employed to perform temporary duties on a
full-time or intermittent basis, with or without compensation, for not
to exceed 130 days during any period of 365 consecutive days.
(c) Person means an individual, a corporation, a company, an
association, a firm, a partnership, a society, a joint stock company, or
any other organization or institution.
(d) Household member means spouse and minor children of an employee,
all blood relations of the employee and any spouse who resides in the
same place of abode with the employee.
(e) SBA Assistance means financial, contractual, grant, managerial
or other aid, including size determinations, section 8(a) participation,
licensing, certification, and other eligibility determinations made by
SBA. The term also includes an express decision to compromise or defer
possible litigation or other adverse action.
Sec. 105.202 Employment of former employee by person previously the recipient of SBA Assistance.
(a) No former employee, who occupied a position involving discretion
over, or who exercised discretion with respect to, the granting or
administration of SBA Assistance may occupy a position as employee,
partner, agent, attorney or other representative of a concern which has
received this SBA Assistance for a period of two years following the
date of granting or administering such SBA Assistance if--
(1) The date of granting or administering such SBA Assistance was
within the period of the employee's term of employment; or
(2) The date of granting or administering such SBA Assistance was
within one year following the termination of such employment.
(b) Failure of a recipient of SBA Assistance to comply with these
provisions may result, in the discretion of SBA, in the requirement for
immediate repayment of SBA financial Assistance, the immediate
termination of
[[Page 25]]
other SBA Assistance involved or other appropriate action.
Sec. 105.203 SBA Assistance to person employing former SBA employee.
(a) SBA will not provide SBA Assistance to any person who has, as an
employee, owner, partner, attorney, agent, owner of stock, officer,
director, creditor or debtor, any individual who, within one year prior
to the request for such SBA Assistance was an SBA employee, without the
prior approval of the SBA Standards of Conduct Counselor. The Standards
of Conduct Counselor will refer matters of a controversial nature to the
Standards of Conduct Committee for final decision; otherwise, his or her
decision is final.
(b) In reviewing requests for approval, the Standards of Conduct
Counselor will consider:
(1) The relationship of the former employee with the applicant
concern;
(2) The nature of the SBA Assistance requested;
(3) The position held by the former employee with SBA and its
relationship to the SBA Assistance requested; and
(4) Whether an apparent conflict of interest might exist if the SBA
Assistance were granted.
Sec. 105.204 Assistance to SBA employees or members of their household.
Without the prior written approval of the Standards of Conduct
Committee, no SBA Assistance, other than Disaster loans under
subparagraphs (1) and (2) of section 7(b) of the Small Business Act,
shall be furnished to a person when the sole proprietor, partner,
officer, director or significant stockholder of the person is an SBA
employee or a household member.
Sec. 105.205 Duty to report irregularities.
Every employee shall immediately report to the SBA Inspector General
any acts of malfeasance or misfeasance or other irregularities, either
actual or suspected, arising in connection with the performance by SBA
of any of its official functions.
Sec. 105.206 Applicable rules and directions.
Every employee shall follow all agency rules, regulations, operating
procedures, instructions and other proper directions in the performance
of his official functions.
Sec. 105.207 Politically motivated activities with respect to the Minority Small Business Program.
(a) Any employee who has authority to take, direct others to take,
recommend, or approve any action with respect to any program or activity
conducted pursuant to section 8(a) or section 7(j) of the Small Business
Act, shall not, with respect to any such action, exercise or threaten to
exercise such authority on the basis of the political activity or
affiliation of any party. Employees shall expeditiously report to the
SBA Inspector General any such action for which such employee's
participation has been solicited or directed.
(b) Any employee who willfully and knowingly violates this section
shall be subject to disciplinary action, which may consist of separation
from service, reduction in grade, suspension, or reprimand.
(c) This section shall not apply to any action taken as a penalty or
other enforcement of a violation of any law, rule, or regulation
prohibiting or restricting political activity.
(d) The prohibitions in and remedial measures provided for under
this section with regard to such prohibitions, shall be in addition to,
and not in lieu of, any other prohibitions, measures or liabilities that
may arise under any other provision of law.
Sec. 105.208 Penalties.
Any employee guilty of violating any of the provisions in this part
may be disciplined, including removal or suspension from SBA employment.
Restrictions on SBA Assistance to Other Individuals
[[Page 26]]
Sec. 105.301 Assistance to officers or employees of other Government organizations.
(a) SBA must receive a written statement of no objection by the
pertinent Department or military service before it gives any SBA
Assistance, other than Disaster loans under subparagraphs (1) and (2) of
section 7(b) of the Small Business Act, to a person when its sole
proprietor, partner, officer, director or stockholder with a 10 percent
or more interest, or a household member, is an employee of another
Government Department or Agency having a grade of at least GS-13 or its
equivalent.
(b) The Standards of Conduct Committee must approve an SBA contract
with an entity if a sole proprietor, general partner, officer, director,
or stockholder with a 10 or more percent interest (or a household member
of such individuals) is an employee of a Government Department or
Agency. See also 48 CFR part 35, subpart 3.6.
(c) The Standards of Conduct Committee must approve SBA Assistance,
other than disaster loans under subparagraphs (1) and (2) of section
7(b) of the Small Business Act, to a person if its sole proprietor,
general partner, officer, director or stockholder with a 10 percent or
more interest (or a household member of such individual) is a member of
Congress or an appointed official or employee of the legislative or
judicial branch of the Government.
Sec. 105.302 Assistance to employees or members of quasi-Government organizations.
(a) The Standards of Conduct Committee must approve SBA Assistance,
other than Disaster loans under subparagraphs (1) and (2) of section
7(b) of the Small Business Act, to a person if its sole proprietor,
general partner, officer, director or stockholder with a 10 percent or
more interest (or a household member) is a member or employee of a Small
Business Advisory Council or is a SCORE volunteer.
(b) In reviewing requests for approval, factors the Standards of
Conduct Committee may consider include whether the granting of the SBA
Assistance might result in or create the appearance of giving
preferential treatment, the loss of complete independence or
impartiality, or adversely affect the confidence of the public in the
integrity of the Government.
Administrative Provisions
Sec. 105.401 Standards of Conduct Committee.
(a) The Standards of Conduct Committee will:
(1) Advise and give direction to SBA management officials concerning
the administration of this part and any other rules, regulations or
directives dealing with conflicts of interest and ethical standards of
SBA employees; and
(2) Make decisions on specific requests when its approval is
required.
(b) The Standards of Conduct Committee will consist of:
(1) The General Counsel or, in his or her absence, the Deputy
General Counsel or, in his or her absence, the Acting General Counsel
who shall act as Chairman of the Committee;
(2) The Associate Deputy Administrator for Management and
Administration, or in his or her absence, the Assistant Administrator
for Administration; and
(3) The Director of Human Resources, or in his or her absence, the
Deputy Director of Human Resources.
Sec. 105.402 Standards of Conduct Counselors.
(a) The SBA Standards of Conduct Counselor is the Designated Agency
Ethics Official, as appointed by the Administrator. Assistant Standards
of Conduct Counselors may be designated by the Standards of Conduct
Counselor.
(b) The Standards of Conduct Counselors and Assistants:
(1) Provide general advice, assistance and guidance to employees
concerning this part and the regulations referred to in Sec. 105.101;
(2) Monitor the Standards of Conduct Program within their assigned
areas and provide required reports thereon;
(3) Review Confidential Financial Disclosure Reports as required
under 5 CFR part 2634, subpart I, and provide an annual report on
compliance with
[[Page 27]]
filing requirements to the SBA Standards of Conduct Counselor as of
February 1 of each year; and
(4) Provide Outside Employment decisions pursuant to 5 CFR 5401.104.
(c) Each employee will be periodically informed of the name, address
and telephone number of the Assistant Standards of Conduct Counselor to
contact for advice and assistance.
(d) Employee requests for advice or rulings should be directed to
the appropriate Standards of Conduct Counselor for appropriate action.
[61 FR 2399, Jan. 26, 1996, as amended at 62 FR 48477, Sept. 16, 1997]
Sec. 105.403 Designated Agency Ethics Officials.
The Designated Agency Ethics Official and Alternates administer the
program for Financial Disclosure Statements under 5 CFR 2634.201,
receive and evaluate these statements, and provide advice and counsel
regarding matters relating to the Ethics in Government Act of 1978 and
its implementing regulations. The duties and responsibilities of the
Designated Agency Ethics Official and Alternates are set forth in more
detail in 5 CFR 2638.203, which is promulgated and amended by the Office
of Government Ethics.
[62 FR 2399, Jan. 26, 1996, as amended at 62 FR 48477, Sept. 16, 1997]
PART 107--SMALL BUSINESS INVESTMENT COMPANIES--Table of Contents
Subpart A--Introduction to Part 107
Sec.
107.20 Legal basis and applicability of this part 107.
107.30 Amendments to Act and regulations.
107.40 How to read this part 107.
Subpart B--Definition of Terms Used in Part 107
107.50 Definition of terms.
Subpart C--Qualifying for an SBIC License
Organizing an SBIC
107.100 Organizing a Section 301(c) Licensee.
107.115 1940 Act and 1980 Act Companies.
107.120 Special rules for a Section 301(d) Licensee owned by another
Licensee.
107.130 Requirement for qualified management.
107.140 SBA approval of initial Management Expenses.
107.150 Management and ownership diversity requirement.
107.160 Special rules for Licensees formed as limited partnerships.
Capitalizing an SBIC
107.200 Adequate capital for Licensees.
107.210 Minimum capital requirements for Licensees.
107.230 Permitted sources of Private Capital for Licensees.
107.240 Limitations on including non-cash capital contributions in
Private Capital.
107.250 Exclusion of stock options issued by Licensee from Management
Expenses.
Applying for an SBIC License
107.300 License application form and fee.
Subpart D--Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
107.400 Changes in ownership of 10 percent or more of Licensee but no
change of Control.
107.410 Changes in Control of Licensee (through change in ownership or
otherwise).
107.420 Prohibition on exercise of ownership or Control rights in
Licensee before SBA approval.
107.430 Notification to SBA of transactions that may change ownership
or Control.
107.440 Standards governing prior SBA approval for a proposed transfer
of Control.
107.450 Notification to SBA of pledge of Licensee's shares.
Restrictions on Common Control or Ownership of Two or More Licensees
107.460 Restrictions on Common Control or ownership of two (or more)
Licensees.
Change in Structure of Licensee
107.470 SBA approval of merger, consolidation, or reorganization of
Licensee.
Transfer of License
107.475 Transfer of license.
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Subpart E--Managing the Operations of a Licensee
General Requirements
107.500 Lawful operations under the Act.
107.501 Identification as a Licensee.
107.502 Representations to the public.
107.503 Licensee's adoption of an approved Valuation Policy.
107.504 Equipment and office requirements.
107.505 Facsimile requirement.
107.506 Safeguarding Licensee's assets/Internal controls.
107.507 Violations based on false filings and nonperformance of
agreements with SBA.
107.509 Employment of SBA officials.
Management and Compensation
107.510 SBA approval of Licensee's Investment Adviser/Manager.
107.520 Management Expenses of a Licensee.
Cash Management by a Licensee
107.530 Restrictions on investments of idle funds by leveraged
Licensees.
Borrowing by Licensees From Non-SBA Sources
107.550 Prior approval of secured third-party debt of leveraged
Licensees.
107.560 Subordination of SBA's creditor position.
107.570 Restrictions on third-party debt of issuers of Participating
Securities.
Voluntary Decrease in Licensee's Regulatory Capital
107.585 Voluntary decrease in Licensee's Regulatory Capital.
Requirement To Conduct Active Investment Operations
107.590 Licensee's requirement to maintain active operations.
Subpart F--Recordkeeping, Reporting, and Examination Requirements for
Licensees
Recordkeeping Requirements for Licensees
107.600 General requirement for Licensee to maintain and preserve
records.
107.610 Required certifications for Loans and Investments.
107.620 Requirements to obtain information from Portfolio Concerns.
Reporting Requirements for Licensees
107.630 Requirement for Licensees to file financial statements with SBA
(Form 468).
107.640 Requirement to file Portfolio Financing Reports (SBA Form
1031).
107.650 Requirement to report portfolio valuations to SBA.
107.660 Other items required to be filed by Licensee with SBA.
107.670 Application for exemption from civil penalty for late filing of
reports.
107.680 Reporting changes in Licensee not subject to prior SBA
approval.
Examinations of Licensees by SBA for Regulatory Compliance
107.690 Examinations.
107.691 Responsibilities of Licensee during examination.
107.692 Examination fees.
Subpart G--Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
107.700 Compliance with size standards in part 121 of this chapter as a
condition of Assistance.
107.710 Requirement to finance smaller enterprises.
107.720 Small Businesses that may be ineligible for financing.
107.730 Financings which constitute conflicts of interest.
107.740 Portfolio diversification (``overline'' limitation).
107.750 Conditions for financing a change of ownership of a Small
Business.
107.760 How a change in size or activity of a Portfolio Concern affects
the Licensee and the Portfolio Concern.
Structuring Licensee's Financing of Eligible Small Businesses: Types of
Financing
107.800 Financings in the form of Equity Securities.
107.810 Financings in the form of Loans.
107.815 Financings in the form of Debt Securities.
107.820 Financings in the form of guarantees.
107.825 Purchasing Securities from an underwriter or other third party.
Structuring Licensee's Financing of an Eligible Small Business: Terms
and Conditions of Financing
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107.830 Minimum duration/term of financing.
107.835 Exceptions to minimum duration/term of Financing.
107.840 Maximum term of financing.
107.845 Maximum rate of amortization on Loans and Debt Securities.
107.850 Restrictions on redemption of Equity Securities.
107.855 Interest rate ceiling and limitations on fees charged to small
businesses (``Cost of Money'').
107.860 Financing fees and expense reimbursements a Licensee may
receive from a small business.
107.865 Restrictions on control of a small business by a Licensee.
107.880 Assets acquired in liquidation of Portfolio securities.
Limitations on Disposition of Assets
107.885 Disposition of assets to Licensee's Associates or to
competitors of Portfolio Concern.
Management Services and Fees
107.900 Management fees for services provided to a Small Business by
Licensee or its Associate.
Subpart H--Non-leveraged Licensees-Exceptions to Regulations
107.1000 Licensees without leverage--exceptions to the regulations.
Subpart I--SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
107.1100 Types of Leverage and application procedures.
107.1120 General eligibility requirements for Leverage.
107.1130 Leverage fees and additional charges payable by Licensee.
107.1140 Licensee's acceptance of SBA remedies under Secs. 107.1800
through 107.1820.
Maximum Amount of Leverage for Which a Licensee Is Eligible
107.1150 Maximum amount of Leverage for a Section 301(c) Licensee.
107.1160 Maximum amount of Leverage for a Section 301(d) Licensee.
107.1170 Maximum amount of Participating Securities for any Licensee.
Conditional Commitments by SBA To Reserve Leverage for a Licensee
107.1200 SBA's Leverage commitment to a Licensee--application
procedure, amount, and term.
107.1210 Payment of leverage fee upon receipt of commitment.
107.1220 Requirement for Licensee to file quarterly financial
statements.
107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
107.1240 Funding of Licensee's draw request through sale to short-term
investor.
Preferred Securities Leverage--Section 301(d) Licensees
107.1400 Dividends or partnership distributions on 4 percent Preferred
Securities.
107.1410 Requirement to redeem 4 percent Preferred Securities.
107.1420 Articles requirements for 4 percent Preferred Securities.
107.1430 Redeeming 4 percent Preferred Securities with proceeds of non-
subsidized Debentures.
107.1440 Three percent preferred stock issued before November 21, 1989.
107.1450 Optional redemption of Preferred Securities.
Participating Securities Leverage
107.1500 General description of Participating Securities.
107.1505 Liquidity requirements for Licensees issuing Participating
Securities.
107.1510 How a Licensee computes Earmarked Profit (Loss).
107.1520 How a Licensee computes and allocates Prioritized Payments to
SBA.
107.1530 How a Licensee computes SBA's Profit Participation.
107.1540 Distributions by Licensee--Prioritized Payments and
Adjustments.
107.1550 Distributions by Licensee--permitted ``tax Distributions'' to
private investors and SBA.
107.1560 Distributions by Licensee--required Distributions to private
investors and SBA.
107.1570 Distributions by Licensee--optional Distribution to private
investors and SBA.
107.1575 Distributions on other than Payment Dates.
107.1580 Special rules for In-Kind Distributions by Licensees.
107.1585 Exchange of Debentures for Participating Securities.
107.1590 Special rules for companies licensed on or before March 31,
1993.
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
107.1600 SBA authority to issue and guarantee Trust Certificates.
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107.1610 Effect of prepayment or early redemption of Leverage on a
Trust Certificate.
107.1620 Functions of agents, including Central Registration Agent,
Selling Agent and Fiscal Agent.
107.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
107.1640 SBA access to records of the CRA, Brokers, Dealers and Pool or
Trust assemblers.
Miscellaneous
107.1700 Transfer by SBA of its interest in Licensee's Leverage
security.
107.1710 SBA authority to collect or compromise its claims.
107.1720 Characteristics of SBA's guarantee.
Subpart J--Licensee's Noncompliance With Terms of Leverage
107.1800 Licensee's agreement to terms and conditions in Secs. 107.1810
and 107.1820.
107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
107.1820 Conditions affecting issuers of Preferred Securities and/or
Participating Securities.
Computation of Licensee's Capital Impairment
107.1830 Licensee's Capital Impairment--definition and general
requirements.
107.1840 Computation of Licensee's Capital Impairment Percentage.
107.1850 Exceptions to Capital Impairment provisions for Licensees with
outstanding Participating Securities.
Subpart K--Ending Operations as a Licensee
107.1900 Surrender of license.
Subpart L--Miscellaneous
107.1910 Non-waiver of SBA's rights or terms of Leverage security.
107.1920 Licensee's application for exemption from a regulation in this
part 107.
107.1930 Effect of changes in this part 107 on transactions previously
consummated.
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g and
687m.
Source: 61 FR 3189, Jan. 31, 1996, unless otherwise noted.
Subpart A--Introduction to Part 107
Sec. 107.20 Legal basis and applicability of this part 107.
(a) The regulations in this part implement Title III of the Small
Business Investment Act of 1958, as amended. All Licensees must comply
with all applicable regulations, accounting guidelines and valuation
guidelines for Licensees.
(b) Provisions of this part which are not mandated by the Act shall
not supersede existing State law. A party claiming that a conflict
exists shall submit an opinion of independent counsel, citing
authorities, for SBA's resolution of the issues involved.
Sec. 107.30 Amendments to Act and regulations.
A Licensee shall be subject to all existing and future provisions of
the Act and parts 107 and 112 of title 13 of the Code of Federal
Regulations.
Sec. 107.40 How to read this part 107.
(a) Center Headings. All references in this part to SBA forms, and
instructions for their preparation, are to the current issue of such
forms. Center headings are descriptive and are used for convenience
only. They have no regulatory effect.
(b) Capitalizing defined terms. Terms defined in Sec. 107.50 are
capitalized in this part 107.
(c) The pronoun ``you'' as used in this part 107 means a Licensee or
license applicant, as appropriate, unless otherwise noted.
Subpart B--Definition of Terms Used in Part 107
Sec. 107.50 Definition of terms.
Accumulated Prioritized Payments has the meaning set forth in
Sec. 107.1520.
Act means the Small Business Investment Act of 1958, as amended.
Adjustments has the meaning set forth in Sec. 107.1520.
Affiliate or Affiliates has the meaning set forth in Sec. 121.103 of
this chapter.
Articles mean articles of incorporation or charter for a Corporate
Licensee and the partnership agreement
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or certificate for a Partnership Licensee.
Assistance or Assisted means Financing of or management services
rendered to a Small Business by a Licensee pursuant to the Act and these
regulations.
Associate of a Licensee means any of the following:
(1)(i) An officer, director, employee or agent of a Corporate
Licensee;
(ii) A Control Person, employee or agent of a Partnership Licensee;
(iii) An Investment Adviser/Manager of any Licensee, including any
Person who contracts with a Control Person of a Partnership Licensee to
be the Investment Adviser/Manager of such Licensee; or
(iv) Any Person regularly serving a Licensee on retainer in the
capacity of attorney at law.
(2) Any Person who owns or controls, or who has entered into an
agreement to own or control, directly or indirectly, at least 10 percent
of any class of stock of a Corporate Licensee or a limited partner's
interest of at least 10 percent of the partnership capital of a
Partnership Licensee. However, a limited partner in a Partnership
Licensee is not considered an Associate if such Person is an entity
Institutional Investor whose investment in the Partnership, including
commitments, represents no more than 33 percent of the partnership
capital of the Licensee and no more than five percent of such Person's
net worth.
(3) Any officer, director, partner (other than a limited partner),
manager, agent, or employee of any Associate described in paragraph (1)
or (2) of this definition.
(4) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, a Licensee.
(5) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, any Person described in
paragraphs (1) and (2) of this definition.
(6) Any Close Relative of any Person described in paragraphs
(1),(2), (4), and (5) of this definition.
(7) Any Secondary Relative of any Person described in paragraphs
(1), (2), (4), and (5) of this definition.
(8) Any concern in which--
(i) Any person described in paragraphs (1) through (6) of this
definition is an officer; general partner, or managing member; or
(ii) Any such Person(s) singly or collectively Control or own,
directly or indirectly, an equity interest of at least 10 percent
(excluding interests that such Person(s) own indirectly through
ownership interests in the Licensee).
(9) Any concern in which any Person(s) described in paragraph (7) of
this definition singly or collectively own (including beneficial
ownership) a majority equity interest, or otherwise have Control. As
used in this paragraph (9), ``collectively'' means together with any
Person(s) described in paragraphs (1) though (7) of this definition.
(10) For the purposes of this definition, if any Associate
relationship described in paragraphs (1) through (7) of this definition
exists at any time within six months before or after the date that a
Licensee provides Financing, then that Associate relationship is
considered to exist on the date of the Financing.
(11) If any Licensee has any ownership interest in another Licensee,
the two Licensees are Associates of each other.
Capital Impairment has the meaning set forth in Sec. 107.1830(c).
Central Registration Agent or CRA means one or more agents appointed
by SBA for the purpose of issuing TCs and performing the functions
enumerated in Sec. 107.1620 and performing similar functions for
Debentures and Participating Securities funded outside the pooling
process.
Charge means an annual fee on Leverage issued on or after October 1,
1996 (except for Leverage issued pursuant to a commitment made by SBA
before October 1, 1996), which is payable to SBA by Licensees, subject
to the terms and conditions set forth in Sec. 107.1130(d).
Close Relative of an individual means:
(1) A current or former spouse;
(2) A father, mother, guardian, brother, sister, son, daughter; or
(3) A father-in-law, mother-in-law, brother-in-law, sister-in-law,
son-in-law, or daughter-in-law.
[[Page 32]]
Combined Capital means the sum of Regulatory Capital and outstanding
Leverage.
Commitment means a written agreement between a Licensee and an
eligible Small Business that obligates the Licensee to provide Financing
(except a guarantee) to that Small Business in a fixed or determinable
sum, by a fixed or determinable future date. In this context the term
``agreement'' means that there has been agreement on the principal
economic terms of the Financing. The agreement may include reasonable
conditions precedent to the Licensee's obligation to fund the
commitment, but these conditions must be outside the Licensee's control.
Common Control means a condition where two or more Persons, either
through ownership, management, contract, or otherwise, are under the
Control of one group or Person. Two or more Licensees are presumed to be
under Common Control if they are Affiliates of each other by reason of
common ownership or common officers, directors, or general partners; or
if they are managed or their investments are significantly directed
either by a common independent investment advisor or managerial
contractor, or by two or more such advisors or contractors that are
Affiliates of each other. This presumption may be rebutted by evidence
satisfactory to SBA.
Control means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
Licensee or other concern, whether through the ownership of voting
securities, by contract, or otherwise.
Control Person means any Person that controls a Licensee, either
directly or through an intervening entity. A Control Person includes:
(1) A general partner of a Partnership Licensee;
(2) Any Person serving as the general partner, officer, director, or
manager (in the case of a limited liability company) of any entity that
controls a Licensee, either directly or through an intervening entity;
(3) Any Person that--
(i) Controls or owns, directly or through an intervening entity, at
least 10 percent of a Partnership Licensee or any entity described in
paragraphs (1) or (2) of this definition; and
(ii) Participates in the investment decisions of the general partner
of such Partnership Licensee;
(4) Any Person that controls or owns, directly or through an
intervening entity, at least 50 percent of a Partnership Licensee or any
entity described in paragraphs (1) or (2) of this definition.
Corporate Licensee. See definition of Licensee in this section.
Cost of Money has the meaning set forth in Sec. 107.855.
Debenture Rate means the interest rate, as published from time to
time in the Federal Register by SBA, for ten year debentures issued by
Licensees and funded through public sales of certificates bearing SBA's
guarantee. User or guarantee fees, if any, paid by a Licensee are not
considered in determining the Debenture Rate.
Debentures means debt obligations issued by Licensees pursuant to
section 303(a) of the Act and held or guaranteed by SBA.
Debt Securities has the meaning set forth in Sec. 107.815.
Disadvantaged Business means a Small Business that is at least 50
percent owned, and controlled and managed, on a day to day basis, by a
person or persons whose participation in the free enterprise system is
hampered because of social or economic disadvantages.
Distributable Securities means equity securities that are determined
by SBA (with the advice of a third party expert in the marketing of
securities) to meet each of the following requirements:
(1) The securities (which may include securities that are salable
pursuant to the provisions of Rule 144 (17 CFR 230.144) under the
Securities Act of 1933, as amended) are salable immediately without
restriction under Federal and state securities laws;
(2) The securities are of a class:
(i) Which is listed and registered on a national securities
exchange, or
(ii) For which quotation information is disseminated in the National
Association of Securities Dealers Automated Quotation System and as to
which transaction reports and last sale data are disseminated pursuant
to Rule
[[Page 33]]
11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities Exchange Act of 1934,
as amended; and
(3) The quantity of such securities to be distributed to SBA can be
sold over a reasonable period of time without having an adverse impact
upon the price of the security.
