[Federal Register Volume 64, Number 189 (Thursday, September 30, 1999)]
[Rules and Regulations]
[Pages 52641-52646]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25244]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107


Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: In order to encourage small business investment companies 
(SBICs) to invest in inner cities and rural areas and in businesses 
that serve such areas, the Small Business Administration (SBA) is 
introducing a new SBIC investment category called low and moderate 
income investments (LMI

[[Page 52642]]

Investments). For each SBIC financing that qualifies as an LMI 
Investment, SBA is modifying its regulations on control of the small 
business, ``cost of money'' of the financing, and term of the 
financing. SBA also will make available a patient form of debenture 
leverage that may be issued only by SBICs that make LMI Investments.

DATES: Effective Date: This final rule is effective September 30, 1999.
    Applicability Date: The regulatory and financial incentives 
described in this rule will apply only to investments made after 
September 30, 1999.

FOR FURTHER INFORMATION CONTACT: Saunders Miller, Investment Division, 
at (202) 205-3646.

SUPPLEMENTARY INFORMATION: On February 9, 1999, SBA proposed a program 
of narrowly-tailored regulatory and financial incentives to encourage 
SBICs to expand their investment activity into inner cities and rural 
areas. See 64 FR 6256. The incentives were proposed to be available to 
any SBIC making qualified investments (LMI Investments) in qualified 
small businesses (LMI Enterprises) located in or providing employment 
for economically distressed inner cities and rural areas (LMI Zones). 
The incentives fell into two categories. First, SBA proposed to allow 
SBICs greater regulatory flexibility when structuring and making LMI 
Investments. Second, SBA proposed to make available a deferred-interest 
debenture exclusively for the financing of LMI Investments.
    SBA received four comment letters on the proposed rule during the 
30-day public comment period. Overall, the four letters were supportive 
of SBA's initiative, although all of the letters contained suggestions 
for improving the proposal. This final rule incorporates certain of the 
changes recommended in those comment letters.

Defining Low and Moderate Income Zones (LMI Zones)

    SBA received two comments on the definition of the markets targeted 
by the proposed LMI initiative. The proposed rule defined those markets 
as small businesses that are located in certain distressed geographic 
areas or that have 35 percent of their full time employees residing in 
those areas.
    One of the two comments suggested that the final rule target 
historically underserved entrepreneurs, regardless of their business 
location, instead of underserved geographic areas. The other comment 
suggested expanding the geographic areas identified in the proposed 
rule to include some or all of the markets targeted for economic 
development by the Federal Home Loan Banks. Those markets are set forth 
in the Community Investment Cash Advance regulation of the Federal 
Housing Finance Board. They include any project that provides jobs or 
services for individuals with income levels at or below certain levels, 
as well as projects located in geographic areas broader than the 
locations specified in SBA's proposed rule.
    SBA considered the comments, but has decided to adopt the proposed 
definition of LMI Zone without change. SBA's proposal was designed to 
bring investment dollars into distressed urban and rural areas to help 
revitalize those communities and bring jobs to their residents. Given 
the finite resources available to the LMI initiative, any expansion of 
the proposal to include groups of individuals without regard to their 
business locations or their residences would dilute the impact of the 
benefits SBA hopes will inure to the targeted communities.
    SBA also believes that, in order to be successful, the definition 
of the targeted markets must be easy for SBICs and SBA examiners to 
use. SBA therefore selected only those geographic areas that are not 
only distressed, but are also found on a government-operated electronic 
address-database. Through the use of these user-friendly databases, 
SBICs and SBA examiners should be able to quickly and easily determine 
whether a given address is located in an ``LMI Zone''.
    If SBA learns that other severely distressed areas are also capable 
of identification through a Government electronic address-database, it 
might consider expanding the targeted markets of the LMI initiative at 
a later date.
    As mentioned in the proposed rule, SBA is exploring the possibility 
of consolidating the various Government databases into a single 
electronic database at SBA. While that possibility still exists, any 
such consolidation is unlikely to be accomplished this calendar year. 
Until SBICs are notified otherwise, they should research addresses 
through the various databases referenced in this rule, and should 
document their files accordingly.
    As was stated in the proposed rule, any address located in a 
HUBZone, an Empowerment Zone, an Enterprise Community, a Low or 
Moderate Income area, or a Persistent Poverty county will be considered 
to be located in an LMI Zone. The government databases for those five 
areas are:

