[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Proposed Rules]
[Pages 58530-58578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28757]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 60, No. 228 / Tuesday, November 28, 1995 /
Proposed Rules
[[Page 58530]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
Small Business Investment Companies
AGENCY: Small Business Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: In response to President Clinton's government-wide regulatory
reform initiative, the Small Business Administration (SBA) is proposing
to restructure its existing regulations. This proposed rule is intended
to streamline the regulations governing the Small Business Investment
Company (SBIC) program. To this end, SBA proposes to eliminate obsolete
regulations and to reorganize the remaining regulations in a more
readable format.
In addition to changes in organization, the proposed regulations
include a number of substantive changes, many of which are intended to
reduce the regulatory burden on Licensees, as well as SBA's
administrative burden. Other proposed changes would provide additional
protection for SBA's position as a creditor of, or investor in,
Licensees with outstanding Leverage. At the same time, certain
requirements would be made inapplicable to non-leveraged Licensees,
which pose no financial risk to the Agency.
DATES: Comments must be submitted on or before December 28, 1995.
ADDRESSES: Written comments should be addressed to David R. Kohler,
Regulatory Reform Initiative Team Leader, Office of General Counsel,
U.S. Small Business Administration, 409 3rd Street, S.W., Suite 13,
Washington, D.C. 20416, Attn. Part 107.
FOR FURTHER INFORMATION CONTACT: Leonard W. Fagan, Investment Division,
at (202) 205-6510.
SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a
Memorandum to all federal agencies, directing them to simplify their
regulations. In response to this directive, SBA has completed a page-
by-page, line-by-line review of all of its existing regulations to
determine which might be revised or eliminated. As a result of its
review of the regulations governing the SBIC program, SBA is proposing
to eliminate obsolete or redundant regulations, substantively revise
others, and reorganize all of Part 107 in a more readable format.
In this proposed rule, all sections are renumbered for purposes of
clarity and improved organization, and the regulations are organized
into the following new subparts:
(A) Introduction to Part 107.
(B) Definition of Terms Used in Part 107.
(C) Qualifying for an SBIC License. (D) Changes in Ownership,
Control, or Structure of Licensee; Transfer of License.
(E) Managing the Operations of a Licensee.
(F) Record keeping, Reporting, and Examination Requirements for
Licensees.
(G) Financing of Small Businesses by Licensees.
(H) Non-leveraged Licensees, Exceptions to the Regulations.
(I) SBA Financial Assistance for Licensees (Leverage).
(J) Licensee's Noncompliance with Terms of Leverage.
(K) Ending Operations as a Licensee.
(L) Miscellaneous.
For convenience, this preamble includes a chart listing the current
section numbers in Part 107 and matching them to either a corresponding
proposed regulation or indicating that the current section is deleted
in the proposed regulations. The chart also identifies the character of
any changes to the current regulations.
Following the chart is a two-part analysis of the proposed changes
to the SBIC regulations. Part I details regulations that would be
eliminated. Part II describes proposed modifications of the current
regulations and the policy reasons for them.
Part 107: Current and Proposed Section Numbers
----------------------------------------------------------------------------------------------------------------
Revised (non- Revised
Current section Proposed section substantive) (substantive) Deleted No change
----------------------------------------------------------------------------------------------------------------
107.1............................ 107.20.............. ............ ............. ............ X
107.2............................ 107.40.............. ............ X ............ ............
107.3............................ 107.50.............. ............ X ............ ............
107.4............................ 107.160............. X X ............ ............
107.101(a)....................... 107.130, 107.230(d). X X ............ ............
107.101(b)....................... 107.508............. X ............. ............ ............
107.101(c)....................... .................... ............ ............. X ............
107.101(d)....................... 107.200............. X ............. ............ ............
107.101(e)....................... 107.210............. X ............. ............ ............
107.101(f)....................... 107.230(e).......... X ............. ............ ............
107.101(g)....................... 107.503............. X ............. ............ ............
107.101(h)....................... 107.504............. X ............. ............ ............
107.101(i)....................... 107.710............. X ............. ............ ............
107.102(a)....................... 107.300............. ............ X ............ ............
107.102(b)....................... 107.400(b), X ............. ............ ............
107.680(b).
107.103.......................... .................... ............ ............. X ............
107.104.......................... 107.475............. X ............. ............ ............
107.105.......................... 107.1900............ X ............. ............ ............
107.210(a)-(d)................... 107.1100-107.1140... X ............. ............ ............
107.210(e)....................... 107.509............. X ............. ............ ............
[[Page 58531]]
107.210(f)(1)-(4)................ 107.1700............ ............ ............. ............ X
107.210(f)(5).................... 107.560............. X ............. ............ ............
107.210(f)(6).................... 107.550............. ............ X ............ ............
107.210(g)....................... 107.1710............ ............ ............. ............ X
107.210(h)....................... 107.1830-107.1850... X ............. ............ ............
107.210(i)....................... 107.1720............ ............ ............. ............ X
107.215.......................... 107.1200-107.1240... X ............. ............ ............
107.215(a)....................... 107.1200(c)......... ............ X ............ ............
107.215(f)(1).................... 107.1230(b)......... ............ X ............ ............
107.220(a)-(b)................... 107.1150(a)......... X ............. ............ ............
107.220(c)....................... 107.1150(b)......... X ............. ............ ............
107.220(d)....................... 107.1150(b)(2)...... ............ ............. ............ ............
107.220(e)....................... 107.1170............ X ............. ............ ............
107.230(a)....................... 107.1100(b)......... X ............. ............ ............
107.230(b)....................... 107.1400-107.1430... X ............. ............ ............
107.230(c)(1)-(5)................ 107.1160............ X ............. ............ ............
107.230(c)(3)(iii)............... 107.1160(f)......... ............ X ............ ............
107.230(c)(4)(iv)................ 107.1160(f)......... ............ X ............ ............
107.230(c)(6).................... 107.1170............ X ............. ............ ............
107.230(d)....................... 107.1100(c)......... X ............. ............ ............
107.230(e)....................... 107.1350............ X ............. ............ ............
107.230(f)....................... 107.1450............ X ............. ............ ............
107.241(a)....................... 107.220............. X ............. ............ ............
107.241(b)....................... 107.1500(b)(4)...... X ............. ............ ............
107.241(c)....................... 107.150............. ............ X ............ ............
107.241(d)....................... 107.140, 107.510.... ............ X ............ ............
107.241(e)....................... 107.570............. X ............. ............ ............
107.241(f)....................... 107.1505............ X ............. ............ ............
107.241(g)....................... 107.1500(e)......... X ............. ............ ............
107.241(h)....................... 107.1500(f)......... X ............. ............ ............
107.242.......................... 107.1510............ ............ X ............ ............
107.243.......................... 107.1520, 107.1540.. X ............. ............ ............
107.244.......................... 107.1530............ X ............. ............ ............
107.245(a)....................... 107.1540(a)......... X ............. ............ ............
107.245(b)....................... 107.1550............ X ............. ............ ............
107.245(c)....................... 107.1560............ X ............. ............ ............
107.245(d)....................... 107.1570............ X ............. ............ ............
107.245(e)....................... 107.1580............ X ............. ............ ............
107.246.......................... 107.1520(g)......... X ............. ............ ............
107.247.......................... 107.1590............ X ............. ............ ............
107.250.......................... 107.1600- 107.1680.. ............ ............. ............ X
107.260.......................... 107.1800............ X ............. ............ ............
107.261.......................... 107.1810............ X ............. ............ ............
107.262.......................... 107.1820............ X ............. ............ ............
107.263.......................... 107.1910............ ............ ............. ............ X
107.301(a)....................... 107.830............. ............ X ............ ............
107.301(b)....................... 107.845............. X ............. ............ ............
107.302.......................... 107.855............. ............ X ............ ............
107.303.......................... 107.740............. X ............. ............ ............
107.304(a)....................... 107.610, 107.700.... X ............. ............ ............
107.304(b)....................... 107.620............. X ............. ............ ............
107.304(c)....................... 107.630(e).......... X ............. ............ ............
107.305.......................... .................... ............ ............. X ............
107.320(a)....................... 107.800............. X ............. ............ ............
107.320(b)....................... 107.815(a).......... X ............. ............ ............
107.321.......................... 107.850............. ............ X ............ ............
107.322.......................... .................... ............ ............. X ............
107.401.......................... 107.820............. ............ X ............ ............
107.402(a)....................... 107.825............. X ............. ............ ............
107.402(b)-(c)................... .................... ............ ............. X ............
107.402(d)-(e)................... 107.860............. ............ X ............ ............
107.402(f)....................... 107.830(d)(3)....... X ............. ............ ............
107.402(g)....................... 107.855............. ............ X ............ ............
107.403(a)....................... .................... ............ ............. X ............
107.403(b)(1).................... 107.835............. ............ X ............ ............
107.403(b)(2).................... .................... ............ ............. X ............
107.403(b)(3).................... 107.828............. X ............. ............ ............
107.404.......................... 107.828............. ............ X ............ ............
107.501.......................... 107.900............. ............ X ............ ............
107.601.......................... 107.410-107.440..... X ............. ............ ............
[[Page 58532]]
107.601(e)....................... 107.1120(f)......... X ............. ............ ............
107.601(g)....................... .................... ............ ............. X ............
107.602.......................... 107.460............. ............ X ............ ............
107.603.......................... 107.450............. X ............. ............ ............
107.701.......................... 107.30.............. ............ ............. ............ X
107.702.......................... .................... ............ ............. X ............
107.703.......................... 107.500............. ............ ............. ............ X
107.704.......................... 107.501............. ............ X ............ ............
107.705(a)....................... 107.240............. X ............. ............ ............
107.705(b)....................... 107.250............. X ............. ............ ............
107.706.......................... 107.760............. X ............. ............ ............
107.707(b)....................... 107.828(d).......... X ............. ............ ............
107.708(a)&(b)................... 107.530............. X ............. ............ ............
107.708(c)....................... 107.1000............ X ............. ............ ............
107.709.......................... 107.510............. ............ X ............ ............
107.710.......................... 107.880............. ............ X ............ ............
107.711.......................... 107.750............. X ............. ............ ............
107.712.......................... 107.120............. X ............. ............ ............
107.801.......................... 107.865............. ............ X ............ ............
107.802.......................... 107.585............. X ............. ............ ............
107.803.......................... 107.470............. X ............. ............ ............
107.804.......................... 107.720(e).......... X ............. ............ ............
107.901(a)....................... 107.720(a).......... X ............. ............ ............
107.901(b)....................... 107.720(i).......... X ............. ............ ............
107.901(c)....................... 107.720(c).......... ............ X ............ ............
107.901(d)....................... 107.720(f).......... X ............. ............ ............
107.901(e)....................... 107.720(g).......... ............ X ............ ............
107.901(f)....................... 107.720(b).......... ............ X ............ ............
107.901(g)....................... 107.720(h).......... X ............. ............ ............
107.902.......................... 107.590............. ............ X ............ ............
107.903.......................... 107.730............. X ............. ............ ............
107.904.......................... 107.885............. X ............. ............ ............
107.905.......................... 107.502............. X ............. ............ ............
107.906.......................... 107.507............. X ............. ............ ............
107.1001......................... 107.690-107.692..... ............ X ............ ............
107.1002(a)-(b).................. 107.600............. ............ X ............ ............
107.1002(c)-(d).................. 107.660............. X ............. ............ ............
107.1002(e)...................... 107.630............. ............ X ............ ............
107.1003(a)...................... 107.506............. X ............. ............ ............
107.1003(b)...................... .................... ............ ............. X ............
107.1004......................... 107.680............. X ............. ............ ............
107.1101......................... 107.670............. X ............. ............ ............
107.1201......................... 107.1920............ X ............. ............ ............
107.1202......................... 107.1930............ X ............. ............ ............
----------------------------------------------------------------------------------------------------------------
Part I
Eliminated Sections
SBA proposes deletion of the following sections of the current
regulations. The effect of the proposed deletion and the reason for the
action is provided.
Current Sec. 107.103 would be deleted, eliminating the requirement
for giving public notice of license applications. Similarly,
Sec. 107.601(g) requiring public notice of an application for a change
in a proposed transfer of Control over a Licensee would be deleted. The
Agency has received few comments in the past on either type of
application and believes these requirements unnecessarily lengthen the
application process.
Current Sec. 107.305 would be deleted, eliminating the requirement
for Licensees to conduct a ``post closing review'' of each Financing of
a Small Business in order to assure that the proceeds were used for the
intended purposes. The requirement that Financing documents contain
certain standard provisions restricting the use of proceeds, and the
requirement for Licensees to report any unauthorized diversion of funds
to SBA, would also be eliminated. SBA believes these provisions are
burdensome because of the special documentation requirements imposed,
and essentially redundant because other regulations require an SBIC to
identify and monitor a Small Business's use of financing proceeds. In
particular, under proposed Sec. 107.620 (which would replace current
Sec. 107.304(b)), a Licensee must obtain information about a Small
Business's intended use of proceeds before extending any Financing and
must obtain updated financial information sufficient to verify the
actual use of proceeds.
Current Sec. 107.322, which allows an SBIC making an equity
investment to place restrictions on current and future indebtedness of
the financed Small Business, would be deleted. This deletion would not
restrict the rights of Licensees in any way, since the practices
described are specifically permitted under the Act. See 15 U.S.C.
section 684(b).
[[Page 58533]]
Part II
1. Subpart A--Introduction to Part 107
As part of its effort to make the regulations more readable, SBA
has used ``you'' to refer to a Licensee or a license applicant, as
appropriate, throughout Part 107. Proposed Sec. 107.40(c) explains this
convention.
2. Subpart B--Definition of Terms Used in Part 107
SBA proposes revising the following definitions currently found in
Sec. 107.3 of the regulations.
a. ``Close Relative'' and ``Secondary Relative''
The definition of ``Close Relative'' would be narrowed to cover
only immediate relatives (spouses, along with parents, children,
brothers and sisters, and their spouses). Other relatives, such as
grandparents and grandchildren, aunts, uncles, and first cousins, would
be defined as ``Secondary Relatives.'' The two separate categories have
been proposed so that a distinction between them can be made in the
definition of ``Associate'', which is discussed below. The effect of
the change is to limit the circumstances under which concerns with only
a peripheral relationship to a Licensee, through a Secondary Relative,
become its Associates.
b. ``Associate''
SBA proposes two modifications to the definition of ``Associate'',
a key term that appears extensively in the conflict of interest rules
(proposed Sec. 107.730), and in various other regulations including
proposed Secs. 107.150 (management and ownership diversity
requirement), 107.865 (Control of Small Businesses), and 107.885
(disposition of assets to Licensee's Associate).
Proposed paragraphs (h) and (i) specify the conditions under which
an Associate's involvement in a concern, either through positions held
or ownership interests, causes that concern to become an Associate of a
Licensee. The two paragraphs are comparable to paragraph (f) of the
current definition, with the following exceptions:
First, under paragraph (h), the presence of an Associate as a
director of a concern would no longer cause the concern to become an
Associate of the Licensee. SBA believes that an Associate functioning
as an outside director is unlikely to create a conflict of interest,
and often can provide insight into a company that a Licensee may find
useful.
Second, under paragraph (i), a concern would not become an
Associate of a Licensee because of its relationship with a Secondary
Relative, unless that relative had a majority equity interest in the
concern (or controlled it through other means), either alone or with
other Associates. For example, a concern in which the uncle of the
president of the Licensee had a 10 percent equity interest would not be
an Associate of the Licensee (as it is under the current definition).
However, if the uncle were the majority owner of the concern, it would
be an Associate. SBA has proposed this change to exclude from the
definition of Associate those concerns that are only marginally related
to the Licensee.
c. ``Control Person''
The definition of ``Control Person'' was developed in part to
identify persons that might control, or at least influence, a
Partnership Licensee's general partner and thus the Licensee itself,
even though they themselves might have no direct relationship with the
Licensee. This designation is important for regulatory purposes because
Control Persons are considered Associates of the Licensee.
A portion of the current definition identifies as a Control Person
(1) any investor that has at least a 10 percent ownership interest in a
Licensee's general partner and participates in the general partner's
investment decisions concerning the Licensee; or (2) any passive
investor that has at least a 40 percent ownership interest in a
Licensee's general partner.
The proposed rule would make the following change to the definition
of Control Person:
Under paragraphs (c) and (d), the same criteria that cause an
investor in a Licensee's general partner to become a Control Person
would also be applied to a direct investor in the Licensee. For
example, under paragraph (d), a 40 percent limited partner in the
Licensee's general partner would be a Control Person, and so would a 40
percent limited partner in the Licensee itself. This proposal reflects
SBA's belief that a limited partner's potential influence on a
partnership Licensee is no different from that of a limited partner
with an equivalent ownership interest in a partnership serving as the
Licensee's general partner.
d. ``Equity Capital Investment''
A Licensee with Participating Securities must make ``Equity Capital
Investments'' in an amount at least equal to the total amount of
Participating Securities issued. In addition, the amount of Equity
Capital Investments in its portfolio at the end of each fiscal year
must remain at least equal to the amount of its outstanding
Participating Securities. SBA is not proposing any substantive change
in the definition of Equity Capital Investments, but is proposing to
clarify that an investment classified as a Debt Security is not
precluded from qualifying as an Equity Capital Investment.