Distribution means any transfer of cash or non-cash assets to SBA,
its agent or Trustee, or to partners in a Partnership Licensee, or to
shareholders in a Corporate Licensee. Capitalization of Retained
Earnings Available for Distribution constitutes a Distribution to the
Licensee's non-SBA partners or shareholders.
Earmarked Assets has the meaning set forth in Sec. 107.1510(b). (See
also Sec. 107.1590.)
Earmarked Profit (Loss) has the meaning set forth in Sec. 107.1510.
Earned Prioritized Payments has the meaning set forth in
Sec. 107.1520.
Equity Capital Investments means investments in a Small Business in
the form of common or preferred stock, limited partnership interests,
options, warrants, or similar equity instruments, including subordinated
debt with equity features if such debt provides only for interest
payments contingent upon and limited to the extent of earnings. Equity
Capital Investments must not require amortization. Equity Capital
Investments may be guaranteed; however, neither Equity Capital
Investments nor such guarantee may be collateralized or otherwise
secured. Investments classified as Debt Securities (see Secs. 107.800
and 107.815) are not precluded from qualifying as Equity Capital
Investments.
Equity Securities has the meaning set forth in Sec. 107.800.
Financing or Financed means outstanding financial assistance
provided to a Small Business by a Licensee, whether through:
(1) Loans;
(2) Debt Securities;
(3) Equity Securities;
(4) Guarantees; or
(5) Purchases of securities of a Small Business through or from an
underwriter (see Sec. 107.825).
Guaranty Agreement means the contract entered into by SBA which is a
guarantee backed by the full faith and credit of the United States
Government as to timely payment of principal and interest on Debentures
or the Redemption Price of and Prioritized Payments on Participating
Securities and SBA's rights in connection with such guarantee.
Includible Non-Cash Gains means those non-cash gains (as reported on
SBA Form 468) that are realized in the form of Publicly Traded and
Marketable securities or investment grade debt instruments. For purposes
of this definition, investment grade debt instruments means those
instruments that are rated ``BBB'' or ``Baa'', or better, by Standard &
Poor's Corporation or Moody's Investors Service, respectively. Non-rated
debt may be considered to be investment grade if Licensee obtains a
written opinion from an investment banking firm acceptable to SBA
stating that the non-rated debt instrument is equivalent in risk to the
issuer's investment grade debt.
Institutional Investor means:
(1) Entities. Any of the following entities if the entity has a net
worth (exclusive of unfunded commitments from investors) of at least $1
million, or such higher amount as is specified in paragraph (1) of this
definition. (See also Sec. 107.230(b)(4) for limitations on the amount
of an Institutional Investor's commitment that may be included in
Private Capital.)
(i) A State or National bank, trust company, savings bank, or
savings and loan association.
(ii) An insurance company.
(iii) A 1940 Act Investment Company or Business Development Company
(each as defined in the Investment Company Act of 1940, as amended (15
U.S.C. 8a-1 et seq.).
(iv) A holding company of any entity described in paragraph (1)(i),
(ii) or (iii) of this definition.
(v) An employee benefit or pension plan established for the benefit
of employees of the Federal government, any State or political
subdivision of a State, or any agency or instrumentality of such
government unit.
(vi) An employee benefit or pension plan (as defined in the Employee
Retirement Income Security Act of 1974, as amended (Pub. L. 93-406, 88
Stat. 829), excluding plans established under
[[Page 34]]
section 401(k) of the Internal Revenue Code of 1986 (26 U.S.C. 401(k)),
as amended).
(vii) A trust, foundation or endowment exempt from Federal income
taxation under the Internal Revenue Code of 1986, as amended.
(viii) A corporation, partnership or other entity with a net worth
(exclusive of unfunded commitments from investors) of more than $10
million.
(ix) A State, a political subdivision of a State, or an agency or
instrumentality of a State or its political subdivision.
(x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors
described in paragraphs (1)(i) through (1)(ix) of this definition, each
of whom must have at least a 10 percent ownership interest in the
entity.
(xi) Any other entity that SBA determines to be an Institutional
Investor.
(2) Individuals. (i) Any of the following individuals if he/she is
also a permanent resident of the United States:
(A) An individual who is an Accredited Investor (as defined in the
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose
commitment to the Licensee is backed by a letter of credit from a State
or National bank acceptable to SBA.
(B) An individual whose personal net worth is at least $2 million
and at least ten times the amount of his or her commitment to the
Licensee. The individual's personal net worth must not include the value
of any equity in his or her most valuable residence.
(C) An individual whose personal net worth (determined in accordance
with paragraph (2)(i)(B) of this definition) is at least $10 million.
(ii) Any individual who is not a permanent resident of the United
States but who otherwise satisfies paragraph (2)(i) of this definition
provided such individual has irrevocably appointed an agent within the
United States for the service of process.
Investment Adviser/Manager means any Person who furnishes advice or
assistance with respect to operations of a Licensee under a written
contract executed in accordance with the provisions of Sec. 107.510.
Lending Institution means a concern that is operating under
regulations of a state or Federal licensing, supervising, or examining
body, or whose shares are publicly traded and listed on a recognized
stock exchange or NASDAQ and which has assets in excess of $500 million;
and which, in either case, holds itself out to the public as engaged in
the making of commercial and industrial loans and whose lending
operations are not for the purpose of financing its own or an
Associates's sales or business operations.
Leverage means financial assistance provided to a Licensee by SBA,
either through the purchase or guaranty of a Licensee's Debentures or
Participating Securities, or the purchase of a Licensee's Preferred
Securities, and any other SBA financial assistance evidenced by a
security of the Licensee.
Leverageable Capital means Regulatory Capital, excluding unfunded
commitments.
Licensee means either a corporation (Corporate Licensee), or a
limited partnership organized pursuant to Sec. 107.160 (Partnership
Licensee), to which a license has been granted pursuant to the Act. For
certain purposes, the Entity General Partner of a Partnership Licensee
is treated as if it were a Licensee (see Sec. 107.160(b)(2)).
LMI Enterprise means:
(1) A Small Business that has at least 50% of its employees or
tangible assets located in LMI Zone(s) or in which at least 35% of the
full-time employees have primary residences in LMI Zone(s), in either
case determined as of the time of application for SBIC financing; or
(2) A Small Business that does not meet the requirements of
paragraph (1) of this definition as of the time of application for SBIC
financing but that certifies at such time that it intends to meet the
requirements within 180 days after the closing of the SBIC financing. A
Small Business qualifying under this paragraph (2) will no longer be an
LMI Enterprise as of the 180th day after the closing of the SBIC
financing unless, on or before such date, at least 50% of its employees
or tangible assets are located in LMI Zones or at least 35% of
[[Page 35]]
its full-time employees have primary residences in LMI Zones.
LMI Investment means a financing of an LMI Enterprise, made after
September 30, 1999, in the form of equity securities or debt securities
that are junior to all existing or future secured borrowings of the
business. The debt securities may be guaranteed and may be secured by
the assets of the LMI Enterprise, but the guarantee may not be
collateralized or otherwise secured.
LMI Zone means any area located within a HUBZone (as defined in 13
CFR 126.103), an Urban Empowerment Zone or Urban Enterprise Community
(as designated by the Secretary of the Department of Housing and Urban
Development), a Rural Empowerment Zone or Rural Enterprise Community (as
designated by the Secretary of the Department of Agriculture), an area
of Low Income or Moderate Income (as recognized by the Federal Financial
Institutions Examination Council), or a county with Persistent Poverty
(as classified by the Economic Research Service of the Department of
Agriculture).
Loan has the meaning set forth in Sec. 107.810.
Loans and Investments means Portfolio Securities, Assets Acquired in
Liquidation of Portfolio Securities, Operating Concerns Acquired, and
Notes and Other Securities Received, as set forth in the Statement of
Financial Position of SBA Form 468.
Management Expenses has the meaning set forth in Sec. 107.520.
1940 Act Company means a Licensee which is registered under the
Investment Company Act of 1940.
1980 Act Company means a Licensee which is registered under the
Small Business Investment Incentive Act of 1980.
Original Issue Price means the price paid by the purchaser for
securities at the time of issuance.
Participating Securities means preferred stock, preferred limited
partnership interests, or similar instruments issued by Licensees,
including debentures having interest payable only to the extent of
earnings, all of which are subject to the terms set forth in
Secs. 107.1500 through 107.1590 and section 303(g) of the Act.
Partnership Licensee. See definition of Licensee in this section.
Payment Date means, for a Participating Securities issuer, each
February 1, May 1, August 1, and November 1 during the term of a
Participating Security.
Person means a natural person or legal entity.
Pool means an aggregation of SBA guaranteed Debentures or SBA
guaranteed Participating Securities approved by SBA.
Portfolio means the securities representing a Licensee's total
outstanding Financing of Small Businesses. It does not include idle
funds or assets acquired in liquidation of Portfolio securities.
Portfolio Concern means a Small Business Assisted by a Licensee.
Preferred Securities means nonvoting preferred stock or nonvoting
limited partnership interests issued to SBA prior to October 1, 1996, by
a Section 301(d) Licensee. Such securities were issued at par value in
the case of preferred stock, or at face value in the case of preferred
limited partnership interests.
Prioritized Payments has the meaning set forth in Sec. 107.1520.
Private Capital has the meaning set forth in Sec. 107.230.
Profit Participation has the meaning set forth in
Sec. 107.1500(c)(3).
Publicly Traded and Marketable means securities that are salable
without restriction or that are salable within 12 months pursuant to
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by
the holder thereof (or in the case of an In-kind Distribution by the
distributee thereof), and are of a class which is traded on a regulated
stock exchange, or is listed in the Automated Quotation System of the
National Association of Securities Dealers (NASDAQ), or has, at a
minimum, at least two market makers as defined in the relevant sections
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et
seq.), and in all cases the quantity of which can be sold over a
reasonable period of time without having an adverse impact upon the
price of the stock.
Qualified Non-private Funds has the meaning set forth in
Sec. 107.230.
[[Page 36]]
Redemption Price means the amount required to be paid by the issuer,
or successor to the issuer, of Preferred or Participating Securities to
repurchase such securities from the holder. The Redemption Price shall
be the Original Issue Price less any prepayments or prior redemptions.
Regulatory Capital means:
(1) General. Regulatory Capital means Private Capital, excluding
non-cash assets contributed to a Licensee or a license applicant, and
non-cash assets purchased by a license applicant, unless such assets
have been converted to cash or have been approved by SBA for inclusion
in Regulatory Capital. For purposes of this definition, sales of
contributed non-cash assets with recourse or borrowing against such
assets shall not constitute a conversion to cash.
(2) Exclusion of questionable commitments. An investor's commitment
to a Licensee is excluded from Regulatory Capital if SBA determines that
the collectibility of the commitment is questionable.
Retained Earnings Available for Distribution means Undistributed Net
Realized Earnings less any Unrealized Depreciation on Loans and
Investments (as reported on SBA Form 468), and represents the amount
that a Licensee may distribute to investors (including SBA) as a profit
Distribution, or transfer to Private Capital.
SBA means the Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
Secondary Relative of an individual means:
(1) A grandparent, grandchild, or any other ancestor or lineal
descendent who is not a Close Relative;
(2) An uncle, aunt, nephew, niece, or first cousin; or
(3) A spouse of any person described in paragraph (1) or (2) of this
definition.
Section 301(c) Licensee has the meaning set forth in Sec. 107.100.
Section 301(d) Licensee means a company licensed prior to October 1,
1996 under section 301(d) of the Act as in effect on the date of
licensing, that may provide Assistance only to Disadvantaged Businesses.
A Section 301(d) Licensee may be organized as a for-profit corporation,
as a non-profit corporation, or as a limited partnership.
Short-term Financing means Financing for a term of less than five
years in accordance with the regulations.
SIC Manual means the latest issue of the Standard Industrial
Classification Manual, prepared by the Office of Management and Budget,
and available from the U.S. Government Printing Office, Superintendent
of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-7954.
Small Business means a small business concern as defined in section
103(5) of the Act (including its Affiliates), which for purposes of size
eligibility, meets the applicable criteria set forth in part 121 of this
chapter.
Smaller Enterprise has the meaning set forth in Sec. 107.710.
Start-up Financing means an Equity Capital Investment in a Small
Business that--
(1) Has not had sales exceeding $3,000,000 or positive cash flow
from operations in any of its last three full fiscal years; and
(2) Was not formed to acquire any existing business, unless the
acquired business satisfies paragraphs (1) and (2) of this definition.
Temporary Debt has the meaning set forth in Sec. 107.570.
Trust means the legal entity created for the purpose of holding
guaranteed Debentures or Participating Securities and the guaranty
agreement related thereto, receiving, holding and making any related
payments, and accounting for such payments.
Trust Certificate Rate means a fixed rate determined by the
Secretary of the Treasury at the time Participating Securities or
Debentures are pooled, taking into consideration the current average
market yield on outstanding marketable obligations of the United States
with maturities comparable to the maturities of the Trust Certificates
being guaranteed by SBA, adjusted to the nearest one-eighth of one
percent.
Trust Certificates (TCs) means certificates issued by SBA, its agent
or Trustee and representing ownership of all or a fractional part of a
Trust or Pool of Debentures or Participating Securities.
[[Page 37]]
Trustee means the trustee or trustees of a Trust.
Undistributed Net Realized Earnings means Undistributed Realized
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
Unrealized Appreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, exceeds the cost basis thereof.
Unrealized Depreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, is below the cost basis thereof.
Unrealized Gain (Loss) on Securities Held means the sum of the
Unrealized Appreciation and Unrealized Depreciation on all of a
Licensee's Loans and Investments, less estimated future income tax
expense or estimated realizable future income tax benefit, as
appropriate.
Venture Capital Financing has the meaning set forth in
Sec. 107.1160.
Wind-up Plan has the meaning set forth in Sec. 107.590.
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 62
FR 11759, Mar. 13, 1997; 63 FR 5865, Feb. 5, 1998; 64 FR 52645, Sept.
30, 1999; 64 FR 70995, Dec. 20, 1999]
Subpart C--Qualifying for an SBIC License
Organizing an SBIC
Sec. 107.100 Organizing a Section 301(c) Licensee.
Section 301(c) Licensee means a company licensed under section
301(c) of the Act. It may be organized as a for-profit corporation or as
a limited partnership created in accordance with the special rules of
Sec. 107.160.
Sec. 107.115 1940 Act and 1980 Act Companies.
A 1940 Act or 1980 Act Company is eligible to apply for an SBIC
license, and an existing Licensee is eligible to apply for SBA's
approval to convert to a 1940 Act or 1980 Act Company. In either case,
the 1940 Act or 1980 Act Company may elect to be taxed as a regulated
investment company under section 851 of the Internal Revenue Code of
1986, as amended (26 U.S.C. 851). However, a Licensee making such
election may make Distributions only as permitted under the applicable
sections of this part (see the definition of Retained Earnings Available
for Distribution, Sec. 107.585, and Secs. 107.1540 through 107.1580).
Sec. 107.120 Special rules for a Section 301(d) Licensee owned by another Licensee.
With SBA's prior written approval, a Section 301(d) Licensee may
operate as the subsidiary of one or more Licensees (participant
Licensees), subject to the following:
(a) Each participant Licensee must own at least 20 percent of the
voting securities of the Section 301(d) Licensee.
(b) A participant Licensee must treat its entire capital
contribution to the subsidiary as a reduction of its Leverageable
Capital. The participant Licensee's remaining Leverageable Capital must
be sufficient to support its outstanding Leverage.
(c) A participant Licensee may not transfer its Leverage to a
subsidiary Section 301(d) Licensee.
[63 FR 5865, Feb. 5, 1998]
Sec. 107.130 Requirement for qualified management.
When applying for a license, you must show, to the satisfaction of
SBA, that your current or proposed management is qualified and has the
knowledge, experience, and capability necessary for investing in the
types of businesses contemplated by the Act, these regulations and your
business plan. You must designate at least one individual as the
official responsible for contact with SBA.
Sec. 107.140 SBA approval of initial Management Expenses.
If you plan to obtain Leverage, you must have your Management
Expenses approved by SBA at the time of licensing. (See Sec. 107.520 for
the definition of Management Expenses.)
[[Page 38]]
Sec. 107.150 Management and ownership diversity requirement.
You must have diversity between management and ownership in order to
be licensed, unless you do not plan to obtain Leverage. To establish
diversity, you must meet the requirements in paragraphs (a) and (b) of
this section unless SBA approves otherwise.
(a) Requirement one. You must satisfy either paragraph (a)(1) or
paragraph (a)(2) of this section.
(1) At least 30 percent of your Regulatory Capital and Leverageable
Capital must be owned by Persons unrelated to management. To satisfy
this requirement, such Persons must not be your Associates (except for
their status as your shareholders or limited partners) and must not
Control, be Controlled by, or be under Common Control with any of your
Associates. You must have as investors at least three such Persons who
are not Affiliates of one another and whose investments are significant
in both dollar and percentage terms, as determined by SBA. As an
alternative, you may substitute one investor who is an acceptable
Institutional Investor for the three investors who are otherwise
required. For purposes of this paragraph (a)(1), the following
Institutional Investors are acceptable:
(i) Entities regulated by state or Federal authorities satisfactory
to SBA;
(ii) Public or private employee pension funds;
(iii) Trusts, foundations, or endowments which are exempt from
Federal income taxation; or
(iv) Other Institutional Investors satisfactory to SBA.
(2) Your common stock or limited partnership interests are publicly
traded.
(b) Requirement two. Your shareholders or limited partners may not
delegate their voting rights to any other Person without prior SBA
approval. This restriction does not apply to:
(1) Publicly traded Licensees.
(2) Proxies given to vote at single specified meetings.
(3) Delegations of voting rights by your investors to their
investment advisors, provided such advisors are not your Associates
(except for their status as your shareholder or partner).
(c) Diversity based on Licensee's parent company. If you do not have
diversity as defined in paragraphs (a) and (b) of this section, SBA in
its sole discretion may accept diversity achieved on the same basis
through your parent company as a substitute. As used in this paragraph
(c), ``parent company'' means an entity that directly or indirectly has
an interest of more than 50 percent of your Regulatory Capital.
(d) Requirement to maintain diversity after licensing. If you were
required to have diversity between management and ownership at the time
you were licensed, you must maintain such diversity while you have
outstanding Leverage or Earmarked Assets, unless SBA approves otherwise.
If, at any time, you no longer satisfy the diversity criteria in
paragraph (a) or (b) of this section, you must:
(1) Notify SBA within 10 days; and
(2) Re-establish diversity within six months.
(e) Exception to diversity rule. This Sec. 107.150 does not apply if
you are not licensed to issue participating securities and:
(1) You received your license before November 28, 1995; or
(2) SBA received your license application before November 28, 1995
and, as of such date, you had raised the funds needed to begin
operations as contemplated in your business plan.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]
Sec. 107.160 Special rules for Licensees formed as limited partnerships.
A limited partnership organized under State law solely for the
purpose of performing the functions and conducting the activities
contemplated under the Act may apply for a license under section 301(c)
or section 301 (d) of the Act (``Partnership Licensee'').
(a) Number of Licensee's General Partners. If you are a Partnership
Licensee, you must have as your general partner(s) at least two
individuals, or at least one corporation, partnership, or limited
liability company (LLC), or any combination of individuals,
corporations, partnerships, or LLCs.
[[Page 39]]
(b) Entity General Partner of Licensee. A general partner which is a
corporation, limited liability company or partnership (an ``Entity
General Partner'') shall be organized under state law solely for the
purpose of serving as the general partner of one or more Licensees.
(1) SBA must approve any person who will serve as an officer,
director, manager, or general partner of the Entity General Partner.
This provision must be stated in an Entity General Partner's Certificate
of Incorporation, member agreement, Limited Partnership Agreement or
other similar governing instrument which must, in each case, accompany
the license application.
(2) An Entity General Partner is subject to the same examination and
reporting requirements as a Licensee under section 310(b) of the Act.
The restrictions and obligations imposed upon a Licensee by
Secs. 107.1800 through 107.1820, and 107.30, 107.410 through 107.450,
107.470, 107.475, 107.500, 107.510, 107.585, 107.600, 107.680, 107.690
through 107.692, 107.865, and 107.1910 apply also to an Entity General
Partner of a Licensee.
(3) The general partner(s) of your Entity General Partner(s) will be
considered your general partner.
(4) If your Entity General Partner is a limited partnership, its
limited partners may be considered your Control Person(s) if they meet
the definition for Control Person in Sec. 107.50.
(5) If your Entity General Partner is a limited partnership, it is
subject to paragraph (a) of this section.
(c) Other requirements for Partnership Licensees. If you are a
Partnership Licensee:
(1) You must have a minimum duration of ten years or two years
following the maturity of your last-maturing Leverage security,
whichever is longer. After 10 years, if all Leverage has been repaid or
redeemed and all amounts due SBA, its agent, or Trustee have been paid,
the Partnership Licensee may be terminated by a vote of your partners.
(For purposes of this provision SBA is not considered a partner.);
(2) None of your general partner(s) may be removed or replaced by
your limited partners without prior written approval of SBA;
(3) Any transferee of, or successor in interest to, your general
partner shall have only the rights and liabilities of a limited partner
pending SBA's written approval of such transfer or succession; and
(4) You must incorporate all the provisions in this paragraph (c) in
your Limited Partnership Agreement.
(d) Obligations of a Control Person. All Control Persons are bound
by the disciplinary provisions of sections 313 and 314 of the Act and by
the conflict-of-interest rules under section 312 of the Act. The term
Licensee, as used in Secs. 107.30, 107.460, and 107.680 includes all of
the Licensee's Control Persons. The term Licensee as used in
Sec. 107.670 includes only the Licensee's general partner(s). The
conditions specified in Secs. 107.1800 through 107.1820 and
Sec. 107.1910 apply to all general partners.
(e) Liability of general partner for partnership debts to SBA.
Subject to section 314 of the Act, your general partner is not liable
solely by reason of its status as a general partner for repayment of any
Leverage or debts you owe to SBA unless SBA, in the exercise of
reasonable investment prudence, and with regard to your financial
soundness, determines otherwise prior to the purchase or guaranty of
your Leverage.
(f) Reorganization of Licensee. A corporate Licensee wishing to
reorganize as a Partnership Licensee, or a Partnership Licensee wishing
to reorganize as a Corporate Licensee, may apply to SBA for approval
under Sec. 107.470.
(g) Special Leverage requirement. Before your first issuance of
Leverage, you must furnish SBA with evidence that you qualify as a
partnership for tax purposes, either by a ruling from the Internal
Revenue Service, or by an opinion of counsel.
Capitalizing an SBIC
Sec. 107.200 Adequate capital for Licensees.
You must meet the requirements of this Sec. 107.200 to qualify for a
license, to continue as a Licensee, and to receive Leverage.
(a) You must have enough Regulatory Capital to provide reasonable
assurance that:
[[Page 40]]
(1) You will operate soundly and profitably over the long term; and
(2) You will be able to operate actively in accordance with your
Articles and within the context of your business plan, as approved by
SBA.
(b) In SBA's sole discretion, you must be economically viable,
taking into consideration actual and anticipated income and losses on
your Loans and Investments, and the experience and qualifications of
your owners and managers.
Sec. 107.210 Minimum capital requirements for Licensees.
(a) Companies licensed on or after October 1, 1996. A company
licensed on or after October 1, 1996 must have Leverageable Capital of
at least $2,500,000 and must meet the applicable minimum Regulatory
Capital requirement:
(1) Licensees other than Participating Securities issuers. A
Licensee that does not wish to be eligible to apply for Participating
Securities must have Regulatory Capital of at least $5,000,000. As an
exception to this general rule, SBA in its sole discretion and based on
a showing of special circumstances and good cause may license an
applicant with Regulatory Capital of at least $3,000,000, but only if
the applicant:
(i) Has satisfied all licensing standards and requirements except
the minimum capital requirement, as determined solely by SBA;
(ii) Has a viable business plan reasonably projecting profitable
operations; and
(iii) Has a reasonable timetable for achieving Regulatory Capital of
at least $5,000,000.
(2) Participating Securities issuers. A Licensee that wishes to be
eligible to apply for Participating Securities must have Regulatory
Capital of at least $10,000,000, unless it demonstrates to SBA's
satisfaction that it can be financially viable over the long term with a
lower amount. Under no circumstances can the Licensee have Regulatory
Capital of less than $5,000,000.
(b) Companies licensed before October 1, 1996. A company licensed
before October 1, 1996 must meet the minimum capital requirements
applicable to such company, as required by the regulations in effect on
September 30, 1996. See Sec. 107.1120(c)(2) for Leverage eligibility
requirements.
[63 FR 5866, Feb. 5, 1998]
Sec. 107.230 Permitted sources of Private Capital for Licensees.
Private Capital means the contributed capital of a Licensee, plus
unfunded binding commitments by Institutional Investors (including
commitments evidenced by a promissory note) to contribute capital to a
Licensee.
(a) Contributed capital. For purposes of this section, contributed
capital means the paid-in capital and paid-in surplus of a Corporate
Licensee, or the partners' contributed capital of a Partnership
Licensee, in either case subject to the limitations in paragraph (b) of
this section.
(b) Exclusions from Private Capital. Private Capital does not
include:
(1) Funds borrowed by a Licensee from any source.
(2) Funds obtained through the issuance of Leverage.
(3) Funds obtained directly or indirectly from any Federal, State,
or local government agency or instrumentality, except for:
(i) Funds invested by a public pension fund;
(ii) Funds obtained from the business revenues (excluding any
governmental appropriation) of any federally chartered or government-
sponsored corporation established before October 1, 1987, to the extent
that such revenues are reflected in the retained earnings of the
corporation; and
(iii) ``Qualified Non-private Funds'' as defined in paragraph (d) of
this section.
(4) Any portion of a commitment from an Institutional Investor with
a net worth of less than $10 million that exceeds 10 percent of such
Institutional Investor's net worth and is not backed by a letter of
credit from a State or National bank acceptable to SBA.