1. HUBZones: www.sba.gov/hubzone/hubqual.html
2. Empowerment Zones: www.hud.gov/ezec/locator/
3. Enterprise Communities: same as for Empowerment Zones
4. Low and Moderate Income areas: www.ffiec.gov/geocode
5. Persistent Poverty counties: www.econ.ag.gov/epubs/other/typolog

Defining LMI Enterprise

    SBA received one comment on the proposed definition of LMI 
Enterprise. Under the proposal, a small business's qualification as an 
LMI Enterprise would be determined as of the time the business applies 
for SBIC financing. This would be true whether the business were 
qualifying under the ``principal place of business'' test or the 
``percentage of employees'' test.
    The commenter pointed out that determining a small business's 
qualification under the principal place of business test ``as of the 
time of application for SBIC financing'' would exclude those small 
businesses that would use the proceeds of the SBIC financing to move 
into an LMI Zone. That is true. Similarly, determining a small 
business's qualification under the percentage of employees test ``as of 
the time of application for SBIC financing'' would exclude those small 
business that would use the proceeds of the SBIC financing to expand 
their business and hire new employees from LMI Zones. SBA had thought 
that determining a business's qualification based only on its intention 
to locate into or hire from eligible areas would introduce too much 
uncertainty into the program.
    Upon reconsideration of the issue, however, SBA believes that the 
rule can be modified in a manner that will encourage businesses to use 
SBIC financing to locate in LMI Zones or to hire residents of LMI 
Zones, while minimizing the risk that the incentives in this LMI 
initiative will be misused. SBA believes this can be accomplished by 
allowing companies that intend either to locate in or to hire from an 
LMI Zone a fixed period of time after closing on their SBIC financing 
to do so. During that time, the business would be considered an LMI 
Enterprise. At the end of the period, though, the business would lose 
its LMI status if it had not located in an LMI Zone or qualified as an 
LMI Enterprise under the percentage of employees test.
    SBA believes that a company should be able to establish its 
principal place of business in an LMI Zone or hire employees from an 
LMI Zone within 180 days from the date the SBIC financing closes. Six 
months should be ample time for a company to resolve any zoning or 
other issues that might delay the opening of the business in an LMI

[[Page 52643]]

Zone or the hiring of residents from an LMI Zone.
    Accordingly, the final rule allows a company to temporarily qualify 
as an LMI Enterprise if, at the time of application for SBIC financing, 
the company certifies as to its intent to locate its principal place of 
business in an LMI Zone or its intent to hire the required number of 
residents of LMI Zones, in either case within 180 days after the SBIC 
financing closes. At the end of the 180-day period, if the company does 
not have its principal place of business in an LMI Zone or 35 percent 
of its employees residing in LMI Zones, it will no longer qualify as an 
LMI Enterprise. This means that the SBIC's financing of the company 
will no longer qualify as an LMI Investment.
    SBA has considered whether the SBIC or the small business should 
bear the risk of the small business' loss of qualification as an LMI 
Enterprise and the financing's loss of qualification as an LMI 
Investment. If the loss of LMI qualification constitutes a default by 
the small business under the financing and the SBIC can demand 
repayment or redemption of the financing, the small business bears most 
of the risk. If loss of LMI qualification does not constitute a 
default, the SBIC must continue to hold its investment in the company 
and must revise the terms of the financing to conform to standard (non-
LMI) SBA regulations (e.g., minimum term, control restrictions). In 
that event, the SBIC alone bears the risk since the small business gets 
the benefit of SBIC financing on standard (non-LMI) terms.
    SBA has concluded that the parties themselves (the SBIC and the 
small business) should determine who is to bear the risk of the loss of 
LMI qualification. The terms of the financing agreement negotiated 
between the small business and the SBIC should specify whether the loss 
of qualification as an LMI Enterprise constitutes a default by the 
small business under the financing. If the loss of qualification as an 
LMI Enterprise does not constitute a default under the financing 
agreement, the SBIC must be sure that the terms of the financing, going 
forward, satisfy SBA requirements for non-LMI financings (e.g., minimum 
term; control restrictions). If the loss of qualification as an LMI 
Enterprise does constitute a default under the financing agreement, the 
SBIC will be entitled to whatever remedies are available to it for the 
default.
    The proposed version of Sec. 107.610(e) required each LMI 
Enterprise to certify to the investing SBIC as to the location of 
either its principal place of business or the primary residences of all 
of its full-time employees. The certification was to be dated no 
earlier than the date the small business applied for the SBIC financing 
and was to be kept in the SBIC's files, along with the SBIC's own 
certification that the small business qualifies as an LMI Enterprise 
and the basis for such qualification.
    The final version of Sec. 107.610(e) still requires certifications 
from both the small business and the SBIC, but allows a small business 
that is intending to locate into an LMI Zone or to hire residents of 
LMI Zones to so certify. Any small business that qualifies as an LMI 
Enterprise based on its intention to locate in an LMI Zone or to hire 
residents of LMI Zones must also provide the SBIC with a later 
certification, dated within the 180 day period discussed above, 
certifying that its principal place of business is located in an LMI 
Zone or that it has 35 percent of its employees residing in LMI Zones. 
The SBIC must make its own certification(s) contemporaneously with the 
certification(s) of the small business.
    SBA has made one final modification to the definition of LMI 
Enterprise and to Sec. 107.610(e). Since the term ``principal place of 
business'' is susceptible to more than one interpretation, SBA has 
decided to specify precisely what is intended by the term as it relates 
to LMI Enterprises. SBA believes that an LMI Enterprise's principal 
place of business should be determined by reference to the location of 
its employees or tangible assets, not its books and records or its 
corporate headquarters. This approach is similar to the one used in 
Sec. 107.720(g)(1)(ii)--SBA's criteria for determining whether a 
business is a non-U.S. business for purposes of the prohibition on 
foreign investments in the SBIC Program.
    Under the final rule, SBA will consider an LMI Enterprise to be 
located where at least 50 percent of its employees or tangible assets 
are located. SBA realizes, though, that the use of the term ``principal 
place of business'' may, itself, cause confusion since that term has 
already been defined differently in other SBA programs. Accordingly, 
the final rule replaces the term ``principal place of business'' with 
the ``50% of employees or tangible assets'' test in the definition of 
LMI Enterprise and in Sec. 107.610(e).