There are two general categories of Debt Securities that may
qualify as Equity Capital Investments. First, the definition of Equity
Capital Investments specifically includes ``subordinated debt with
equity features if such debt provides only for interest payments
contingent upon and limited to the extent of earnings.'' Such debt must
also be unsecured and non-amortizing in order to qualify.
Second, certain equity interests may qualify as Equity Capital
Investments even if they have covenants and/or redemption provisions
that require them to be classified as Debt Securities for regulatory
purposes. Such an investment may qualify if a Licensee's ability to
recover its investment and/or realize returns is subject to essentially
the same conditions that apply to a qualifying subordinated debt
instrument. For example, a Licensee could purchase the preferred stock
of a Small Business, with a provision requiring the issuer to redeem it
after five years at its original cost plus any accumulated unpaid
dividends. Because of the mandatory redemption provision, the
investment would be treated as a Debt Security under proposed
Sec. 107.800. However, as long as dividends were payable only from
retained earnings, the investment would qualify as an Equity Capital
Investment.
e. ``Financing''
In the current regulations, ``Financings'' are defined to include
commitments made to Small Businesses in addition to amounts actually
invested and amounts guaranteed. The proposed definition would exclude
such commitments. SBA is proposing this change to make the definition
of Financing more objective, and to eliminate the regulatory compliance
issues that sometimes arise when Licensees keep making commitments
without actually making investments for an extended period of time.
f. ``Institutional Investor''
The ``Institutional Investor'' definition identifies those
investors in a Licensee whose unfunded binding commitments may be
included in the Licensee's Private Capital. Institutional Investors may
be entities or individuals. SBA proposes three non-substantive changes
[[Page 58534]]
to this definition which are intended to clarify the Agency's
interpretation:
First, proposed paragraph (a)(6), which permits a qualified
employee benefit or pension plan to be an Institutional Investor, would
clarify that 401(k) plans are excluded. This treatment is consistent
with SBA's interpretation of the current regulation.
Second, proposed paragraph (a)(10) would clarify the circumstances
under which an entity that invests the funds of others can qualify as
an Institutional Investor. The purpose of the clarification is to
reflect more precisely the original intent of this paragraph, which is
to allow a ``fund of funds'' to qualify as an Institutional Investor if
it is investing on behalf of other entities that also meet the
Institutional Investor criteria.
Third, under proposed paragraph (b)(1), an individual with net
worth of less than $2 million would qualify as an Institutional
Investor only if his/her commitment were backed by a letter of credit
from a State or National bank acceptable to SBA. This is a
clarification of the current definition, which requires only that the
letter of credit be issued by a ``qualified Institutional Investor.''
SBA has proposed the new language to minimize confusion as to the
meaning of a ``qualified'' Institutional Investor.
f. ``Lending Institution''
The definition of ``Lending Institution'' is used in proposed
Sec. 107.730 (comparable to current Sec. 107.903), which provides an
exemption from the conflict of interest rules for certain transactions
involving Lending Institutions that are Associates of the Licensee.
Under the current definition, a Lending Institution must be an entity
subject to federal or state regulation, such as a bank or savings and
loan association. SBA recognizes, however, that other types of entities
now extend credit in a manner similar to banks. Therefore, SBA proposes
that the term ``Lending Institution'' be expanded to include
corporations engaged in activities similar to those performed by
commercial lenders, if they have assets in excess of $500 million and
their shares are publicly traded and listed on a recognized stock
exchange or NASDAQ. SBA believes that such entities, although not
regulated in the same manner as banks, have sufficient oversight under
federal securities laws.
g. ``Disadvantaged Business''
SBA is proposing to change the defined term ``Disadvantaged
Concern'' to ``Disadvantaged Business''; however, the Agency is not
proposing any change in the definition itself at this time. SBA is
reviewing the definition as part of an examination of various issues
affecting the SSBIC program, and intends to work with the SSBIC
industry to develop a revised definition which will be proposed at a
later date.
3. Subpart C--Qualifying for an SBIC License
a. Permitted Forms of Organization for Licensees
Proposed Secs. 107.100 and 107.110 describe the permitted forms of
organization for Section 301(c) and Section 301(d) Licensees,
respectively; these provisions are currently found in Sec. 107.3. The
proposed sections would delete limited liability companies as a
permitted form of organization because this form is not currently
authorized by the Act. SBA plans to seek a legislative change that
would permit SBICs to organize as limited liability companies.
b. 1940 Act and 1980 Act Companies
Under proposed Sec. 107.115, SBA would license 1940 and 1980 Act
Companies only if they do not elect to be taxed as regulated investment
companies under section 851 of the Internal Revenue Code. The same
criteria would be applied to existing Licensees seeking to convert to
1940 Act or 1980 Act Companies. This reflects current program policy in
the licensing area, and is being formalized because the tax code
conflicts with the distribution regulations applicable to Participating
Securities as mandated by the Act, and with SBIC program accounting
guidelines that limit other profit distributions to the amount of a
Licensee's Retained Earnings Available for Distribution. Such
distribution regulations are designed to reduce risk to SBA by
protecting its investment or creditor position.
c. SBIC management
Proposed Sec. 107.130 would continue the general requirement in
current Sec. 107.101(a) that each Licensee must have qualified
management approved by SBA. However, two changes are proposed. First,
the specific requirement that the manager be ``available to the public
during normal business hours'' would be eliminated, giving Licensees
greater flexibility in their management arrangements. Second, each
Licensee would be required to designate at least one individual as the
official responsible for contact with SBA. This change would allow SBA
to address communications to a specific person, who would be
responsible for routing information to the appropriate persons within
the Licensee's organization.
d. SBA approval of initial Management Expenses
Under proposed Sec. 107.140, all new license applicants would be
required to obtain SBA approval of their initial Management Expenses.
Currently, SBA approves initial Management Expenses only if an
applicant plans to issue Participating Securities, or if an applicant
plans to issue Debentures and utilizes an Investment Advisor/Manager.
Otherwise, SBA approves only management compensation. With the proposed
change, SBA seeks to have consistency in controlling excessive expenses
of Licensees, regardless of management structure or the type of
Leverage an applicant expects to issue.
e. Management and Ownership Diversity
Proposed Sec. 107.150 would require all license applicants planning
to obtain Leverage to have diversity between management and ownership.
This represents an expansion of current Sec. 107.241(c), which requires
such diversity only for applicants that plan to issue Participating
Securities. SBA's intent in broadening the diversity requirement is for
all new leveraged Licensees to have investors who are independent of
management and who have a substantial stake in the Licensee's financial
performance. The Agency believes that the presence of such investors
will reduce the potential for self-dealing and help to assure that
Licensees are operated with the objective of optimizing returns and
protecting the interests of all investors. Under current
Sec. 107.241(c), the diversity criteria may be satisfied either by a
Licensee or by its ``ultimate parent'' (an entity that has an interest
in the Licensee's Regulatory Capital of more than 50 percent). Proposed
Sec. 107.150 would not change the diversity criteria, but would require
them to be satisfied by the Licensee itself unless SBA agreed to accept
diversity achieved at the parent level as a substitute. The Agency
believes that it must have this discretion in order to assure that a
Licensee has genuine diversity between management and ownership, as
opposed to an ownership structure that provides ``technical'' diversity
but does not satisfy the intent of the regulation.
Finally, under proposed Sec. 107.150, any SBIC that was required to
have diversity in order to be licensed would also have to maintain
diversity as long as it had outstanding Leverage or Earmarked Assets in
its portfolio. A Licensee that failed to maintain
[[Page 58535]]
diversity would have to re-establish it within six months.
f. Special Rules for Partnership Licensees
Proposed Sec. 107.160(b) would allow an Entity General Partner to
be organized for the sole purpose of serving as the general partner of
one or more Licensees. Under the current regulation (Sec. 107.4), an
entity may serve as the general partner of only one Licensee. The
proposed change would reduce the expense and administrative burden of
general partners that Control more than one company in the SBIC
program.
g. Minimum Capital Requirements
Proposed Sec. 107.220 would require any company licensed after the
regulation is finalized to have Regulatory Capital of at least
$5,000,000 in order to apply for Debentures, unless it demonstrates to
SBA's satisfaction that it can be financially viable over the long term
with a lower amount. A review of the financial performance of Licensees
supports the conclusion that Regulatory Capital below $5 million
significantly reduces the likelihood of profitable operation over the
long term. Companies licensed before the effective date of the final
rule would be grandfathered under proposed Secs. 107.210(a) or (b), or
Sec. 107.220(c), depending on the date they were licensed.
h. Qualified Non-private Funds
Proposed Sec. 107.230(d) would broaden the definition of
``qualified non-private funds'' which may be included in the Private
Capital of Section 301(d) Licensees. Currently, a nonprofit entity that
has received state or local government grant funds may invest only the
income derived from such grant funds in a Section 301(d) Licensee. The
proposed change would allow a nonprofit entity to invest the principal
of the grant funds in a Section 301(d) Licensee as long as: (1) the
nonprofit entity exercises discretionary authority over such funds, and
(2) SBA determines that such funds have taken on a private character
and that the nonprofit entity is not simply acting as a conduit for
government funds.
i. License Application Fees
Proposed Sec. 107.300 would raise the license application fee in
order to reflect the true costs of processing applications and to
reimburse SBA for such costs. In accordance with applicable statutory
provisions, the Administration has taken into consideration direct and
indirect costs to SBA of necessary services performed, value to the
recipients, the public policy interest served, and other pertinent
factors involved. The base fee would be raised from $5,000 to $10,000
for all applicants. There would be a surcharge of $5,000 for a
Partnership applicant and an additional $5,000 surcharge for an
applicant planning to issue Participating Securities. Thus, a
Partnership applicant that intends to issue Participating Securities
would pay a fee of $20,000.
4. Subpart D--Changes in Ownership, Control or Structure of Licensee;
Transfer of License
a. Fees for Transfer of Control or Change in Form of Organization
Proposed Sec. 107.410 would raise the processing fee for an
application to transfer Control of a Licensee from $5,000 to $10,000.
The fee would be the same as the base amount charged for a new license
application, as discussed under subpart C. Proposed Sec. 107.470 would
require a $5,000 processing fee for a change in a Licensee's form of
organization (from a corporation to a partnership, or vice versa) which
does not involve a change of Control.
b. Licensees under Common Control
Under current Sec. 107.602, SBA generally must approve common
management or ownership of two or more Licensees. Section 301(d)
Licensees, however, are exempt from this requirement. Proposed
Sec. 107.460(b) would narrow the exemption, limiting it to a Section
301(d) Licensee and its parent Section 301(c) Licensee. SBA considers
this to be an issue of safety and soundness which is equally applicable
to Section 301(c) and Section 301(d) Licensees.
5. Subpart E--Managing the Operations of a Licensee
a. Identification as a Licensee
Under current Sec. 107.704, a Licensee must identify itself to the
public as ``A Federal licensee under the Small Business Investment Act
of 1958'' on all written communications. Proposed Sec. 107.501 would
limit this requirement only to Financing documents (commitment letters,
closing documents, etc.), where SBA believes the requirement is most
meaningful. This change would accommodate the increasing number of
Licensees that utilize Investment Advisor/Managers, by allowing such
managers to handle correspondence on behalf of Licensees using their
own letterhead.
b. Responsibility for Licensee's Valuations
Current Sec. 107.101(g)(1) states that a Licensee's board of
directors or general partners shall have ``sole responsibility'' for
valuing the Licensee's Loans and Investments. This regulation was not
intended to mean that SBA would abandon its obligation as a regulatory
agency to exercise oversight over this critical area of a Licensee's
operations. Therefore, proposed Sec. 107.503(c) would clarify SBA's
original intention by stating that the board of directors or general
partners are solely responsible for using the Licensee's approved
valuation policy to prepare the Licensee's valuations of its Loans and
Investments for submission to SBA. The Agency would reserve the right
to review or independently establish valuations.
c. Facsimile Receiving Capability
Proposed Sec. 107.505 would require Licensees to be capable of
receiving fax messages 24 hours a day. In order to make the most
efficient use of limited resources, most communications from SBA to
SBICs are done at night through broadcast faxes.
d. Internal Control
Current Sec. 107.100 contains many specific requirements concerning
internal control procedures and the safeguarding of a Licensee's
assets. Under proposed Sec. 107.506(a), the requirements for dual
control over cash disbursements and securities (or alternative bond
coverage) would be eliminated. The general requirement that Licensees
adopt a plan to safeguard their assets and maintain an adequate
internal control environment would remain. SBA believes that proper
safeguards and controls are essential if Licensees are to operate
soundly and profitably, but that Licensees themselves are in the best
position to determine the appropriate procedures.
e. SBA Approval of Contract With Investment Adviser/Manager
Proposed Sec. 107.510 would require SBA's prior approval of a
contract with an Investment Adviser/Manager only for Licensees that
have Leverage or plan to seek Leverage. Prior approval is currently
required for all Licensees. SBA considers this provision to be
unnecessary when the Agency has no financial interest to protect.
Although it is not addressed in the regulations, SBA's current
policy concerning a Licensee's contract with an Investment Adviser/
Manager requires that such contracts contain a provision allowing for
termination, without
[[Page 58536]]
penalty to the SBIC, on not more than 60 days notice (see SBA Policy
and Procedural Release #2001). SBA intends to eliminate this
requirement because it believes that such a provision is a matter for
negotiation between the two parties.
f. Management Expenses
Current Sec. 107.241(d) requires Licensees with Participating
Securities or Earmarked Assets to have their Management Expenses
approved by SBA at the time of licensing and before any proposed
increases in such expenses. Proposed Sec. 107.520, together with
proposed Sec. 107.140 (discussed above), would extend this requirement
to Licensees with any type of outstanding Leverage. Under proposed
Sec. 107.520(c), a leveraged Licensee whose Management Expenses had not
already been approved by SBA would be required to submit such expenses
for approval with its SBA Form 468 for its first fiscal year ending
after the effective date of the final rule. SBA believes that this
review of the expenses of leveraged Licensees is consistent with its
obligation to ensure the safety and soundness of the SBIC program.
In evaluating the expenses of Licensees, particularly those that
have been in the program for some time, SBA does not intend to impose
any specific expense ceiling or formula. Rather, the Agency will
compare Licensees with similar profiles to determine whether a Licensee
is out of line with its peers in terms of its operating costs.
SBA is also proposing a non-substantive change in the definition of
Management Expenses. This proposed rule would delete language from the
definition (currently found in Sec. 107.3) which states that Management
Expenses do not include ``the cost of services provided by any
Associate of the Licensee which are not part of the normal process of
making and monitoring venture capital financings.'' This language is
found in the Act and SBA does not intend to change the meaning of
Management Expenses as a result of the deletion. Rather, SBA believes
that this exclusion is encompassed in proposed Sec. 107.520(b), which
excludes from Management Expenses the cost of services provided by
``specialized outside consultants, outside lawyers and independent
public accountants, if they perform services not generally performed by
a venture capital company.'' As SBA interprets this provision,
``outside'' consultants and lawyers may be Associates of the Licensee,
so it is not necessary to include a separate provision dealing with
Associates in the regulations.
g. Limitations on Third-party Debt
Under current Sec. 107.210(f)(6), Licensees with outstanding
Leverage must obtain SBA's prior written approval before incurring
secured third-party debt. Under proposed Sec. 107.550(a), expansion of
the scope of a security interest or lien associated with existing debt
would also require SBA approval. This proposal is intended to address
SBA's concern about situations in which SBICs have given blanket liens
on all their assets to third-party creditors, even when the amount of
money borrowed is very small by comparison.
A similar concern underlies proposed Sec. 107.550(c), which states
specifically that SBA would look unfavorably upon any request involving
a blanket lien on all assets, or a security interest in the Licensee's
unfunded investor commitments in excess of 1.25 times the amount to be
borrowed. Under proposed Sec. 107.550(d), proposed borrowings would
qualify for expedited approval by SBA only if the security interest
given were limited either to the assets acquired with the borrowed
funds or to an asset coverage ratio of no more than 1.25 to 1.
h. Activity Requirement
Proposed Sec. 107.590 would revise the test used to determine
whether an SBIC is actively making Financings. The current test is
based upon the amount of Financings made over an 18-month period
relative to a Licensee's average idle funds balance for the period.
With the change in the Act made in 1992 that recognized commitments
from Institutional Investors as part of a Licensee's Regulatory
Capital, along with associated ``lockstep'' takedowns of Leverage, most
new SBICs take down funds only when needed, and make distributions to
their investors as they realize income or gains on their portfolios.
Thus, very little idle funds would be maintained by Licensees.
Proposed Sec. 107.590(a) would institute a two-part activity test.
In order to be considered active, a Licensee could have no more than 20
percent of its total assets in idle funds at the end of its fiscal
year, and must have invested an amount equal to at least 20 percent of
its Regulatory Capital over the previous 18 months. In Sec. 107.590(b),
there would be recognized exemptions to the activity tests, taking into
account the chronological unevenness of investing and profit-taking by
SBICs. For example, a Licensee may have excess idle funds at the end of
its fiscal year because it recently received Leverage, raised
additional capital, or liquidated an investment.
Under proposed Sec. 107.590(c), the activity requirements would be
inapplicable to any Licensee that has filed a ``Wind-up Plan'' approved
by SBA. Such a Licensee would no longer be making investments other
than follow-on Financings of existing portfolio companies. This new
provision accommodates the normal operating pattern of a limited-life
investment company.