(c) Non-cash capital contributions. Capital contributions in a form
other than cash are subject to the limitations in Sec. 107.240.
(d) Qualified Non-private Funds. Private Capital includes
``Qualified Non-
[[Page 41]]
private Funds'' as defined in this paragraph (d); however, investors of
Qualified Non-private Funds must not control, directly or indirectly, a
Licensee's management, or its board of directors or general partner(s).
Qualified Non-private Funds are:
(1) Funds directly or indirectly invested in any Licensee on or
before August 16, 1982 by any Federal agency except SBA, under a statute
explicitly mandating the inclusion of such funds in ``Private Capital'';
(2) Funds directly or indirectly invested in any Licensee by any
Federal agency under a statute that is enacted after September 4, 1992,
explicitly mandating the inclusion of such funds in ``Private Capital'';
(3) Funds invested in any Licensee or license applicant by one or
more State or local government entities (including any guarantee
extended by such entities) in an aggregate amount that does not exceed
33 percent of Regulatory Capital; and
(4) Funds invested in or committed in writing to any Section 301(d)
Licensee prior to October 1, 1996, from the following sources:
(i) A State financing agency, or similar agency or instrumentality,
if the funds invested are derived from such agency's net income and not
from appropriated State or local funds; and
(ii) Grants made by a state or local government agency or
instrumentality into a nonprofit corporation or institution exercising
discretionary authority with respect to such funds, if SBA determines
that such funds have taken on a private character and the nonprofit
corporation or institution is not a mere conduit.
(e) You may not accept any capital contribution made with funds
borrowed by a Person seeking to own an equity interest (whether direct
or indirect, beneficial or of record) of at least 10 percent of your
Private Capital. This exclusion does not apply if:
(1) Such Person's net worth is at least twice the amount borrowed;
or
(2) SBA gives its prior written approval of the capital
contribution.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999]
Sec. 107.240 Limitations on including non-cash capital contributions in Private Capital.
Non-cash capital contributions to a Licensee or license applicant
are included in Private Capital only if they fall into one of the
following categories:
(a) Direct obligations of, or obligations guaranteed as to principal
and interest by, the United States.
(b) Services rendered or to be rendered to you, priced at no more
than their fair market value.
(c) Tangible assets used in your operations, priced at no more than
their fair market value.
(d) Shares in a Disadvantaged Business received by a subsidiary
Section 301(d) Licensee from its parent Licensee, valued at the lower of
cost or fair value.
(e) Other non-cash assets approved by SBA.
Sec. 107.250 Exclusion of stock options issued by Licensee from Management Expenses.
Stock options issued by any Licensee, including a 1940 or 1980 Act
Company, are not considered compensation and therefore do not count as
part of a Licensee's Management Expenses.
Applying for an SBIC License
Sec. 107.300 License application form and fee.
The license application must be submitted on SBA Form 415 together
with a processing fee computed as follows:
(a) All license applicants will pay a base fee of $10,000.
(b) All applicants who will be Partnership Licensees will pay an
additional $5,000 fee, for a total of $15,000.
(c) All applicants who will be issuing Participating Securities will
pay an additional $5,000 fee, for a total of $15,000, or a total fee of
$20,000 if they also intend to be Partnership Licensees.
[[Page 42]]
Subpart D--Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
Sec. 107.400 Changes in ownership of 10 percent or more of Licensee but no change of Control.
(a) Prior approval requirements. You must obtain SBA's prior written
approval for any proposed transfer or issuance of ownership interests
that results in the ownership (beneficial or of record) by any Person,
or group of Persons acting in concert, of at least 10 percent of any
class of your stock or partnership capital.
(b) Fee. A processing fee of $200 must accompany each such request
for approval of a change of ownership.
Sec. 107.410 Changes in Control of Licensee (through change in ownership or otherwise).
(a) Prior approval requirements. You must obtain SBA's prior written
approval for any proposed transaction or event that results in Control
by any Person(s) not previously approved by SBA.
(b) Fee. A processing fee of $10,000 must accompany any application
for approval of one or more transactions or events that will result in a
transfer of Control.
Sec. 107.420 Prohibition on exercise of ownership or Control rights in Licensee before SBA approval.
Without prior written SBA approval, no change of ownership or
Control may take effect and no officer, director, employee or other
Person acting on your behalf shall:
(a) Register on your books any transfer of ownership interest to the
proposed new owner(s);
(b) Permit the proposed new owner(s) to exercise voting rights with
respect to such ownership interest (including directly or indirectly
procuring or voting any proxy, consent or authorization as to such
voting rights at any shareholders' or partnership meeting);
(c) Permit the proposed new owner(s) to participate in any manner in
the conduct of your affairs (including exercising control over your
books, records, funds or other assets; participating directly or
indirectly in any disposition thereof; or serving as an officer,
director, partner, employee or agent); or
(d) Allow ownership or Control to pass to another Person.
Sec. 107.430 Notification to SBA of transactions that may change ownership or Control.
You must promptly notify SBA as soon as you have knowledge of
transactions or events that may result in a transfer of Control or
ownership of at least 10 percent of your capital. If there is any doubt
as to whether a particular transaction or event will result in such a
change, report the facts to SBA.
Sec. 107.440 Standards governing prior SBA approval for a proposed transfer of Control.
SBA approval is contingent upon full disclosure of the real parties
in interest, the source of funds for the new owners' interest, and other
data requested by SBA. As a condition of approving a proposed transfer
of control, SBA may:
(a) Require an increase in your Regulatory Capital;
(b) Require the new owners or the transferee's Control Person(s) to
assume, in writing, personal liability for your Leverage, effective only
in the event of their direct or indirect participation in any transfer
of Control not approved by SBA; or
(c) Require compliance with any other conditions set by SBA.
Sec. 107.450 Notification to SBA of pledge of Licensee's shares.
(a) You must notify SBA in writing, within 30 calendar days, of the
terms of any transaction in which:
(1) Any Person, or group of Persons acting in concert, pledges
shares of your stock (or equivalent ownership interests) as collateral
for indebtedness; and
(2) The shares pledged are at least 10 percent of your Regulatory
Capital.
(b) If the transaction creates a change of ownership or Control, you
must comply with Sec. 107.400 or Sec. 107.410, as appropriate.
[[Page 43]]
Restrictions on Common Control or Ownership of Two or More Licensees
Sec. 107.460 Restrictions on Common Control or ownership of two (or more) Licensees.
(a) General rule. Without SBA's prior written approval, you must not
have an officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) who is
also:
(1) An officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) of another
Licensee; or
(2) An officer or director of any Person that directly or indirectly
controls, or is controlled by, or is under Common Control with, another
Licensee.
(b) Exceptions to general rule. This Sec. 107.460 does not apply to:
(1) Common officers, directors, managers, or owners of a Section
301(c) Licensee and its Section 301(d) subsidiary; or
(2) Common officers, directors, managers, Control Persons, or owners
of two (or more) Licensees which have no Leverage.
Change in Structure of Licensee
Sec. 107.470 SBA approval of merger, consolidation, or reorganization of Licensee.
(a) Prior approval requirements. You may not merge, consolidate,
change form of organization (corporation or partnership) or reorganize
without SBA's prior written approval. Any such merger or consolidation
will be subject to Sec. 107.440.
(b) Fee. A processing fee of $5,000 must accompany any application
for approval of a change in your form of organization (from corporation
to partnership or partnership to corporation).
Transfer of License
Sec. 107.475 Transfer of license.
You may not transfer your license in any manner without SBA's prior
written approval.
Subpart E--Managing the Operations of a Licensee
General Requirements
Sec. 107.500 Lawful operations under the Act.
You must engage only in the activities contemplated by the Act and
in no other activities.
Sec. 107.501 Identification as a Licensee.
You must display your SBIC license in a prominent location. You must
also have a listed telephone number. Before collecting an application
fee or extending Financing to a Small Business, you must obtain a
written statement from the concern acknowledging its awareness that you
are ``a Federal licensee under the Small Business Investment Act of
1958, as amended.''
Sec. 107.502 Representations to the public.
You may not represent or imply to anyone that the SBA, the U.S.
Government or any of its agencies or officers has approved any ownership
interests you have issued or obligations you have incurred. Be certain
to include a statement to this effect in any solicitation to investors.
Example: You may not represent or imply that ``SBA stands behind the
Licensee'' or that ``Your capital is safe because SBA's experts review
proposed investments to make sure they are safe for the Licensee.''
Sec. 107.503 Licensee's adoption of an approved valuation policy.
(a) Valuation guidelines. You must prepare, document and report the
valuations of your Loans and Investments in accordance with the
Valuation Guidelines for SBICs issued by SBA. These guidelines may be
obtained from SBA's Investment Division.
[[Page 44]]
(b) SBA approval of valuation policy. You must have a written
valuation policy approved by SBA for use in determining the value of
your Loans and Investments. You must either:
(1) Adopt without change the model valuation policy set forth in
section III of the Valuation Guidelines for SBICs; or
(2) Obtain SBA's prior written approval of an alternative valuation
policy.
(c) Responsibility for valuations. Your board of directors or
general partner(s) will be solely responsible for adopting your
valuation policy and for using it to prepare valuations of your Loans
and Investments for submission to SBA. If SBA reasonably believes that
your valuations, individually or in the aggregate, are materially
misstated, it reserves the right to require you to engage, at your
expense, an independent third party, acceptable to SBA, to substantiate
the valuations.
(d) Frequency of valuations. (1) If you have outstanding Leverage or
Earmarked Assets, you must value your Loans and Investments at the end
of the second quarter of your fiscal year, and at the end of your fiscal
year.
(2) Otherwise, you must value your Loans and Investments only at
your fiscal year end.
(3) On a case-by-case basis, SBA may require you to perform
valuations more frequently.
(4) You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
(e) Review of valuations by independent public accountant. (1) For
valuations performed as of the end of your fiscal year, your independent
public accountant must review your valuation procedures and the
implementation of such procedures, including adequacy of documentation.
(2) The independent public accountant's report on your audited
annual financial statements (SBA Form 468) must include a statement that
your valuations were prepared in accordance with your approved valuation
policy established in accordance with section 310(d)(2) of the Act.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]
Sec. 107.504 Equipment and office requirements.
(a) Computer capability. You must have a personal computer with a
modem, and be able to use this equipment to prepare reports (using SBA-
provided software) and transmit them to SBA. In addition, by March 31,
2000, you must have access to the Internet and the capability to send
and receive electronic mail via the Internet.
(b) Facsimile capability. You must be able to receive facsimile
messages 24 hours per day at your primary office.
(c) Accessible office. You must maintain an office that is
convenient to the public and is open for business during normal working
hours.
[64 FR 70995, Dec. 20, 1999]
Sec. 107.505 Facsimile requirement.
You must be able to receive fax messages 24 hours per day at your
primary office.
Sec. 107.506 Safeguarding Licensee's assets/Internal controls.
You must adopt a plan to safeguard your assets and monitor the
reliability of your financial data, personnel, Portfolio, funds and
equipment. You must provide your bank and custodian with a certified
copy of your resolution or other formal document describing your control
procedures.
Sec. 107.507 Violations based on false filings and nonperformance of agreements with SBA.
The following shall constitute a violation of this part:
(a) Nonperformance. Nonperformance of any of the requirements of any
Debenture, Participating Security or Preferred Security, or of any
written agreement with SBA.
(b) False statement. In any document submitted to SBA:
(1) Any false statement knowingly made; or
(2) Any misrepresentation of a material fact; or
(3) Any failure to state a material fact. A material fact is any
fact which is necessary to make a statement not misleading in light of
the circumstances under which the statement was made.
[[Page 45]]
Sec. 107.509 Employment of SBA officials.
Without SBA's prior written approval, for a period of two years
after the date of your most recent issuance of Leverage (or the receipt
of any SBA Assistance as defined in part 105 of this chapter), you are
not permitted to employ, offer employment to, or retain for professional
services, any person who:
(a) Served as an officer, attorney, agent, or employee of SBA on or
within one year before such date; and
(b) As such, occupied a position or engaged in activities which, in
SBA's determination, involved discretion with respect to the granting of
Assistance under the Act.
Management and Compensation
Sec. 107.510 SBA approval of Licensee's Investment Adviser/Manager.
You may employ an Investment Adviser/Manager who will be subject to
the supervision of your board of directors or general partner. If you
have Leverage or plan to seek Leverage, you must obtain SBA's prior
written approval of the management contract. SBA's approval of an
Investment Adviser/Manager for one Licensee does not indicate approval
of that manager for any other Licensee.
(a) Management contract. The contract must:
(1) Specify the services the Investment Adviser/Manager will render
to you and to the Small Businesses in your Portfolio; and
(2) Indicate the basis for computing Management Expenses.
(b) Material change to approved management contract. If there is a
material change, both you and SBA must approve such change in advance.
If you are uncertain if the change is material, submit the proposed
revision to SBA.
Sec. 107.520 Management Expenses of a Licensee.
SBA must approve any increases in your Management Expenses if you
have outstanding Leverage or Earmarked Assets.
(a) Definition of Management Expenses. Management Expenses include:
(1) Salaries;
(2) Office expenses;
(3) Travel;
(4) Business development;
(5) Office and equipment rental;
(6) Bookkeeping; and
(7) Expenses related to developing, investigating and monitoring
investments.
(b) Management Expenses do not include services provided by
specialized outside consultants, outside lawyers and independent public
accountants, if they perform services not generally performed by a
venture capital company.
(c) If your Management Expenses have not already been approved by
SBA, you must submit such expenses for approval with your SBA Form 468
for your first fiscal year ending after January 31, 1996.
Cash Management by a Licensee
Sec. 107.530 Restrictions on investments of idle funds by leveraged Licensees.
(a) Applicability of this section. This Sec. 107.530 applies if you
have outstanding Leverage or if you have applied for Leverage.
(b) Permitted investments of idle funds. Funds not invested in Small
Businesses must be maintained in:
(1) Direct obligations of, or obligations guaranteed as to principal
and interest by, the United States, which mature within 15 months from
the date of the investment; or
(2) Repurchase agreements with federally insured institutions, with
a maturity of seven days or less. The securities underlying the
repurchase agreements must be direct obligations of, or obligations
guaranteed as to principal and interest by, the United States. The
securities must be maintained in a custodial account at a federally
insured institution; or
(3) Certificates of deposit with a maturity of one year or less,
issued by a federally insured institution; or
(4) A deposit account in a federally insured institution, subject to
a withdrawal restriction of one year or less; or
(5) A checking account in a federally insured institution; or
(6) A reasonable petty cash fund.
[[Page 46]]
(c) Deposit of funds in excess of the insured amount. (1) You are
permitted to deposit funds in a federally insured institution in excess
of the institution's insured amount, but only if the institution is
``well capitalized'' in accordance with the definition set forth in
regulations of the Federal Deposit Insurance Corporation, as amended (12
CFR 325.103).
(2) Exception: You may make a temporary deposit (not to exceed 30
days) in excess of the insured amount, in a transfer account established
to facilitate the receipt and disbursement of funds or to hold funds
necessary to honor Commitments issued.
(d) Deposit of funds in Associate institution. A deposit in, or a
repurchase agreement with, a federally insured institution that is your
Associate is not considered a Financing of such Associate under
Sec. 107.730, provided the terms of such deposit or repurchase agreement
are no less favorable than those available to the general public.
Borrowing by Licensees From Non-SBA Sources
Sec. 107.550 Prior approval of secured third-party debt of leveraged Licensees.
(a) Definition. In this Sec. 107.550, ``secured third-party debt''
means any non-SBA debt secured by any of your assets, including secured
guarantees and other contingent obligations that you voluntarily assume,
secured lines of credit, and secured Temporary Debt of a Licensee with
outstanding Participating Securities.
(b) General rule. If you have outstanding Leverage, you must get
SBA's written approval before you incur any secured third-party debt or
refinance any debt with secured third-party debt, including any renewal
of a secured line of credit, increase in the maximum amount available
under a secured line of credit, or expansion of the scope of a security
interest or lien. For purposes of this paragraph (b), ``expansion of the
scope of a security interest or lien'' does not include the substitution
of one asset or group of assets for another, provided the asset values
(as reported on your most recent annual Form 468) are comparable.
(c) Additional rule for secured lines of credit in existence on
April 8, 1994. If you have outstanding Leverage and you have a secured
line of credit that was created on or before April 8, 1994, you must
receive SBA's written approval of the line before you increase the
amounts outstanding thereunder.
(d) Conditions for SBA approval. As a condition of granting its
approval under this Sec. 107.550, SBA may impose such restrictions or
limitations as it deems appropriate, taking into account your historical
performance, current financial position, proposed terms of the secured
debt and amount of aggregate debt you will have outstanding (including
Leverage). SBA will not favorably consider any requests for approval
which include a blanket lien on all your assets, or a security interest
in your investor commitments in excess of 125 percent of the proposed
borrowing.
(e) Thirty day approval. Unless SBA notifies you otherwise within 30
days after it receives your request, you may consider your request
automatically approved if:
(1) You are in regulatory compliance;
(2) The security interest in your assets is limited to either those
assets being acquired with the borrowed funds or an asset coverage ratio
of no more than 2:1;
(3) Your Leverage does not exceed 150 percent of your Leverageable
Capital; and
(4) Your request is for approval of a secured line of credit that
would not cause your total outstanding borrowings (not including
Leverage) to exceed 50 percent of your Leverageable Capital.
Sec. 107.560 Subordination of SBA's creditor position.
(a) Debentures purchased or guaranteed on or before July 1, 1991.
Under the terms of any Debenture purchased or guaranteed by SBA on or
before July 1, 1991, SBA's unsecured claims against you, as a Debenture-
holder or as subrogee, are subordinated in favor of all your other
creditors, except to the extent that such claims may be subject
[[Page 47]]
to equitable subordination in SBA's favor.
(b) Debentures purchased or guaranteed after July 1, 1991, including
refinancings of Debentures previously purchased or guaranteed. (1) Under
the terms of any Debenture purchased or guaranteed by SBA after July 1,
1991, SBA's unsecured claims against you, as a Debenture-holder or as
subrogee, are subordinated only in favor of non-Associate lenders; and,
to the extent that your indebtedness to such lenders exceeds the lesser
of $10,000,000 or 200 percent of your Regulatory Capital (determined as
of the date your Debentures were purchased or guaranteed), SBA's
unsecured claims enjoy parity with those of other unsecured creditors,
except with respect to indebtedness created on or before July 1, 1991.
(2) In order to induce others to lend you money after your Debenture
has been purchased or guaranteed, SBA may agree in writing on a case-by-
case basis to subordinate its unsecured claims, on such terms as it may
determine, in favor of one or more of your Associates, or in favor of
other lenders in excess of the amounts mentioned in paragraph (b)(1) of
this section.
(3) SBA reserves the authority to refuse to subordinate its claims
if it determines, at the time you request your Debenture be purchased or
guaranteed, that the exercise of reasonable investment prudence and your
financial condition warrant such refusal.
Sec. 107.570 Restrictions on third-party debt of issuers of Participating Securities.
(a) General. Temporary Debt is the only debt (other than Leverage)
that you are permitted to incur if you have applied to issue
Participating Securities or if you have outstanding Participating
Securities. For additional rules governing secured Temporary Debt, see
Sec. 107.550.
(b) Definition of Temporary Debt. Temporary Debt means your short-
term borrowings if:
(1) Such borrowings are for the purpose of maintaining your
operating liquidity or providing funds for a particular Financing of a
Small Business;
(2) The funds are borrowed from a regulated financial institution or
a regulated credit company (or, if approved by SBA on a case-by-case
basis, from non-regulated lenders including shareholders or partners);
(3) Your total outstanding borrowings (not including Leverage) do
not exceed 50 percent of your Leverageable Capital; and
(4) All such borrowings are fully paid off for at least 30
consecutive days during your fiscal year so that you have no outstanding
third-party debt for 30 days.
Voluntary Decrease in Licensee's Regulatory Capital
Sec. 107.585 Voluntary decrease in Licensee's Regulatory Capital.
You must obtain SBA's prior written approval to reduce your
Regulatory Capital by more than two percent in any fiscal year, unless
otherwise permitted under Secs. 107.1560 and 107.1570. At all times, you
must retain sufficient Regulatory Capital to meet the minimum capital
requirements in the Act and Sec. 107.210, and sufficient Leverageable
Capital to avoid having excess Leverage in violation of section 303 of
the Act and Secs. 107.1150 through 107.1170.
Requirement To Conduct Active Investment Operations
Sec. 107.590 Licensee's requirement to maintain active operations.
(a) Activity test. You must conduct active operations, as determined
under this Sec. 107.590, as a condition of your license. You will be
considered active if:
(1) During the eighteen months preceding your most recent fiscal
year end, you made Financings totaling at least 20 percent of your
Regulatory Capital; or
(2) Your idle funds did not exceed 20 percent of your total assets
(at cost) at your most recent fiscal year end.
(b) Permitted exceptions to activity requirements. You are
considered active if your failure to meet the requirements in paragraph
(a) of this section is the result of one or more of the following
factors:
[[Page 48]]
(1) Your excess idle funds are the result of the receipt, within the
previous nine months, of realized gains, repayments, additional capital
contributions, or Leverage.
(2) It is necessary for you to maintain excess idle funds to conduct
your operations because:
(i) Your unfunded commitments from investors are no more than 20
percent of your Regulatory Capital; and
(ii) You cannot receive additional Leverage, solely because SBA has
insufficient funds available.
(3) You have not made sufficient Financings because of a lack of
available funds, evidenced by Loans and Investments (at cost) equal to
at least 90 percent of your Combined Capital as of your most recent
fiscal year end.
(4) You have not made sufficient Financings solely because SBA has
restricted your ability to make investments.
(c) Applicability of activity requirements. The activity
requirements in paragraph (a) of this section do not apply if you have
filed a ``Wind-up Plan'' approved by SBA. ``Wind-up Plan'' means a plan
that you prepare when you decide that you will no longer make any
Financings other than follow-on investments, and that you update
annually when you file your SBA Form 468. The plan must contain your
best estimates of the following:
(1) The remaining number of years you expect to operate.
(2) For each of your Loans and Investments, the expected liquidation
date and anticipated proceeds.
(3) The timing of your repayment of obligations to SBA.
(4) The timing and amount of any planned reductions in your
Management Expenses.
(d) Phase-in of activity requirements. (1) General rule. You must
meet the activity requirements in this Sec. 107.590 as of the end of
your first full fiscal year beginning after January 31, 1996. Until
then, you will be considered active if you meet the activity
requirements in effect on January 30, 1996.
(2) Rule for new Licensees. If you received your license after
January 31, 1996, or if you received your license less than eighteen
months before the fiscal year end determined under paragraph (d)(1) of
this section, you must meet the activity requirements in this
Sec. 107.590 as of the end of your second full fiscal year beginning
after the date you received your license.
Subpart F--Recordkeeping, Reporting, and Examination Requirements for
Licensees
Recordkeeping Requirements for Licensees
Sec. 107.600 General requirement for Licensee to maintain and preserve records.
(a) Maintaining your accounting records. You must establish and
maintain your accounting records using SBA's standard chart of accounts
for Licensees, unless SBA approves otherwise.
(b) Location of records. You must keep the following records at your
principal place of business or, in the case of paragraph (b)(3) of this
section, at the branch office that is primarily responsible for the
transaction:
(1) All your accounting and other financial records;
(2) All minutes of meetings of directors, stockholders, executive
committees, partners, or other officials; and
(3) All documents and supporting materials related to your business
transactions, except for any items held by a custodian under a written
agreement between you and a Portfolio Concern or non-SBA lender, or any
securities held in a safe deposit box, or by a licensed securities
broker in an amount not exceeding the broker's per-account insurance
coverage.
(c) Preservation of records. You must retain all the records that
are the basis for your financial reports. Such records must be preserved
for the periods specified in this paragraph (c), and must remain
accessible for the first two years of the preservation period.
(1) You must preserve for at least 15 years or, in the case of a
Partnership Licensee, at least two years beyond the date of liquidation:
[[Page 49]]
(i) All your accounting ledgers and journals, and any other records
of assets, asset valuations, liabilities, equity, income, and expenses.
(ii) Your Articles, bylaws, minute books, and license application.
(iii) All documents evidencing ownership of the Licensee including
ownership ledgers, and ownership transfer registers.
(2) You must preserve for at least six years all supporting
documentation (such as vouchers, bank statements, or canceled checks)
for the records listed in paragraph (b)(1) of this section.
(3) After final disposition of any item in your Portfolio, you must
preserve for at least six years:
(i) Financing applications and Financing instruments.
(ii) All loan, participation, and escrow agreements.
(iii) Size status declarations (SBA Form 480) and Financing
Eligibility Statements (SBA Form 1941).
(iv) Any capital stock certificates and warrants of the Portfolio
Concern that you did not surrender or exercise.
(v) All other documents and supporting material relating to the
Portfolio Concern, including correspondence.
(4) You may substitute a microfilm or computer-scanned or generated
copy for the original of any record covered by this paragraph (c).
Sec. 107.610 Required certifications for Loans and Investments.
For each of your Loans and Investments, you must have the documents
listed in this section. You must keep these documents in your files and
make them available to SBA upon request.
(a) SBA Form 480, the Size Status Declaration, executed both by you
and by the concern you are financing. By executing this document, both
parties certify that the concern is a Small Business. For securities
purchased from an underwriter in a public offering, you may substitute a
prospectus showing that the concern is a Small Business.
(b) SBA Form 652, a certification by the concern you are financing
that it will not illegally discriminate (see part 112 of this chapter).
(c) SBA Form 1941 (for Section 301(d) Licensees only), executed both
by you and by the concern you are financing. By executing this document,
both parties certify that the concern is a Disadvantaged Business.
(d) A certification by the concern you are financing of the intended
use of the proceeds. For securities purchased from an underwriter in a
public offering, you may substitute a prospectus indicating the intended
use of proceeds.