Defining LMI Investment

    As discussed in the proposed rule, SBA wants to ensure that the 
SBIC Program is used to promote true venture capital financing in LMI 
Zones, not just high-interest lending. SBA is also concerned that LMI 
Enterprises that receive SBIC financing not be precluded from using 
their assets to secure third-party debt. SBA therefore proposed that 
LMI Investments be defined to include only those SBIC financings that 
are in the form of equity securities (as defined in Sec. 107.800) or 
debt securities (as defined in Sec. 107.815) which are subordinated to 
all borrowings of the business from financial institutions. The 
proposed rule also required that LMI Investments in the form of debt 
securities be unsecured, although the SBIC would have been permitted to 
accept a guarantee of the debt security if the guarantee were itself 
unsecured.
    SBA received two comments on the proposed definition of an LMI 
Investment. Both comments argued in favor of expanding the definition 
to include debt securities that are secured by the assets of the small 
business if the security interest is junior to any other secured debt 
of the business. The commenters argued that excluding secured financing 
of LMI Enterprises would discourage SBIC support of those businesses. 
One commenter further argued that an SBIC holding an unsecured position 
in a company might take more precipitous action to protect its interest 
than if the SBIC had collateral to protect its position.
    SBA concurs with the suggested change to the definition. SBA 
expects that allowing SBICs to take a junior secured position in the 
assets of an LMI Enterprise will not prevent the LMI Enterprise from 
obtaining secured debt from other sources.
    This change would place SBICs ahead of any unsecured debt of the 
LMI Enterprise. SBA believes, though, that unsecured debt is generally 
unavailable to most LMI Enterprises, except from the principals of the 
enterprise. Even under the proposed rule, LMI Investments were not 
required to subordinate in favor of borrowings from the principals of 
the enterprise. Accordingly, the final definition of LMI Investment 
includes debt securities that are secured by the assets of the small 
business provided the SBIC's security interest is junior to any other 
existing or future secured debt of the business.

Regulatory and Financial Incentives

    Under the proposed rule, SBA proposed to modify the regulations 
governing three subject matters, as they would apply to LMI 
Investments--control of the small business, the treatment of royalties 
in the calculation of cost of money, and minimum term of investment. 
SBA also discussed its intention to create a new form of debenture for 
use by SBICs that make LMI Investments.

[[Page 52644]]

1. Temporary Control of the LMI Enterprise

    SBA proposed to permit SBICs to take temporary control of each 
business in which they make an LMI Investment. No comments were 
received on this portion of the proposal. Accordingly, Sec. 107.865(d) 
is finalized as proposed.