Proposed Sec. 107.590(d) would provide a phase-in period for the
new activity requirements above. During such period, any Licensee that
is in compliance with the current regulation would be considered
active.
The activity requirements would also be affected by the proposed
change in the definition of ``Financing'' that is discussed under
Subpart A. As a result of this change, Licensees would no longer be
able to meet the activity test by making commitments to invest in Small
Businesses; only actual investments (and guarantees) would count.
6. Subpart F--Record keeping, Reporting, and Examination Requirements
for Licensees
a. Record Keeping Requirements
For Licensees with more than one business location, proposed
Sec. 107.600(b) would clarify that records relating to an individual
Financing transaction may be kept at the branch with primary
responsibility for the transaction. For all Licensees, paragraph (b)(3)
would clarify that a Licensee's securities may be held in a safe
deposit box or by a licensed securities broker, provided the securities
are covered by the broker's insurance.
Current Sec. 107.1002(b)(1) requires a Licensee to preserve certain
business and accounting records for a period of 20 years. Proposed
Sec. 107.600(c)(1) would reduce the period to 15 years for a
corporation or two years beyond the date of liquidation for a
partnership. SBA believes that shorter time periods are adequate to
protect the Agency's interests.
Proposed Sec. 107.610 includes two new documentation requirements
for Loans and Investments. Paragraph (c) would implement a recent
change in the Act by requiring a Section 301(d) Licensee to have a
completed ``Financing Eligibility Statement'' (SBA Form 1941) for each
Financing, certifying that the concern being financed is a
Disadvantaged Business. Paragraph (d) would require each concern being
financed to certify its intended use of the financing
[[Page 58537]]
proceeds. This change is intended to make it easier for Licensees to
satisfy Sec. 107.620 (the equivalent of current Sec. 107.304(b)), which
requires that information be obtained regarding a Small Business's
intended use of Financing proceeds.
b. Insurance Requirement for Independent Public Accountants
Proposed Sec. 107.630(a)(2) would require all accountants who
perform audits of SBICs to carry errors and omissions insurance or be
self-insured with a net worth acceptable to SBA. The Agency is
proposing this change because, in a number of instances, substandard
audits have resulted in a misleading presentation of a Licensee's
financial condition. The change would create a source of recovery for
monetary damages in the event SBA or the SBIC were injured as a result
of an auditor's negligence. SBA recognizes that the regulation, as
proposed, does not provide adequate guidance, particularly as far as
the amounts of insurance or net worth that would be ``acceptable to
SBA.'' The Agency strongly encourages Licensees, accountants, and other
interested parties to submit any suggestions on this topic.
c. SBA Access to Accountant's Work Papers
Proposed Sec. 107.691 would require the agreement between a
Licensee and the independent public accountant performing its annual
audit to allow SBA personnel, including examiners, to have access to
the accountant's work papers. Although SBA does not expect to review
accountants' work papers on a routine basis, the Agency believes that
it needs such access to carry out its regulatory oversight function.
d. Examination Fees
Proposed Sec. 107.692(a) would increase the examination fees
charged to SBICs. Fees would continue to be assessed based on total
assets of the Licensee, but at higher rates as shown in the table
included in the proposed rule. The proposed fee schedule was designed
to produce total revenue sufficient to cover the current direct costs
to SBA of conducting examinations. The change would help to sustain the
examination function, which is a key element in maintaining the
integrity of the SBIC program.
Proposed Sec. 107.692 would reflect inflation and the actual costs
of delay to SBA, by increasing from $250 to $500 per day the fee
imposed if an examination is delayed due to a Licensee's lack of
cooperation or based on the condition of its records. Licensees are
required to cooperate with SBA's examination; Licensees are also
required to maintain their records in a reasonable and businesslike
manner. This section is designed as an incentive to SBICs to cooperate
with the examination and to compensate SBA for costs incurred if they
do not.
7. Subpart G--Financing of Small Businesses by Licensees
a. Financings of Smaller Businesses
Although proposed Sec. 107.710 contains approximately the same
wording as current Sec. 107.101(i), the requirement to finance Smaller
Businesses would be affected by the proposed change in the definition
of ``Financing.'' As discussed under Subpart A, this term would no
longer include commitments to make investments. Thus, only actual
loans, investments, or guarantees would be counted when measuring the
amount of ``Financing'' extended to Smaller Businesses.
Another change is proposed in Sec. 107.710(e), which deals with
Licensees that have not achieved the required percentage of Financings
to Smaller Businesses. The current regulation states that such
Licensees may provide Financing only to Smaller Businesses until they
are in compliance. The proposed rule would allow greater flexibility,
requiring only that such Licensees reach the required percentage by the
end of their next fiscal year.
b. Passive Businesses
Existing Sec. 107.901(f) prohibits the Financing of passive
businesses; however, the term ``passive'' is inadequately defined.
Proposed Sec. 107.720(b) would provide more specific criteria. For
example, the proposed rule would clarify that a business is passive if
its employees are not making the day to day operating decisions of the
company, or if it passes substantially all of the Financing proceeds
through to another entity. The proposed changes are consistent with the
public purpose of the SBIC program, which is to provide capital to
operating small businesses to stimulate the economy and create jobs.
c. Real Estate Investments
Financing of most real estate leasing and development activities is
prohibited or restricted under current Secs. 107.901(c) and 107.101(c)
since SBA considers that the Section 504 program is specifically
designed to finance real estate. In addition, most real estate
investments tend to be ``project''-oriented rather than the financing
of an on-going long-term business. Proposed Sec. 107.720(c) would
recognize these realities by narrowing the range of permitted real
estate-related financing. Financing of real estate subdividers and
developers (who subdivide and improve building lots), and of
``operative builders'' (who build homes or other buildings) would be
prohibited. Currently, these activities are permitted, though only on a
limited basis (see current Sec. 107.101(c)). The section would also
prohibit financing of businesses that buy real estate for the purpose
of improving and reselling it, an activity currently permitted under
Sec. 107.901(c)(2)(ii).
However, the Financing of the acquisition of real estate by an
operating concern for its own use would still be permitted, and the
restrictions in current Sec. 107.101(c) that limit investment in
companies that operate hotels and motels would be removed.
d. Project Financing
Proposed Sec. 107.720(d) would prohibit project financing (such as
dams, oil and gas wells, and motion pictures). Although this
prohibition does not appear in the current regulations, it has been in
effect as a matter of policy for more than ten years, reflecting SBA's
view that project financing is essentially short-term in nature and is
inconsistent with the goals of the Act. An investment is considered
project financing if the assets of the business are reduced as the life
of the business progresses (as opposed to a continuing business that
regularly replenishes its inventory, for example) and the business
provides a stream of cash payments to its investors or lenders as
assets are sold (for example, payments made as oil is pumped from a
well and sold). An investment is also considered project financing if
its major purpose is to fund production of a specific item (such as a
motion picture), over a limited period of time, by a company whose
major activity consists of such production. The company need not have
been formed for the specific purpose of carrying out the project,
although this is often the case.
e. Foreign Investment
The current Sec. 107.901(e) requires at least 51 percent of the
``assets and activities'' of a Financed Small Business to remain within
the United States. The term ``assets and activities'' has never had a
definitive interpretation. Proposed Sec. 107.720(g) would clarify the
restriction on foreign investment by requiring at least 60 percent of
the employees and at least 60 percent of the tangible assets to remain
within the United States for one year after the Financing unless the
SBIC can demonstrate, to SBA's satisfaction,
[[Page 58538]]
that the proceeds were used for a specific domestic purpose.
f. Conflicts of Interest
Proposed Sec. 107.730(a)(4) would permit a Licensee to provide
financing that the Small Business will use to repay an obligation to a
Lending Institution that is an Associate of the Licensee, provided the
obligation was incurred in the normal course of business. The current
requirement that such obligations be short-term would be removed, in
order to give Small Businesses greater flexibility in meeting their
financing needs.
Proposed Sec. 107.730(d) would replace the current rules on ``Joint
Financings with Associates'' (which cover investments by a Licensee and
its Associate that take place no more than 6 months apart) with new
provisions on ``Financings with Associates'' (which cover all
situations in which a Licensee and its Associate finance the same Small
Business, regardless of when each party invests). The basic requirement
for such Financings is that a Licensee be able to demonstrate that the
terms and conditions are fair and equitable to the Licensee (paragraph
(d)(2)). This reflects SBA's fundamental concern that a Licensee not be
disadvantaged relative to its Associates when these parties co-invest.
The proposed regulation would also establish certain categories of
Financings with Associates that would require SBA's prior written
approval (paragraph (d)(1)), and other categories that would be exempt
from such requirement (paragraph (d)(3)).
In addition to the specific changes proposed, Sec. 107.730 would
also be affected throughout by the proposed changes in the definition
of ``Associate'' that are discussed under Subpart A.
g. Overline Limitation
Under current Sec. 107.303(c), a Licensee may increase its
``overline'' limit (the maximum amount it is permitted to invest in any
one company) if it has net unrealized appreciation on ``marketable
securities.'' Proposed Sec. 107.740 contains the same rule, but would
replace the term ``marketable'' with the very similar defined term
``Publicly Traded and Marketable'' used elsewhere in the regulations.
The only effect of the change would be on the number of market makers
that a non-listed stock must have in order to qualify (two under the
proposed rule, compared with three under the current rule).
h. Definition of ``Equity Securities''
Under proposed Sec. 107.800(b), an apparent equity financing would
be considered Debt Financing for regulatory purposes if the Financing
agreement included covenants or compliance provisions with remedies
typical of debt, such as acceleration. This change is consistent with
current SBA policy, under which the Agency looks to the substance of an
investment rather than its form in order to determine whether it is
debt disguised as equity.
Under the current regulation, securities that the Small Business
must redeem at a fixed price are classified as Debt Securities rather
than equity. Under proposed Sec. 107.800(b) in combination with
Sec. 107.850(b), this provision would remain in effect with one
clarification: If the fixed redemption price is no higher than the
amount the Licensee originally paid for the security, then the security
would still qualify as an Equity Security.
As used in proposed Sec. 107.850(b), ``redemption price'' includes
all amounts that the Small Business is required to pay at redemption,
including accumulated dividends. Thus, if a Licensee purchased the
preferred stock of a Small Business for $500,000, and the Financing
agreement required the Small Business to pay $500,000 at the time of
redemption, the Licensee's investment would be considered an Equity
Security. However, if the required payment at the time of redemption
was $500,000 plus cumulative dividends of 8 percent per year, the
investment would be considered a Debt Security.
i. Options Received from Small Businesses
Proposed Sec. 107.815(a) would require a Licensee to pay some
consideration (even if only $1) for any options acquired from a Small
Business, in order to establish a basis for such options.
Proposed Sec. 107.815(b) would restrict the ability of a Licensee's
employees, officers, directors, or general partners to receive options
in a Small Business financed by the Licensee. Such persons could
receive options only if they participated in the Financing on the same
terms and conditions as the Licensee or if approved by SBA. The Agency
believes that officers and partners of SBICs should share in the
overall profits of an SBIC, but should not have special beneficial side
deals.
j. Guarantees of the Obligations of Small Businesses
Proposed Sec. 107.820 would delete two provisions from the current
rules on guarantees. Current Sec. 107.401(a)(6), which permits a
Licensee to guarantee a Small Business's obligation to an Associate if
approved by SBA under the rules governing conflicts of interest, would
be eliminated. This type of arrangement is covered in the conflict of
interest provisions and does not need to be repeated in this section.
The second proposed change is that guarantees would no longer be
limited to 100 percent of Regulatory Capital. Guarantees are considered
Financings and are included in a Licensee's overline computation, since
the risk to the Licensee is the same whether a cash investment is made
or whether a guarantee is utilized. Thus, SBA should not have a
preference for one type of Financing over another, so long as a Small
Business benefits.
k. Fees Paid to Associate Underwriters
Proposed Sec. 107.828(c) would allow an underwriter who is an
Associate of a Licensee to receive fees from Licensees that purchase
securities in an initial public offering, including the Licensee with
which it has the Associate relationship. However, if the underwriter
and the Licensee are Associates, the total fees or charges paid by the
Licensee may not exceed the total of the application and closing fees
and reimbursable expenses permitted by proposed Sec. 107.860. The
current regulations prohibit an underwriter who is an Associate of a
Licensee from receiving fees from any Licensee, and thus effectively
requires Licensees to purchase from non-Associate underwriters. This
proposed regulation recognizes the risks involved in underwriting and
allows an underwriter to be compensated.
l. Minimum Term of Financings
Under proposed Sec. 107.830(b), the entire portfolio of a Section
301(d) Licensee could consist of Financings with a minimum term of four
years instead of five. Currently, such Financings are limited to 50
percent of a Section 301(d) Licensee's portfolio. This change is
intended to give Section 301(d) Licensees greater flexibility in
structuring their Financings.
Currently, short-term Financings permitted under Sec. 107.403 are
limited, in the aggregate, to 20 percent of a Licensee's ``total
adjusted assets'' (total assets minus outstanding Leverage and current
liabilities). Proposed Sec. 107.835 would remove this limitation for
most types of permitted short-term Financings. For short-term
Financings of changes of ownership in a Small Business, the limit would
be set at 20 percent of total Loans and Investments (at cost). SBA is
proposing these changes to give Licensees greater flexibility to
respond to the needs of
[[Page 58539]]
Small Businesses. However, Licensees should bear in mind that the
purpose of the SBIC program, as stated in the Act, is to provide equity
capital and long-term loan funds to Small Businesses. Thus, Licensees
should not plan to have the bulk of their portfolios in short-term
investments; to do so would constitute engaging in activities not
contemplated by the Act.
m. Amortization of Loan Principal
Proposed Sec. 107.845 would establish uniform amortization rules
for all Loans and Debt Securities. This change would eliminate the
accelerated amortization of principal permitted, to a limited extent,
under current Sec. 107.403(b)(2). SBA considers straight-line
amortization to be fair to both Licensees and Small Businesses,
particularly when coupled with the right of Small Businesses to prepay
loans voluntarily at any time.
n. Redemption of Equity Securities
Proposed Sec. 107.850 would provide certain exceptions to the
general rule that Equity Securities cannot be redeemed in less than
five years. Earlier redemption would be allowed if the Small Business
makes a public offering, incurs a change of management or control,
files for bankruptcy protection, or materially breaches the Financing
agreement. In addition, when a Licensee makes a follow-on investment,
the minimum redemption period would be counted from the date of the
first closing, so that the follow-on Financing could be redeemed in
less than five years.
o. Cost of Money
Under proposed Sec. 107.855, SBA's Cost of Money rules would be
substantively revised in some respects and clarified throughout.
Paragraph (c) would raise the minimum Cost of Money ceiling for a Loan
from 15 percent to 19 percent, allowing an SBIC that does not receive
any equity interest in a firm to charge a higher interest rate
commensurate with risk. The minimum ceiling for a Debt Security would
remain unchanged at 14 percent.
Proposed Sec. 107.855(d) would allow Licensees to recalculate their
``Cost of Capital'' quarterly rather than annually. The proposed term
``Cost of Capital'' replaces the current unwieldy term ``Weighted
Average Cost of Qualified Borrowing.'' Paragraph (e) would reduce the
paperwork burden by eliminating the current requirement for Licensees
to submit their Cost of Capital computations to SBA. However, SBICs
would have to document such computations and make them available for
SBA's review, upon request.
SBA is aware that many private firms do not want to give up any
equity at all to outside shareholders, yet would like to grow faster
than retained earnings would allow. At the same time, an SBIC must
achieve an equity type return if it is taking equity type risks. To
accommodate these needs, proposed Sec. 107.855(g) would permit a
Licensee to receive a one-time ``bonus'' from a Small Business at the
end of the term of a Debt Financing in lieu of an equity participation,
and to exclude such a bonus from the Cost of Money if it meets the
criteria in proposed Sec. 107.855(i). Paragraph (g) also explicitly
sets forth the fees and expenses that are excluded from Cost of Money
calculations; currently, these exclusions are found in the definition
of Cost of Money in Sec. 107.3.
Finally, proposed Sec. 107.855(h) would eliminate a great deal of
current confusion over how to make the calculations that determine
whether an SBIC is in compliance with Cost of Money ceilings. This
paragraph would require that the evaluation of compliance with a Cost
of Money ceiling always be performed on a discounted cash flow basis,
based solely upon actual cash outflows and inflows.
p. Financing Fees Charged to Small Businesses
Proposed Sec. 107.860 would replace the ``processing fee'' that a
Licensee may charge under current Sec. 107.402 with an ``application
fee'' and ``closing fee'' that are very easy to administer. A Licensee
would be able to charge a nonrefundable one percent application fee to
review a Financing application, and a two percent (for Loans) or four
percent (for Debt or Equity Securities) closing fee when it actually
disburses funds to a Small Business. All the complex provisions in the
current regulation concerning the circumstances under which a
processing fee must be partially or fully refunded would be eliminated.
q. Control of a Small Business
Proposed Sec. 107.865 would modify the restrictions on Control of a
Small Business by a Licensee. As in the current regulations, paragraph
(b) of the proposed section would establish a presumption of Control
based on a Licensee's percentage of ownership. However, proposed
paragraph (c) would allow the presumption of Control to be rebutted if
the management of the Small Business owns at least 25 percent of the
voting securities and can elect at least 40 percent of the board of
directors (and Licensees and their Associates can elect no more than 40
percent). By defining conditions under which Licensees can avoid the
time-consuming process of seeking a waiver from SBA, this provision is
intended to make it easier for Licensee to co-invest with non-SBIC
investors.