(e) For each LMI Investment:
(1) A certification by the concern, dated as of the date of
application for SBIC financing, as to the basis for its qualification as
an LMI Enterprise,
(2) If the concern qualifies as an LMI Enterprise as defined in
paragraph (2) of the definition of LMI Enterprise in Sec. 107.50, an
additional certification dated no later than the date 180 days after the
closing of the LMI Investment, as to the location of the concern's
employees or tangible assets or the principal residences of its full-
time employees as of the date of such certification, and
(3) Certification(s) by the SBIC, made contemporaneously with the
certification(s) of the concern, that the concern qualifies as an LMI
Enterprise as of the date(s) of the concern's certification(s) and the
basis for such qualification.
[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999]
Sec. 107.620 Requirements to obtain information from Portfolio Concerns.
All the information required by this section is subject to the
requirements of Sec. 107.600 and must be in English.
(a) Information for initial Financing decision. Before extending any
Financing, you must require the applicant to submit such financial
statements, plans of operation (including intended use of financing
proceeds), cash flow analyses and projections as are necessary to
support your investment decision. The information submitted must be
consistent with the size and type of the business and the amount of the
proposed Financing.
(b) Updated financial information. (1) The terms of each Financing
must require the Portfolio Concern to provide, at least annually,
sufficient financial
[[Page 50]]
information to enable you to perform the following required procedures:
(i) Evaluate the financial condition of the Portfolio Concern for
the purpose of valuing your investment;
(ii) Determine the continued eligibility of the Portfolio Concern;
and
(iii) Verify the use of Financing proceeds.
(2) The information submitted to you must be certified by the
president, chief executive officer, treasurer, chief financial officer,
general partner, or proprietor of the Portfolio Concern.
(3) For financial and valuation purposes, you may accept a complete
copy of the Federal income tax return filed by the Portfolio Concern (or
its proprietor) in lieu of financial statements, but only if appropriate
for the size and type of the business involved.
(4) The requirements in this paragraph (b) do not apply when you
acquire securities from an underwriter in a public offering (see
Sec. 107.825). In that case, you must keep copies of all reports
furnished by the Portfolio Concern to the holders of its securities.
(c) Information required for examination purposes. You must obtain
any information requested by SBA's examiners for the purpose of
verifying the certifications made by a Portfolio Concern under
Sec. 107.610. In this regard, your Financing documents must contain
provisions requiring the Portfolio Concern to give you and/or SBA's
examiners access to its books and records for such purpose.
Reporting Requirements for Licensees
Sec. 107.630 Requirement for Licensees to file financial statements with SBA (Form 468).
(a) Annual filing of Form 468. For each fiscal year, you must submit
to SBA financial statements and supplementary information prepared on
SBA Form 468. You must file Form 468 on or before the last day of the
third month following the end of your fiscal year, except for the
information required under paragraph (e) of this section, which must be
filed on or before the last day of the fifth month following the end of
your fiscal year.
(1) Audit of Form 468. The annual Form 468 must be audited by an
independent public accountant acceptable to SBA.
(2) Insurance requirement for public accountant. Unless SBA approves
otherwise, your independent public accountant must carry at least
$1,000,000 of Errors and Omissions insurance, or be self-insured and
have a net worth of at least $1,000,000.
(b) Interim filings of Form 468. When requested by SBA, you must
file interim reports on Form 468. SBA may require you to file the entire
form or only certain statements and schedules. You must file such
reports on or before the last day of the month following the end of the
reporting period. If you have an outstanding Leverage commitment from
SBA, see the filing requirements in Sec. 107.1220.
(c) Standards for preparation of Form 468. You must prepare SBA Form
468 in accordance with SBA's Accounting Standards and Financial
Reporting Requirements for Small Business Investment Companies.
(d) Where to file Form 468. Submit all filings of Form 468 to the
Investment Division of SBA.
(e) Reporting of economic impact information on Form 468. Your
annual filing of SBA Form 468 must include an assessment of the economic
impact of each Financing, specifying the full-time equivalent jobs
created or retained, and the impact of the Financing on the revenues and
profits of the business and on taxes paid by the business and its
employees.
Sec. 107.640 Requirement to file Portfolio Financing Reports (SBA Form 1031).
For each Financing of a Small Business (excluding guarantees), you
must submit a Portfolio Financing Report on SBA Form 1031 within 30 days
of the closing date.
Sec. 107.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 107.503. You must report such valuations to SBA
within 90 days of the end of the fiscal year in the case of annual
valuations, and within 30
[[Page 51]]
days following the close of other reporting periods. You must report
material adverse changes in valuations at least quarterly, within thirty
days following the close of the quarter.
Sec. 107.660 Other items required to be filed by Licensee with SBA.
(a) Reports to owners. You must give SBA a copy of any report you
furnish to your investors, including any prospectus, letter, or other
publication concerning your financial operations or those of any
Portfolio Concern.
(b) Documents filed with SEC. You must give SBA a copy of any
report, application or document you file with the Securities and
Exchange Commission.
(c) Litigation reports. When you become a party to litigation or
other proceedings, you must give SBA a report within 30 days that
describes the proceedings and identifies the other parties involved and
your relationship to them.
(1) The proceedings covered by this paragraph (c) include any action
by you, or by your security holder(s) in a personal or derivative
capacity, against an officer, director, Investment Adviser or other
Associate of yours for alleged breach of official duty.
(2) SBA may require you to submit copies of the pleadings and other
documents SBA may specify.
(3) Where proceedings have been terminated by settlement or final
judgment, you must promptly advise SBA of the terms.
(4) This paragraph (c) does not apply to collection actions or
proceedings to enforce your ordinary creditors' rights.
(d) Notification of criminal charges. If any officer, director, or
general partner of the Licensee, or any other person who was required by
SBA to complete a personal history statement in connection with your
license, is charged with or convicted of any criminal offense other than
a misdemeanor involving a minor motor vehicle violation, you must report
the incident to SBA within 5 calendar days. Such report must fully
describe the facts which pertain to the incident.
(e) Other reports. You must file any other reports that SBA may
require by written directive.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]
Sec. 107.670 Application for exemption from civil penalty for late filing of reports.
(a) If it is impracticable to submit any required report within the
time allowed, you may apply for an extension. The request for an
extension must:
(1) Be filed before the reporting deadline;
(2) Certify to an extraordinary occurrence, not within your control,
that makes timely filing of the report impracticable; and
(3) Be accompanied by written evidence of such occurrence, where
appropriate.
(b) Upon receipt of your request, SBA may exempt you from the civil
penalty provision of section 315(a) of the Act, in such manner and under
such conditions as SBA determines.
Sec. 107.680 Reporting changes in Licensee not subject to prior SBA approval.
(a) Changes to be reported for post approval. (1) This section
applies to any changes in your Articles, ownership, capitalization,
management, operating area, or investment policies that do not require
SBA's prior approval. You must report such changes to SBA within 30 days
for post approval. A processing fee of $200 must accompany each request
for post approval of new officers, directors, or Control Persons.
(2) Exception for non-leveraged Licensees. If you do not have
outstanding Leverage or Earmarked Assets, you are not required to obtain
post approval of new directors or new officers other than your chief
operating officer; however, you must notify SBA of the new directors or
officers within 30 days.
(b) Approval by SBA. You may consider any change submitted under
this section Sec. 107.680 to be approved unless SBA notifies you to the
contrary within 90 days after receiving it. SBA's approval is contingent
upon your full disclosure of all relevant facts and is subject to any
conditions SBA may prescribe.
[[Page 52]]
Examinations of Licensees by SBA for Regulatory Compliance
Sec. 107.690 Examinations.
SBA will examine all Licensees for the purpose of evaluating
regulatory compliance.
Sec. 107.691 Responsibilities of Licensee during examination.
You must make all books, records and other pertinent documents and
materials available for the examination, including any information
required by the examiner under Sec. 107.620(c). In addition, the
agreement between you and the independent public accountant performing
your audit must provide that any information in the accountant's working
papers be made available to SBA upon request.
Sec. 107.692 Examination fees.
(a) General. SBA will assess fees for examinations in accordance
with this Sec. 107.692. Unless SBA determines otherwise on a case by
case basis, SBA will not assess fees for special examinations to obtain
specific information.
(b) Base fee. A base fee will be assessed based on your total assets
(at cost) as of the date of your latest certified financial statement or
a more recent interim statement requested by and submitted to SBA in
connection with the examination. The base fee table is as follows:
----------------------------------------------------------------------------------------------------------------
Total assets of licensee Base fee Plus, percent of assets
----------------------------------------------------------------------------------------------------------------
$0 to $1,500,000.................... $3,500 +0%
$1,500,001 to $5,000,000............ 3,700 +.065% of the amount over $1,500,000
$5,000,001 to $10,000,000........... 6,000 +.02% of the amount over $5,000,000
$10,000,001 to $15,000,000.......... 7,000 +.01% of the amount over $10,000,000`
$15,000,001 to $25,000,000.......... 7,700 +.015% of the amount over $15,000,000
$25,000,001 to $50,000,000.......... 9,200 +.015% of the amount over $25,000,000
$50,000,001 to $60,000,000.......... 13,000 +.01% of the amount over $50,000,000
$60,000,001 and above............... 14,000 +0%
----------------------------------------------------------------------------------------------------------------
(c) Adjustments to base fee. Your base fee, as determined by the
table in paragraph (b) of this section, will be adjusted (increased or
decreased) based on the following criteria:
(1) If you have no outstanding regulatory violations at the time of
the commencement of the examination and SBA did not identify any
violations as a result of the most recent prior examination, you will
receive a 15% discount on your base fee;
(2) If you were fully responsive to the letter of notification of
examination (that is, you provided all requested documents and
information within the time period stipulated in the notification letter
in a complete and accurate manner, and you prepared and had available
all information requested by the examiner for on-site review), you will
receive a 10% discount on your base fee;
(3) If you are organized as a partnership or limited liability
company, you will pay an additional charge equal to 5% of your base fee;
(4) If you are a Licensee authorized to issue Participating
Securities, you will pay an additional charge equal to 10% of your base
fee; and
(5) If you maintain your records/files in multiple locations (as
permitted under Sec. 107.600(b)), you will pay an additional charge
equal to 10% of your base fee.
(d) Fee discounts and additions table. The following table
summarizes the discounts and additions noted in paragraph (c) of this
section:
----------------------------------------------------------------------------------------------------------------
Amount of Amount of
discount--% Addition--%
Examination fee discounts of base Examination fee additions of base
examination examination
fee fee
----------------------------------------------------------------------------------------------------------------
No prior violations........................... 15 Partnership or limited liability 5
company.
Responsiveness................................ 10 Participating Security Licensee....... 10
Records/files at multiple locations... 10
----------------------------------------------------------------------------------------------------------------
[[Page 53]]
(e) Delay fee. If, in the judgement of SBA, the time required to
complete your examination is delayed due to your lack of cooperation or
the condition of your records, SBA may assess an additional fee of up to
$500 per day.
[62 FR 23338, Apr. 30, 1997]
Subpart G--Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
Sec. 107.700 Compliance with size standards in part 121 of this chapter as a condition of Assistance.
You are permitted to provide financial assistance and management
services only to a Small Business. To determine whether an applicant is
a Small Business, you may use either the financial size standards in
Sec. 121.301(c)(1) of this chapter or the industry standard covering the
industry in which the applicant is primarily engaged, as set forth in
Sec. 121.301(c)(2) of this chapter.
Sec. 107.710 Requirement to finance smaller enterprises.
Your Portfolio must include Financings to Smaller Enterprises.
(a) Definition of Smaller Enterprise. A Smaller Enterprise means any
small business concern that:
(1) Together with its Affiliates has a net worth of not more than
$6.0 million and average net income after Federal income taxes
(excluding any carry-over losses) for the preceding two years no greater
than $2.0 million; or
(2) Both together with its Affiliates, and by itself, meets the size
standard of Sec. 121.201 of this chapter at the time of Financing for
the industry in which it is then primarily engaged.
(b) Smaller Enterprise Financings.--(1) General rule. At the close
of each of your fiscal years, for all Financings you extended since
April 25, 1994, excluding Financings made in whole or in part with
Leverage in excess of $90,000,000, at least 20 percent (in total
dollars) must have been invested in Smaller Enterprises. If you were
licensed after April 25, 1994, the 20 percent requirement applies to the
Financings you extended since you were licensed, excluding Financings
made in whole or in part with Leverage in excess of $90,000,000, plus
any pre-licensing investments approved by SBA for inclusion in your
Regulatory Capital. For purposes of this paragraph (b)(1), Leverage in
excess of $90,000,000 includes aggregate Leverage over $90,000,000
issued by two or more Licensees under Common Control. See also paragraph
(d) of this section.
(2) Phase-in for new Licensees. At the close of your first full
fiscal year after licensing, at least 10 percent of the total dollar
amount of the Financings you extended, including any pre-licensing
investments approved by SBA for inclusion in your Regulatory Capital,
must have been invested in Smaller Enterprises. At the close of each
fiscal year thereafter, you must meet the requirement in paragraph
(b)(1) of this section.
(c) Special requirement for certain leveraged Licensees.--(1) This
paragraph (c) applies if you were licensed on or before September 30,
1996, and you issued Leverage after that date, and you have Regulatory
Capital of:
(i) Less than $10,000,000 if such Leverage included Participating
Securities; or
(ii) Less than $5,000,000 if such Leverage was Debentures only.
(2) At the close of each of your fiscal years, at least 50 percent
of the total dollar amount of the Financings you extended after
September 30, 1996 must have been invested in Smaller Enterprises.
(d) Special requirement for Leverage over $90,000,000. If you have
issued Leverage over $90,000,000 (including aggregate Leverage over
$90,000,000 issued by two or more Licensees under Common Control), at
the end of each of your fiscal years the cumulative Financings you
extended to Smaller Enterprises must equal at least:
(1) The dollar amount necessary to satisfy paragraph (b) of this
section; plus
(2) 100 percent of the amount of all Financings made in whole or in
part with Leverage over $90,000,000.
(e) Financing a change of ownership which results in the creation of
a Smaller Enterprises. The Financing of
[[Page 54]]
a change of ownership under Sec. 107.750 which results in the creation
of a Smaller Enterprise qualifies as a Smaller Enterprise Financing.
(f) Non-compliance with this section. If you have not reached the
required percentage of Smaller Enterprise Financings at the end of any
fiscal year, then you must be in compliance by the end of the following
fiscal year. However, you will not be eligible for additional Leverage
until you reach the required percentage (see Sec. 107.1120(c) through
(e)).
[62 FR 11760, Mar. 13, 1997, as amended at 63 FR 5866, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999]
Sec. 107.720 Small Businesses that may be ineligible for financing.
(a) Relenders or reinvestors. You are not permitted to finance any
business that is a relender or reinvestor.
(1) Definition. Relenders or reinvestors are businesses whose
primary business activity involves, directly or indirectly, providing
funds to others, purchasing debt obligations, factoring, or long-term
leasing of equipment with no provision for maintenance or repair.
(2) Exception. You may provide Venture Capital Financing to
Disadvantaged Businesses that are relenders or reinvestors (except banks
or savings and loans not insured by agencies of the federal government,
and agricultural credit companies). Without SBA's prior written
approval, total Financings under this paragraph (a)(2) that are
outstanding as of the close of your fiscal year must not exceed your
Regulatory Capital.
(b) Passive Businesses. You are not permitted to finance a passive
business.
(1) Definition. A business is passive if:
(i) It is not engaged in a regular and continuous business operation
(for purposes of this paragraph (b), the mere receipt of payments such
as dividends, rents, lease payments, or royalties is not considered a
regular and continuous business operation); or
(ii) Its employees are not carrying on the majority of day to day
operations, and the company does not provide effective control and
supervision, on a day to day basis, over persons employed under
contract; or
(iii) It passes through substantially all of the proceeds of the
Financing to another entity.
(2) Exception for pass-through of proceeds to subsidiary. You may
finance a passive business if it is a Small Business and it passes
substantially all the proceeds through to one or more subsidiary
companies, each of which is an eligible Small Business that is not
passive. For the purpose of this paragraph (b)(2), ``subsidiary
company'' means a company in which at least 50 percent of the
outstanding voting securities are owned by the Financed passive
business.
(3) Exception for certain Partnership Licensees. With the prior
written approval of SBA, if you are a Partnership Licensee, you may form
one or more wholly-owned corporations in accordance with this paragraph
(b)(3). The sole purpose of such corporation(s) must be to provide
Financing to one or more eligible, unincorporated Small Businesses. You
may form such corporation(s) only if a direct Financing to such Small
Businesses would cause any of your investors to incur unrelated business
taxable income under section 511 of the Internal Revenue Code of 1986,
as amended (26 U.S.C. 511). Your ownership of such corporation(s) will
not constitute a violation of Sec. 107.865(a) and your investment of
funds in such corporation(s) will not constitute a violation of
Sec. 107.730(a).
(c) Real Estate Businesses. (1) You are not permitted to finance any
business classified under Major Group 65 (Real Estate) or Industry No.
1531 (Operative Builders) of the SIC Manual, with the following
exceptions:
(i) Title Abstract companies (Industry No. 6541); and
(ii) Companies listed under Industry No. 6531 (for example, real
estate agents, brokers, escrow agents, managers and multiple listing
services) that derive at least 80 percent of their revenue from non-
Affiliate sources.
(2) You are not permitted to finance a business, regardless of SIC
classification, if the Financing is to be used to acquire or refinance
real property, unless the Small Business:
(i) Is acquiring an existing property and will use at least 51
percent of the
[[Page 55]]
usable square footage for an eligible business purpose; or
(ii) Is building or renovating a building and will use at least 67
percent of the usable square footage for an eligible business purpose;
or
(iii) Occupies the subject property and uses at least 67 percent of
the usable square footage for an eligible business purpose.
(d) Project Financing. You are not permitted to finance a business
if:
(1) The assets of the business are to be reduced or consumed,
generally without replacement, as the life of the business progresses,
and the nature of the business requires that a stream of cash payments
be made to the business's financing sources, on a basis associated with
the continuing sale of assets. Examples include real estate development
projects and oil and gas wells; or
(2) The primary purpose of the Financing is to fund production of a
single item or defined limited number of items, generally over a defined
production period, and such production will constitute the majority of
the activities of the Small Business. Examples include motion pictures
and electric generating plants.
(e) Farm land purchases. You are not permitted to finance the
acquisition of farm land. Farm land means land which is or is intended
to be used for agricultural or forestry purposes, such as the production
of food, fiber, or wood, or is so taxed or zoned.
(f) Public interest. You are not permitted to finance any business
if the proceeds are to be used for purposes contrary to the public
interest, including but not limited to activities which are in violation
of law, or inconsistent with free competitive enterprise.
(g) Foreign investment--(1) General rule. You are not permitted to
finance a business if:
(i) The funds will be used substantially for a foreign operation; or
(ii) At the time of the Financing or within one year thereafter,
more than 49 percent of the employees or tangible assets of the Small
Business are located outside the United States (unless you can show, to
SBA's satisfaction, that the Financing was used for a specific domestic
purpose).
(2) Exception. This paragraph (g) does not prohibit a Financing used
to acquire foreign materials and equipment or foreign property rights
for use or sale in the United States.
(h) Associated supplier. You are not permitted to finance a business
that purchases, or will purchase, goods or services from a supplier who
is your Associate, except under the following conditions:
(1) The amount of goods and services purchased (or to be purchased)
from your Associate with the proceeds of the Financing, or with funds
released as a result of the Financing, is less than 50 percent of the
total amount of the Financing (75 percent for a Section 301(d)
Licensee);
(2) The price of such goods and services is no higher than that
charged other customers of your Associate; and
(3) The Small Business purchases no capital goods from your
Associate.
(i) Financing Licensees. You are not permitted to provide funds,
directly or indirectly, that the Small Business will use:
(1) To purchase stock in or provide capital to a Licensee; or
(2) To repay an indebtedness incurred for the purpose of investing
in a Licensee.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999]
Sec. 107.730 Financings which constitute conflicts of interest.
(a) General rule. You must not self-deal to the prejudice of a Small
Business, the Licensee, its shareholders or partners, or SBA. Unless you
obtain a prior written exemption from SBA for special instances in which
a Financing may further the purposes of the Act despite presenting a
conflict of interest, you must not directly or indirectly:
(1) Provide Financing to any of your Associates.
(2) Provide Financing to an Associate of another Licensee if one of
your Associates has received or will receive any direct or indirect
Financing or a Commitment from that Licensee or a third Licensee
(including Financing or Commitments received under any understanding,
agreement, or cross dealing, reciprocal or circular arrangement).
[[Page 56]]
(3) Borrow money from:
(i) A Small Business Financed by you;
(ii) An officer, director, or owner of at least a 10 percent equity
interest in such business; or
(iii) A Close Relative of any such officer, director, or equity
owner.
(4) Provide Financing to a Small Business to discharge an obligation
to your Associate or free other funds to pay such obligation. This
paragraph (a)(4) does not apply if the obligation is to an Associate
Lending Institution and is a line of credit or other obligation incurred
in the normal course of business.
(5) Provide Financing to a Small Business for the purpose of
purchasing property from your Associate, except as permitted under
Sec. 107.720(h).
(b) Rules applicable to Associates. Without SBA' s prior written
approval, your Associates must not, directly or indirectly:
(1) Borrow money from any Person described in paragraph (a)(3) of
this section.
(2) Receive from a Small Business any compensation in connection
with Assistance you provide (except as permitted under Secs. 107.825(c)
and 107.900), or anything of value for procuring, attempting to procure,
or influencing your action with respect to such Assistance.
(c) Applicability of other laws. You are also bound by any
restrictions in Federal or State laws governing conflicts of interest
and fiduciary obligations.
(d) Financings with Associates--(1) Financings with Associates
requiring prior approval. Without SBA's prior written approval, you may
not Finance any business in which your Associate has either a voting
equity interest, or total equity interests (including potential
interests), of at least five percent.
(2) Other Financings with Associates. If you and an Associate
provide Financing to the same Small Business, either at the same time or
at different times, you must be able to demonstrate to SBA's
satisfaction that the terms and conditions are (or were) fair and
equitable to you, taking into account any differences in the timing of
each party's financing transactions.
(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A
Financing that falls into one of the following categories is exempt from
the prior approval requirement in paragraph (d)(1) of this section or is
presumed to be fair and equitable to you for the purposes of paragraph
(d)(2) of this section, as appropriate:
(i) Your Associate is a Lending Institution that is providing
financing under a credit facility in order to meet the operational needs
of the Small Business, and the terms of such financing are usual and
customary.
(ii) Your Associate invests in the Small Business on the same terms
and conditions and at the same time as you.
(iii) Both you and your Associate are leveraged Licensees, and both
have outstanding Participating Securities or neither has outstanding
Participating Securities.
(iv) You have no outstanding Leverage and do not intend to issue
Leverage in the future, and your Associate either is not a Licensee or
has no outstanding Leverage and does not intend to issue Leverage in the
future.
(e) Use of Associates to manage Portfolio Concerns. To protect your
investment, you may designate an Associate to serve as an officer,
director, or other participant in the management of a Small Business.
You must identify any such Associate in your records available for SBA's
review under Sec. 107.600. Without SBA's prior written approval, the
Associate must not:
(1) Have any other direct or indirect financial interest in the
Portfolio Concern that exceeds, or has the potential to exceed, 5
percent of the Portfolio Concern's equity.
(2) Have served for more than 30 days as an officer, director or
other participant in the management of the Portfolio Concern before you
provided Financing.
(3) Receive any income or anything of value from the Portfolio
Concern unless it is for your benefit, with the exception of director's
fees, expenses, and distributions based upon the Associate's ownership
interest in the Concern.
(f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940
or 1980 Act
[[Page 57]]
Company and you receive an exemption from the Securities and Exchange
Commission for a transaction described in this Sec. 107.730, you need
not obtain SBA's approval of the transaction. However, you must promptly
notify SBA of the transaction and satisfy the public notice requirements
in paragraph (g) of this section.
(g) Public notice. Before SBA grants an exemption under this
Sec. 107.730, you must publish notice of the transaction in a newspaper
of general circulation in the locality most directly affected by the
transaction, and furnish a certified copy to SBA within 10 days of
publication. SBA will publish a similar notice in the Federal Register.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 70996, Dec. 20, 1999]
Sec. 107.740 Portfolio diversification (``overline'' limitation).
(a) General rule. This Sec. 107.740 applies if you have outstanding
Leverage or intend to issue Leverage in the future.
Without SBA's prior written approval, you may provide Financing or a
Commitment to a Small Business only if the resulting amount of your
aggregate outstanding Financings and Commitments to such Small Business
and its Affiliates does not exceed:
(1) For a Section 301(c) Licensee, 20 percent of the sum of:
(i) Your Regulatory Capital as of the date of the Financing or
Commitment; plus
(ii) Any Distribution(s) you made under Sec. 107.1570(b), during the
five years preceding the date of the Financing or Commitment, which
reduced your Regulatory Capital; plus
(iii) Any Distribution(s) you made under Sec. 107.585, during the
five years preceding the date of the Financing or Commitment, which
reduced your Regulatory Capital by no more than two percent or which SBA
approves for inclusion in the sum determined in this paragraph (a)(1).
(2) For a Section 301(d) Licensee, 30 percent of a sum determined in
the manner set forth in paragraph (a)(1)(i) through (iii) of this
section.
(b) Outstanding Financings. For the purposes of paragraph (a) of
this section, you must measure each outstanding Financing at its current
cost plus any amount of the Financing that was previously written off.
(c) Adjustment to Regulatory Capital. For the purposes of paragraph
(a) of this section, you may compute a higher maximum permitted
investment in a Small Business (an ``increased limit'') by adding ``net
unrealized gains'' on Publicly Traded and Marketable securities to your
Regulatory Capital, subject to the following conditions:
(1) ``Net unrealized gains'' on Publicly Traded and Marketable
securities means unrealized gains on Publicly Traded and Marketable
securities minus unrealized losses on all Loans and Investments.
(2) You must value your Publicly Traded and Marketable securities in
accordance with your SBA-approved valuation policy.
(3) You must have positive Retained Earnings Available for
Distribution at the time you compute an increased limit under this
paragraph (c).