2. Royalties and Cost of Money

    SBA proposed to exclude royalty payments on LMI Investments from 
the calculation of ``Cost of Money'' under Sec. 107.855. Cost of Money 
is the term for the sum of the interest rate and other charges that an 
SBIC imposes on a small business. The Cost of Money to the small 
business must not exceed the SBIC's Cost of Money ceiling, as computed 
under Sec. 107.855(c).
    To qualify for the proposed exclusion, the royalty would have to be 
based on improvement in the performance of the LMI Enterprise after the 
date of the financing. The proposed rule explained that the royalty 
might be expressed, for example, as a percentage of any increase in an 
underlying unit of measurement (e.g., revenue or sales) after the date 
of the financing.
    SBA received one comment on this provision. The comment asked for 
clarification as to whether a royalty could be based on an increase in 
more than one unit of measurement and still be excluded from the Cost 
of Money calculation. For example, could a royalty provide for payment 
to the SBIC if either the revenues or the profits of the small business 
increased?
    SBA was not intending to restrict royalties to increases in a 
single underlying unit of measurement. To do so would force SBICs to 
determine in advance which performance measurement would be most likely 
to reflect the improved performance of the small business. A business 
might have higher profits but steady or even declining revenues, or it 
might have increased revenues but steady profits. Either circumstance 
could constitute improvement in the performance of the business.
    If an SBIC and a small business agree to a royalty that is 
expressed as a percentage of increases in alternative performance 
measurements (e.g., profits or revenues), the royalty will be excluded 
from Cost of Money. SBA believes that the text of proposed Sec. 107.855 
is sufficiently broad to cover this possibility. Accordingly, proposed 
Sec. 107.855 is finalized without change.
    SBA would also like to clarify the application of the royalty 
provision to any LMI Investments that an SBIC makes through a holding 
company or an investment vehicle, as permitted under Sec. 107.720(b). 
In determining whether a business's performance has improved, SBA will 
look through any holding company or investment vehicle to the 
performance of the operating business itself. It is the improvement in 
the operating business's performance, not the improvement in the 
performance of a holding company or investment vehicle, which would 
serve as the basis for the calculation of the royalty payment to the 
SBIC.
    Since the publication of the proposed rule, the President signed 
the Small Business Investment Improvement Act of 1999. See Public Law 
106-9, 113 Stat. 17, April 5, 1999. Section 2(a) of the new law 
excludes certain royalty payments from the calculation of Cost of Money 
for all investments made by SBICs. SBA will be publishing a proposed 
rule to implement this change in the near future.

3. Minimum Term of LMI Investment

    SBA received no comments on its proposal to set a one-year minimum 
term for LMI Investments. The proposed changes to Secs. 107.835 and 
107.850(a) are, therefore, adopted without change.

4. Deferred Interest Debenture

    SBA proposed to allow SBICs to finance LMI Investments with a more 
patient-type of debenture (called an LMI Debenture). No regulatory 
changes are necessary to create the new debenture, but SBA is 
continuing to work on its design and method of funding.
    The LMI Debenture under development would be a non-amortizing 
debenture with a term of up to 10 years, issued at a discount so as to 
be, in effect, ``zero coupon'' for the first five years. It would 
require semi-annual interest payments on the face amount for the 
remainder of the term. SBA leverage fees would not be deferred; they 
would be paid as required under Sec. 107.1130.
    The proposed rule explained that an SBIC's eligibility for LMI 
Debentures would be based solely on the SBIC's outstanding LMI 
Investments (made after the effective date of the final rule). SBA has 
come to the conclusion that this approach might discourage SBICs from 
making LMI Investments since the LMI Debenture funds would only be 
available after the investment had already been made.
    Instead, SBA has decided to determine an SBIC's eligibility for LMI 
Debentures based on the sum of its outstanding LMI Investments (made 
after the effective date of the final rule) plus any LMI Investments 
the SBIC intends to make with the proceeds of the LMI Debenture. If an 
SBIC with no outstanding LMI Investments applies for a draw down of 
debenture leverage and intends to use the leverage to make an LMI 
Investment, SBA can approve the issuance of an LMI Debenture.
    As stated in the proposed rule, an SBIC's overall eligibility for 
an LMI Debenture will still be determined in two ways. First, the SBIC 
will have to be eligible to issue leverage in an amount equal to the 
face amount of the LMI Debenture. Eligibility for this purpose is 
determined under Secs. 107.1120-107.1160.
    Second, the face amount of the SBIC's requested LMI Debenture, plus 
the face amount of the SBIC's outstanding LMI Debenture(s), cannot 
exceed 1.5 times the sum of the SBIC's outstanding LMI Investments plus 
the proposed LMI Investment. In other words, under this second test an 
SBIC would be eligible for an LMI Debenture with a face amount equal to 
(a) 1.5 times the sum of the SBIC's existing and planned LMI 
Investments at the time of application, minus (b) the face amount of 
any outstanding LMI Debentures. The 1.5 multiple takes into 
consideration the zero-coupon feature of the LMI Debenture and allows 
for an approximate matching of net proceeds of LMI Debentures with 
funds invested in LMI Investments.
    SBA will notify all SBICs when LMI Debentures are ready for use.
    The regulatory and financial incentives described in this final 
rule will apply only to investments made after the effective date of 
this rule.