Proposed paragraph (d) would expand the circumstances under which a
Licensee may take temporary Control of a Small Business to include the
following: (1) If the Small Business has materially breached the
Financing agreement; (2) if there has been during the past two years,
or will be as a result of the Financing, a substantial change in the
Small Business's operations or products, and the Licensee (or investor
group including the Licensee) is the concern's major source of capital;
or (3) if the Financing is a Start-up Financing, and the Licensee (or
investor group including the Licensee) is the concern's major source of
capital. These changes are intended to encourage investment by giving
Licensees an increased ability to protect their investment positions,
particularly in high-risk areas such as start-ups.
Proposed Sec. 107.865(d) would eliminate the current requirement to
file a plan of divestiture when a Licensee takes temporary Control of a
concern. Instead, a Licensee would file a ``Control certification''
stating the date on which it took Control and the reason for its
action, and the Licensee's agreement to relinquish Control within five
years. SBA is persuaded that the typical plan of divestiture represents
nothing more than guesswork as to future events, and therefore serves
no practical purpose.
r. Assets Acquired in Liquidation of Portfolio Securities
Proposed Sec. 107.880(b)(2) would eliminate the prior approval
requirement for reasonably necessary expenditures to improve acquired
assets and make them salable, as long as an overline does not occur as
a result. Paragraph (c) would limit the prior approval requirement for
expenditures involving overlines to leveraged Licensees only. SBA
believes that these changes will not adversely affect the Agency's
financial interests and will reduce the regulatory burden on Licensees.
s. Management Services Provided to Small Businesses
SBA is proposing to liberalize the rules governing management
services provided to a Small Business. Under proposed Sec. 107.900, a
Licensee could provide management services to a Financed Small Business
without SBA's prior approval, as long as the contract met the criteria
in Sec. 107.900(a). The
[[Page 58540]]
proposed regulation would not apply at all to services provided to a
Small Business not financed by the Licensee; SBA believes that in such
cases, any agreement between the parties is likely to be a true arm's-
length transaction, in which the Small Business does not require any
special protections.
Proposed Sec. 107.900(e) would allow Licensees to charge reasonable
``transaction fees'' for services performed in connection with a public
or private offering made by the Small Business or the sale of all or
part of the business. In addition, this paragraph generally would allow
an Associate of the Licensee to charge market rate investment banking
fees to a Small Business in connection with Financing provided by
anyone other than the Licensee.
8. Subpart H--Non-Leveraged Licensees--Exceptions to Regulations
The primary purpose of certain regulations is to protect the
government's interest as a creditor or investor in a Licensee. If a
Licensee does not have outstanding Leverage and has no plans to seek
Leverage, the safeguards provided by many regulations are unnecessary.
Proposed Sec. 107.1000 would provide a consolidated listing of
those regulatory provisions from which a non-Leveraged Licensee would
be exempt. This section would include provisions in the current
regulations such as those relating to portfolio diversification
(overline) and deposits of idle funds. It would also include several
provisions that appeared in a proposed rule published in the Federal
Register on February 7, 1994 (59 FR 5552). That proposed rule is hereby
withdrawn.
Proposed Sec. 107.1000(a)(4) would exempt non-leveraged Licensees
from the limitations on expenses incurred to maintain or improve assets
acquired in liquidation of portfolio securities (see proposed
Sec. 1007.880).
Paragraph (b)(1) would allow non-leveraged Licensees to reduce
their Regulatory Capital by more than two percent per year without SBA
approval (see proposed Sec. 107.585).
Paragraph (b)(2) would permit non-leveraged Licensees to dispose of
assets to an Associate without SBA approval (see proposed
Sec. 107.885).
Paragraph (b)(3) would allow non-leveraged Licensees to contract
with an Investment Adviser/Manager without SBA approval; Licensees
would only be required to notify SBA of the compensation paid under the
contract (see proposed Sec. 107.510).
For ease of reference, proposed Sec. 107.1000 would incorporate the
current exemptions for non-leveraged Licensees from the rules governing
overline investments, third party debt, and idle funds. Regarding the
investment of idle funds, proposed Sec. 107.1000(a)(2) states that non-
Leveraged Licensees are exempt from the restrictions in Sec. 107.530,
provided they do not engage in activities not contemplated by the Act.
SBA is proposing this language in order to emphasize that a licensed
SBIC, whether leveraged or not, must be formed for the purpose of
making long-term investments in Small Businesses. It is not appropriate
under the Act, for example, for a non-leveraged Licensee to invest its
``idle funds'' in commodities futures or financial derivatives to the
extent that such investing becomes a major component of its operations.
9. Subpart I--SBA Financial Assistance for Licensees (Leverage)
a. Eligibility for Leverage
Under proposed Sec. 107.1120(a), with respect to determining
eligibility for Leverage, a Licensee that had invested at least 50
percent of its Leverageable Capital would be presumed to lack
sufficient funds for investment only in connection with its first
takedown of Leverage. Currently, the presumption applies to all
issuances of Leverage and refers to the investment of ``50 percent of
Leverageable Capital and outstanding Leverage.'' Regardless of how this
ambiguous wording is interpreted, SBA believes the presumption is not
appropriate for later takedowns of Leverage, since a Licensee could be
presumed eligible while having a significant dollar amount of
uninvested capital.
b. Eligibility For Fourth Tier of Leverage and Second Tier of Preferred
Securities
Proposed Secs. 107.1160 (c) and (d) would eliminate the current
minor distinctions between the types of investments needed for a
Section 301(d) Licensee to qualify for a fourth tier of Leverage
(currently, ``Venture Capital Financings'') and for a second tier of
Preferred Securities (currently, ``Qualified Investments''). The change
is intended to simplify the process of establishing and maintaining the
required investment amounts and ratios by substituting a single
category of qualifying investments (to be called ``Venture Capital
Financings'') for use in determining eligibility for both types of
Leverage. The proposed definition of Venture Capital Financing would
include equity securities and those debt securities that are unsecured
and subordinated to all other borrowings of the issuer.
c. SBA Leverage Commitment to Licensees
Proposed Sec. 107.1200 would reduce the minimum amount of a
Leverage commitment from $1 million to $500,000; proposed Sec. 107.1230
would make the same reduction in the minimum amount of a Licensee's
draw request. These changes are intended to give Licensees greater
flexibility and to recognize the current limitations on the
availability of Leverage funds.
d. Earmarked Profit computation for Participating Securities issuers
Proposed Sec. 107.1510 would simplify the computation of Earmarked
Profit (Loss) for Participating Securities issuers that have both
Earmarked Assets and non-Earmarked Assets in their portfolios
(currently, there are no such Licensees). The proposed regulation would
replace requirements to identify whether certain revenues and expenses
are specifically attributable to Earmarked or non-Earmarked Assets with
a simpler percentage allocation system. Capital gains and losses would
continue to be classified as Earmarked or non-Earmarked based on the
specific assets from which they are derived.
e. Computation of the Profit Participation Rate for Participating
Securities Issuers
Proposed Sec. 107.1530(e) would clarify the method of computing the
ratio of Participating Securities to Leverageable Capital (the ``PLC
ratio''), which a Participating Securities issuer uses in determining
SBA's Profit Participation Rate for a particular distribution. The
current regulation does not always produce a definitive answer when a
Licensee increases its Leverageable Capital. The proposed rule also
would add a ``lockout period'' of 120 days before the date as of which
Profit Participation is computed; increases in Leverageable Capital
within that period could not be used to reduce the PLC ratio. SBA
considers this change necessary to protect the Agency from a sharp
decrease in its Profit Participation when a Licensee increases its
capital shortly before performing its distribution calculations.
Proposed Sec. 107.1530(g)(2) would make a technical correction in
the method of time weighting outstanding issuances of Participating
Securities for the purpose of indexing the Profit Participation Rate.
The current method incorrectly causes the Profit Participation Rate to
go to zero after all
[[Page 58541]]
Participating Securities have been redeemed.
f. ``Payment Dates'' for Participating Securities
This proposed rule would add the defined term ``Payment Dates'' to
the regulations for issuers of Participating Securities, reflecting the
terms of the public fundings of Participating Securities that have
already taken place. Payment Dates have been established as each
February 1, May 1, August 1, and November 1 during the term of a
Participating Security, and represent the dates on which Trust
Certificate holders receive interest payments and any returns of
principal to which they are entitled. To accommodate this structure,
Participating Securities issuers would be permitted to make
distributions only on Payment Dates. SBA recognizes, however, that
there is one situation in which this arrangement may present
difficulties for Licensees, and is requesting comments and suggestions
to help resolve the following issue:
Under proposed Sec. 107.1550 (equivalent to current
Sec. 107.245(b)), a partnership Licensee may make an annual ``tax
distribution'' to its private investors and SBA. The recipients of this
distribution may or may not be taxable investors. However, for those
who are taxable and need to receive cash in order to pay taxes by the
April 15 filing deadline, the timing of the Payment Dates may present a
problem: For a Licensee with a December 31 fiscal year end, it is
unlikely that a distribution based on audited year end figures could be
made as early as February 1; on the other hand, the next Payment Date
(May 1) is after the tax filing deadline. SBA is willing to consider an
exception that would permit a tax distribution to be made on a date
other than a Payment Date, but is asking interested parties to assist
the Agency in developing an effective approach.
10. Subpart J--Licensee's Non-Compliance with Terms of Leverage
a. Capital Impairment Computation
The determination of a Licensee's Capital Impairment would be
clarified in two ways. In the computation of Adjusted Unrealized Gain
for Capital Impairment purposes, proposed Sec. 107.1840(d)(3) would
clarify that a Licensee claiming unrealized appreciation on non-
Publicly Traded and Marketable Securities based on subsequent rounds of
equity financing at a higher price (``Class 2 Appreciation'') must
substantiate, to SBA's satisfaction, that such appreciation meets the
required criteria. Proposed Sec. 107.1840(d)(6) would require
unrealized gains on securities that are pledged or encumbered to be
reduced by the amount of the related borrowing or other obligation.
These changes reflect current SBA policy in the administration of the
Capital Impairment regulations.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this proposed rule would not be a significant
regulatory action for purposes of Executive Order 12866 because it
would not have an annual effect on the economy of more than $100
million, and that it would not have a significant economic impact on a
substantial number of small entities within the meaning of the
Regulatory Flexibility Act, 5 U.S.C. 601, et seq. The primary purpose
of the proposed rule is to streamline the regulations governing the
SBIC program by eliminating obsolete regulations and reorganizing the
remainder in a more logical and readable format.
Two areas of the proposed regulations would have some economic
effect, including possible effects on small entities. First, license
application fees and examination fees would be raised. An SBIC license
applicant would pay a fee of $10,000 to $20,000, compared with the
current $5,000. This increase is not significant relative to the
private capital of an average Licensee, which exceeds $10 million. Exam
fees would continue to be based on the total assets of a Licensee, but
at higher rates. The largest Licensees, generally those with assets of
at least $25 million, could experience fee increases of $20,000 or
more; however, the number of such Licensees is currently very small.
Second, the proposed changes in the regulations governing ``Cost of
Money'' (the maximum amount a Licensee can charge on loans and debt
securities) would potentially affect the borrowing costs of small
entities. Although the interest rate on loans is determined primarily
by market forces, the proposed rule would raise the interest rate
ceiling on loans extended by Licensees from 15 percent to 19 percent.
The total amount of loans provided to small businesses by Licensees is
approximately $240 million per year. Even if the additional four
percentage points were charged on the entire balance of such loans, the
annual economic impact would be less than $10 million.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this proposed rule, if adopted in final form, would
contain no new reporting or record keeping requirements that have not
already been approved by the Office of Management and Budget. The
``Financing Eligibility Statement'' (SBA Form 1941) which would be
required under proposed Sec. 107.610 has already been approved by OMB
under Control Number 3245-0301.
For purposes of Executive Order 12612, SBA certifies that this rule
would not have any federalism implications warranting the preparation
of a Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
For the reasons set forth above, SBA hereby proposes to amend Part
107 of Title 13 of the Code of Federal Regulations as follows:
1. 107.1 through 107.1202 and all center headings are removed the
authority citation for Part 107 continues to read as set forth below,
and new subparts A through L are added to read as follows:
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
Subpart A--Introduction to Part 107
107.20 Legal basis and applicability of Part 107.
107.30 Amendments to Act and regulations.
107.40 How to read 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.
107.110 Organizing a Section 301(d) 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.
107.220 Special minimum capital requirements for Licensees issuing
Leverage.
[[Page 58542]]
107.230 Permitted sources of Private Capital for Licensees.
107.240 Limitations on accepting non-cash capital contributions.
107.250 Issuance of stock options by Licensees.
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.
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 Computer capability requirements of Licensee.
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.
107.508 Accessible office.
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--Record keeping, 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 Businesses.
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 Commitments to Small Businesses.
107.828 Purchasing Securities from an underwriter or other third
party.
Structuring Licensee's Financing of an Eligible Small Business: Terms
and Conditions of Financing
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 available.
107.1110 How to apply for Leverage.
107.1120 General eligibility requirements for Leverage.
107.1130 Leverage fees 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.
[[Page 58543]]
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 Commitment fees payable by Licensee.
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.
Exchange of Outstanding Debentures for Participating or Preferred
Securities--Section 301(d) Licensees
107.1350 Exchange by Section 301(d) Licensee of Debentures for
Preferred or Participating Securities.
Preferred Securities Leverage--Section 301(d) Licensees
107.1400 Stock 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
issuers.
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.
107.1580 Special rules for In-Kind Distributions by Licensees.
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.
107.1610 Terms and conditions of Trust Certificates.
107.1620 SBA authority to pay subsidy amount on subsidized
Debentures.
107.1630 Effect of prepayment or early redemption of Leverage on a
Trust Certificate.
107.1640 Subrogation of SBA upon payment under Trust Certificate
Program.
107.1650 Formation of a Pool or Trust holding Leverage securities.
107.1660 Functions of agents, including Central Registration Agent,
Selling Agent and Fiscal Agent.
107.1670 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
107.1680 SBA access to records of the CRA, Brokers, Dealers and
Pool or Trust assemblers.
Miscellaneous
107.1700 Characteristics of SBA's guarantee.
107.1710 Transfer by SBA of its interest in Licensee's Leverage
security.
107.1720 SBA authority to collect or compromise its claims.
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
Part 107.
107.1930 Effect of changes in Part 107 on transactions previously
consummated.
* * * * *
Authority: Title III of the Small Business Investment Act, 15
U.S.C. 681 et seq., as amended; 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.
Subpart A--Introduction to Part 107
Sec. 107.20 Legal basis and applicability of Part 107.
(a) The regulations in this part implement Title III of the Small
Business Investment Act of 1958, as amended. All Licensees, including
Section 301(d) 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 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 hereafter.
(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. 121.401.
Articles mean articles of incorporation or charter for a Corporate
Licensee and the partnership agreement 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 in the capacity of
attorney at law.
[[Page 58544]]
(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; 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) through (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. 107.1660 and performing similar functions
for Debentures and Participating Securities funded outside the pooling
process.
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.
Combined Capital means the sum of Regulatory Capital and
outstanding Leverage.
Commitment has the meaning set forth in Sec. 107.825.
Common Control means a condition where two or more Licensees 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
veto or 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 40 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.
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.
[[Page 58545]]
Entity General Partner has the meaning set forth in
Sec. 107.160(b).
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. 107.805).
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 below. (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).
(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, excluding
plans established under section 401(k) of the Internal Revenue Code of
1986, 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) 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 and Qualified Non-private Funds whose source is Federal
funds.
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)).
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
[[Page 58546]]
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 issued to SBA
by a for-profit Section 301(d) Corporate Licensee, or securities having
similar characteristics issued by a Section 301(d) Licensee organized
as a nonprofit corporation, or nonvoting preferred limited partnership
interests issued by a Section 301(d) Partnership Licensee.
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 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, 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.
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 has the meaning set forth in Sec. 107.110.
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 Business has the meaning set forth in Sec. 107.710.
Start-up Financing means an Equity Capital Investment in a Small
Business that--
(1) Engages in technology development or commercialization,
manufacturing, and/or exporting;
(2) At the time of Licensee's initial Financing has not existed, in
any form, for more than three fiscal years;
(3) Has not had sales exceeding $5,000,000 or positive cash flow in
any fiscal year; and
(4) Was not formed to acquire any existing business.
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 at the time
Participating Securities are issued by the Secretary of the Treasury
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.
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 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 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.
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.
[[Page 58547]]
Sec. 107.110 Organizing a Section 301(d) Licensee.
Section 301(d) Licensee means a company licensed under section
301(d) of the Act that may provide Assistance only to Disadvantaged
Businesses. A Section 301(d) Licensee may be organized as a for-profit
corporation, a non-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.
For license applications received on or after November 28, 1995,
SBA will license a 1940 Act or 1980 Act Company only if such company
does not elect to be taxed as a regulated investment company under
section 851 of the Internal Revenue Code of 1986, as amended. After
such date, a request by an existing Licensee to convert to a 1940 Act
or 1980 Company will be approved by SBA only if the same criteria are
satisfied.
Sec. 107.120 Special rules for a Section 301(d) Licensee owned by
another Licensee.