(4) At the time you first compute an increased limit, and as of the
first business day of each calendar quarter that the increased limit is
in effect, you must keep copies in your files of the NASDAQ listings (or
the Wall Street Journal) or written quotations from the market makers
quoting the Publicly Traded and Marketable securities which support the
adjustment.
(5) If your net unrealized gains on Publicly Traded and Marketable
securities are more than 30 percent below their original level on the
first business day of any calendar quarter, and remain so for the next
30 days, you agree to do one of the following to remain in compliance
with the terms of your Leverage:
(i) By the first day of the next calendar quarter, increase your
Regulatory Capital sufficiently to restore support for the increased
limit; or
(ii) Lower the increased limit to reflect the decrease in net
unrealized gains on Publicly Traded and Marketable securities, and
reduce any Financings that exceed the lower limit.
Example to paragraph (c) of this section. Your Regulatory Capital is
$2,500,000 and your overline limit is $500,000 (20 percent of
[[Page 58]]
$2,500,000). On January 15, 1995, you document net unrealized gains on
Publicly Traded and Marketable securities of $200,000 and compute an
increased limit of $540,000 (20 percent of $2,700,000). You now make an
investment of $540,000 in a Small Business. Nothing changes until the
first business day of April, 1996, when you document net unrealized
gains on Publicly Traded and Marketable securities of only $120,000, a
reduction of more than 30 percent. Your net unrealized gains remain at
this level for the next 30 days. Your increased limit is now only
$524,000 (20 percent of $2,620,000). By July 1, 1996, you must either
increase Regulatory Capital by $80,000 to restore your increased limit
to $540,000, or reduce your portfolio investment from $540,000 to
$524,000.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 70996, Dec. 20, 1999]
Sec. 107.750 Conditions for financing a change of ownership of a Small Business.
You may finance a change of ownership of a Small Business only under
the conditions set forth in this section.
(a) The Financing must:
(1) Promote the sound development or preserve the existence of the
Small Business;
(2) Help create a Small Business as a result of a corporate
divestiture; or
(3) Facilitate ownership in a Disadvantaged Business.
(b) The Resulting Concern (as defined in paragraph (c) of this
section) must:
(1) Be a Small Business under Sec. 107.700;
(2) Have 500 or fewer full-time equivalent employees; or meet one of
the appropriate debt/equity ratio tests:
(i) If you have outstanding Leverage, the Resulting Concern's ratio
of debt to equity must be no more than 5 to 1; or
(ii) If you have no outstanding Leverage, the Resulting Concern's
ratio of debt to equity must be no more than 8 to 1.
(c) Definitions. (1) The ``Resulting Concern'' is determined by
viewing the business as though the change of ownership had already
occurred, giving effect to all contemplated financing, mergers, and
acquisitions.
(2) For purposes of this section, ``debt'' means long-term debt,
including contingent liabilities, but excluding accounts payable,
operating leases, letters of credit, subordinated notes payable to the
seller, any other liabilities approved for exclusion by SBA and short-
term working capital loans (so long as the loans carry a zero balance
for 30 consecutive days during the concern's fiscal year).
(3) For purposes of this section, ``equity'' means common and
preferred stock (corporation), contributed capital (partnership), or
membership interests (limited liability company).
Sec. 107.760 How a change in size or activity of a Portfolio Concern affects the Licensee and the Portfolio Concern.
(a) Effect on Licensee of a change in size of a Portfolio Concern.
If a Portfolio Concern no longer qualifies as a Small Business you may
keep your investment in the concern and:
(1) Subject to the overline limitations of Sec. 107.740, you may
provide additional Financing to the concern up to the time it makes a
public offering of its securities.
(2) Even after the concern makes a public offering, you may exercise
any stock options, warrants, or other rights to purchase Equity
Securities which you acquired before the public offering, or fund
Commitments you made before the public offering.
(b) Effect of a change in business activity occurring within one
year of Licensee's initial Financing--(1) Retention of Investment.
Unless you receive SBA's written approval, you may not keep your
investment in a Portfolio Concern, small or otherwise, which becomes
ineligible by reason of a change in its business activity within one
year of your initial investment.
(2) Request for SBA's approval to retain investment. If you request
that SBA approve the retention of your investment, your request must
include sufficient evidence to demonstrate that the change in business
activity was caused by an unforeseen change in circumstances and was not
contemplated at the time the Financing was made.
(3) Additional Financing. If SBA approves your request to retain an
investment under paragraph (b)(2) of this section, you may provide
additional Financing to the Portfolio Concern to the extent necessary to
protect against the
[[Page 59]]
loss of the amount of your original investment, subject to the overline
limitations of Sec. 107.740.
(c) Effect of a change in business activity occurring more than one
year after the initial Financing. If a Portfolio Concern becomes
ineligible because of a change in business activity more than one year
after your initial Financing you may:
(1) Retain your investment; and
(2) Provide additional Financing to the Portfolio Concern to the
extent necessary to protect against the loss of the amount of your
original investment, subject to the overline limitations of
Sec. 107.740.
Structuring Licensee's Financing of Eligible Small Businesses: Types of
Financing
Sec. 107.800 Financings in the form of Equity Securities.
(a) You may purchase the Equity Securities of a Small Business. You
may not, inadvertently or otherwise:
(1) Become a general partner in any unincorporated business; or
(2) Become jointly or severally liable for any obligations of an
unincorporated business.
(b) Definition. Equity Securities means stock of any class in a
corporation, stock options, warrants, limited partnership interests in a
limited partnership, membership interests in a limited liability
company, or joint venture interests. If the Financing agreement contains
debt-type acceleration provisions or includes redemption provisions
other than those permitted under Sec. 107.850, the security will be
considered a Debt Security for purposes of Sec. 107.855.
Sec. 107.810 Financings in the form of Loans.
You may make Loans to Small Businesses. A Loan means a transaction
evidenced by a debt instrument with no provision for you to acquire
Equity Securities.
Sec. 107.815 Financings in the form of Debt Securities.
You may purchase Debt Securities from Small Businesses.
(a) Definition. Debt Securities are instruments evidencing a loan
with an option or any other right to acquire Equity Securities in a
Small Business or its Affiliates, or a loan which by its terms is
convertible into an equity position. Consideration must be paid for all
options that you acquire.
(b) Restriction on options obtained by Licensee's management and
employees. If you have outstanding Leverage or plan to obtain Leverage,
your employees, officers, directors or general partners, or the general
partners of the management company that is providing services to you or
to your general partner, may obtain options in a Financed Small Business
only if:
(1) They participate in the Financing on a pari passu basis with
you; or
(2) SBA gives its prior written approval; or
(3) The options received are compensation for service as a member of
the board of directors of the Small Business, and such compensation does
not exceed that paid to other outside directors. In the absence of such
directors, fees must be reasonable when compared with amounts paid to
outside directors of similar companies.
Sec. 107.820 Financings in the form of guarantees.
At the request of a Small Business or where necessary to protect
your existing investment, you may guarantee the monetary obligation of a
Small Business to any non-Associate creditor.
(a) You may not issue a guaranty if:
(1) You would become subject to State regulation as an insurance,
guaranty or surety business;
(2) The amount of the guaranty plus any direct Financings to the
Small Business exceed the overline limitations of Sec. 107.740, except
that a pledge of the Equity Securities of the issuer or a subordination
of your lien or creditor position does not count toward your overline;
or
(3) The total financing cost to the Small Business exceeds the cost
of money limits of Sec. 107.855.
(b) Pledge of Licensee's assets as guaranty. For purposes of this
section, a guaranty with recourse only to specific asset(s) you have
pledged is equal to the fair market value of such asset(s)
[[Page 60]]
or the amount of the debt guaranteed, whichever is less.
Sec. 107.825 Purchasing securities from an underwriter or other third party.
(a) Securities purchased through or from an underwriter. You may
purchase the securities of a Small Business through or from an
underwriter if:
(1) You purchase such securities within 90 days of the date the
public offering is first made;
(2) Your purchase price is no more than the original public offering
price; and
(3) The amount paid by you for the securities (less ordinary and
reasonable underwriting charges and commissions) has been, or will be,
paid to the Small Business, and the underwriter certifies in writing
that this requirement has been met.
(b) Recordkeeping requirements. If you have outstanding Leverage or
plan to obtain Leverage, you must keep records available for SBA's
inspection which show the relevant details of the transaction,
including, but not limited to, date, price, commissions, and the
underwriter's certifications required under paragraph (c) of this
section.
(c) Underwriter's requirements. If you have outstanding Leverage or
plan to obtain Leverage, the underwriter must certify whether it is your
Associate. You may pay reasonable and customary commissions and expenses
to an Associate underwriter for the portion of an offering that you
purchase, provided it is no more than 25 percent of the total offering.
If you buy more than 25 percent of the offering, the amount you pay to
the Associate underwriter must not exceed the total of the application
and closing fees and reimbursable expenses permitted by Sec. 107.860.
(d) Securities purchased from another Licensee or from SBA. You may
purchase from, or exchange with, another Licensee, Portfolio securities
(or any interest therein). Such purchase or exchange may only be made on
a non-recourse basis. You may not have more than one-third of your total
assets(valued at cost) invested in such securities. If you have
previously sold Portfolio Securities (or any interest therein) on a
recourse basis, you shall include the amount for which you may be
contingently liable in your overline computation.
(e) Purchases of securities from other non-issuers. You may purchase
securities of a Small Business from a non-issuer not previously
described in this Sec. 107.825 if:
(1) Such acquisition is a reasonably necessary part of the overall
sound Financing of the Small Business under the Act; or
(2) The securities are acquired to finance a change of ownership
under Sec. 107.750.
Structuring Licensee's Financing of an Eligible Small Business: Terms
and Conditions of Financing
Sec. 107.830 Minimum duration/term of financing.
(a) General rule for Section 301(c) Licensees. If you are a Section
301(c) Licensee, the duration/term of all your Financings must be for a
minimum period of five years. Exception: You may finance a Disadvantaged
Business for a minimum term of four years.
(b) General rule for Section 301(d) Licensees. The duration/term of
your Financings may be for a minimum period of four years.
(c) Restrictions on mandatory redemption of Equity Securities. If
you have acquired Equity Securities, options or warrants on terms that
include redemption by the Small Business, you must not require
redemption by the Small Business within the first five years of your
acquisition except as permitted in Sec. 107.850.
(d) Special rules for Loans and Debt Securities. (1) Term. The
minimum term for Loans and Debt Securities starts with the first
disbursement of the Financing.
(2) Prepayment before five years. You must permit voluntary
prepayment of Loans and Debt Securities by the Small Business at any
time during the initial five year term. You must obtain SBA's prior
written approval of any restrictions on the ability of the Small
Business to prepay other than the imposition of a reasonable prepayment
[[Page 61]]
penalty under paragraph (d)(3) of this section.
(3) Prepayment penalties. You may charge a reasonable prepayment
penalty which must be agreed upon at the time of the Financing. If SBA
determines that a prepayment penalty is unreasonable, you must refund
the entire penalty to the Small Business. A prepayment penalty equal to
5 percent of the outstanding balance during the first year of any
Financing, declining by one percentage point per year through the fifth
year, is considered reasonable.
Sec. 107.835 Exceptions to minimum duration/term of Financing.
You may make a Short-term Financing for a term less than five years
if the Financing is:
(a) An interim financing (for a period not to exceed one year) in
contemplation of long-term Financing. The contemplated long-term
Financing must be in an amount at least equal to the short-term
Financing, and must be made by you alone or in participation with other
investors; or
(b) For protection of your prior investment(s); or
(c) For the purpose of Financing a change of ownership under
Sec. 107.750. The total amount of such Financings may not exceed 20
percent of your Loans and Investments (at cost) at the end of any fiscal
year; or
(d) An LMI Investment with a term of at least one year; or
(e) For the purpose of aiding a Small Business in performing a
contract awarded under a Federal, State, or local government set-aside
program for ``minority'' or ``disadvantaged'' contractors.
[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999]
Sec. 107.840 Maximum term of Financing.
The maximum term of any Loan or Debt Security Financing must be no
longer than 20 years.
Sec. 107.845 Maximum rate of amortization on Loans and Debt Securities.
The principal of any Loan (or the loan portion of a Debt Security)
with a term of five years or less cannot be amortized faster than
straight line. If the term is greater than five years, the principal
cannot be amortized faster than straight line for the first five years.
Sec. 107.850 Restrictions on redemption of Equity Securities.
(a) A Portfolio Concern cannot be required to redeem Equity
Securities earlier than five years (or one year in the case of an LMI
Investment) from the date of the first closing unless:
(1) The concern makes a public offering, or has a change of
management or control, or files for protection under the provisions of
the Bankruptcy Code, or materially breaches your Financing agreement; or
(2) You make a follow-on investment, in which case the new
securities may be redeemed in less than five years, but no earlier than
the redemption date associated with your earliest Financing of the
concern.
(b) The redemption price must be either:
(1) A fixed amount that is no higher than the price you paid for the
securities; or
(2) An amount that cannot be fixed or determined before the time of
redemption. In this case, the redemption price must be based on:
(i) A reasonable formula that reflects the performance of the
concern (such as one based on earnings or book value); or
(ii) The fair market value of the concern at the time of redemption,
as determined by a professional appraisal performed under an agreement
acceptable to both parties.
(c) Any method for determining the redemption price must be agreed
upon no later than the date of the first (or only) closing of the
Financing.
[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999]
Sec. 107.855 Interest rate ceiling and limitations on fees charged to Small Businesses (``Cost of Money'').
``Cost of Money'' means the interest and other consideration that
you receive from a Small Business. Subject to lower ceilings prescribed
by local law, the Cost of Money to the Small Business must not exceed
the ceiling determined under this section.
[[Page 62]]
(a) Financings to which the Cost of Money rules apply. This section
applies to all Loans and Debt Securities. As required by
Sec. 107.800(b), you must include as Debt Securities any equity
interests with redemption provisions that do not meet the restrictions
in Sec. 107.850.
(b) When to determine the Cost of Money ceiling for a Financing. You
may determine your Cost of Money ceiling for a particular Financing as
of the date you issue a Commitment or as of the date of the first
closing of the Financing. Once determined, the Cost of Money ceiling
remains fixed for the duration of the Financing.
(c) How to determine the Cost of Money ceiling for a Financing. At a
minimum, you may use a Cost of Money ceiling of 19 percent for a Loan
and 14 percent for a Debt Security. To determine whether you may charge
more, do the following:
(1) Choose a base rate for your Cost of Money computation. The base
rate may be either the Debenture Rate currently in effect plus the
applicable Charge determined under Sec. 107.1130(d)(1), or your own
``Cost of Capital'' as determined under paragraph (d) of this section.
(2) For a Loan, add 11 percentage points to the base rate; for a
Debt Security, add 6 percentage points. In either case, round the sum
down to the nearest eighth of one percent.
(3) If the result is more than 19 percent (for a Loan) or 14 percent
(for a Debt Security), you may use it as your Cost of Money ceiling.
(4) If two or more Licensees participate in the same Financing of a
Small Business, the base rate used in this paragraph (c) is the highest
of the following:
(i) The current Debenture Rate plus the applicable Charge determined
under Sec. 107.1130(d)(1);
(ii) The Cost of Capital of the lead Licensee; or
(iii) The weighted average of the Cost of Capital for all Licensees
participating in the Financing.
(d) How to determine your Cost of Capital. ``Cost of Capital'' is an
optional computation of the weighted average interest rate you pay on
your ``qualified borrowings''. ``Qualified borrowings'' means your
Debentures together with your borrowings at or below the usual interest
rate charged by banks in your locality on the date your loan was made.
(1) For any fiscal year, you may compute your Cost of Capital:
(i) As of the first day of your fiscal year, to remain in effect for
the entire year; or
(ii) As of the first day of every fiscal quarter during the fiscal
year, to remain in effect for the duration of the quarter.
(2) For each qualified borrowing outstanding at your last fiscal
year or fiscal quarter end, multiply the ending principal balance (net
of related unamortized fees) by the number of days during the past four
fiscal quarters that the borrowing was outstanding, and divide the
result by 365.
(3) Add together the amounts computed for all borrowings under
paragraph (d)(2) of this section. The result is your weighted average
borrowings.
(4) For all qualified borrowings outstanding at your last fiscal
year or fiscal quarter end, determine the aggregate interest expense for
the past four fiscal quarters, excluding amortization of loan fees. For
the purposes of this paragraph (d)(4):
(i) Interest expense on Debentures includes the 1 percent Charge
paid by a Licensee under Sec. 107.1130(d)(1); and
(ii) Section 301(d) Licensees with outstanding subsidized Debentures
are presumed to have paid interest at the rate stated on the face of
such Debentures, without regard to any subsidy paid by SBA.
(5) Divide the interest expense from paragraph (d)(4) of this
section by the weighted average borrowings from paragraph (d)(3) of this
section, and multiply by 100. The result is your Cost of Capital, which
you may use to compute a Cost of Money ceiling under paragraph (c) of
this section.
(e) SBA review of Cost of Capital computation. You must keep your
Cost of Capital computations in a separate file available for SBA's
review.
(1) A computation that is kept in such a file and is audited by your
independent public accountant is considered correct unless SBA
demonstrates otherwise.
(2) If a computation is not kept in such a file or is unaudited, you
must
[[Page 63]]
prove its accuracy to SBA's satisfaction.
(f) Charges included in the Cost of Money. The Cost of Money
includes all interest, points, discounts, fees, royalties, profit
participation, and any other consideration you receive from a Small
Business, except for the specific exclusions in paragraph (g) of this
section. For equity interests subject to the Cost of Money rules (see
paragraph (a) of this section), you must include:
(1) The portion of the fixed redemption price that exceeds your
original cost.
(2) Any amount of a redemption that is paid out of accounts other
than the Small Business's capital accounts (capital, paid-in surplus, or
retained earnings of a corporation; or partners' capital of a
partnership).
(g) Charges excluded from the Cost of Money. You may exclude from
the Cost of Money:
(1) Discount on the loan portion of a Debt Security, if such
discount exists solely as the result of the allocation of value to
detachable stock purchase warrants in accordance with generally accepted
accounting principles.
(2) Closing fees, application fees, and expense reimbursements, each
as permitted under Sec. 107.860.
(3) Reasonable prepayment penalties permitted under
Sec. 107.830(d)(3).
(4) Out-of-pocket conveyance and/or recordation fees and taxes.
(5) Reasonable closing costs.
(6) Fees for management services as permitted under Sec. 107.900.
(7) Reasonable and necessary out-of-pocket expenses you incur to
monitor the Financing.
(8) Board of director fees not in excess of those paid to other
outside directors, if your board representation meets the requirements
of Sec. 107.730(e).
(9) A reasonable fee for arranging financing for a Small Business
from a source that is neither a Licensee nor an Associate of yours. The
Small Business must agree in writing to pay such a fee before you
arrange the financing.
(10) A one-time ``bonus'' that satisfies the requirements in
paragraph (i) of this section.
(11) The difference between the contractual interest rate of the
Financing and a default rate of interest permitted as follows:
(i) If a Small Business is in default, you may charge a default rate
of interest as much as 7 percentage points higher than the contractual
rate until the default is cured.
(ii) For this purpose, ``default'' means either failure to pay an
amount when due or failure to provide information required under the
Financing documents.
(12) Royalty payments received under any LMI Investment if the
royalty is based on improvement in the performance of the Small Business
after the date of the financing.
(h) How to evaluate compliance with the Cost of Money ceiling. You
must determine whether a Financing is within the Cost of Money ceiling
based on its discounted cash flows, as follows:
(1) Beginning with the date of the first disbursement (``period
zero''), identify your cash inflows and cash outflows for each period of
the Financing. The appropriate period to use (such as years, quarters,
or months) depends on how you have structured the disbursements and
payments.
(2) Discount the cash flows back to the first disbursement date
using the Cost of Money ceiling from paragraph (d) of this section as
the discount rate.
(3) If the result is zero or less, the Financing is within the Cost
of Money ceiling; if it is greater than zero, the Financing exceeds the
Cost of Money ceiling.
(i) ``Bonus'' paid by a Small Business. You may provide Financing to
a Small Business that includes both a loan and a one-time ``bonus''
determined at the end of the loan term. For Cost of Money purposes, you
must treat such a Financing as a Debt Security. You may exclude a bonus
from the Cost of Money only if it is:
(1) Computed on or after the date that the Financing is repaid in
full or was originally due to be repaid in full, whichever is earlier;
(2) Not fixed or determinable before the computation date; and
(3) Fully contingent upon factor(s) that reflect the performance of
the Small Business. The period for which such performance is measured
must not extend beyond the Small Business's
[[Page 64]]
fiscal year end immediately following repayment of the Financing. You
must demonstrate to SBA's satisfaction that the factor(s) used are
appropriate indicators of performance. Examples of generally acceptable
factors include net income and operating cash flow; examples of
generally unacceptable factors include gross revenues or gross margin.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 52646, Sept. 30, 1999]
Sec. 107.860 Financing fees and expense reimbursements a Licensee may receive from a Small Business.
You may collect Financing fees and receive expense reimbursements
from a Small Business only as permitted under this Sec. 107.860.
(a) Application fee. You may collect a nonrefundable application fee
from a Small Business to review its Financing application. The
application fee may be collected at the same time as the closing fee
under paragraph (c) or (d) of this section, or earlier. The fee must be:
(1) No more than 1 percent of the amount of Financing requested (or,
if two or more Licensees participate in the Financing, their combined
application fees are no more than 1 percent of the total Financing
requested); and
(2) Agreed to in writing by the Financing applicant.
(b) SBA review of application fees. For any fiscal year, if the
number of application fees you collect is more than twice the number of
Financings closed, SBA in its sole discretion may determine that you are
engaged in activities not contemplated by the Act, in violation of
Sec. 107.500.
(c) Closing fee--Loans. You may charge a closing fee on a Loan if:
(1) The fee is no more than 2 percent of the Financing amount (or,
if two or more Licensees participate in the Financing, their combined
closing fees are no more than 2 percent of the total Financing amount);
and
(2) You charge the fee no earlier than the date of the first
disbursement.
(d) Closing fee--Debt or Equity Financings. You may charge a Closing
Fee on a Debt Security or Equity Security Financing if:
(1) The fee is no more than 4 percent of the Financing amount (or,
if two or more Licensees participate in the Financing, their combined
closing fees are no more than 4 percent of the total Financing amount);
and
(2) You charge the fee no earlier than the date of the first
disbursement.
(e) Limitation on dual fees. If another Licensee or an Associate of
yours collects a transaction fee under Sec. 107.900(e) in connection
with your Financing of a Small Business, the sum of the transaction fee
and your application and closing fees cannot exceed the maximum
application and closing fees permitted under this Sec. 107.860.
(f) Expense reimbursements. You may charge a Small Business for the
reasonable out-of-pocket expenses, other than Management Expenses, that
you incur to process its Financing application. If SBA determines that
any of your reimbursed expenses are unreasonable or are Management
Expenses, SBA will require you to include such amounts in the Cost of
Money or refund them to the Small Business.
(g) Breakup fee. If a Small Business accepts your Commitment and
then fails to close the Financing because it has accepted funds from
another source, you may charge a ``breakup fee'' equal to the closing
fee that you would have been permitted to charge under paragraph (c) or
(d) of this section.
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996]
Sec. 107.865 Restrictions on Control of a Small Business by a Licensee.
(a) General. You must not operate a business enterprise or function
as a holding company exercising Control over a business enterprise.
Neither you, nor you and your Associates, nor you and other Licensee(s)
(in the latter two cases, the ``Investor Group'') may, except as set
forth in this section, assume Control over a Small Business through
management agreements, voting trusts, majority representation on the
board of directors, or otherwise.
(b) Presumption of Control. Control over a Small Business will be
presumed to exist whenever you or the Investor Group own or control,
directly or indirectly:
[[Page 65]]
(1) At least 50 percent of the outstanding voting securities, if
there are fewer than 50 shareholders; or
(2) More than 25 percent of the outstanding voting securities, if
there are 50 or more shareholders; or
(3) A block of at least 20 percent of the outstanding voting
securities, if there are 50 or more shareholders and no other party
holds a larger block.
(c) Rebuttals to presumption of Control. A presumption of Control
under paragraph (b) of this section is rebutted if:
(1) The management of the Small Business owns at least a 25 percent
interest in the voting securities of the business; and
(2) The management of the Small Business can elect at least 40
percent of the board members of a corporation, general partners of a
limited partnership, or managers of a limited liability company, as
appropriate, and the Investor Group can elect no more than 40 percent.
The balance of such officials may be elected through mutual agreement by
management and the Investor Group.
(d) Temporary Control permitted. You may acquire temporary Control:
(1) Where reasonably necessary for the protection of your existing
investment;
(2) If there has been a material breach of the Financing agreement
by the Small Business;
(3) If there has been a substantial change in the Small Business's
operations or products during the past 2 years, or such a change is the
intended result of the Financing, and the Investor Group's Financing
constitutes the Small Business's major source of capital;
(4) In the case of a Start-up Financing, if you or the Investor
Group constitute the Small Business's major source of capital; or
(5) If your financing of the Small Business is an LMI Investment.
(e) Control certification. If you take temporary Control of a Small
Business under paragraph (d) of this section, you must file a Control
certification with SBA within 30 days. The certification must state:
(1) The date on which you took Control;
(2) The basis for taking Control; and
(3) Your agreement to relinquish Control within five years (although
you may, under extraordinary circumstances, request SBA's approval of an
extension beyond five years). In the case of an LMI Investment with a
term of less than five years, you must agree to relinquish Control
within the term of the financing.
(f) Control acquired through enforcement actions. If you retain or
acquire Control through enforcement action, you must notify SBA
immediately and submit a Control certification within 30 days.
(g) Additional Financing for businesses under Licensee's Control. If
you assume Control of a Small Business, you may later provide additional
Financing, without an exemption under Sec. 107.730(a)(1).
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 52646, Sept. 30, 1999]
Sec. 107.880 Assets acquired in liquidation of Portfolio securities.
