[Federal Register Volume 59, Number 164 (Thursday, August 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20903]


[[Page Unknown]]

[Federal Register: August 25, 1994]


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SMALL BUSINESS ADMINISTRATION
 

Specialized Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Notice.

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SUMMARY: This Notice clarifies SBA's position on the permissible 
sources of funds for the repurchase of 3% preferred tock from the 
Agency by specialized small business investment companies. Under the 
narrow circumstances described in this Notice, the stock may be 
repurchased with ``idle funds'' of the company.

DATES: This Notice is effective on August 25, 1994.

FOR FURTHER INFORMATION CONTACT: Edward L. Cleveland, Special Assistant 
to the Associate Administrator for Investment, U.S. Small Business 
Administration, 409 Third Street, S.W., Washington, DC 20416, (202) 
205-7581.

SUPPLEMENTARY INFORMATION: On April 1, 1994, SBA published a Notice in 
the Federal Register  setting forth the guidelines SBA would follow in 
its implementation of the 3% Preferred Stock Repurchase Program for 
Small Business Investment Companies licensed under section 301(d) of 
the Small Business Investment Act of 1958, as amended (SSBICs). See 59 
FR 15491. SBA has determined that those guidelines require further 
clarification as they relate to the use of ``idle funds'' to finance a 
repurchase transaction.

    SBA reiterates its position that the financing of a repurchase with 
cash already in an SSBIC is inconsistent with the policy of avoiding 
the transfer of cash flows from SSBICs into the Agency. Under certain 
unique circumstances, however, an SSBIC's idle funds may be a 
permissible temporary source of funds.
    If an SSBIC (i) has retained earnings available for distribution 
which, when capitalized, would be insufficient to pay the full 
repurchase price, (ii) has no outstanding indebtedness to SBA or any 
other party, and (iii) holds unencumbered publicly traded and 
marketable securities with an unrealized gain (after deducting any 
allowances for prospective income taxes and other contingent 
liabilities such as incentive compensation) equal to at least 20 
percent of the difference between the repurchase price and the 
capitalizable retained earnings, SBA will permit the SSBIC to use its 
idle funds in the financing of its repurchase transaction provided 
that, based on its most recent financials submitted with its 
application for repurchase, cash and idle funds remaining in the SSBIC 
after the repurchase would be more than the total loans and investments 
made by the SSBIC during the prior two fiscal years. SBA's permission 
would be conditioned upon the following:
    (1) The SSBIC would be required to capitalize its retained earnings 
available for distribution. Idle funds would be used only to fund the 
difference between the repurchase price and the capitalizable retained 
earnings.
    (2) The use of idle funds in the financing of a repurchase 
transaction would be a temporary measure only. Within two years of 
using idle funds in its repurchase transaction, the SSBIC must 
``replace'' those funds by increasing its private capital through the 
sale of stock for cash to non-SBA sources or through a capitalization 
of retained earnings available for distribution.
    (3) Until private capital is increased in the manner described in 
the preceding paragraph, the SSBIC must continue to hold unencumbered 
publicly traded and marketable securities with a value, after 
allowances, of not less than two times the amount of capital yet to be 
raised by the SSBIC. Failure to comply with this paragraph or the 
preceding paragraph could result in the transfer of the SSBIC to the 
Office of Liquidation.

    Authority: Title III of the Small Business Investment Act, 15 
U.S.C. 681 et seq.; 15 U.S.C. 687(c); 15 U.S.C. 683; 15 U.S.C. 687d; 
15 U.S.C. 687g; 15 U.S.C. 687b; 15 U.S.C. 687m, as amended by Pub. 
L. 102-366.

    Dated: August 18, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-20903 Filed 8-24-94; 8:45 am]
BILLING CODE 8025-01-M