A Section 301(d) Licensee may be licensed to operate as the
subsidiary of one or more Licensees (participant Licensee), with or
without non-Licensee participation, subject to the following:
(a) Application. In reviewing the license application, SBA will
consider what effect, if any, a capital contribution to the proposed
Section 301(d) Licensee will have on the participant Licensee.
(b) Participant Licensees. Each participant Licensee must propose
to own at least twenty percent of the voting securities of the proposed
Section 301(d)Licensee.
(c) Capital contribution. A subsidiary Section 301(d) Licensee must
receive capital contributions in cash, in an amount at least equal to
the minimum capital requirement under Sec. 107.210. Capital contributed
by a participant Licensee in excess of the required minimum may be in
the form of securities of a Disadvantaged Business, valued at the lower
of cost or fair value. A participant Licensee must treat its entire
capital contribution to the subsidiary as a reduction of its
Leveragable Capital. The participant Licensee's remaining Leverageable
Capital must be sufficient to support its outstanding Leverage.
(d) No transfer of Leverage. A participant Licensee may not
transfer its Leverage to a subsidiary Section 301(d) Licensee.
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.
You must have your Management Expenses approved by SBA at the time
of licensing. (See Sec. 107.520 for the definition of Management
Expenses.)
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) You must have at least three shareholders or limited partners,
or at least one acceptable Institutional Investor, in either case with
an aggregate ownership interest equal to at least 30 percent of your
Regulatory Capital. Such investors must not be your Associates (except
for their status as your shareholders or limited partners) or
Affiliates of any of your Associates. 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 by 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:
(1) You received your license before November 28, 1995 and you are
not licensed to issue Participating Securities; 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.
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.
(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
[[Page 58548]]
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 the extension of any
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:
(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) Minimum capital for Section 301(c) Licensees--general rule. A
Section 301(c) Licensee or applicant must have Regulatory Capital
(excluding commitments from your investors) of at least $2,500,000.
(b) Minimum capital for Section 301(d) Licensees--general rule. A
Section 301(d) Licensee or applicant must have Regulatory Capital
(excluding commitments from your investors) of at least $1,500,000.
(c) Exception to general rule--grandfather clause. The minimum
capital requirements in paragraphs (a) and (b) of this section do not
apply if you were licensed before October 2, 1990, or if SBA had your
license application on file before October 2, 1990 and granted you a
license on the basis of such application. If you qualify for this
exception, you must have at least the minimum Private Capital required
by the regulations in effect on October 1, 1990.
(d) Additional capital requirements for Licensees seeking Leverage.
If you are a license applicant who intends to seek Leverage, see
Sec. 107.220.
Sec. 107.220 Special minimum capital requirements for Licensees
issuing Leverage.
(a) Participating Securities. You must have Regulatory Capital of
at least $10,000,000 in order to apply for Participating Securities,
unless you demonstrate to SBA's satisfaction that you can be
financially viable over the long term with a lower amount. You are not
permitted under any circumstances to apply for Participating Securities
if your Regulatory Capital is less than $5,000,000.
(b) Debentures. If you are licensed after the effective date of
this regulation, you must have Regulatory Capital of at least
$5,000,000 in order to apply for Debentures, unless you demonstrate to
SBA's satisfaction that you can be financially viable over the long
term with a lower amount.
(c) Companies licensed before October 2, 1990. If Sec. 107.210(c)
applies to you and your Regulatory Capital (excluding commitments from
investors) is below $2,500,000 (for a Section 301(c) Licensee) or
$1,500,000 (for a Section 301(d) Licensee):
(1) You are eligible for Leverage (other than refinancing) only if
you can demonstrate to SBA's satisfaction that you have been profitable
for three out of your last four fiscal years before applying for
Leverage and, on the average, have been profitable for all such fiscal
years.
(2) Even if you do not satisfy paragraph (c)(1) of this section,
you may apply for Leverage needed to refinance any Debenture
outstanding on October 2, 1990, as follows:
(i) Any such Debenture which matures on or before December 31, 1995
may be refinanced, one time only, for a term of not more than ten
years; and
(ii) Any such Debenture which matures after December 31, 1995, may
be refinanced, one time only, for a term of three years.
Sec. 107.230 Permitted sources of Private Capital for Licensees.
Private Capital means the contributed capital of a Licensee, plus
unfunded
[[Page 58549]]
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, or any government agency or instrumentality,
except for funds invested by a public pension fund and ``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 of this
section.
(d) Qualified Non-private Funds. Private Capital includes
``Qualified Non-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 any Section 301(d) Licensee or such license
applicant 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.
Sec. 107.240 Limitations on accepting non-cash capital contributions.
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 Issuance of stock options by Licensees.
(a) Issuance of stock options. You may issue stock options. A 1940
Act Company or a 1980 Act Company may issue stock options only as
permitted under such Acts or orders issued thereunder.
(b) Stock options not deemed compensation. 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.
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
[[Page 58550]]
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.
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) Exception for Section 301(d) Licensees. This Sec. 107.460 does
not apply to common officers, directors, managers, or owners of a
Section 301(c) Licensee and its Section 301(d) subsidiary.
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. All Financing documents must
identify you as ``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) SBA approval. You must have a written valuation policy for use
in determining the value of your Loans and Investments. You must
include this policy as part of your initial application to SBA.
(b) Adopting SBA's valuation guidelines/automatic approval. If you
adopt the exact wording of the Model Valuation Policy, ``Valuation
Guidelines for SBICs'', and make absolutely no additions or changes,
then SBA will automatically accept your Valuation Policy. With SBA's
prior written approval, you may adopt a policy that differs from the
model.
(c) Licensee's adoption of policy. Your board of directors or
general partners 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. SBA reserves the right to review or
independently establish valuations of your Loans and Investments.
(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 changes in valuations at least
quarterly, within thirty days following the close of the quarter.
(e) Review of valuations by independent public accountant. Your
independent public accountant must review only valuations performed as
of the end of your fiscal year. The accountant's responsibility
includes reviewing your valuation procedures and the implementation of
such procedures, including adequacy of documentation. The accountant
also has reporting responsibilities concerning the results of this
review.
Sec. 107.504 Computer capability requirements of Licensee.
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 by modem to SBA.
[[Page 58551]]
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.
Sec. 107.508 Accessible office.
You must maintain an office that is convenient to the public and is
open for business during normal working hours.
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/Advisor 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;
(2) Indicate the basis for computing Management Expenses; and
(3) Be approved annually by your board of directors or principals.
(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 the effective date of this
Regulation.
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.
(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) General rule. If you have outstanding Leverage, you must get
SBA's written approval before you incur any non-SBA debt secured by any
of your assets (referred to in this section as ``secured third-party
debt'') or refinance any debt with secured third-party debt, including
any renewal of, or increase in, a secured line of credit, or expansion
of the scope of a security interest or lien. Secured third-party debt
includes all guarantees and other contingent obligations that you
voluntarily assume that are secured by any of your assets, all secured
lines of credit, and any secured Temporary Debt of a Licensee
[[Page 58552]]
with outstanding Participating Securities.
(b) 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.
(c) 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.
(d) 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 1.25:1;
(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
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 Restriction 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 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 (excluding Commitments) totaling at least
20 percent of your Regulatory Capital; and
(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 SBA determines that your failure to meet the
requirements in paragraph (a) of this section is the result of one or
more of the following factors:
(1) Your excess idle funds are the result of recent realized gains,
repayments, the raising of additional capital or Leverage recently
received.
(2) It is necessary for you to maintain excess idle funds to
conduct your operations because:
(i) You have no remaining unfunded commitments from investors; 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.
[[Page 58553]]
(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. You must meet the activity
requirements in this Sec. 107.590 as of the end of your first full
fiscal year following the effective date of the final regulation. Until
then, you will be considered active if you meet the activity
requirements in effect the day before the effective date of the final
regulation.
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 Licensee, 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:
(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.
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 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 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. 107.828). 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
[[Page 58554]]
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.
(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. Your independent
public accountant must carry Errors and Omissions insurance in an
amount acceptable to SBA, or be self-insured and have a net worth
acceptable to SBA.
(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.
(c) Standards for preparation of Form 468. You must prepare SBA
Form 468 in accordance with appendix I, 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 days following the close of other reporting
periods. You must report material 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) Other reports. You must file any other reports that SBA may
require by written directive.
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. 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 officer, directors, or Control Persons.
(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.
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) SBA will assess fees for examinations. Fees will be assessed
based on your assets as of the date of your latest certified financial
statement submitted to SBA prior to the examination. As a general rule,
SBA will not assess fees for special examinations to obtain specific
information. The rate table is as follows:
----------------------------------------------------------------------------------------------------------------
Total assets of licensee Base rate Percent of assets
----------------------------------------------------------------------------------------------------------------
$0 to $2,000,000........................ $3,500 +0
$2,000,001 to $5,000,000................ $3,500 +.24% over $2,000,000
$5,000,001 to $10,000,000............... $10,700 +.12% over $5,000,000
$10,000,001 to $15,000,000.............. $16,700 +.06% over $10,000,000
$15,000,001 or more..................... $19,700 +.03% over $15,000,000
----------------------------------------------------------------------------------------------------------------
[[Page 58555]]
(b) Delay Fee. If, in the judgment of SBA, the time required to
complete your examination is delayed due to your lack of cooperation or
the condition or your records, SBA may assess an additional fee of up
to $500 per day.
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. 121.802(a)(3)(i) of this chapter or the industry standard covering
the industry in which the applicant is primarily engaged, as set forth
in Sec. 121.802(a)(3)(ii) of this chapter.
Sec. 107.710 Requirement to finance Smaller Businesses.
Your Portfolio must include Financings to Smaller Businesses.
(a) Definition of Smaller Business. A Smaller Business means a
business 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. 121.601 of this chapter at the time of the
Financing for the industry in which it is then primarily engaged.
(b) Phase 1 of Smaller Business Financing requirement. At the close
of your first complete fiscal year beginning on or after April 25,
1994, at least 10 percent of the total dollar amount of the Financings
you extended since April 25, 1994 must have been in Smaller Businesses.
(c) Phase 2 of Smaller Business Financing requirement. At the close
of each of your next fiscal years, at least 20 percent of the total
dollar amount of the Financings you extended since April 25, 1994 must
have been invested in Smaller Businesses.
(d) Financing a change of ownership which results in the creation
of a Smaller Business. The Financing of a change of ownership under
Sec. 107.750 which results in the creation of a Smaller Business
qualifies as a Smaller Business Financing.
(e) Non-compliance with this section. If you have not reached the
required percentage of Smaller Business Financings at the end of any
fiscal year, then you must be in compliance by the end of the following
fiscal year.
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 the day to
day operations; or
(iii) It passes through substantially all of the proceeds of the
Financing to another entity.
(2) Exception. You may finance a passive business if it passes all
the proceeds of the Financing through to a wholly-owned eligible Small
Business that is not passive.
(c) Real Estate Businesses. (1) You are not permitted to finance
any business classified under Major Group 65 (Real Estate) or Industry
No. 1532 (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 realty or to
discharge an obligation relating to the prior acquisition of realty,
unless the Small Business:
(i) Is acquiring an existing building and will use at least 51
percent of the usable square footage for an eligible business activity;
or
(ii) Is building or renovating a building and will use at least 67
percent of the usable square footage for an eligible business activity.
(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 40 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
[[Page 58556]]
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.
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).
(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. 107.828(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) Both you and your Associate are non-leveraged Licensees.
(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, 3
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 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.
Sec. 107.740 Portfolio diversification (``overline'' limitation).
(a) General rule. This Sec. 107.740 applies if you have outstanding
Leverage or want to be eligible for Leverage. Without SBA's prior
written approval, your aggregate outstanding Financings and Commitments
to a Small Business (including its Affiliates) must not exceed:
(1) 20 percent of Regulatory Capital for a Section 301(c) Licensee;
or
(2) 30 percent of Regulatory Capital for a Section 301(d) Licensee.
(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:
[[Page 58557]]
(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 $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.
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.
(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) Presumption against Portfolio Concern--Default. If such a
change occurs within one year, there is a presumption that the change
was within the contemplation of the Portfolio Concern at the time of
your initial Financing. Unless this presumption is rebutted, this
change constitutes a default or breach of the terms of your initial
Financing and a violation of this part.
(3) Licensee's rights upon default of Portfolio Concern. If the
Portfolio Concern is in breach or default, you have the right to demand
immediate repayment of all indebtedness owed by the Portfolio Concern
to you, or redemption of all of your equity investments in the
Portfolio Concern.
(4) 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 rebut the presumption in paragraph
(b)(2) of this section by a showing that the change in business
activity was caused by an unforeseen change in circumstances.
(5) Additional Financing. If SBA approves your request to retain an
investment under paragraph (b)(4) of this section, you may 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.
(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) You may 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.
[[Page 58558]]
(b) Definition. Equity Securities means stock of any class in a
corporation, limited partnership interests in a limited partnership,
membership interests in a limited liability company, or joint venture
interests. If the Financing agreement contains covenants or compliance
provisions with debt-type remedies (as determined by SBA), or includes
redemption provisions other than those permitted under Sec. 107.850,
the security will be considered a Debt Security for all regulatory
purposes.
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. 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.
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) or the
amount of the debt guaranteed, whichever is less.
Sec. 107.825 Commitments to Small Businesses.
You may enter into a written Commitment to provide Financing to a
Small Business. A Commitment is a written agreement between you and an
eligible Small Business that obligates you 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. You may include in the agreement
reasonable conditions precedent to your obligation to fund the
commitment but these conditions must be outside your control.
Sec. 107.828 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.
(b) Recordkeeping requirements. In addition to the recordkeeping
requirements of Sec. 107.600, 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. The underwriter must certify in
writing that the requirement in paragraph (a)(3) of this section has
been met. The underwriter also must certify whether it is your
Associate. Any such Associate underwriter may keep fees or charges
related to the portion of the offering purchased by you only if such
fees and charges do 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. 107.828 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 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 penalty under paragraph
(d)(3) of this section.
(3) Prepayment penalties. You may charge a reasonable prepayment
penalty
[[Page 58559]]
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) 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.
Sec. 107.840 Maximum term of Financing.
The maximum term of any 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 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
(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.
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. The Cost of Money to the Small
Business may not exceed the ceiling determined under this section.
(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.
Your Cost of Money ceiling for a particular Financing is determined as
of the date of the first closing of the Financing and 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 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;
(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).
(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 prove its accuracy to SBA's satisfaction.
(f) Charges included in the Cost of Money. The Cost of Money
includes all
[[Page 58560]]
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) Closing fees, application fees, and expense reimbursements,
each as permitted under Sec. 107.860.
(2) Reasonable prepayment penalties permitted under
Sec. 107.830(d)(3).
(3) Out-of-pocket conveyance and/or recordation fees and taxes.
(4) Reasonable closing costs.
(5) Fees for management services as permitted under Sec. 107.900.
(6) Reasonable and necessary out-of-pocket expenses you incur to
monitor the Financing.
(7) 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).
(8) 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.
(9) A one-time ``bonus'' that satisfies the requirements in
paragraph (i) of this section.
(10) 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 or SBA regulations.
(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;
(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 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 profit.
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 if:
(1) The fee is 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) The Financing applicant signs a letter agreeing to pay the fee.
(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. 107.115.
(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.
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:
(1) At least 50 percent of the outstanding voting securities, if
there are fewer than 50 shareholders; or
[[Page 58561]]
(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 (rounded down) 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 (rounded up). 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
investment under circumstances where a Small Business is threatened
with insolvency or closure;
(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 original
Financing constitutes the Small Business's major source of capital; or
(4) In the case of a Start-up Financing, if you or the Investor
Group constitute the Small Business's major source of capital.
(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).
(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).
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:
(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) Services are provided only on an hourly fee basis;
(3) The fees charged are for services actually performed; and
(4) The hourly rate does not exceed the prevailing rate charged for
comparable services by other organizations in your geographic area.
(b) Fees for service as a board member. You or your Associate may
receive fees 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.
(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) Record keeping 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. However, at
[[Page 58562]]
least 95 percent of the Associate's revenues must derive from sources
unrelated to Financings by you. If the Associate does not meet this
test, its fee must not exceed the sum of the application and closing
fees permitted under Sec. 107.860.
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.
(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.
(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.
Subpart I--SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
Sec. 107.1100 Types of Leverage available.
(a) Types of Leverage available for Section 301(c) Licensees. If
you are a Section 301(c) Licensee, 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) Types of Leverage available for Section 301(d) Licensees. If
you are a Section 301(d) Licensee, you may apply for Leverage from SBA
in one or more of the following forms:
(1) The purchase or guarantee of your Debentures.
(2) The purchase or guarantee of your Participating Securities.
(3) The purchase of your Preferred Securities.
(c) Subsidized and non-subsidized Debentures available to
Licensees. If you are a Section 301(d) Licensee, you may issue both
subsidized and non-subsidized Debentures. If you are a Section 301(c)
Licensee, you may issue only non-subsidized Debentures.
(1) Non-subsidized Debentures. SBA may purchase or guarantee non-
subsidized Debentures under section 303(b) of the Act. You pay interest
on a non-subsidized Debenture at the rate stated on its face.
(2) Subsidized Debentures. SBA may purchase or guarantee subsidized
Debentures under section 303(c) of the Act. On a guaranteed Debenture,
during the first 5 years of the term, you pay an interest rate that is
300 basis points below the rate stated on the face of the Debenture. On
a Debenture that SBA purchases, you pay a reduced interest rate
determined under section 317 of the Act.