You may acquire assets in full or partial liquidation of a Small
Business's obligation to you under the conditions permitted by this
Sec. 107.880. The assets may be acquired from the Small Business, a
guarantor of its obligation, or another party.
(a) Timely disposition of assets. You must dispose of assets
acquired in liquidation of a Portfolio security within a reasonable
period of time.
(b) Permitted expenditures to preserve assets. (1) You may incur
reasonably necessary expenditures to maintain and preserve assets
acquired.
(2) You may incur reasonably necessary expenditures for improvements
to render such assets saleable.
(3) You may make payments of mortgage principal and interest
(including amounts in arrears when you acquired the asset), pay taxes
when due, and pay for necessary insurance coverage.
(c) SBA approval of expenditures. This paragraph (c) applies if you
have outstanding Leverage or are applying for Leverage. Any application
for SBA approval under this paragraph must specify all expenses
estimated to be necessary pending disposal of the assets. Without SBA's
prior written approval:
[[Page 66]]
(1) Your total expenditures under paragraphs (b)(1) and (b)(2) of
this section plus your total Financing(s) to the Small Business must not
exceed your overline limit under Sec. 107.740; and
(2) Your total expenditures under paragraph (b) of this section plus
your total Financing(s) to the Small Business must not exceed 35 percent
of your Regulatory Capital.
Limitations on Disposition of Assets
Sec. 107.885 Disposition of assets to Licensee's Associates or to competitors of Portfolio Concern.
(a) Sale of assets to Associate. Except with SBA's prior written
approval, you are not permitted to dispose of assets (including assets
acquired in liquidation) to any Associate if you have outstanding
Leverage or Earmarked Assets. As a prerequisite to such approval, you
must demonstrate that the proposed terms of disposal are at least as
favorable to you as the terms obtainable elsewhere.
(b) Sale of assets to competitor of Small Business. Except with the
prior written approval of the Portfolio Concern (if it is not under your
Control) or of SBA, you are not permitted to dispose of Portfolio
securities to a competitor of such concern. If SBA's prior approval is
not required, you must promptly notify SBA of any such disposal.
Management Services and Fees
Sec. 107.900 Management fees for services provided to a Small Business by Licensee or its Associate.
This Sec. 107.900 applies to management services that you or your
Associate provide to a Small Business during the term of a Financing or
prior to Financing. It does not apply to management services that you or
your Associate provide to a Small Business that you do not finance. Fees
permitted under this section are not included in the Cost of Money (see
Sec. 107.855).
(a) Permitted management fees. You or your Associate may provide
management services to a Small Business financed by you if:
(1) You or your Associate have entered into a written contract with
the Small Business;
(2) The fees charged are for services actually performed;
(3) Services are provided on an hourly fee, project fee, or other
reasonable basis; and
(4) You can demonstrate to SBA, upon request, that the rate does not
exceed the prevailing rate charged for comparable services by other
organizations in the geographic area of the Small Business.
(b) Fees for service as a board member. You or your Associate may
receive fees in the form of cash, warrants, or other payments, for
services provided as members of the board of directors of a Small
Businesses Financed by you. The fees must not exceed those paid to other
outside board members. In the absence of such board members, fees must
be reasonable when compared with amounts paid to outside directors of
similar companies.
(c) SBA approval required. You must obtain SBA's prior written
approval of any management contract that does not satisfy paragraphs (a)
or (b) of this section.
(d) Recordkeeping requirements. You must keep a record of hours
spent and amounts charged to the Small Business, including expenses
charged.
(e) Transaction fees. (1) You may charge reasonable transaction fees
for work you or your Associate perform to prepare a client for a public
offering, private offering, or sale of all or part of the business, and
for assisting with the transaction. Compensation may be in the form of
cash, notes, stock, and/or options.
(2) Your Associate may charge market rate investment banking fees to
a Small Business on that portion of a Financing that you do not provide.
Subpart H--Non-leveraged Licensees--Exceptions to Regulations
Sec. 107.1000 Licensees without Leverage--exceptions to the regulations.
The regulatory exceptions in this section apply to Licensees with no
outstanding Leverage or Earmarked Assets.
[[Page 67]]
(a) You are exempt from the following provisions (but you must come
into compliance with them to become eligible for Leverage):
(1) The overline limitation in Sec. 107.740.
(2) The restrictions in Sec. 107.530 on investments of idle funds,
provided you do not engage in activities not contemplated by the Act.
(3) The restrictions in Sec. 107.550 on third-party debt.
(4) The restrictions in Sec. 107.880 on expenses incurred to
maintain or improve assets acquired in liquidation of Portfolio
securities.
(5) The recordkeeping requirements and fee limitations in
Sec. 107.825 (b) and (c), respectively, for securities purchased through
or from an underwriter.
(b) You are exempt from the requirements to obtain SBA's prior
approval for:
(1) A decrease in your Regulatory Capital of more than two percent
under Sec. 107.585 (but not below the minimum required under the Act or
these regulations). You must report the reduction to SBA within 30 days.
(2) Disposition of any asset to your Associate under Sec. 107.885.
(3) A contract to employ an Investment Adviser/Manager under
Sec. 107.510. However, you must notify SBA of the Management Expenses to
be incurred under such contract, or of any subsequent material changes
in such Management Expenses, within 30 days of execution. In order to
become eligible for Leverage, you must have the contract approved by
SBA.
(4) Your initial Management Expenses under Sec. 107.140 and
increases in your Management Expenses under Sec. 107.520. However, you
must have your Management Expenses approved by SBA in order to become
eligible for Leverage.
(5) Options obtained from a Small Business by your management or
employees under Sec. 107.815(b).
(c) You are exempt from the requirement in Sec. 107.680 to obtain
SBA's post approval of new directors and new officers, other than your
chief operating officer. However, you must notify SBA of the new
directors or officers within 30 days, and you must have all directors
and officers approved by SBA in order to become eligible for Leverage.
Subpart I--SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
Sec. 107.1100 Types of Leverage and application procedures.
(a) Types of Leverageable available. You may apply for Leverage from
SBA in one or both of the following forms:
(1) The purchase or guarantee of your Debentures.
(2) The purchase or guarantee of your Participating Securities.
(b) Applying for Leverage. The Leverage application process has two
parts. You must first apply for SBA's conditional commitment to reserve
a specific amount of Leverage for your future use. Yu may then apply to
draw down Leverage against the commitment. See Secs. 107.1200 through
107.1240.
(c) Where to send your application. Send all Leverage applications
to SBA, Investment Division, 409 Third Street, S.W., Washington, DC
20416.
[63 FR 5868, Feb. 5, 1998, as amended at 64 FR 70996, Dec. 20, 1999]
Sec. 107.1120 General eligibility requirements for Leverage.
To be eligible for Leverage, you must:
(a) Demonstrate a need for Leverage, evidenced by your investment
activity and a lack of sufficient funds for investment. For your first
issuance of Leverage, if you have invested at least 50 percent of your
Leverageable Capital, you are presumed to lack sufficient funds for
investment.
(b) Have adequate Private Capital to satisfy the requirements for
financial viability under Sec. 107.200.
(c) Meet the minimum capital requirements of Sec. 107.210, subject
to the following additional conditions:
(1) If you were licensed after September 30, 1996 under the
exception in Sec. 107.210(a)(1), you will not be eligible for Leverage
until you have Regulatory Capital of at least $5,000,000.
[[Page 68]]
(2) If you were licensed on or before September 30, 1996, and have
Regulatory Capital of less than $5,000,000 (less than $10,000,000 if you
wish to issue Participating Securities):
(i) You must certify in writing that at least 50 percent of the
aggregate dollar amount of your Financings extended after September 30,
1996 will be provided to Smaller Enterprises (as defined in
Sec. 107.710(a)); and
(ii) You must demonstrate to SBA's satisfaction that the approval of
Leverage will not create or contribute to an unreasonable risk of
default or loss to the United States government, based on such
measurements of profitability and financial viability as SBA deems
appropriate.
(d) Certify, if applicable, that you will satisfy the requirement in
Sec. 107.710(d) to provide Financing to Smaller Enterprises.
(e) Certify in writing that you are in compliance with the
requirement to finance Smaller Enterprises in Sec. 107.710(b).
(f) Show, to the satisfaction of SBA, that your management is
qualified and has the knowledge, experience, and capability necessary
for investing in the types of businesses contemplated by the Act, the
regulations in this part and your business plan.
(g) Be in compliance with the regulations in this part.
(h) If required by SBA, have your Control Person(s) assume, in
writing, personal responsibility for your Leverage, effective only if
such Control Person(s) participate (directly or indirectly) in a
transfer of Control not approved by SBA.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64
FR 70996, Dec. 20, 1999]
Sec. 107.1130 Leverage fees and additional charges payable by Licensee.
(a) Leverage fee. You must pay a leverage fee to SBA for each
issuance of a Debenture or Participating Security. The fee is 3 percent
of the face amount of the Leverage issued.
(b) Payment of leverage fee. (1) If you issue a Debenture or
Participating Security to repay or redeem existing Leverage, you must
pay the leverage fee before SBA will guarantee or purchase the new
Leverage security.
(2) If you issue a Debenture or Participating Security that is not
used to repay or redeem existing Leverage, SBA will deduct the leverage
fee from the proceeds remitted to you, unless you prepaid the fee under
Sec. 107.1210.
(c) Refundability. The leverage fee is not refundable under any
circumstances.
(d) Additional charge for Leverage.--(1) Debentures. You must pay to
SBA a Charge of 1 percent per annum on the outstanding amount of your
Debentures issued on or after October 1, 1996, payable under the same
terms and conditions as the interest on the Debentures. This Charge does
not apply to Debentures issued pursuant to a Leverage commitment
obtained from SBA on or before September 30, 1996.
(2) Participating Securities. You must pay to SBA a Charge of 1
percent per annum on the outstanding amount of your Participating
Securities issued on or after October 1, 1996, payable under the same
terms and conditions as the Prioritized Payments on the Participating
Securities. This Charge does not apply to Participating Securities
issued pursuant to a Leverage commitment obtained from SBA on or before
September 30, 1996.
(e) Other Leverage fees. SBA may establish a fee structure for
services performed by the CRA. SBA will not collect any fee for its
guarantee of TCs.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]
Sec. 107.1140 Licensee's acceptance of SBA remedies under Secs. 107.1800 through 107.1820.
If you issue Leverage after April 25, 1994, you automatically agree
to the terms and conditions in Secs. 107.1800 through 107.1820 as they
exist at the time of issuance. The effect of these terms and conditions
is the same as if they were fully incorporated in the terms of your
Leverage.
Maximum Amount of Leverage for Which a Licensee Is Eligible
[[Page 69]]
Sec. 107.1150 Maximum amount of Leverage for a Section 301(c) Licensee.
(a) Maximum amount of Leverage. (1) Amounts before indexing. If you
are a Section 301(c) Licensee, the following table shows the maximum
amount of Leverage you may have outstanding at any time, subject to the
indexing adjustment set forth in paragraph (a)(2) of this section:
------------------------------------------------------------------------
Then your maximum leverage
If your leverageable capital is: is:
------------------------------------------------------------------------
(1) Not over $17,500,000.................. 300 percent of Leverageable
Capital
(2) Over $17,500,000 but not over $52,500,000 + [2 x
$35,100,000. (Leverageable Capital -
$17,500,000)]
(3) Over $35,100,000 but not over $87,700,000 + (Leverageable
$52,600,000. Capital -$35,100,000)
(4) Over $52,600,000...................... $105,200,000
------------------------------------------------------------------------
(2) Indexing of maximum amount of Leverage. SBA will adjust the
amounts in paragraph (a) of this section annually to reflect increases
through September in the Consumer Price Index published by the Bureau of
Labor Statistics. SBA will publish the indexed maximum Leverage amounts
each year in a Notice in the Federal Register.
(b) Exceptions to maximum Leverage provisions. (1) Licensees under
Common Control. Two or more Licensees under Common Control may have
aggregate outstanding Leverage over $105,200,000 (subject to indexing as
set forth in paragraph (a)(2) of this section) only if SBA gives them
permission to do so. SBA may grant such permission on a case-by-case
basis only. SBA may impose any terms and conditions SBA considers
appropriate to minimize its risk of loss in the event of default.
(2) Licensees with excess Leverage issued before March 31, 1993. If
you had outstanding Debentures on March 31, 1993 that exceeded 300
percent of your Leverageable Capital:
(i) You do not have to prepay the excess amount.
(ii) You may apply for an additional Debenture guarantee or
Participating Security guarantee if you use the proceeds solely to pay
the amount due at maturity on a Debenture issued before March 31, 1993.
The new Debenture or Participating Security must mature on or before
September 30, 2002.
(iii) You must maintain at least 65 percent of your ``Total Funds
Available for Investment'' in ``Venture Capital Financings'' (as defined
in Sec. 107.1160(e) and (f), respectively) until your outstanding
Debentures no longer exceed 300 percent of your Leverageable Capital.
(3) Maximum amount of Participating Securities. See Sec. 107.1170.
[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 70996, Dec. 20, 1999]
Sec. 107.1160 Maximum amount of Leverage for a Section 301(d) Licensee.
This section applies to Leverage issued by a Section 301(d) Licensee
on or before September 30, 1996. Effective October 1, 1996, a Section
301(d) Licensee may apply to issue new Leverage, or refinance existing
Leverage, only on the same terms permitted under Sec. 107.1150.
(a) Maximum amount of subsidized Leverage. (1) ``Subsidized
Leverage'' means Debentures with a reduced interest rate and Preferred
Securities. If you are a Section 301(d) Licensee:
(i) The maximum amount of subsidized Leverage you may have
outstanding at any time is the lesser of 400 percent of your
Leverageable Capital, or $35,000,000. The same limit applies to a group
of Section 301(d) Licensees under Common Control.
(ii) The maximum amount of Preferred Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital.
(2) Certain types and amounts of subsidized Leverage have special
eligibility requirements (see paragraphs (c) and (d) of this section).
(b) Maximum amount of total Leverage. Use Sec. 107.1150 (a) and
(b)(1) to determine your maximum amount of Leverage as if you were a
Section 301(c) Licensee. If the result is more than your maximum
subsidized Leverage, then this is your maximum total (subsidized plus
non-subsidized) Leverage. Otherwise, your maximum total Leverage is the
same as your maximum subsidized Leverage. For Participating Securities,
see Sec. 107.1170.
(c) Special eligibility requirements for fourth tier of Leverage. A
``fourth tier of Leverage'' is any amount of outstanding Leverage in
excess of 300 percent of your Leverageable Capital.
[[Page 70]]
(1) To qualify for a fourth tier of Leverage, you must have invested
(or have Commitments to invest) at least 30 percent of your ``Total
Funds Available for Investment'' in ``Venture Capital Financings'' (see
the definitions in paragraphs (e) and (f) of this section).
(2) While you have a fourth tier of Leverage, you must maintain
Venture Capital Financings (at cost) that equal at least 30 percent of
your Total Funds Available for Investment.
(d) Special eligibility requirements for second tier of Preferred
Securities. A ``second tier of Preferred Securities'' is any amount of
outstanding Preferred Securities in excess of 100 percent of your
Leverageable Capital.
(1) To qualify for a second tier of Preferred Securities:
(i) If your license was issued after October 13, 1971, you must have
at least $500,000 of Leverageable Capital.
(ii) You must have invested (or have Commitments to invest) at least
the same dollar amount in Venture Capital Financings.
(2) While you have a second tier of Preferred Securities, you must
maintain at least the same dollar amount of Venture Capital Financings
(at cost).
(e) Definition of ``Total Funds Available for Investment''. Total
Funds Available for Investment means the result obtained from the
following formula:
T = .90 x (CA + LI)
Where:
T = Total funds available for investment
CA = Total current assets
LI = Total Loans and Investment at cost (as reported on SBA Form 468),
net of current maturities
(f) Definition of ``Venture Capital Financing''. Venture Capital
Financing means an investment represented by common or preferred stock,
a limited partnership interest, or a similar ownership interest; or by
an unsecured debt instrument that is subordinated by its terms to all
other borrowings of the issuer.
(1) A debt secured by any agreement with a third party is not a
Venture Capital Financing, whether or not you have a security interest
in any asset of the third party or have recourse against the third
party.
(2) A Financing that originally qualified as a Venture Capital
Financing will continue to qualify (at its original cost), even if you
later must report it on SBA Form 468 under either Assets Acquired in
Liquidation of Portfolio Securities or Operating Concerns Acquired.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]
Sec. 107.1170 Maximum amount of Participating Securities for any Licensee.
The maximum amount of Participating Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital. If
you are a Section 301(d) Licensee, the maximum combined amount of
Participating Securities and Preferred Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital.
Conditional Commitments by SBA To Reserve Leverage for a Licensee
Sec. 107.1200 SBA's Leverage commitment to a Licensee--application procedure, amount, and term.
(a) General. Under the provisions in Secs. 107.1200 through
107.1240, you may apply for SBA's conditional commitment to reserve a
specific amount and type of Leverage for your future use. You may then
apply to draw down Leverage against the commitment.
(b) Applying for a Leverage commitment. SBA will notify you when it
is accepting requests for Leverage commitments. Upon receipt of your
request, SBA will send you a complete application package.
(c) Limitations on the amount of a Leverage commitment. The amount
of a Leverage commitment must be a multiple of $5,000.
(d) Term of Leverage commitment. SBA's Leverage commitment will
automatically lapse on the expiration date stated in the commitment
letter issued to you by SBA.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]
[[Page 71]]
Sec. 107.1210 Payment of leverage fee upon receipt of commitment.
(a) Partial prepayment of leverage fee. As a condition of SBA's
Leverage commitment, and before you draw any Leverage under such
commitment, you must pay to SBA a non-refundable fee equal to 1 percent
of the face amount of the Debentures or Participating Securities
reserved under the commitment. This amount represents a partial
prepayment of the 3 percent leverage fee established under
Sec. 107.1130(a).
(b) Automatic cancellation of commitment. Unless you pay the fee
required under paragraph (a) of this section by 5:00 P.M. Eastern Time
on the 30th calendar day following the issuance of SBA's Leverage
commitment, the commitment will be automatically canceled.
[63 FR 5868, Feb. 5, 1998]
Sec. 107.1220 Requirement for Licensee to file quarterly financial statements.
As long as any part of SBA's Leverage commitment is outstanding, you
must give SBA a Financial Statement on SBA Form 468 (Short Form) as of
the close of each quarter of your fiscal year (other than the fourth
quarter, which is covered by your annual filing of Form 468 under
Sec. 107.630(a)). You must file this form within 30 days after the close
of the quarter. You will not be eligible for a draw if you are not in
compliance with this Sec. 107.1220.
[64 FR 70996, Dec. 20, 1999]
Sec. 107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
(a) Licensee's authorization of SBA to purchase or guarantee
securities. By submitting a request for a draw against SBA's Leverage
commitment, you authorize SBA, or any agent or trustee SBA designates,
to guarantee your Debenture or Participating Security and to sell it
with SBA's guarantee.
(b) Limitations on amount of draw. The amount of a draw must be a
multiple of $5,000. SBA, in its discretion, may determine a minimum
dollar amount for draws against SBA's Leverage commitments. Any such
minimum amounts will be published in Notices in the Federal Register
from time to time.
(c) Effect of regulatory violations on Licensee's eligibility for
draws--(1) General rule. You are eligible to make a draw against SBA's
Leverage commitment only if you are in compliance with all applicable
provisions of the Act and SBA regulations (i.e., no unresolved statutory
or regulatory violations).
(2) Exception to general rule. If you are not in compliance, you may
still be eligible for draws if:
(i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations and that you have not
repeatedly violated any non-substantive provisions; or
(ii) You have agreed with SBA on a course of action to resolve your
violations and such agreement does not prevent you from issuing
Leverage.
(d) Procedures for funding draws. You may request a draw at any time
during the term of the commitment. With each request, submit the
following documentation:
(1) A statement certifying that there has been no material adverse
change in your financial condition since your last filing of SBA Form
468 (see also Sec. 107.1220 for SBA Form 468 filing requirements).
(2) If your request is submitted more than 30 days following the end
of your fiscal year, but before you have submitted your annual filing of
SBA Form 468 (Long Form) in accordance with Sec. 107.630(a), a
preliminary unaudited annual financial statement on SBA Form 468 (Short
Form).
(3) A statement certifying that to the best of your knowledge and
belief, you are in compliance with all provisions of the Act and SBA
regulations (i.e., no unresolved regulatory or statutory violations), or
a statement listing any specific violations you are aware of. Either
statement must be executed by one of the following:
(i) An officer of the Licensee;
(ii) An officer of a corporate general partner of the Licensee; or
(iii) An individual who is authorized to act as or for a general
partner of the Licensee.
(4) A statement that the proceeds are needed to fund one or more
particular Small Businesses or to provide liquidity for your operations.
If required by
[[Page 72]]
SBA, the statement must include the name and address of each Small
Business, and the amount and anticipated closing date of each proposed
Financing.
(e) Reporting requirements after drawing funds. (1) Within 30
calendar days after the actual closing date of each Financing funded
with the proceeds of your draw, you must file an SBA Form 1031
confirming the closing of the transaction.
(2) If SBA required you to provide information concerning a specific
planned Financing under paragraph (d)(3) of this section, and such
Financing has not closed within 60 calendar days after the anticipated
closing date, you must give SBA a written explanation of the failure to
close.
(3) If you do not comply with this paragraph (e), you will not be
eligible for additional draws. SBA may also determine that you are not
in compliance with the terms of your Leverage under Secs. 107.1810 or
107.1820.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64
FR 70996, Dec. 20, 1999]
Sec. 107.1240 Funding of Licensee's draw request through sale to short-term investor.
(a) Licensee's authorization of SBA to arrange sale of securities to
short-term investor. By submitting a request for a draw of Debenture or
Participating Security Leverage, you authorize SBA, or any agent or
trustee SBA designates, to enter into any agreements (and to bind you to
such agreements) necessary to accomplish:
(1) The sale of your Debenture or Participating Security to a short-
term investor at a rate that may be different from the Trust Certificate
Rate which will be established at the time of the pooling of your
security;
(2) The purchase of your security from the short-term investor,
either by you or on your behalf; and
(3) The pooling of your security with other securities with the same
maturity date.
(b) Sale of Debentures to a short-term investor. If SBA sells your
Debenture to a short-term investor:
(1) The sale price will be the face amount.
(2) At the next scheduled date for the sale of Debenture Trust
Certificates, whether or not the sale actually occurs, you must pay
interest to the short-term investor for the short-term period. If the
actual sale of Trust Certificates takes place after the scheduled date,
you must pay the short-term investor interest from the scheduled sale
date to the actual sale date. This additional interest is due on the
actual sale date.
(3) Failure to pay the interest constitutes noncompliance with the
terms of your Leverage (see Sec. 107.1810).
(c) Sale of Participating Securities to a short-term investor. If
SBA sells your Participating Security to a short-term investor, the sale
price will be the face amount.
(d) Licensee's right to repurchase its Debentures before pooling.
You may repurchase your Debentures from the short-term investor before
they are pooled. To do so, you must:
(1) Give SBA written notice at least 10 days before the cut-off date
for the pool in which your Debenture is to be included; and
(2) Pay the face amount of the Debenture, plus interest, to the
short-term investor.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]
Preferred Securities Leverage--Section 301(d) Licensees
Sec. 107.1400 Dividends or partnership distributions on 4 percent Preferred Securities.
If you issued Preferred Securities to SBA on or after November 21,
1989, you must pay SBA a dividend or partnership distribution of 4
percent per year, from the date you issued Preferred Securities to the
date you repay them, both inclusive. The dividend or partnership
distribution is:
(a) Computed on the par value of the outstanding stock or the face
value of the outstanding limited partnership interest.
(b) Cumulative. This means that if you do not pay the entire
dividend or partnership distribution for a given fiscal year, the unpaid
balance accumulates as a distribution in arrears. You
[[Page 73]]
do not have to pay interest on distributions in arrears.
(c) Preferred. This means that you must pay SBA in full (including
distributions in arrears) before setting aside or paying any amount to
any other equity holder.
(d) Payable at the discretion of your Board of Directors or General
Partner(s), except that all distributions in arrears must be paid in
full when you redeem the Preferred Securities.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]
Sec. 107.1410 Requirement to redeem 4 percent Preferred Securities.
You must redeem 4 percent Preferred Securities not later than 15
years from the date of issuance. At the redemption date, you must pay to
SBA:
(a) The par value (of preferred stock) or face value (of a preferred
limited partnership interest); plus
(b) Any unpaid dividends or partnership distributions accrued to the
redemption date.
Sec. 107.1420 Articles requirements for 4 percent Preferred Securities.
If you have outstanding 4 percent Preferred Securities, your
Articles must contain all the provisions in Secs. 107.1400 and 107.1410.
[63 FR 5869, Feb. 5, 1998]
Sec. 107.1430 Redeeming 4 percent Preferred Securities with proceeds of non-subsidized Debentures.
If SBA approves, a Section 301(d) Licensee may use the proceeds of a
Debenture to redeem Preferred Securities at their mandatory redemption
date, including any accrued unpaid dividends or partnership
distributions.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]
Sec. 107.1440 Three percent preferred stock issued before November 21, 1989.
Before November 21, 1989, Preferred Securities were available only
in the form of preferred stock and had a preferred and cumulative
dividend of 3 percent. If you have such preferred stock outstanding, you
must follow Sec. 107.1400 (except for Sec. 107.1400(d)), substituting
``3 percent'' for ``4 percent'' throughout.) Dividends on 3 percent
preferred stock are payable at the discretion of your Board of Directors
or General Partner(s), except that all dividends in arrears must be paid
in full before any non-SBA investor receives any distribution. Upon your
liquidation, SBA is entitled to payment of all dividends in arrears even
if you have no Retained Earnings Available for Distribution at such
time.
Sec. 107.1450 Optional redemption of Preferred Securities.
(a) Redemption at par or face value. A Section 301(d) Licensee may
redeem Preferred Securities at any time, provided you give SBA at least
30 days written notice. You may redeem all or only part of your
Preferred Securities, but the par value or face value of the securities
being redeemed must be at least $50,000. At the redemption date, you
must pay to SBA:
(1) The par value (of preferred stock) or face value (of a preferred
limited partnership interest); plus
(2) Any unpaid dividends or partnership distributions accrued to the
redemption date.
(b) Repurchase of 3 percent preferred stock for less than par value.
If you issued 3 percent preferred stock to SBA, you may ask SBA to sell
it back to you at a price less than its par value. The terms and
conditions of any such transaction will be as set forth in the Notice
published in the Federal Register on April 1, 1994 (Copies of this
notice are available from SBA, 409 3rd Street, SW., Washington, DC,
20416). SBA has sole discretion to:
(1) Approve or disapprove the sale.
(2) Determine the sale price after considering any factors SBA
considers appropriate.
(3) Determine the form of payment SBA will accept. SBA is not
authorized to accept the proceeds of a subsidized Debenture as payment.
Participating Securities Leverage
[[Page 74]]
Sec. 107.1500 General description of Participating Securities.
(a) Types of Participating Securities. Participating Securities are
redeemable, preferred, equity-type securities. SBA may purchase or
guarantee Participating Securities issued by Licensees in the form of
limited partnership interests, preferred stock, or debentures with
interest payable only to the extent of earnings. The structure, terms
and conditions of Participating Securities are set forth in detail in
Secs. 107.1500 through 107.1590.
(b) Special eligibility requirements for Participating Securities.
In addition to the general eligibility requirements for Leverage under
Sec. 107.1120, Participating Securities issuers must also comply with
special rules on:
(1) Minimum capital (see Sec. 107.210).
(2) Liquidity (see Sec. 107.1505).
(3) Non-SBA borrowing (see Sec. 107.570).
(4) Equity investing, as set forth in this paragraph (b)(4). If you
issue Participating Securities, you must invest an amount equal to the
Original Issue Price of such securities solely in Equity Capital
Investments, as defined in Sec. 107.50.
(c) Special features of Participating Securities--Prioritized
Payments, Adjustments, and Profit Participation. When you issue
Participating Securities, you agree to make the following payments:
(1) Prioritized Payments. Depending upon the type of Participating
Security you issue, Prioritized Payments may be preferred partnership
distributions, preferred dividends, or interest. Your obligation to pay
Prioritized Payments is contingent upon your profits as determined under
Sec. 107.1520.
(2) Adjustments to Prioritized Payments. If you have unpaid
Prioritized Payments, you must compute Adjustments, which are additional
contingent obligations determined under Sec. 107.1520. The conditions
for paying Adjustments are the same as for Prioritized Payments.
(3) SBA Profit Participation. Profit Participation is an amount
payable to SBA under Sec. 107.1530 in consideration for SBA's guarantee
of your Participating Securities.
(d) Distributions by Licensees issuing Participating Securities.
Sections 107.1540 through 107.1580 govern both required and optional
Distributions by Participating Securities issuers. Distributions include
both profit distributions and returns of capital, paid either to SBA or
to your non-SBA investors.
(e) Mandatory redemption of Participating Securities. You must
redeem Participating Securities at the redemption date, which is the
same as the maturity date of the Trust Certificates for the Trust
containing such securities. The redemption date can never be later than
15 years after the issue date. You must pay the Redemption Price plus
any unpaid Earned Prioritized Payments and any earned Adjustments and
earned Charges (see Sec. 107.1520).
(f) Priority of Participating Securities in liquidation of Licensee.
In the event of your liquidation, the following are senior in priority,
for all purposes, to all other equity interests you have issued at any
time:
(1) The Redemption Price of Participating Securities;
(2) Any Earned Prioritized Payments and any earned Adjustments and
earned Charges (see Sec. 107.1520); and
(3) Any Profit Participation allocated to SBA under Sec. 107.1530.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]
Sec. 107.1505 Liquidity requirements for Licensees issuing Participating Securities.
If you have outstanding Participating Securities, you must maintain
sufficient liquidity to avoid a condition of Liquidity Impairment. Such
a condition will constitute noncompliance with the terms of your
Leverage under Sec. 107.1820(e).
(a) Definition of Liquidity Impairment. A condition of Liquidity
Impairment exists when your Liquidity Ratio, as determined in paragraph
(b) of this section, is less than 1.20. You are responsible for
calculating whether you have a condition of Liquidity Impairment:
(1) As of the close of your fiscal year;
(2) At the time you apply for Leverage, unless SBA permits
otherwise; and
(3) At such time as you contemplate making any Distribution.
(b) Computation of Liquidity Ratio. Your Liquidity Ratio equals your
Total Current Funds Available (A) divided by your Total Current Funds
Required
[[Page 75]]
(B), as determined in the following table:
Calculation of Liquidity Ratio
------------------------------------------------------------------------
Amount
Financial account reported on Weight Weighted
SBA form 468 amount
------------------------------------------------------------------------
(1) Cash and invested idle .............. x 1.00 ..............
funds.
(2) Commitments from .............. x 1.00 ..............
investors.
(3) Current maturities....... .............. x 0.50 ..............
(4) Other current assets..... .............. x 1.00 ..............
(5) Publicly Traded and .............. x 1.00 ..............
Marketable Securities.
(6) Anticipated operating (1) x 1.00 ..............
revenue for next 12 months.
(7) Total Current Funds .............. ......... A
Available.
(8) Current liabilities...... .............. x 1.00 ..............
(9) Commitments to Small .............. x 0.75 ..............
Businesses.
(10) Anticipated operating (1) x 1.00 ..............
expense for next 12 months.
(11) Anticipated interest (1) x 1.00 ..............
expense for next 12 months.
(12) Contingent liabilities .............. x 0.25 ..............
(guarantees).
(13) Total Current Funds .............. ......... B
Required.
------------------------------------------------------------------------
\1\ As determined by Licensee's management under its business plan.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]
Sec. 107.1510 How a Licensee computes Earmarked Profit (Loss).
Computing your Earmarked Profit (Loss) is the first step in
determining your obligations to pay Prioritized Payments, Adjustments
and Charges under Sec. 107.1520 and Profit Participation under
Sec. 107.1530.
(a) Requirement to compute your Earmarked Profit (Loss). While you
have Participating Securities outstanding or have Earmarked Assets (as
defined in paragraph (b) of this section), you must compute your
Earmarked Profit (Loss) for:
(1) Each full fiscal year.
(2) Any interim period (consisting of one or more fiscal quarters)
for which you want to make a Distribution.
(b) How to determine your Earmarked Assets. ``Earmarked Assets''
means all the Loans and Investments that you have when you issue
Participating Securities or that you acquire while you have
Participating Securities outstanding, and any non-cash assets that you
receive in exchange for such Loans and Investments.
(1) An Earmarked Asset remains earmarked until you dispose of it,
even if you no longer have any outstanding Participating Securities.
(2) Investments you make after redeeming all your Participating
Securities are not Earmarked Assets. However, if you issue new
Participating Securities, all of your Loans and Investments again become
Earmarked Assets.
(3) If you were licensed before March 31, 1993, you may be permitted
to exclude Loans and Investments held at that date from Earmarked Assets
under Sec. 107.1590.
(c) How to compute your Earmarked Asset Ratio. You must determine
your Earmarked Asset Ratio each time you compute Earmarked Profit
(Loss). If all your Loans and Investments are Earmarked Assets, your
Earmarked Asset Ratio equals 100 percent. Otherwise, compute your
Earmarked Asset Ratio using the following formula:
EAR = (EA LI) x 100
where:
EAR = Earmarked Asset Ratio.
EA = Average Earmarked Assets (at cost) for the fiscal year or
interim period.
LI = Average Loans and Investments (at cost) for the fiscal year or
interim period.
(d) How to compute your Earmarked Profit (Loss) if Earmarked Asset
Ratio is 100 percent. (1) (i) If your Earmarked Asset Ratio from
paragraph (b) of this section is 100 percent, use the following formula
to compute your Earmarked Profit (Loss):
EP = NI + IK + EME
where:
[[Page 76]]
EP = Earmarked Profit (Loss)
NI = Net Income (Loss), as reported on SBA Form 468 except as otherwise
provided in this paragraph (d)(1)
IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that you
are distributing as an In-Kind Distribution under Sec. 107.1580
EME = Excess Management Expenses
(ii) For the purpose of determining Net Income (Loss), leverage fees
paid to SBA and partnership syndication costs that you incur must be
capitalized and amortized on a straight-line basis over not less than
five years.
(2) ``Excess Management Expenses'' are those that exceed the
following limit:
(i) For a full fiscal year, the limit is the lower of:
(A) 2.5 percent of your weighted average Combined Capital for the
year, plus $125,000 if Combined Capital is below $20,000,000; or
(B) Your Management Expenses approved by SBA.
(ii) For less than a full fiscal year, you must prorate the annual
amounts in paragraph (d)(2)(i) of this section to determine the limit.
(e) How to compute your Earmarked Profit (Loss) if Earmarked Asset
Ratio is less than 100 percent. If your Earmarked Asset Ratio is less
than 100 percent, compute your Earmarked Profit (Loss) as follows:
(1) Do the Earmarked Profit (Loss) computation in paragraph (d) of
this section.
(2) Subtract your net realized gain (loss) (as reported on SBA Form
468) on Loans and Investments that are not Earmarked Assets.
(3) Separate the result from paragraph (e)(2) of this section into:
(i) Net realized gain (loss) (as reported on SBA Form 468) on
Earmarked Assets (``EGL''); and
(ii) The remainder (``R'').
(4) Your Earmarked Profit (Loss) equals:
EGL + (R x Earmarked Asset Ratio)
(f) How to compute your cumulative Earmarked Profit (Loss). Sum your
Earmarked Profit (Loss) for all fiscal years and for any interim period
following the end of your last fiscal year. The total is your cumulative
Earmarked Profit (Loss), which you must use in the Prioritized Payment
computations under Sec. 107.1520.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5870, Feb. 5, 1998]
Sec. 107.1520 How a Licensee computes and allocates Prioritized Payments to SBA.
This section tells you how to compute Prioritized Payments,
Adjustments and Charges on Participating Securities and determine the
amounts you must pay. To distribute these amounts, see Sec. 107.1540.
(a) How to compute Prioritized Payments and Adjustments--(1)
Prioritized Payments. For a full fiscal year, the Prioritized Payment on
an outstanding Participating Security equals the Redemption Price times
the related Trust Certificate Rate. For an interim period, you must
prorate the annual Prioritized Payment. If your Participating Security
was sold to a short-term investor in accordance with Sec. 107.1240, the
Prioritized Payment for the short-term period equals the Redemption
Price times the short-term rate.
(2) Adjustments. Compute Adjustments using paragraph (f) of this
section.
(3) Charges. Compute Charges in accordance with Sec. 107.1130(d)(2).
(b) Licensee's obligation to pay Prioritized Payments, Adjustments
and Charges. You are obligated to pay Prioritized Payments, Adjustments
and Charges only if you have profit as determined in paragraph (d) of
this section.
(1) Prioritized Payments that you must pay (or have already paid)
because you have sufficient profit are ``Earned Prioritized Payments''.
(2) Prioritized Payments that have not become payable because you
lack sufficient profit are ``Accumulated Prioritized Payments''. Treat
all Prioritized Payments as ``Accumulated'' until they become ``Earned''
under this section.
(3) Adjustments (computed under paragraph (f) of this section) and
Charges (computed under Sec. 107.1130(d)(2)) are ``earned'' according to
the same criteria applied to Prioritized Payments.
[[Page 77]]
(c) How to keep track of Prioritized Payments. You must establish
three accounts to record your Accumulated and Earned Prioritized
Payments:
(1) Accumulation Account. The Accumulation Account is a memorandum
account. Its balance represents your Accumulated Prioritized Payments,
unearned Adjustments and unearned Charges.
(2) Distribution Account. The Distribution Account is a liability
account. Its balance represents your unpaid Earned Prioritized Payments,
earned Adjustments and earned Charges.
(3) Earned Payments Account. The Earned Payments Account is a
memorandum account. Each time you add to the Distribution Account
balance, add the same amount to the Earned Payments Account. Its balance
represents your total (paid and unpaid) Earned Prioritized Payments,
earned Adjustments and earned Charges.
(d) How to determine your profit for Prioritized Payment purposes.
As of the end of each fiscal year and any interim period for which you
want to make a Distribution:
(1) Bring the Accumulation Account up to date by adding to it all
Prioritized Payments and Charges through the end of the appropriate
fiscal period.
(2) Determine whether you have profit for the purposes of this
section by doing the following computation:
(i) Cumulative Earmarked Profit (Loss) under Sec. 107.1510(f); minus
(ii) The Earned Payments Account balance; minus
(iii) All Distributions previously made under Secs. 107.1550,
107.1560 and 107.1570(a); minus
(iv) Any Profit Participation previously allocated to SBA under
Sec. 107.1530, but not yet distributed.
(3) The amount computed in paragraph (d)(2) of this section, if
greater than zero, is your profit. If the amount is zero or less, you
have no profit.
(4) If you have a profit, continue with paragraph (e) of this
section. Otherwise, continue with paragraph (f) of this section.
(e) Allocating Prioritized Payments to the Distribution Account. (1)
If you have a profit under paragraph (d) of this section, determine the
lesser of:
(i) Your profit; or
(ii) The balance in your Accumulation Account.
(2) Subtract the result in paragraph (e)(1) of this section from the
Accumulation Account and add it to the Distribution Account and the
Earned Payments Account.
(f) How to compute Adjustments. You must compute Adjustments as of
the end of each fiscal year if you have a balance greater than zero in
either your Accumulation Account or your Distribution Account, after
giving effect to any Distribution that will be made no later than the
second Payment Date following the fiscal year end.
(1) Determine the combined average Accumulation Account and
Distribution Account balances for the fiscal year, assuming that
Prioritized Payments accumulate on a daily basis without compounding.
(2) Multiply the average balance computed in paragraph (f)(1) of
this section by the average of the Trust Certificate Rates for all the
Participating Securities poolings during the fiscal year.
(3) Add the amounts computed in this paragraph (f) to your
Accumulation Account.
(g) Licensee's obligation to pay Prioritized Payments after
redeeming Participating Securities. This paragraph (g) applies if you
have redeemed all your Participating Securities, but you still hold
Earmarked Assets and still have a balance in your Accumulation Account.
(1) You must continue to perform all the procedures in this section
as of the end of each fiscal quarter and prior to making any
Distribution. You must distribute any Earned Prioritized Payments,
earned Adjustments and earned Charges in accordance with Sec. 107.1540.
(2) After you dispose of all your Earmarked Assets and make any
required Distributions in accordance with Sec. 107.1540, your obligation
to pay any remaining Accumulated Prioritized Payments, unearned
Adjustments and unearned Charges will be extinguished.
[63 FR 5870, Feb. 5, 1998]
[[Page 78]]
Sec. 107.1530 How a Licensee computes SBA's Profit Participation.
This section tells you how to compute SBA's Profit Participation.
Profit Participation is included in the Distributions you make to SBA
under Secs. 107.1550 and 107.1560.
(a) How to compute Profit Participation. Profit Participation equals
your ``Base'' times your ``Profit Participation Rate'' (if the Base is
zero or less, you do not owe SBA Profit Participation). Compute the Base
using paragraph (c) of this section and the Profit Participation Rate
using paragraphs (d) through (g) of this section. You must compute your
Earmarked Profit (Loss) under Sec. 107.1510 and your Prioritized
Payments and Adjustments under Sec. 107.1520 before you can compute
Profit Participation.
(b) How to keep track of Profit Participation. You must establish a
Profit Participation Account to record your computations under this
section and payments under Secs. 107.1550 and 107.1560. Its balance
represents your unpaid Profit Participation.
(c) How to compute the Base. As of the end of each fiscal year and
any year-to-date interim period for which you want to make a
Distribution, compute your Base using the following formula:
B = EP-PPA-UL
where:
B = Base.
EP = Earmarked Profit (Loss) for the period from Sec. 107.1510.
PPA = Prioritized Payments for the period from Sec. 107.1520(a)(1),
Adjustments (if applicable) from Sec. 107.1520(f), and Charges (if
applicable) from Sec. 107.1130(d)(2).
UL = ``Unused Loss'' from prior periods as determined in this
paragraph (c).
(1) If the Base computed as of the end of your previous fiscal year
(your ``Previous Base'') was less than zero, your Unused Loss equals
your Previous Base.
(2) If your Previous Base was zero or greater, your Unused Loss
equals zero, with the following exception: If you made an interim
Distribution of Profit Participation during your previous fiscal year,
and your Previous Base was lower than the interim Base on which your
Distribution was computed, then your Unused Loss equals the difference
between the interim Base and the Previous Base. For example, assume you
are computing your Base as of December 31, 1997, your fiscal year end.
Your Previous Base, computed as of December 31, 1996, was $3,000,000.
During 1996, you made an interim Distribution which was computed on a
Base of $3,500,000 as of June 30, 1996. The $500,000 difference between
the 1996 interim and year-end Bases would be carried forward as Unused
Loss in the computation of your Base as of December 31, 1997.
(3) If you had no Participating Securities outstanding as of the end
of your last fiscal year, you may request SBA's approval to treat your
Undistributed Net Realized Loss, as reported on SBA Form 468 for that
year, as Unused Loss. If you did not file SBA Form 468 because you were
not yet licensed as of the end of your last fiscal year, you may request
SBA's approval to treat pre-licensing losses as Unused Loss.
(d) How to compute the Profit Participation Rate. You must determine
your Profit Participation Rate each time you compute a Base that is
greater than zero. Compute the Rate by following the steps in paragraphs
(e) through (g) of this section.
(e) Compute the ``PLC ratio''. (1) General rule. The ``PLC ratio''
is the highest ratio of outstanding Participating Securities to
Leverageable Capital that you have ever attained.
(2) Exception. You may reduce the ratio computed under paragraph
(e)(1) of this section if you have increased your Leverageable Capital
above its highest previous level. The increase must have taken place at
least 120 days before the date as of which your Base is computed. In
addition, the increase must have been expressly provided for in a plan
of operations submitted to and approved by SBA in writing, or must be
the result of the takedown of commitments or the conversion of non-cash
assets that were included in your Private Capital. If these conditions
are satisfied, compute your reduced PLC ratio as follows:
(i) Divide the highest dollar amount of Participating Securities you
have
[[Page 79]]
ever had outstanding by your increased Leverageable Capital.
(ii) If the result in paragraph (e)(2)(i) of this section is lower
than your PLC ratio currently in effect, such result will become your
new PLC ratio.
(f) Compute the Profit Participation Rate (before indexing). Compute
the Profit Participation Rate (before indexing) using the table in this
paragraph (f). Then go to paragraph (g) of this section to determine
whether to index the Profit Participation Rate.
------------------------------------------------------------------------
If your PLC ratio is: Then your Profit Participation Rate is:
------------------------------------------------------------------------
1 or less...................... 9% x PLC Ratio.
More than 1.................... 9%+[3% x (PLC ratio-1)].
------------------------------------------------------------------------
(g) Indexing the Profit Participation Rate. The Profit Participation
Rate is indexed, up or down, to the yield-to-maturity on Treasury bonds
with a remaining term of ten (10) years (the ``Treasury Rate''). You
must perform the indexing procedures in this paragraph (g) unless the
Treasury Rate was exactly 8 percent on every date that you issued
Participating Securities.
(1) Licensees that have issued Participating Securities on only one
occasion. Determine the Treasury Rate for the date you issued your
Participating Security. Adjust the Profit Participation Rate from
paragraph (f) of this section by the percentage difference between the
Treasury Rate and 8 percent. For example, assume that you issued
Participating Securities when the Treasury Rate was 10 percent. The
percentage difference between 10 percent and 8 percent is 25 percent. If
you had a PLC ratio of 1, the Profit Participation Rate before indexing
would be 9 percent. You would increase this rate by 25 percent, giving
you a Profit Participation Rate of 11.25 percent.
(2) Licensees that have issued Participating Securities on more than
one occasion. Determine the Treasury Rate for each of the dates you
issued Participating Securities.
(i) Compute an average of all such Treasury Rates, weighted to
reflect the dollar amount of each issuance (ignoring any redemptions)
and the number of days from the date of each issuance to the date as of
which you are computing the Profit Participation Rate.
Example to paragraph (g)(2)(i) of this section. If you issued $10
million of Participating Securities on the 60th day of Fiscal Year 1
when the Treasury Rate was 8 percent, and another $15 million on the
100th day of Fiscal Year 3 when the Treasury Rate was 10 percent, then
the weighted average Treasury Rate computed as of the end of Fiscal Year
3 would be 8.55 percent. [Days elapsed since first issuance of
Participating Securities = 1,035; days elapsed since second issuance of
Participating Securities = 265; weighted amount of first issuance =
$10,000,000 x 1,035/1,035 = $10,000,000; weighted amount of second
issuance = $15,000,000 x 265/1035 = $3,840,579; weighted average
amount of Participating Securities issued = $10,000,000 + $3,840,579 =
$13,840,579; weighted average Treasury Rate= {(.08 x $10,000,000) +
(.10 x $3,840,579)} / $13,840,579 = 8.55%]
(ii) Adjust the Profit Participation Rate from paragraph (f) of this
section by the percentage difference between the weighted average
Treasury Rate and 8 percent. In the example given in paragraph (g)(2)(i)
of this section, if the PLC ratio were equal to 2, the Profit
Participation Rate for the fiscal year would be 12.83 percent.
[{((.0855-.08) .08) + 1} x .12 x 100 = 12.83%]
(h) Computing SBA's Profit Participation. If the Base from paragraph
(c) of this section is greater than zero, you must compute SBA's Profit
Participation as follows:
(1) Multiply the Base from paragraph (c) of this section by the
Profit Participation Rate from paragraph (g) of this section.
(2) If your last Profit Participation computation was for an interim
period during the same fiscal year and used a higher Profit
Participation Rate than the Rate you just used in paragraph (h)(1) of
this section, you must adjust the amount computed in paragraph (h)(1) of
this section as follows:
(i) Determine the difference between the Profit Participation Rate
you just used in paragraph (h)(1) of this section and the Rate used in
your previous computation;
(ii) Multiply the difference by the Base from your last Profit
Participation computation; and
[[Page 80]]
(iii) Add the result to the amount you computed in paragraph (h)(1)
of this section.
(3) Reduce the Profit Participation computed in paragraphs (h)(1)
and (h)(2) of this section by any amounts of Profit Participation that
you distributed or reserved for distribution to SBA, or its designated
agent or Trustee, for any previous interim period(s) during the fiscal
year. The result is SBA's Profit Participation (unless it is less than
zero, in which case SBA's Profit Participation is zero).
(i) Allocation of Profit Participation. Before any Distribution and
in any case within 120 days following the end of your fiscal year, you
must add the amount of Profit Participation computed under this
Sec. 107.1530 to the Profit Participation Account. You must reserve
funds equal to this amount for distribution to SBA, or its designated
agent or Trustee; you may not reinvest these funds or use them for any
other purpose.
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 63
FR 5871, Feb. 5, 1998]
Sec. 107.1540 Distributions by Licensee--Prioritized Payments and Adjustments.
After you compute Prioritized Payments and Adjustments under
Sec. 107.1520, you must distribute them in accordance with this
Sec. 107.1540. You must notify SBA of any planned distribution under
this section 10 business days before the distribution date, unless SBA
permits otherwise.
(a) Requirement to distribute Prioritized Payments and Adjustments.
This paragraph (a) applies only if you satisfy the liquidity requirement
in Sec. 107.1505. All Distributions under this paragraph (a) go to SBA
or its designated agent or trustee.
(1) You must distribute the balance in your Distribution Account
from Sec. 107.1520 annually on the first or second Payment Date
following your fiscal year end, and on any date when you are making any
other Distribution.
(2) You may distribute all or part of the balance in your
Distribution Account on any Payment Date regardless of whether you are
making any other Distribution on that date.
(b) Additional requirement for Licensees with undistributed
Prioritized Payments. This paragraph (b) applies if you do not
distribute the full amount in your Distribution Account by the second
Payment Date following the end of your fiscal year. At the end of each
fiscal quarter, until you reduce the balance in your Distribution
Account to zero, you must:
(1) Do all the steps in Sec. 107.1520; and
(2) Distribute the balance in your Distribution Account on the next
Payment Date following the end of your fiscal quarter, provided you
satisfy the liquidity requirement in Sec. 107.1505.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998]
Sec. 107.1550 Distributions by Licensee--permitted ``tax Distributions'' to private investors and SBA.
If you have outstanding Participating Securities or Earmarked
Assets, and you are a limited partnership, ``S Corporation,'' or
equivalent pass-through entity for tax purposes, you may make ``tax
Distributions'' to your investors in accordance with this Sec. 107.1550,
whether or not they have an actual tax liability. SBA receives a share
of any tax Distribution you make. This section tells you when you may
make a ``tax Distribution'' and how to compute it. You must notify SBA
of any planned distribution under this section 10 business days before
the distribution date, unless SBA permits otherwise.
(a) Conditions for making a tax Distribution. You may make a tax
Distribution only if:
(1) You have paid all your Prioritized Payments, Adjustments, and
Charges, so that the balance in both your Distribution Account and your
Accumulation Account is zero (see Sec. 107.1520).
(2) You satisfy the liquidity requirement in Sec. 107.1505.
(3) The tax Distribution does not exceed your Retained Earnings
Available for Distribution.
(4) The tax Distribution does not exceed the Maximum Tax Liability
from paragraph (b) of this section.
(b) How to compute the Maximum Tax Liability. (1) You may compute
your Maximum Tax Liability for a full fiscal
[[Page 81]]
year or for any calendar quarter. Use the following formula:
M = (TOI x HRO) + (TCG x HRC)
where:
M = Maximum Tax Liability
TOI = Net ordinary income allocated to your partners or other owners for
Federal income tax purposes for the fiscal year or calendar quarter
for which the Distribution is being made, excluding Prioritized
Payments allocated to SBA.