Sec. 107.1110 How to apply for Leverage.
(a) Application forms. Select the appropriate form from the
following table:
------------------------------------------------------------------------
Type of leverage you are applying for Application form
------------------------------------------------------------------------
Debentures (any type)................. SBA Form 1022.
Participating Securities.............. SBA Form 1022A.
4% Preferred Securities............... SBA Form 1022B.
------------------------------------------------------------------------
(b) Where to send your application. Send all Leverage applications
to SBA, Investment Division, 409 Third Street, S.W., Washington, D.C.
20416.
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 or
Sec. 107.220, as appropriate.
(d) 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, these
regulations and your business plan.
(e) Be in compliance with the regulations in this Part.
(f) 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.
Sec. 107.1130 Leverage fees payable by Licensee.
(a) User fee for Debentures and Participating Securities. You must
pay a user fee to SBA for each issuance of a Debenture or Participating
Security. The fee is 2 percent of the face amount of the Leverage
issued.
(b) Payment of user fee. If you issue a Debenture or Participating
Security:
(1) To repay or redeem existing Leverage, you must pay the user fee
before SBA will guarantee or purchase the new Debenture or
Participating Security.
(2) That is not used to repay or redeem existing Leverage, SBA will
deduct the user fee from the proceeds remitted to you, unless you
prepaid the fee under Sec. 107.1210.
(c) Refundability. The user fee is not refundable under any
circumstances.
(d) 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.
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
Sec. 107.1150 Maximum amount of Leverage for a Section 301(c)
Licensee.
(a) Maximum amount of Leverage. If you are a Section 301(c)
Licensee, use the following table to determine the maximum amount of
Leverage you may have outstanding at any time:
[[Page 58563]]
------------------------------------------------------------------------
Then your maximum leverage
If your leverageable capital is is:
------------------------------------------------------------------------
Not over $15,000,000...................... 300% of Leverageable
Capital.
Over $15,000,000 but not over $30,000,000. $45,000,000 + [200% of
(Leverageable Capital -
$15,000,000)].
Over $30,000,000 but not over $45,000,000. $75,000,000 + [100% of
(Leverageable Capital -
$30,000,000)].
Over $45,000,000.......................... $90,000,000.
------------------------------------------------------------------------
(b) Exceptions to maximum Leverage provisions--(1) Licensees under
Common Control. Two or more Licensees under Common Control may have
aggregate outstanding Leverage over $90,000,000 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.
Sec. 107.1160 Maximum amount of Leverage for a Section 301(d)
Licensee.
(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.
(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.
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 any Leverage commitment must be at least $500,000. It must not
exceed 100 percent of your Regulatory Capital or your remaining
Leverage eligibility, whichever is less.
(d) Term of Leverage commitment. SBA's Leverage commitment will
automatically lapse at 5:00 P.M. Eastern Time on August 1 of the next
full Federal fiscal year following issuance of the commitment.
[[Page 58564]]
Sec. 107.1210 Commitment fees payable by Licensee.
(a) Commitment fees. As a condition of SBA's Leverage commitment,
and before you may draw any Leverage, you must pay SBA a non-refundable
fee of:
(1) 3 percent of the face amount of the Debentures or Participating
Securities reserved under the commitment; or
(2) 1 percent of the issue price of Preferred Securities reserved
under the commitment.
(b) Credit for user fee. The 3 percent commitment fee paid by
issuers of Debentures or Participating Securities under paragraph
(a)(1) of this section includes the 2 percent user fee required under
Sec. 107.1130. If you pay the commitment fee, you do not have to pay
the user fee separately.
(c) Automatic cancellation of commitment. Unless you pay the full
amount of the commitment fee 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.
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. You must file this
form within 30 days after the close of the quarter, or with any request
for a draw that you make within such 30-day period. You will not be
eligible for a draw if you are not in compliance with this
Sec. 107.1220.
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:
(1) Authorize SBA to purchase your Preferred Security; or
(2) Authorize SBA, or any agent or trustee SBA designates, to
guaranty your Debenture or Participating Security and to sell it with
SBA's guarantee.
(b) Limitations on amount of draw. For Debentures or Participating
Securities, any draw against SBA's Leverage commitment must be at least
$500,000; amounts above $500,000 must be in multiples of $100,000. You
may issue Preferred Securities in any amount.
(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) If your request is submitted within 30 days following the close
of your fiscal quarter, a Financial Statement on SBA Form 468 (Short
Form) prepared as of the close of that fiscal quarter; otherwise, a
statement certifying that there has been no material adverse change in
your financial condition since your last filing of SBA Form 468 (Long
or Short Form).
(2) 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.
(3) A statement that the proceeds are needed to fund one or more
particular Small Businesses, including 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) Within 60 calendar days after the anticipated closing date, if
a planned Financing has not closed, 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.
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;
(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 will be at a discount based on an interest rate
determined under section 303(b) of the Act (without any interest rate
subsidy), as if the maturity date of the Debenture were the next
scheduled date for the sale of Debenture Trust Certificates.
(2) If the actual sale of Trust Certificates takes place after the
scheduled date, you must pay the short-term investor daily interest on
the Debenture, at the same rate, from the scheduled sale date to the
actual sale date. This additional interest is due on the actual sale
date. Failure to pay the interest constitutes noncompliance with the
terms of your Leverage (see Secs. 107.1810 and 107.1820).
(c) Sale of Participating Securities to a short-term investor. If
SBA sells your Participating Security to a short-term investor:
(1) The sale price will be the face amount.
(2) At the closing of the next scheduled sale of Participating
Security Trust Certificates, you (or SBA, as guarantor) must pay the
short-term investor Earned Prioritized Payments at a rate determined
under section 303(b) of the Act, as if the maturity date of the
Participating Security were the next scheduled date for the sale of
Trust Certificates.
(d) Licensee's right to repurchase its securities before pooling.
You may repurchase your securities 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 security is to be included; and
[[Page 58565]]
(2) Pay the face amount of the Debenture, or the face amount of the
Participating Security plus Earned Prioritized Payments, to the short-
term investor.
Exchange of Outstanding Debentures for Participating or Preferred
Securities--Section 301(d) Licensees
Sec. 107.1350 Exchange by Section 301(d) Licensee of Debentures for
Preferred or Participating Securities.
(a) Conditions for exchange of Debentures. A Section 301(d)
Licensee may, in SBA's discretion, retire an eligible Debenture through
the issuance of Preferred or Participating Securities. To do so, you
must:
(1) Pay all unpaid accrued interest on the Debenture, plus any
applicable prepayment penalties, fees, and other charges.
(2) Comply with all conditions that apply to the issuance of
Preferred or Participating Securities.
(b) Debentures not eligible for exchange. You may not retire a
Debenture by issuing Preferred or Participating Securities if SBA
guaranteed or purchased it on the basis of funds not included in your
Leverageable Capital. You must repay such a Debenture at its maturity
date, unless SBA extends it. SBA has discretion to extend the maturity
to a date not more than 15 years from the date of issuance if SBA
believes the extension is necessary for orderly liquidation of the
indebtedness.
Preferred Securities Leverage--Section 301(d) Licensees
Sec. 107.1400 Stock dividends or partnership distributions on 4
percent Preferred Securities.
Preferred Securities that SBA purchases from a Section 301(d)
Licensee may be in the form of either preferred stock issued at par
value or a preferred limited partnership interest issued at face value.
When you issue Preferred Securities, you agree to pay SBA a dividend or
partnership distribution of 4 percent per year, from the date you issue
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 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.
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
issuers.
You may issue 4 percent Preferred Securities only if your Articles
contain all the provisions in Secs. 107.1400 and 107.1410.
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. For this purpose, you may issue only a non-subsidized
Debenture (see Sec. 107.1100(c)).
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, S.W., Washington,
D.C., 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
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. 107.220).
(2) Liquidity (see Sec. 107.1505).
(3) Non-SBA borrowing (see Sec. 107.570).
(4) Making Equity Capital Investments in Small Businesses, as
follows:
(i) General rule. If you issue Participating Securities, you must
invest an amount equal to the Original Issue Price of such securities
solely in Equity Capital Investments.
(ii) Continuing requirement to maintain Equity Capital Investments.
[[Page 58566]]
Unless SBA permits otherwise, once you have met the initial investment
requirement of this paragraph (b)(4), you must maintain Equity Capital
Investments with an original cost equal to or greater than the
outstanding balance of Participating Securities in your portfolio,
measured as of the end of each fiscal year.
(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 due
under 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 Prioritized Payments and earned Adjustments; and
(3) Any Profit Participation allocated to SBA under Sec. 107.1530.
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 as of
the close of your fiscal year, at the time of application for Leverage,
or at such time as you contemplate making any Distribution. However,
SBA has the right to make the final determination of Liquidity
Impairment.
(b) Computation of Liquidity Ratio. Your Liquidity Ratio equals
your Total Current Funds Available (A) divided by your Total Current
Funds Required (B), as determined in the following table:
Calculation of Liquidity Ratio
------------------------------------------------------------------------
Amount
reported on Weighted
Financial account SBA form Weight amount
468
------------------------------------------------------------------------
Total Current Funds
Available(A)
Cash and invested idle funds.. ........... x 1.00
Commitments from investors.... ........... x 1.00
Current maturities............ ........... x 0.50
Other current assets.......... ........... x 1.00
Publicly Traded and Marketable ........... x 0.65
Securities.
Anticipated operating revenue (\1\) x 1.00
for next 12 months.
Total Current Funds
Required(B)
Current liabilities........... ........... x 1.00
Commitments to Small ........... x 0.75
Businesses.
Anticipated operating expense (\1\) x 1.00
for next 12 months.
Anticipated interest expense (\1\) x 1.00
for next 12 months.
Contingent liabilities ........... x 0.25
(guarantees).
------------------------------------------------------------------------
\1\ As determined by Licensee's management under its business plan.
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 and
Adjustments 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.
[[Page 58567]]
(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 + P) / (LI + P)] x 100
Where:
EAR = Earmarked Asset Ratio
EA = Weighted average Earmarked Assets (at cost) for the fiscal year or
interim period
P = Weighted average uninvested proceeds of Participating Securities
for the fiscal year or interim period
LI = Weighted 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) 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:
EP = Earmarked Profit (Loss)
NI = Net Income (Loss), as reported on SBA Form 468
IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that
you are distributing as an In-Kind Distribution under Sec. 107.1580
EME = Excess Management Expenses
(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.
Sec. 107.1520 How a Licensee computes and allocates Prioritized
Payments to SBA.
This section tells you how to compute Prioritized Payments and
Adjustments and determine the amounts you must pay. To distribute
Prioritized Payments, see Sec. 107.1540.
(a) How to compute Prioritized Payments and Adjustments--(1)
Prioritized Payments. For a full fiscal year, the Prioritized Payment
on a Participating Security equals the Redemption Price times the Trust
Certificate Rate. For a shorter period (one or more fiscal quarters),
you must prorate the annual Prioritized Payment.
(2) Adjustments. Compute Adjustments using paragraph (f) of this
section.
(b) Licensee's obligation to pay Prioritized Payments and
Adjustments. You are obligated to pay Prioritized Payments and
Adjustments only if you have profit as determined under 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 are not payable because you lack
sufficient profit are ``Accumulated Prioritized Payments''. Treat all
Prioritized Payment as ``Accumulated'' until they become ``Earned''
under this section.
(3) Adjustments are computed under paragraph (f) of this section
and are ``earned'' according to the same criteria applied to
Prioritized Payments.
(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
and unearned Adjustments.
(2) Distribution Account. The Distribution Account is a liability
account. Its balance represents your unpaid Earned Prioritized Payments
and earned Adjustments.
(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 and earned Adjustments.
(d) How to determine your profit for Prioritized Payment purposes.
As of the end of each fiscal year and any interim period (one or more
fiscal quarters) for which you want to make a Distribution:
(1) Bring the Accumulation Account up to date by adding to it all
Prioritized Payments through the end of the fiscal period.
(2) Determine your cumulative Earmarked Profit (Loss) under
Sec. 107.1510(e) and subtract your Earned Payments Account balance from
it. The result (if greater than zero) is your profit for the purposes
of this section; if zero or less, you have no profit.
(3) 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.
(f) How to compute Adjustments. You must compute your Adjustments
as of the end of each fiscal year.
(1) Adjustments based on Accumulation Account balance. If you have
any balance in your Accumulation Account, determine your average
Accumulation Account balance for the fiscal year and multiply it by the
average of the Trust Certificate Rates for all the Participating
Securities poolings during such year.
(2) Adjustments based on Distribution Account balance. If you have
any balance in your Distribution Account after giving effect to any
Distribution that will be made on the first or second Payment Date
following your fiscal year end, do the computations in paragraph (f)(1)
of this section, substituting
[[Page 58568]]
``Distribution Account'' for ``Accumulation Account''.
(3) Add the amounts computed in this paragraph (f) to your
Accumulation Account balance.
(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
Sec. 107.1520 as of the end of each fiscal quarter. You must distribute
any Earned Prioritized Payments and earned Adjustments 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 and
unearned Adjustments will be extinguished.
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 (one or more fiscal quarters) 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 from Sec. 107.1520(a)(1) and Adjustments (if
applicable) from Sec. 107.1520(f)
UL = ``Unused Loss'' as determined in this paragraph (c).
(1) If you have never computed a Base before, or if the Base as of
the end of your last fiscal year (your ``Previous Base'') was zero or
greater, your Unused Loss is zero.
(2) If your Previous Base was less than zero, your Unused Loss
equals your Previous Base.
(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 and
must have been expressly provided for in a plan of operations submitted
to and approved by SBA in writing. To reduce your PLC ratio:
(i) Determine the increase in your Leverageable Capital over its
highest previous level.
(ii) Find your highest previous ratio of Participating Securities
to Leverageable Capital. If you have attained your highest ratio more
than once, with different numerators and denominators, choose the ratio
with the highest numerator.
(iii) Add the increase in Leverageable Capital to the denominator
of the ratio chosen in paragraph (e)(2)(ii) of this section, and divide
the numerator by the revised denominator. The result is your new PLC
ratio.
(3) Once you compute a PLC ratio under either paragraph (e)(1) or
(e)(2) of this section, do not recompute it unless there has been a
change in your outstanding Participating Securities or your
Leverageable Capital.
(4) Example.
----------------------------------------------------------------------------------------------------------------
Participating
securities Leverageable A/B PLC ratio
(A) capital (B)
----------------------------------------------------------------------------------------------------------------
End of period 1.......................................... 1,000 1,000 1.00 1.00
End of period 2.......................................... 1,500 1,000 1.50 1.50
End of period 3.......................................... 1,200 900 1.33 1.50
End of period 4.......................................... 750 500 1.50 1.50
End of period 5.......................................... 750 1,500 0.50 1.00
----------------------------------------------------------------------------------------------------------------
Explanation of PLC Ratio calculation following increase in Leverageable Capital:
Step 1: Increase in Leverageable Capital over highest previous level = 1,500-1,000=500.
Step 2: Highest previous ratio of Participating Securities to Leverageable Capital = 1.50 (attained two times,
at end of periods 2 and 4).
Step 3: Highest numerator associated with highest ratio = 1,500 (at end of period 2); associated denominator =
1,000.
Step 4: Add the increase in Leverageable Capital (from step 1) to the denominator (from step 3):
500+1,000=1,500.
Step 5: Divide the numerator (from step 3) by the revised denominator (from step 4): 1,500/1,500=1.00.
(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.
------------------------------------------------------------------------
Then your profit
If your PLC ratio is 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
[[Page 58569]]
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 by the Profit Participation Rate to determine
the Profit Participation for the fiscal year or year-to-date interim
period.
(2) Reduce the Profit Participation from paragraph (h)(1) 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 during the fiscal year.
(3) If you computed Profit Participation for any previous interim
period during the fiscal year, you must adjust it to account for any
increase in the Profit Participation Rate.
(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.
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.
(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 Payment 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.
(c) Order of Prioritized Payment Distributions. If you have issued
Participating Securities on more than one occasion, you must pay
Prioritized Payments on them in the order of their issue date.
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 an annual
``tax Distribution'' to your investors, 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.
(a) Conditions for making a tax Distribution. You may make a tax
Distribution only if:
(1) You have paid all your Prioritized Payments and Adjustments, 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) Compute your
Maximum Tax Liability for a full fiscal year only. Use the following
formula:
M = (TOI x HRO) + (TCG x HRC)
Where:
M = Maximum Tax Liability.
TOI = Total ordinary income allocated to your partners or shareholders
for Federal income tax purposes.
HRO = The highest combined marginal Federal and State income tax rates
for corporations or individuals (whichever is higher), on ordinary
income.
TCG = Total capital gains allocated to your partners or shareholders
for Federal income tax purposes.
HRC = The highest combined marginal Federal and State income tax rates
for corporations or individuals (whichever is higher), on capital
gains.
(2) For purposes of this paragraph (b), the ``State income tax'' is
that of the State where your principal place of business is located.
(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.
[[Page 58570]]
(3) SBA will apply its share of the tax Distribution to the Profit
Participation you owe SBA under Sec. 107.1530.
(d) Paying a tax Distribution. You may make a tax Distribution only
on the first or second Payment Date following the end of your fiscal
year.
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.