HRO = The highest combined marginal Federal and State income tax rate
for corporations or individuals on ordinary income, determined in
accordance with paragraphs (b)(2) through (b)(4) of this section.
TCG = Net capital gains allocated to your partners or other owners for
Federal income tax purposes for the fiscal year or calendar quarter
for which the Distribution is being made, excluding Prioritized
Payments allocated to SBA.
HRC = The highest combined marginal Federal and State income tax rate
for corporations or individuals on capital gains, determined in
accordance with paragraphs (b)(2) through (b)(4) of this section.
(2) You may compute the highest combined marginal Federal and State
income tax rate on ordinary income and capital gains using either
individual or corporate rates. However, you must apply the same type of
rate, either individual or corporate, to both ordinary income and
capital gains.
(3) In determining the combined Federal and State income tax rate,
you must assume that State income taxes are deductible from Federal
income taxes. For example, if the Federal tax rate was 35 percent and
the State tax rate was 5 percent, the combined tax rate would be [35%
x (1-.05)] + 5% = 38.25%.
(4) For purposes of this paragraph (b), the ``State income tax'' is
that of the State where your principal place of business is located, and
does not include any local income taxes.
(c) SBA's share of the tax Distribution. (1) SBA's percentage share
of the tax Distribution is equal to the Profit Participation Rate
computed under Sec. 107.1530.
(2) SBA may direct you to pay its share of the tax Distribution to
its designated agent or Trustee.
(3) SBA will apply its share of the tax Distribution in the order
set forth in Sec. 107.1560(g).
(d) Paying a tax Distribution. You may make an annual tax
Distribution on the first or second Payment Date following the end of
your fiscal year. You may make a quarterly tax Distribution on the first
Payment Date following the end of the calendar quarter for which the
Distribution is being made. See also Sec. 107.1575(a).
(e) Excess tax Distributions. (1) As of the end of your fiscal year,
you must determine whether you made any excess tax Distributions for the
year in accordance with paragraph (e)(2) of this section. Any tax
Distributions that you make for a subsequent period must be reduced by
the excess amount distributed.
(2) Determine your excess tax Distributions by adding together all
your quarterly tax Distributions for the year (ignoring any required
reductions for excess tax Distributions made in prior years), and
subtracting the maximum tax Distribution that you would have been
permitted to make based upon a single computation performed for the
entire fiscal year. The result, if greater than zero, is your excess tax
Distribution for the year.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998; 64
FR 70996, Dec. 20, 1999]
Sec. 107.1560 Distributions by Licensee--required Distributions to private investors and SBA.
You must make Distributions under this Sec. 107.1560 if you have
outstanding Participating Securities or Earmarked Assets and you satisfy
the conditions in paragraph (a) of this section. Distributions under
this section are determined as of the end of each fiscal year. You must
notify SBA of any planned distribution under this section 10 business
days before the distribution date, unless SBA permits otherwise.
(a) Conditions for making Distributions. Distributions under this
section are subject to the following conditions:
[[Page 82]]
(1) You must have paid all Prioritized Payments, Adjustments and
Charges, so that the balance in both your Distribution Account and your
Accumulation Account is zero (see Secs. 107.1520 and 107.1540).
(2) You must have made any permitted tax Distribution that you
choose to make under Sec. 107.1550.
(3) You must satisfy the liquidity requirement in Sec. 107.1505.
(4) The amount you distribute under this section must not exceed
your remaining Retained Earnings Available for Distribution.
(b) Total amount you must distribute. Unless SBA permits otherwise,
the total amount you must distribute equals the result (if greater than
zero) of the following computation:
(1) Your Retained Earnings Available for Distribution as of the end
of your fiscal year, after giving effect to any Distribution under
Secs. 107.1540 and 107.1550; minus
(2) All previous Distributions under this section and
Sec. 107.1570(a) that were applied as redemptions or repayments of
Leverage; plus
(3) All previous Distributions under Sec. 107.1570(b) that reduced
your Retained Earnings Available for Distribution.
(c) When you must make Distributions. You must make the required
Distributions on either the first or second Payment Date following the
end of your fiscal year.
(d) Effect of Distributions on Retained Earnings Available for
Distribution. Distributions under this Sec. 107.1560 have the following
effect on your Retained Earnings Available for Distribution:
(1) All Distributions to private investors reduce Retained Earnings
Available for Distribution.
(2) Distributions to SBA, or its designated agent or Trustee, reduce
Retained Earnings Available for Distribution if they are applied as
payments of Profit Participation or distributions on Preferred
Securities (see paragraph (g) of this section).
(3) Distributions to SBA, or its designated agent or Trustee, do not
reduce Retained Earnings Available for Distribution if they are applied
as a repayment or redemption of Leverage (see paragraph (g) of this
section).
(e) SBA's share of the total Distribution. Use the following table
to determine the percentage share of the total Distribution (from
paragraph (b) of this section) that goes to SBA (or its designated agent
or Trustee):
SBA's Percentage Share of Total Distribution
------------------------------------------------------------------------
If your ratio of Leverage to Leverageable Then SBA's percentage share
Capital as of the fiscal period end is: of the Distribution is:
------------------------------------------------------------------------
Over 200%................................. [Leverage / (Leverage +
Leverageable Capital)] x
100.
Over 100% but not over 200%............... 50%.
100% or less.............................. Profit Participation Rate
from Sec. 107.1530.
------------------------------------------------------------------------
(f) Exceptions to the Distribution requirement. (1) With SBA's prior
written approval, you may withhold from distribution reasonable reserves
necessary to protect your investments or relative position in Loans and
Investments and to meet contingent liabilities.
(i) If you submit a written request for SBA approval, you may
consider it approved unless SBA notifies you otherwise within 30 days
from receipt.
(ii) Reserves that you withhold from distribution may not be used to
make investments in additional portfolio companies.
(iii) Withholding of reserves under this paragraph (f)(1) is not a
``payment failure'' in violation of Sec. 107.1820(e)(6).
(2) SBA may restrict Distributions under this Sec. 107.1560 if SBA
determines that the value of your assets is materially overstated. SBA
must give you notice of such a determination in advance of your proposed
Distribution.
(g) How SBA will apply your Distributions. Your Distributions to SBA
(or its designated agent or Trustee) under this Sec. 107.1560 will be
applied in the following order:
(1) First, to Profit Participation;
(2) Second, to the extent there remain any Retained Earnings
Available for Distribution, to distributions on Preferred Securities;
(3) Third, as a redemption of Participating Securities in order of
issue;
(4) Fourth, as a redemption of Preferred Securities; and
(5) Fifth, as the repayment of principal of any outstanding
Debentures,
[[Page 83]]
with such repayment to be made into escrow on terms and conditions SBA
determines.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998]
Sec. 107.1570 Distributions by Licensee--optional Distribution to private investors and SBA.
If you have outstanding Participating Securities or Earmarked
Assets, you may make two types of optional Distributions under this
Sec. 107.1570: quarterly Distributions determined the same way as the
required annual Distributions in Sec. 107.1560, and Distributions
allocated between SBA and your private investors in proportion to the
capital contributions of each. You must notify SBA of any planned
distribution under this section 10 business days before the distribution
date, unless SBA permits otherwise.
(a) Quarterly Distributions subject to conditions in Sec. 107.1560.
(1) You may make Distributions under this paragraph (a) as of the end of
any fiscal quarter, giving SBA (or its designated agent or Trustee) a
percentage share determined under Sec. 107.1560(e).
(2) Such Distributions are subject to all the provisions in
Sec. 107.1560 (a)(1), (a)(3), (a)(4), (d), (f)(2), and (g).
(3) You may make such Distributions only on the next Payment Date
following the end of your fiscal quarter.
(4) The total amount of such Distributions may not exceed the result
of the following computation:
(i) Your Retained Earnings Available for Distribution as of the end
of your fiscal quarter; minus
(ii) All previous Distributions under this paragraph (a) or
Sec. 107.1560 that were applied as redemptions or repayments of
Leverage; plus
(iii) All previous Distributions under paragraph (b) of this section
that reduced your Retained Earnings Available for Distribution.
(b) Other optional Distributions. On any Payment Date, you may make
additional Distributions to your private investors and to SBA (or its
designated agent or Trustee) under this paragraph (b).
(1) Conditions for making a Distribution. You may make a
Distribution under this paragraph (b) only if:
(i) You have distributed all Earned Prioritized Payments, earned
Adjustments, and earned Charges, so that the balance in your
Distribution Account is zero (see Sec. 107.1520).
(ii) You have distributed all Profit Participation computed under
Sec. 107.1530 which you are required to distribute under Sec. 107.1560
or permitted to distribute under paragraph (a) of this section, as
appropriate, and you have made all required Distributions under
Sec. 107.1560.
(iii) You satisfy the liquidity requirement in Sec. 107.1505 or
obtain SBA's prior written approval of the Distribution.
(iv) You do not have a condition of Capital Impairment.
(v) The Distribution does not reduce your Regulatory Capital
(excluding commitments from Institutional Investors) below the minimum
required under Sec. 107.210, unless SBA approves the reduction as part
of a plan of liquidation.
(vi) The Distribution does not cause you to have excess Leverage
contrary to section 303 of the Act.
(2) SBA's share of Distribution. (i) If your Capital Impairment
Percentage under Sec. 107.1840 is zero, SBA's percentage share of any
Distribution under this paragraph (b) equals:
[Leverage/(Leverage + Leverageable Capital)] x 100
In this formula, use Leverage and Leverageable Capital as of the date of
the Distribution, after giving effect to any Distribution under
Sec. 107.1560 and paragraph (a) of this section.
(ii) If your Capital Impairment Percentage under Sec. 107.1840 is
greater than zero, you must modify the formula in paragraph (b)(2)(i) of
this section by replacing Leverageable Capital with:
Leverageable Capital x (100% - CIP)
where ``CIP'' is your Capital Impairment Percentage or 100 percent,
whichever is less.
(3) How SBA will apply Distributions. Any amounts you distribute to
SBA, or its designated agent or Trustee, under this paragraph (b) will
be applied as a repayment or redemption of Leverage in the order set
forth in Sec. 107.1560 (g)(3) through (g)(5).
(4) Effect of Distributions on Retained Earnings Available for
Distribution. Any
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amounts you distribute to non-SBA investors under this paragraph (b)
must reduce your Retained Earnings Available for Distribution to zero
before reducing your Private Capital.
(5) Permitted exception to Sec. 107.585. You may make any
Distribution permitted by this paragraph (b), even if the result is a
reduction in your Regulatory Capital that would otherwise be prohibited
under Sec. 107.585.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998]
Sec. 107.1575 Distributions on other than Payment Dates.
(a) Permitted Distributions on other than Payment Dates.
Notwithstanding any provisions to the contrary in Secs. 107.1540 through
107.1570, you may make Distributions on dates other than Payment Dates
as follows:
(1) Required annual Distributions under Sec. 107.1540(a)(1), annual
Distributions under Sec. 107.1550, and any Distributions under
Sec. 107.1560 must be made no later than the second Payment Date
following the end of your fiscal year.
(2) Required Distributions under Sec. 107.1540(b) must be made no
later than the first Payment Date following the end of the applicable
fiscal quarter;
(3) Optional Distributions under Sec. 107.1540(a)(2) and
Sec. 107.1570 may be made on any date.
(4) Quarterly Distributions under Sec. 107.1550 must be made no
earlier than the last day of the calendar quarter for which the
Distribution is being made and no later than the first Payment Date
following the end of such calendar quarter.
(b) Conditions for making Distribution. All Distributions under this
section are subject to the following conditions:
(1) You must obtain SBA's written approval before the distribution
date;
(2) The ending date of the period for which you compute your
Earmarked Profits, Prioritized Payments, Adjustments, Charges, Profit
Participation, Retained Earnings Available for Distribution, liquidity
ratio, Capital Impairment, and any other applicable computations
required under Secs. 107.1500 through 107.1570, must be:
(i) The distribution date, or
(ii) If your Distribution includes annual Distributions under
Secs. 107.1540(a)(1), 107.1550 and/or 107.1560, your most recent fiscal
year end;
(3) If your Distribution includes an amount which SBA will apply as
a redemption of Participating Securities, the effective date of such
redemption, for all purposes including future computations of
Prioritized Payments, will be the next Payment Date following the
distribution date.
[63 FR 5872, Feb. 5, 1998, as amended at 64 FR 70997, Dec. 20, 1999]
Sec. 107.1580 Special rules for In-Kind Distributions by Licensees.
(a) In-Kind Distributions while Licensee has outstanding
Participating Securities. A Distribution under Secs. 107.1540, 107.1560
or 107.1570 may consist of securities (an ``In-Kind Distribution'').
Such a Distribution must satisfy the conditions in this paragraph (a).
(1) You may distribute only Distributable Securities.
(2) You must distribute each security pro-rata to all investors and
to SBA or its designated agent or Trustee, based on the amounts that
each party would receive if the Distribution were in cash.
(3) You must impute a gain (loss) on each security being distributed
as if it were being sold, using the value of the security as of the
declaration date of the Distribution (if you are a Corporate Licensee)
or the distribution date (if you are a Partnership Licensee).
(4) You must deposit SBA's share of securities being distributed
with a disposition agent designated by SBA. As an alternative, if you
agree, SBA may direct you to dispose of its shares. In this case, you
must promptly remit the proceeds to SBA.
(b) In-Kind Distributions after Licensee has redeemed all
Participating Securities. This paragraph (b) applies from the time you
redeem all your Participating Securities until you dispose of all your
Earmarked Assets.
(1) You may make an In-Kind Distribution of an Earmarked Asset only
if you pay SBA the lower of:
(i) An amount equal to the Unrealized Appreciation on the asset; or
(ii) The full amount of your Accumulated Prioritized Payments and
unpaid Adjustments.
[[Page 85]]
(2) You must obtain SBA's prior written approval of any In-Kind
Distribution of Earmarked Assets that are not Distributable Securities,
specifically including approval of the valuation of the assets.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998; 64
FR 70997, Dec. 20, 1999]
Sec. 107.1585 Exchange of Debentures for Participating Securities.
You may, in SBA's discretion, retire a Debenture through the
issuance of Participating Securities. To do so, you must:
(a) Obtain SBA's approval to issue Participating Securities;
(b) Pay all unpaid accrued interest on the Debenture, plus any
applicable prepayment penalties, fees, and other charges;
(c) Have outstanding Equity Capital Investments (at cost) equal to
the amount of the Debenture being refinanced; and
(d) Classify all your existing Loans and Investments as Earmarked
Assets.
[63 FR 5869, Feb. 5, 1998]
Sec. 107.1590 Special rules for companies licensed on or before March 31, 1993.
This section applies to companies licensed on or before March 31,
1993 that apply to issue Participating Securities.
(a) Election to exclude pre-existing portfolio. You may choose to
exclude all (but not a portion) of your Loans and Investments as of
March 31, 1993, from classification as Earmarked Assets if:
(1) The proceeds of your first issuance of Participating Securities
are not used to refinance outstanding Debentures (see Sec. 107.1585(a)).
SBA will consider payment or prepayment of any outstanding Debenture to
be a refinancing unless you demonstrate to SBA's satisfaction that you
can pay the Debenture principal without relying on the proceeds of the
Participating Securities.
(2) SBA, in its sole discretion, approves the exclusion.
(b) Treatment of pre-existing portfolio if not excluded. If you do
not choose to exclude your Loans and Investments as of March 31, 1993,
they will be Earmarked Assets for all purposes.
(c) Requirements for Licensee's first issuance of Participating
Securities. When you apply for your first issuance of Participating
Securities, you must comply with the following:
(1) For each of your Loans and Investments, you must submit:
(i) The most recent annual report (or fiscal year-end financial
statements) and the most recent interim financial statements of the
Small Business; and
(ii) Your valuation reports on the Small Business, prepared as of
the end of each of your last three fiscal years. If you have applied for
Participating Securities on the basis of interim financial statements,
you must also submit a valuation report as of your interim financial
statement date.
(2) If you have negative Undistributed Net Realized Earnings and/or
a net Unrealized Loss on Securities Held, SBA may require you to undergo
a quasi-reorganization in accordance with generally accepted accounting
principles.
(3) If your financial statements accompanying the Participating
Securities application are for an interim period, you must have your
SBA-approved independent public accountant perform a limited-scope audit
of the statements. For purposes of this paragraph (d)(3), ``limited
scope audit'' means auditing procedures sufficient to enable the
independent public accountant to express an opinion on the Statement of
Financial Position and the accompanying Schedule of Loans and
Investments.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
Sec. 107.1600 SBA authority to issue and guarantee Trust Certificates.
(a) Authorization. Sections 319(a) and (b) of the Act authorize SBA
or its CRA to issue TCs, and SBA to guarantee the timely payment of the
principal and interest thereon. Any guarantee by SBA of such TC is
limited to the principal and interest due on the Debentures or the
Redemption Price of and Prioritized Payments on Participating
[[Page 86]]
Securities in any Trust or Pool backing such TC. The full faith and
credit of the United States is pledged to the payment of all amounts due
under the guarantee of any TC.
(b) Periodic exercise of authority. SBA will issue guarantees of
Debentures and Participating Securities under section 303 and of TCs
under section 319 of the Act at six month intervals, or at shorter
intervals, taking into account the amount and number of such guarantees
or TCs.
(c) SBA authority to arrange public or private fundings of Leverage.
SBA in its discretion may arrange for public or private financing under
its guarantee authority. Such financing arranged by SBA may be
accomplished by the sale of individual Debentures or Participating
Securities, aggregations of Debentures or Participating Securities, or
Pools or Trusts of Debentures or Participating Securities.
(d) Pass-through provisions. TCs shall provide for a pass-through to
their holders of all amounts of principal and interest paid on the
Debentures, or the Redemption Price of and Prioritized Payments on the
Participating Securities, in the Pool or Trust against which they are
issued.
(e) Formation of a Pool or Trust holding Leverage Securities. SBA
shall approve the formation of each Pool or Trust. SBA may, in its
discretion, establish the size of the Pools and their composition, the
interest rate on the TCs issued against Trusts or Pools, fees,
discounts, premiums and other charges made in connection with the Pools,
Trusts, and TCs, and any other characteristics of a Pool or Trust it
deems appropriate.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]
Sec. 107.1610 Effect of prepayment or early redemption of Leverage on a Trust Certificate.
(a) The rights, if any, of a Licensee to prepay any Debenture or
make early redemption of any Participating Security are established by
the terms of such securities, and no such right is created or denied by
the regulations in this part.
(b) SBA's rights to purchase or prepay any Debenture without premium
are established by the terms of the Guaranty Agreement relating to the
Debenture. SBA's rights to redeem, at any time, any Participating
Security without premium are established by the terms of the Guaranty
Agreement relating to the Participating Security.
(c) Any prepayment of a Debenture or early redemption of a
Participating Security pursuant to the terms of the Guaranty Agreement
relating to such securities, shall reduce the SBA guarantee of timely
payment of principal and interest on a TC in proportion to the amount of
principal or Redemption Price that such prepaid Debenture or redeemed
Participating Security represents in the Trust or Pool backing such TC.
(d) SBA shall be discharged from its guarantee obligation to the
holder or holders of any TC, or any successor or transferee of such
holder, to the extent of any such prepayment, whether or not such
successor or transferee shall have notice of any such prepayment.
(e) Interest on prepaid Debentures and Prioritized Payments on
Participating Securities shall accrue only through the date of such
voluntary prepayment or SBA payment, as the case may be.
(f) In the event that all Debentures or Participating Securities
constituting a Trust or Pool are prepaid, the TCs backed by such Trust
or Pool shall be redeemed by payment of the unpaid principal and
interest on the TCs; Provided, however, that in the case of the
prepayment of a Debenture pursuant to the provisions of the Guaranty
Agreement relating to the Debenture, the CRA shall pass through pro rata
to the holders of the TCs any such prepayments including any prepayment
penalty paid by the obligor Licensee pursuant to the terms of the
Debenture.
Sec. 107.1620 Functions of agents, including Central Registration Agent, Selling Agent and Fiscal Agent.
(a) Agents. SBA will appoint or cause to be appointed agent(s) to
perform functions necessary to market and service Debentures,
Participating Securities, or TCs pursuant to this part.
(1) Selling Agent. As a condition of guaranteeing a Debenture or
Participating Security, SBA shall cause each
[[Page 87]]
Licensee to appoint a Selling Agent to perform functions which include,
but are not limited to:
(i) Selecting qualified entities to become pool or Trust assemblers
(``Poolers'').
(ii) Receiving guaranteed Debentures and Participating Securities as
well as negotiating the terms and conditions of periodic offerings of
Debentures and/or TCs with Poolers on behalf of Licensees.
(iii) Directing and coordinating periodic sales of Debentures and
Participating Securities and/or TCs.
(iv) Arranging for the production of the Offering Circular,
certificates, and such other documents as may be required from time to
time.
(2) Fiscal Agent. SBA shall appoint a Fiscal Agent to:
(i) Establish performance criteria for Poolers.
(ii) Monitor and evaluate the financial markets to determine those
factors that will minimize or reduce the cost of funding Debentures or
Participating Securities.
(iii) Monitor the performance of the Selling Agent, Poolers, CRA,
and the Trustee.
(iv) Perform such other functions as SBA, from time to time, may
prescribe.
(3) Central Registration Agent. Pursuant to a contract entered into
with SBA, the CRA, as SBA's agent, will do the following with respect to
the Pools or Trust Certificates for the Debentures or Participating
Securities:
(i) Form an SBA-approved Pool or Trust;
(ii) Issue the TCs in the form prescribed by SBA;
(iii) Transfer the TCs upon the sale of original issue TCs in any
secondary market transaction;
(iv) Receive payments from Licensees;
(v) Make periodic payments as scheduled or required by the terms of
the TCs, and pay all amounts required to be paid upon prepayment of
Debentures or redemption of Participating Securities;
(vi) Hold, safeguard, and release all Debentures and Participating
Securities constituting Trusts or Pools upon instructions from SBA;
(vii) Remain custodian of such other documentation as SBA shall
direct by written instructions;
(viii) Provide for the registration of all pooled Debentures and
Participating Securities, all Pools and Trusts, and all TCs;
(ix) Perform such other functions as SBA may deem necessary to
implement the provisions of this section.
(b) Functions. The function of locating purchasers, and negotiating
and closing the sale of Debentures, Participating Securities and TCs,
may be performed either by SBA or an agent appointed by SBA. Nothing in
the regulations in this part shall be interpreted to prevent the CRA
from acting as SBA's agent for this purpose.
Sec. 107.1630 SBA regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates.
(a) Disclosure to purchasers. Prior to any sale of a Debenture,
Participating Security, or TC, SBA shall require the seller, or the
broker or dealer as agent for the seller, to disclose to the purchaser,
in a form prescribed or approved by SBA, specified information on the
terms, conditions, and yield of such instrument.
(b) Brokers and Dealers. Each broker, dealer, and Pool or Trust
assembler approved by SBA pursuant to these regulations shall either be
regulated by a Federal financial regulatory agency, or be a member of
the National Association of Securities Dealers (NASD), and shall be in
good standing in respect to compliance with the financial, ethical, and
reporting requirements of such body. They also shall be in good standing
with SBA as determined by the SBA Associate Administrator for Investment
(see paragraph (d) of this section) and shall provide a fidelity bond or
insurance in such amount as SBA may require.
(c) Suspension and/or termination of Broker or Dealer. SBA shall
exclude from the sale and all other dealings in Debentures,
Participating Securities or TCs any broker or dealer:
(1) If such broker's or dealer's authority to engage in the
securities business has been revoked or suspended by a supervisory
agency. When such
[[Page 88]]
authority has been suspended, such broker or dealer will be suspended by
SBA for the duration of such suspension by the supervisory agency.
(2) If such broker or dealer has been indicted or otherwise formally
charged with a misdemeanor or felony bearing on its fitness, such broker
or dealer may be suspended while the charge is pending. Upon conviction,
participation may be terminated.
(3) If such broker or dealer has suffered an adverse final civil
judgment, holding that such broker or dealer has committed a breach of
trust or violation of law or regulation protecting the integrity of
business transactions or relationships, participation in the market for
Debentures, Participating Securities or TCs may be terminated.
(4) If such broker or dealer has failed to make full disclosure of
the information required by SBA in paragraph (a) of this section, such
broker's or dealer's participation in the market for Debentures,
Participating Securities or TCs may be terminated.
(d) Termination/suspension proceedings. A broker's or dealer's
participation in the market for Debentures, Participating Securities or
TCs will be conducted in accordance with part 134 of this chapter. SBA
may, for any of the reasons stated in paragraphs (b)(1) through (b)(4)
of this section, suspend the privilege of any broker or dealer to
participate in this market. SBA shall give written notice at least ten
(10) business days prior to the effective date of such suspension. Such
notice shall inform the broker or dealer of the opportunity for a
hearing pursuant to part 134 of this chapter.
Sec. 107.1640 SBA access to records of the CRA, Brokers, Dealers and Pool or Trust assemblers.
The CRA and any broker, dealer and Pool or Trust assembler operating
under the regulations in this part shall make all books, records and
related materials associated with Debentures, Participating Securities
and TCs available to SBA for review and copying purposes. Such access
shall be at such party's primary place of business during normal
business hours.
Miscellaneous
Sec. 107.1700 Transfer by SBA of its interest in Licensee's Leverage security.
Upon such conditions and for such consideration as it deems
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any
Preferred Security, Debenture, Participating Security, or other security
held by or on behalf of SBA in connection with Leverage. Upon notice by
SBA, Licensee will make all payments of principal, dividends, interest,
Prioritized Payments, and redemptions as shall be directed by SBA.
Licensee will be liable for all damage or loss which SBA may sustain by
reason of such disposal, up to the amount of Licensee's liability under
such security, plus court costs and reasonable attorney's fees incurred
by SBA.
Sec. 107.1710 SBA authority to collect or compromise its claims.
SBA may, upon such conditions and for such consideration as it deems
reasonable, collect or compromise all claims relating to Preferred or
Participating Securities or obligations held or guaranteed by SBA, and
all legal or equitable rights accruing to SBA.