(a) Conditions for making Distributions. Distributions under this
section are subject to the following conditions:
(1) You must have paid all your Prioritized Payments and
Adjustments, 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 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; minus
(2) All previous Distributions under this Sec. 107.1560 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 year 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, with such repayment to be made into escrow on terms and
conditions SBA determines.
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.
(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 Distribution. You may make a Distribution
under this paragraph (b) only if:
(i) You have distributed all Earned Prioritized Payments and earned
Adjustments, 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 and made all required Distributions under Sec. 107.1560.
[[Page 58571]]
(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 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.
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. 107.1560 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 securities that are Publicly Traded and
Marketable at the time of the Distribution.
(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 the securities being
distributed with the CRA, who will select a Disposition Agent (a person
who is knowledgeable about and proficient in the marketing of thinly
traded securities). As an alternative, if you agree, SBA may direct you
to dispose of its share. 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.
(2) You must obtain SBA's prior written approval of any In-Kind
Distribution of an Earmarked Asset that is not Publicly Traded and
Marketable, specifically including approval of the valuation of the
asset.
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 paragraph (c) of
this section). 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) Refinancing Debentures with Participating Securities. SBA may
permit you to use the proceeds of a Participating Security to pay the
principal amount due on an outstanding Debenture if:
(1) You have outstanding Equity Capital Investments (at cost) equal
to the amount of the Debentures being refinanced.
(2) You have not elected to exclude Loans and Investments from
Earmarked Assets under paragraph (a) of this section.
(d) 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.
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
Sec. 107.1600 SBA authority to issue and guarantee Trust Certificates.
(a) Full Faith and Credit. Sections 321 (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
[[Page 58572]]
to the principal and interest due on the Debentures or the Redemption
Price of and Prioritized Payments on Participating 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 321 of the Act at three month intervals, or at shorter
intervals, taking into account the amount and number of such guarantees
or TCs.
Sec. 107.1610 Terms and conditions of Trust Certificates.
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. SBA
shall determine the legal and other terms and conditions of TCs in
conjunction with the Secretary of the Treasury and its own statutory
authority and such other requirements as may be mandated by law. The
interest rate on Debentures or the Prioritized Payment rate on the
Participating Securities in a Trust or Pool shall be determined
pursuant to section 303 (b) or (g), respectively, of the Act.
Sec. 107.1620 SBA authority to pay subsidy amount on subsidized
Debentures.
If SBA guarantees Debentures of a Section 301(d) Licensee, section
303(d) of the Act requires SBA to make payments to the CRA, or to the
holder of any such Debenture, sufficient to reduce the effective rate
of interest to such Licensee during the first five years of the term of
such Debenture by three percentage points.
Sec. 107.1630 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. 107.1640 Subrogation of SBA upon payment under Trust Certificate
Program.
In the event SBA pays a claim under the guarantee of a TC, SBA's
claim is subrogated fully to the rights satisfied by such payment. No
state or Federal law can preclude or limit SBA's exercise of its
ownership rights acquired by subrogation upon payment under its
guarantee.
Sec. 107.1650 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.
Sec. 107.1660 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 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''). Such actions shall be subject to SBA prior written
approval and to the provisions of Sec. 107.1670(b).
(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.
(3) Monitor the performance of the Selling Agent, Poolers, CRA, and
the Trustee.
(4) Perform such other functions as SBA, from time to time, may
prescribe.
(b) 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.
(c) Pursuant to a contract entered into with SBA, the CRA shall do
the following as agent of SBA:
(1) Issuance of the TCs. Upon the formation of any Pool or Trust
approved by SBA, CRA shall issue TCs, in the form prescribed by SBA,
upon the primary sale of Debentures or Participating Securities, and
shall issue or effect the transfer of TCs upon the sale of original
issue TCs in any secondary market transaction.
(2) Receipt of amounts due on Debentures and Participating
Securities. CRA shall receive payments from Licensees of amounts due on
Debentures and Participating Securities, and amounts paid under
voluntary prepayments or prepayments by SBA pursuant to the terms of
the relevant Guaranty Agreements.
[[Page 58573]]
(3) Payments of amounts due on TCs. CRA shall 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.
(4) Custody of Debentures and Participating Securities and
Documentation. CRA shall hold and safeguard all Debentures and
Participating Securities constituting Trusts or Pools and shall
release, upon instructions of SBA, the Debentures and Participating
Securities paid in full at maturity or prepaid in full prior to
maturity. CRA also shall be custodian of such other documentation as
SBA shall direct by written instructions.
(5) Registration of Debentures and Participating Securities and
TCs. CRA shall provide for the registration of all pooled Debentures
and Participating Securities, all Pools and Trusts, and all TCs. With
respect to each sale of Debentures or Participating Securities, such
registration shall include:
(i) The identification of the selling License;
(ii) The interest rate to be paid on the Debentures;
(iii) The Prioritized Payment rate to be paid on the Participating
Securities;
(iv) All commissions, fees, and/or discounts paid to brokers and
dealers in TCs or others;
(v) Identification of each purchaser and any subsequent purchaser
of any TC;
(vi) The interest rate on any TC;
(vii) The price paid by any purchaser for a TC;
(viii) The fee of the CRA; and
(ix) Such other information as SBA may deem appropriate or that may
be customary in the markets for transactions of similar type.
(6) Fidelity bond or insurance. CRA shall provide a fidelity bond
or insurance in such amount as SBA may require to fully protect the
interest of the government.
(7) Other necessary functions. CRA shall perform such other
functions as SBA may deem necessary to implement the provisions of this
section.
Sec. 107.1670 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 (c)(5) of this section) and shall provide a
fidelity bond or insurance in such amount as SBA may require. Nothing
in these provisions shall affect the applicability of the securities
laws, as that term is defined in section 3(a)(47) of the Securities
Exchange Act of 1934, or any of the rules and regulations thereunder,
or otherwise supersede or limit the jurisdiction of the Securities and
Exchange Commission or any authority at any time conferred under the
securities laws.
(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 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 to
participate in the market for Debentures, Participating Securities or
TCs, such broker or dealer may be suspended while the charge is
pending. Upon conviction, participation may be terminated.
(3) When 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) When such broker or dealer has failed to make full disclosure
of the information required by paragraph (a) of this section, such
broker's or dealer's participation in the market for Debentures,
Participating Securities or TCs may be terminated.
(5) Proceedings to terminate such broker's or dealer's
participation in the market for Debentures, Participating Securities or
TCs shall be conducted in accordance with Part 134 of this Chapter. SBA
may, for any of the reasons stated above, 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. The
Assistant Administrator of the Office of Hearings and Appeals or an
Administrative Law Judge of such office shall be the reviewing official
for purposes of Secs. 134.32(b)(7) and 134.34 of this chapter.
Sec. 107.1680 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 Characteristics of SBA's guarantee.
(a) Unconditional nature of SBA's guarantee. If SBA agrees to
guarantee your Debentures or Participating Securities, such guarantee
will be unconditional, irrespective of the validity, regularity or
enforceability of the Debentures or Participating Securities or any
other circumstances which might constitute a legal or equitable
discharge or defense of a guarantor. Pursuant to its guarantee, SBA
will make timely payments of principal and interest on the Debentures
or the Redemption Price of and Prioritized Payments on the
Participating Securities, irrespective of any default by you or
acceleration of the maturity of the Debentures by SBA, or your
inability to pay the Redemption Price of or to make the Prioritized
Payments on the Participating Securities, or any early redemption of
the Participating Securities by SBA.
(b) 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 issued or sold
[[Page 58574]]
pursuant to Secs. 107.1600 through 107.1680. Persons interested in
providing funds to Licensees with SBA's guarantee must notify SBA by
letter, certifying any direct or indirect beneficial interest, or
actual or potential voting rights, in any Licensee, or in any person
directly or indirectly controlling, controlled by or under common
control with, any Licensee. These reporting requirements are approved
under OMB No. 3245-0081.
(c) SBA subrogation rights. In the event SBA pays a claim under its
guarantee, SBA's claim is subrogated fully to the rights satisfied by
such payment. No state law or Federal law can preclude or limit SBA's
exercise of its ownership rights acquired by subrogation upon payment
under its guarantee.
Sec. 107.1710 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. 107.1720 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.
Subpart J--Licensee's Noncompliance With Terms of Leverage
Sec. 107.1800 Licensee's agreement to terms and conditions in
Secs. 107.1810 and 107.1820.
Any Licensee that violates the terms and conditions of its Leverage
is subject to SBA remedies. The terms, conditions and remedies in
Sec. 107.1810 apply to outstanding Debentures issued after April 25,
1994. The terms, conditions and remedies in Sec. 107.1820 apply to
outstanding Preferred Securities and Participating Securities issued
after April 25, 1994, or if you have Earmarked Assets in your
portfolio.
Sec. 107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
(a) Applicability of this section. This Sec. 107.1810 applies to
Debentures issued after April 25, 1994. By issuing such Debentures, you
automatically agree to the terms, conditions and remedies in this
section, as in effect at the time of issuance and as if fully set forth
in the Debentures. Debentures issued before April 25, 1994 continue to
be governed by the remedies in effect at the time of their issuance.
(b) Automatic events of default. The occurrence of one or more of
the events in this paragraph (b) causes the remedies in paragraph (c)
of this section to take effect immediately.
(1) Insolvency. You become equitably or legally insolvent.
(2) Voluntary assignment. You make a voluntary assignment for the
benefit of creditors without SBA's prior written approval.
(3) Bankruptcy. You file a petition to begin any bankruptcy or
reorganization proceeding, receivership, dissolution or other similar
creditors' rights proceeding, or such action is initiated against you
and is not dismissed within 60 days.
(c) SBA remedies for automatic events of default. Upon the
occurrence of one or more of the events in paragraph (b) of this
section:
(1) Without notice, presentation or demand, the entire indebtedness
evidenced by your Debentures, including accrued interest, and any other
amounts owed SBA with respect to your Debentures, is immediately due
and payable; and
(2) You automatically consent to the appointment of SBA or its
designee as your receiver under section 311(c) of the Act.
(d) Events of default with notice. For any occurrence (as
determined by SBA) of one or more of the events in this paragraph (d),
SBA may avail itself of one or more of the remedies in paragraph (e) of
this section.
(1) Fraud. You commit a fraudulent act which causes detriment to
SBA's position as a creditor or guarantor.
(2) Fraudulent transfers. You make any transfer or incur any
obligation that is fraudulent under the terms of 11 USC 548.
(3) Willful conflicts of interest. You willfully violate
Sec. 107.730.
(4) Willful non-compliance. You willfully violate one or more of
the substantive provisions of the Act, specifically including but not
limited to the provisions summarized in section 310(c) of the Act, or
any substantive regulation promulgated under the Act.
(5) Repeated Events of Default. At any time after being notified by
SBA of the occurrence of an event of default under paragraph (f) of
this section, you engage in similar behavior which results in another
occurrence of the same event of default.
(6) Transfer of Control. You violate Sec. 107.475 and/or willfully
violate Sec. 107.410, and as a result of such violation you undergo a
transfer of Control.
(7) Non-cooperation under Sec. 107.1810(h). You fail to take
appropriate steps, satisfactory to SBA, to accomplish any action SBA
may have required under paragraph (h) of this section.
(8) Non-notification of Events of Default. You fail to notify SBA
as soon as you know or reasonably should have known that any event of
default exists under this section.
(9) Non-notification of defaults to others. You fail to notify SBA
in writing within ten days from the date of a declaration of an event
of default or nonperformance under any note, debenture or indebtedness
of yours, issued to or held by anyone other than SBA.
(e) SBA remedies for events of default with notice. Upon written
notice to you of the occurrence (as determined by SBA) of one or more
of the events in paragraph (d) of this section:
(1) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest, and/or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(2) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment
of SBA or its designee as your receiver under section 311(c) of the
Act.
(f) Events of default with opportunity to cure. For any occurrence
(as determined by SBA) of one or more of the events in this paragraph
(f), SBA may avail itself of one or more of the remedies in paragraph
(g) of this section.
(1) Excessive Management Expenses. Without the prior written
consent of SBA, you incur Management Expenses in excess of those
permitted under Sec. 107.520.
(2) Improper Distributions. You make any Distribution to your
shareholders or partners, except with the prior written consent of SBA,
other than:
(i) Distributions permitted under Sec. 107.585;
(ii) Payments from Retained Earnings Available for Distribution
based on either the shareholders' pro-rata
[[Page 58575]]
interests or the provisions for profit distributions in your
partnership agreement, as appropriate; and
(iii) Distributions by Participating Securities issuers as
permitted under Secs. 107.1540 through 107.1580.
(3) Failure to make payment. Unless otherwise approved by SBA, you
fail to make timely payment of any amount due under any security or
obligation of yours that is issued to, held or guaranteed by SBA.
(4) Failure to maintain Regulatory Capital. You fail to maintain
the minimum Regulatory Capital required under these regulations or,
without the prior written consent of SBA, you reduce your Regulatory
Capital, except as permitted by Secs. 107.585 and 107.1560 through
107.1580.
(5) Capital Impairment. You have a condition of Capital Impairment
as determined under Sec. 107.1830.
(6) Cross-default. An obligation of yours that is greater than
$100,000 becomes due or payable (with or without notice) before its
stated maturity date, for any reason including your failure to pay any
amount when due. This provision does not apply if you pay the amount
due within any applicable grace period or contest the payment of the
obligation in good faith by appropriate proceedings.
(7) Nonperformance. You violate or fail to perform one or more of
the terms and conditions of any security or obligation of yours that is
issued to, held or guaranteed by SBA, or of any agreement with or
conditions imposed by SBA in its administration of the Act and the
regulations promulgated under the Act.
(8) Noncompliance. Except as otherwise provided in paragraph (d)(5)
of this section, SBA determines that you have violated one or more of
the substantive provisions of the Act, specifically including but not
limited to the provisions summarized in section 310(c) of the Act, or
any substantive regulation promulgated under the Act.
(9) Failure to maintain investment ratio. You fail to maintain the
investment ratio for Leverage in excess of 300 percent of Leverageable
Capital (see Secs. 107.1150(b)(2) and 107.1160(c)), if applicable to
you, as of the end of each fiscal year. In determining whether you have
maintained the ratio, SBA will disregard any prepayment, sale, or
disposition of Venture Capital Financing, any increase in Leverageable
Capital, and any receipt of additional Leverage, within 120 days prior
to the end of your fiscal year.
(10) Failure to maintain diversity. You fail to maintain diversity
between management and ownership as required by Sec. 107.150, if
applicable to you.
(g) SBA remedies for events of default with opportunity to cure.
(1) Upon written notice to you of the occurrence (as determined by SBA)
of one or more of the events of default in paragraph (f) of this
section, and subject to the conditions in paragraph (g)(2) of this
section:
(i) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest, and/or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(ii) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment
of SBA or its designee as your receiver under section 311(c) of the
Act.
(2) SBA may invoke the remedies in paragraph (g)(1) of this section
only if:
(i) It has given you at least 15 days to cure the default(s); and
(ii) You fail to cure the default(s) to SBA's satisfaction within
the allotted time.
(h) Repeated non-substantive violations. If you repeatedly fail to
comply with one or more of the non-substantive provisions of the Act or
any non-substantive regulation promulgated under the Act, SBA, after
written notification to you and until you cure such condition to SBA's
satisfaction, may deny you additional Leverage and/or require you to
take such actions as SBA may determine to be appropriate under the
circumstances.
(i) Consent to removal of officers, directors, or general partners
and/or appointment of receiver. The Articles of any Licensee issuing
Debentures after April 25, 1994 must include the following provisions
as a condition to the purchase or guarantee by SBA of such Leverage.
Upon the occurrence of any of the events specified in paragraphs (d)(1)
through (d)(6) or (f)(1) through (f)(3) of this section as determined
by SBA, SBA shall have the right, and you consent to SBA's exercise of
such right:
(1) With respect to a Corporate Licensee, upon written notice, to
require you to replace, with individuals approved by SBA, one or more
of your officers and/or such number of directors of your board of
directors as is sufficient to constitute a majority of such board; or
(2) With respect to a Partnership Licensee, upon written notice, to
require you to remove the person(s) responsible for such occurrence
and/or to remove the general partner of Licensee, which general partner
shall then be replaced in accordance with Licensee's Articles by a new
general partner approved by SBA; and/or
(3) With respect to either a Corporate or Partnership Licensee, to
obtain the appointment of SBA or its designee as your receiver under
section 311(c) of the Act for the purpose of continuing your
operations. The appointment of a receiver to liquidate a Licensee is
not within such consent, but is governed instead by the relevant
provisions of the Act.
Sec. 107.1820 Conditions affecting issuers of Preferred Securities
and/or Participating Securities.
(a) Applicability of this section. This section applies if you have
Preferred Securities issued after April 25, 1994, or if you issue
Participating Securities or have Earmarked Assets in your portfolio.
Your Articles must include the provisions of this Sec. 107.1820 as a
condition to SBA's purchase of Preferred Securities or guarantee of
Participating Securities and for as long as you own Earmarked Assets.
Preferred Securities issued before April 25, 1994 continue to be
governed by the remedies in effect at the time of their issuance.
(b) Removal Conditions. Upon the occurrence (as determined by SBA)
of any of the following conditions (``Removal Conditions''), SBA may
avail itself of one or more of the remedies in paragraph (d) of this
section:
(1) Insolvency or extreme Capital Impairment. You become equitably
or legally insolvent, or have a Capital Impairment Percentage of 100
percent or more (``extreme Capital Impairment'') and have not cured
such Capital Impairment within the time limits set by SBA in writing.
In this regard:
(i) You are not considered to have a condition of extreme Capital
Impairment during the first eight years following your first issuance
of Participating Securities.
(ii) This paragraph (b)(1) does not give you an additional
opportunity to cure if you have already had an opportunity to cure your
Capital Impairment under paragraph (e)(3) of this section.
(2) Voluntary assignment. You make a voluntary assignment for the
benefit of creditors.
(3) Bankruptcy. You begin any bankruptcy or reorganization
proceeding, receivership, dissolution or other similar creditors'
rights proceeding, or such action is initiated against you and is not
dismissed within 60 days.
(4) Transfer of Control. You violate Sec. 107.475 and/or willfully
violate Sec. 107.410, and such violation results in a transfer of
Control.
[[Page 58576]]
(5) Fraud. You commit a fraudulent act which causes serious
detriment to SBA's position as a guarantor or investor.
(6) Fraudulent transfers. You make any transfer or incur any
obligation that is fraudulent under the terms of 11 USC 548.
(c) Contingent Removal Conditions. Upon the occurrence (as
determined by SBA) of any of the following conditions (``Contingent
Removal Conditions''), SBA may avail itself of one or more of the
remedies in paragraph (d) of this section, but only if you fail to
remove the person(s) SBA identifies as responsible for such occurrence
and/or cure such occurrence to SBA's satisfaction within a time period
determined by SBA (but not less than 15 days):
(1) Willful conflicts of interest. You willfully violate
Sec. 107.730.
(2) Willful or repeated noncompliance. You willfully or repeatedly
violate one or more of the substantive provisions of the Act,
specifically including but not limited to the provisions summarized in
section 310(c) of the Act, or any substantive regulation promulgated
under the Act.
(3) Failure to comply with restrictions under paragraph (f) of this
section. You fail to comply with the restrictions imposed by SBA under
paragraph (f) of this section.
(d) SBA remedies for Removal Conditions and Contingent Removal
Conditions. Upon the occurrence (as determined by SBA) of any Removal
Condition, or any Contingent Removal Condition accompanied by your
failure to act as set forth in paragraph (c) of this section, SBA has
the following rights, and you consent to SBA's exercise of any or all
of such rights:
(1) With respect to a Corporate Licensee, upon written notice, to
require you to replace, with individuals approved by SBA, one or more
of your officers and/or such number of directors as is sufficient to
constitute a majority of your board of directors; or
(2) With respect to a Partnership Licensee, upon written notice, to
require you to remove the person(s) responsible for such occurrence
and/or to remove your general partner, who shall then be replaced in
accordance with your Articles by a new general partner approved by SBA;
and/or
(3) With respect to either a Corporate or Partnership Licensee, to
the appointment of SBA or its designee as your receiver under section
311(c) of the Act for the purpose of continuing your operations. The
appointment of a receiver to liquidate a Licensee is not within such
consent, but is governed instead by the relevant provisions of the Act.
(e) Restricted Operations Conditions. Upon the occurrence (as
determined by SBA) of any of the following conditions (``Restricted
Operations Conditions''), SBA may avail itself of any of the remedies
in paragraph (f) of this section.
(1) Removal Conditions or Contingent Removal Conditions. Any
condition occurs which is listed in paragraphs (b) or (c) of this
section.
(2) Failure to maintain Regulatory Capital. You fail to maintain
the minimum Regulatory Capital required by this part.
(3) Capital or Liquidity Impairment. You have a condition of
Capital Impairment as determined under Sec. 107.1830 or, if applicable,
a condition of Liquidity Impairment as determined under Sec. 107.1505,
and you fail to cure the impairment within time limits set by SBA in
writing.
(4) Improper Distributions. You make any Distribution to your
shareholders or partners other than those permitted by Secs. 107.585
and 107.1560 through 107.1580.
(5) Excessive Management Expenses. Without the prior written
consent of SBA, you incur Management Expenses in excess of those
permitted under Sec. 107.520.
(6) Failure to make payment. You fail to pay any amounts due under
Preferred Securities or required by Secs. 107.1500 through 107.1590,
unless otherwise permitted by SBA.
(7) Noncompliance. Except as otherwise provided for in paragraphs
(c)(1) and (c)(2) of this section, SBA determines that you have failed
to comply with one or more of the substantive provisions of the Act,
specifically including but not limited to the provisions summarized in
section 310(c) of the Act, or any substantive regulation promulgated
under the Act.
(8) Failure to maintain diversity. You fail to maintain diversity
between management and ownership as required by Sec. 107.150, if
applicable to you.
(9) Failure to maintain investment ratios. You fail to maintain the
investment ratios or amounts required for Participating Securities
(Sec. 107.1500(b)(4)) or Leverage in excess of 300 percent of
Leverageable Capital (Sec. 107.1160(c)) or Preferred Securities in
excess of 100 percent of Leverageable Capital (Sec. 107.1160(d)), if
applicable to you, as of the end of each fiscal year. In determining
whether you have maintained the ratios or amounts, SBA will disregard
any prepayment, sale, or disposition of Equity Capital Investments or
Venture Capital Financings, as appropriate, any increase in
Leverageable Capital, and any receipt of additional Leverage, within
120 days prior to the end of your fiscal year.
(10) Nonperformance. You violate or fail to perform one or more of
the terms and conditions of any Participating Security or Preferred
Security or of any agreement with or condition imposed by SBA in its
administration of the Act and the regulations promulgated thereunder.
(11) Noncooperation under paragraph (g) of this section. You fail
to take appropriate steps, satisfactory to SBA, to accomplish such
action as SBA may have required under paragraph (g) of this section.
(f) SBA remedies for Restricted Operations Conditions. Upon the
occurrence of any Restricted Operations Condition, and until such
condition(s) are cured to SBA's satisfaction within a time period
determined by SBA (but not less than 15 days), upon written notice SBA
shall have the following rights, and you consent to SBA's exercise of
any or all of such rights:
(1) To prohibit you from making any additional investments except
for investments under legally binding commitments you entered into
before such notice and, subject to SBA's prior written approval,
investments that are necessary to protect your investments;
(2) Until all Leverage is redeemed and amounts due are paid, to
prohibit Distributions by you to any party other than SBA, its agent or
Trustee;
(3) To require all your commitments from investors to be funded at
the earliest time(s) permitted in accordance with your Articles; and
(4) To review and re-determine your approved Management Expenses.
(g) Repeated non-substantive violations. If you repeatedly fail to
comply with one or more of the non-substantive provisions of the Act or
any non-substantive regulation promulgated thereunder, SBA, after
written notification to you and until such condition is cured to SBA's
satisfaction, will deny you additional Leverage and/or require you to
take such actions as SBA may determine to be appropriate under the
circumstances.
Computation of Licensee's Capital Impairment
Sec. 107.1830 Licensee's Capital Impairment--definition and general
requirements.
(a) Applicability of this section. This Sec. 107.1830 applies to
you if you have any outstanding Leverage issued on or after April 25,
1994. If you only have outstanding Leverage issued before April 25,
1994, you must comply with paragraphs (e) and (f) of this section and
the Capital Impairment regulations in
[[Page 58577]]
this part in effect when you issued your Leverage.
(b) Significance of Capital Impairment condition. If you have a
condition of Capital Impairment, you are not in compliance with the
terms of your Leverage. As a result, SBA has the right to impose the
applicable remedies for noncompliance in Secs. 107.1810(g) and
107.1820(f).
(c) Definition of Capital Impairment condition. You have a
condition of Capital Impairment if your Capital Impairment Percentage,
as computed in Sec. 107.1840, exceeds:
(1) For Section 301(d) Licensees, 75 percent.
(2) For Section 301(c) Licensees, the appropriate percentage from
the following table:
Maximum Permitted Capital Impairment Percentages for Section 301(c)
Licensees
------------------------------------------------------------------------
And your ratio of
If the percentage of equity outstanding leverage Then your maximum
capital investments (at cost) to leverageable permitted capital
in your portfolio is: capital percentage impairment
is: percentage is:
------------------------------------------------------------------------
67........................... 100 or less......... 70
Over 100 but not over 200 60..................
Over 200 50..................
At least 40 but under 67..... 100 or less......... 55
Over 100 but not 50
over 200.
Over 200 40..................
Under 40..................... 100 or less......... 45
Over 100 but not over 200 40..................
Over 200 35..................
------------------------------------------------------------------------
(d) Phase-in of maximum permitted Capital Impairment Percentages
for Section 301(c) Licensees. If you are a Section 301(c) Licensee,
regardless of your maximum permitted Capital Impairment Percentage
under paragraph (c) of this section, you will not have a condition of
Capital Impairment if:
(1) Your Capital Impairment Percentage does not exceed 50 percent;
and
(2) You have not reached your first fiscal year end occurring after
April 25, 1995.
(e) Quarterly computation requirement and procedure. You must
determine whether you have a condition of Capital Impairment as of the
end of each fiscal quarter. You must notify SBA promptly if you are
capitally impaired.
(f) SBA's right to determine Licensee's Capital Impairment
condition. SBA may make its own determination of your Capital
Impairment condition at any time.
Sec. 107.1840 Computation of Licensee's Capital Impairment Percentage.
(a) General. This section contains the procedures you must use to
determine your Capital Impairment Percentage if you have outstanding
Leverage issued after April 25, 1994. You must compare your Capital
Impairment Percentage to the maximum permitted under Sec. 107.1830(c)
to determine whether you have a condition of Capital Impairment.
(b) Preliminary impairment test. If you satisfy the preliminary
impairment test, your Capital Impairment Percentage is zero and you do
not have to perform any more procedures in this Sec. 107.1840.
Otherwise, you must continue with paragraph (c) of this section. You
satisfy the test if the following amounts are both zero or greater:
(1) The sum of Undistributed Net Realized Earnings, as reported on
SBA Form 468, and Includible Non-Cash Gains.
(2) Unrealized Gain (Loss) on Securities Held.
(c) How to compute your Capital Impairment Percentage. (1) If you
have an Unrealized Gain on Securities Held, compute your Adjusted
Unrealized Gain using paragraph (d) of this section. If you have an
Unrealized Loss on Securities Held, continue with paragraph (c)(2) of
this section.
(2) Add together your Undistributed Net Realized Earnings, your
Includible Non-cash Gains, and either your Unrealized Loss on
Securities Held or your Adjusted Unrealized Gain.
(3) If the sum in paragraph (c)(2) of this section is zero or
greater, your Capital Impairment Percentage is zero.
(4) If the sum in paragraph (c)(2) of this section is less than
zero, drop the negative sign, divide by your Regulatory Capital
(excluding Treasury Stock), and multiply by 100. The result is your
Capital Impairment Percentage.
(d) How to compute your Adjusted Unrealized Gain. (1) Subtract
Unrealized Depreciation from Unrealized Appreciation. This is your
``Net Appreciation''.
(2) Determine your Unrealized Appreciation on Publicly Traded and
Marketable securities. This is your ``Class 1 Appreciation''.
(3) Determine your Unrealized Appreciation on securities that are
not Publicly Traded and Marketable and meet the following criteria,
which must be substantiated to the satisfaction of SBA (this is your
``Class 2 Appreciation''):
(i) The Small Business that issued the security received a
significant subsequent equity financing by an investor whose objectives
were not primarily strategic and at a price that conclusively supports
the Unrealized Appreciation;
(ii) Such financing represents a substantial investment in the form
of an arm's length transaction by a sophisticated new investor in the
issuer's securities; and
(iii) Such financing occurred within 24 months of the date of the
Capital Impairment computation, or the Small Business' pre-tax cash
flow from operations for its most recent fiscal year was at least 10
percent of the Small Business' average contributed capital for such
fiscal year.
(4) Perform the appropriate computation from the following table:
Adjusted Unrealized Gain Before Estimated Tax Effects
------------------------------------------------------------------------
------------------------------------------------------------------------
If:......................... And:................ Then Adjusted
Unrealized Gain
before Taxes is:
[[Page 58578]]
Class 1 Appreciation Net Appreciation. Appreciation + Appreciation) +
Class 2 (50% x Class 2
Appreciation Net
Appreciation.
Class 1 Appreciation Net Appreciation. Appreciation + Appreciation) +
Class 2 [(50% x Net
Appreciation > Appreciation -
Net Appreciation. Class 1
Appreciation)].
Class 1 Appreciation > Net .................... 80% x Net
Appreciation. Appreciation.
------------------------------------------------------------------------
(5) Reduce the gain computed in paragraph (d)(4) of this section by
your estimate of related future income tax expense. Subject to any
adjustment required by paragraph (d)(6) of this section, the result is
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this
section.
(6) If any securities that are the source of either Class 1 or
Class 2 Appreciation are pledged or encumbered in any way, you must
reduce the Adjusted Unrealized Gain computed in paragraph (d)(5) of
this section by the amount of the related borrowing or other
obligation.
Sec. 107.1850 Exceptions to Capital Impairment provisions for
Licensees with outstanding Participating Securities.
The provisions in this Sec. 107.1850 apply only if at least two-
thirds of your outstanding Leverage consists of Participating
Securities, and at least two-thirds of your Loans and Investments (at
cost) consist of Equity Capital Investments.
(a) Forbearance period for Participating Securities issuers. During
the first forty-eight (48) months following your first issuance of
Participating Securities, you will not have a condition of Capital
Impairment if your Capital Impairment Percentage is below 85 percent.
(b) Extended forbearance period for early stage investors. If at
least two-thirds of your Loans and Investments (at cost) are in Start-
Up Financings, the forbearance period in paragraph (a) of this section
is extended to 60 months.
(c) Forbearance based on actions by Licensee. The provisions of
this paragraph (c) apply only during the fifth and sixth years
following your first issuance of Participating Securities. If your
Capital Impairment Percentage, as determined either by you or by SBA,
exceeds the maximum permitted under Sec. 107.1830(c) but is below 85
percent, you will not have a condition of Capital Impairment if you do
either of the following within thirty (30) days of such determination:
(1) Increase your Regulatory Capital by a cash contribution placed
in an escrow account or other account satisfactory to SBA, for its
benefit. The contribution must equal, during the fifth year, 15 percent
of your outstanding Leverage or, during the sixth year, 30 percent.
(2) Provide a guarantee, satisfactory to SBA and for its benefit,
for the amount of the cash contribution required in paragraph (c)(1) of
this section. SBA will credit any escrowed funds or guarantee received
in the fifth year toward the requirements for the sixth year.
(d) Conditions for forbearance under paragraph (c) of this section.
(1) You cannot count any funds placed in an escrow or other account
under paragraph (c) of this section as Leverageable Capital.
(2) Any fee and/or any claim to repayment by the party making the
capital contribution or by the guarantor must be deferred and
subordinate to all outstanding Leverage plus any unpaid Earned
Prioritized Payments and earned Adjustments.
(3) If there is an acceleration or mandatory redemption under
Sec. 107.1810 or Sec. 107.1820, any funds in the escrow account and/or
any guarantee received under paragraph (c) of this section will be
applied toward repaying any amounts due SBA.
(4) If you reduce your Capital Impairment Percentage to zero, SBA
will release and return any escrowed funds and/or any guarantee
received under paragraph (c) of this section.
Subpart K--Ending Operations as a Licensee
Sec. 107.1900 Surrender of license.
You may not surrender your license without SBA's prior written
approval. Your request for approval must be accompanied by an offer of
immediate repayment of all of your outstanding Leverage (including any
prepayment penalties thereon), or by a plan satisfactory to SBA for the
orderly liquidation of the Licensee.
Subpart L--Miscellaneous
Sec. 107.1910 Non-waiver of SBA's rights or terms of Leverage
security.
SBA's failure to exercise or delay in exercising any right or
remedy under the Act or the regulations in this part does not
constitute a waiver of such right or remedy. SBA's failure to require
you to perform any term or provision of your Leverage does not affect
SBA's right to enforce such term or provision. Similarly, SBA's waiver
of, or failure to enforce, any term or provision of your Leverage or of
any event or condition set forth in Secs. 107.1810 or 107.1820 does not
constitute a waiver of any succeeding breach of such term or provision
or condition.
Sec. 107.1920 Licensee's application for exemption from a regulation
in Part 107.
You may file an application in writing with SBA to have a proposed
action exempted from any procedural or substantive requirement,
restriction, or prohibition to which it is subject under this part,
unless the provision is mandated by the Act. SBA may grant an exemption
for such applicant, conditionally or unconditionally, provided the
exemption would not be contrary to the purposes of the Act. Your
application must be accompanied by supporting evidence which
demonstrates to SBA's satisfaction that:
(a) The proposed action is fair and equitable; and
(b) The exemption requested is reasonably calculated to advance the
best interests of the SBIC program in a manner consonant with the
policy objectives of the Act and regulations.
Sec. 107.1930 Effect of changes in Part 107 on transactions previously
consummated.
The legality of a transaction covered by these regulations is
governed by the regulations in effect at the time the transaction was
consummated, regardless of later changes. Nothing in this part bars SBA
enforcement action with respect to any transaction consummated in
violation of provisions applicable at the time, but no longer in
effect.
Dated: November 11, 1995.
Philip Lader,
Administrator.
[FR Doc. 95-28757 Filed 11-27-95; 8:45 am]
BILLING CODE 8025-18-P