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 final rule may constitute a significant 
regulatory action within the meaning of Executive Order 12866, since it 
raises a new policy issue reflecting the President's priorities.
    One of the purposes of the SBIC Program is to encourage the flow of 
equity-type investments into small businesses. For the first 35 years 
of the SBIC Program, however, the only type of leverage available to 
SBICs (other than Specialized SBICs) was debt leverage with interest 
payable every six months.
    Congress recognized this mismatch of source and use of funds and 
created Participating Securities leverage in 1992. Participating 
Securities leverage is a type of ``patient capital'' and helps to 
promote equity investing by SBICs. However, because required payments 
on Participating Securities are a function of an SBIC's profits, SBA 
makes such leverage available only to larger SBICs

[[Page 52645]]

that can reasonably project returns-on-investments greater than 20 
percent.
    While the Participating Securities program has been very successful 
at encouraging SBICs to do equity investing in general, SBA wishes to 
encourage more equity-type investments in underserved areas or ``New 
Markets''--urban and rural areas that have severe shortages of equity 
capital. Unfortunately, investments in these areas often are of a type 
that will not have the potential for yielding returns that are high 
enough to justify the use of Participating Securities.
    The LMI Debenture is being created to fill this gap. It is another 
type of patient capital, with interest deferred for the first 5 years. 
An SBIC utilizing the LMI Debenture will not be expected to achieve the 
high returns expected of Participating Securities users. Thus, the 
availability of the LMI Debenture is expected to increase the flow of 
equity-type capital to New Markets.
    Some of this increase will come from existing SBICs which find that 
the LMI Debentures, together with the regulatory incentives in this 
final rule, will encourage them to make investments that they may 
perceive as having greater risk than their typical investments. SBA 
expects these SBICs to make investments in businesses which lie in 
areas that they have previously overlooked.
    While it is expected that existing SBICs will participate to some 
degree in the LMI program, SBA anticipates that most of the LMI program 
benefits will derive from new SBICs that are currently being formed and 
which will be created in the future. Already, SBA is seeing an increase 
in the number of venture capitalists who are working to form new SBICs 
with an LMI orientation.
    SBA also believes that an increasing number of banks will actively 
seek to invest in SBICs since a bank's investment in an SBIC is now 
presumed to satisfy one of the tests under the Community Reinvestment 
Act (CRA) regulations. SBA expects that many banks will find LMI-
oriented SBICs to be especially attractive. This should be true not 
only because the banks can receive CRA credit for their investment, but 
also because they will find that (1) such investments expand their 
urban and rural markets, and (2) with equity infusions of capital, 
small businesses can become less risky borrowers.
    The LMI Debentures have the same subsidy rate as do regular 
debentures and will carry interest rates similar to those of regular 
debentures. They present no additional cost either to the government or 
to the SBICs. Regarding reporting requirements (further discussed 
below), an SBIC must ascertain that the company in which it is 
investing meets the LMI standards, and must report this to SBA on its 
usual financing report (form 1031). The cost to the SBIC to obtain this 
information is nominal.
    SBA certifies that this final rule does 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. This 
final rule will change some requirements to encourage SBICs to make 
additional qualified investments in low and moderate income zones. In 
FY 1998, SBICs invested in 2700 small businesses. While the final rule 
may increase the number of small businesses receiving SBIC investments 
because SBICs may make investments in smaller increments, the number of 
small businesses eligible for SBIC investments would not change.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. CH. 35, SBA 
has requested approval to require participating SBICs to report the 
information they are required to maintain by the final rule. The final 
rule requires SBICs that make LMI Investments to keep track of their 
LMI Investments and report them to SBA in connection with applications 
for LMI Debentures. To determine whether an SBIC is making an LMI 
Investment, the SBIC will have to verify the location of the LMI 
Enterprise or its employees using the databases discussed in this rule. 
SBA estimates that the time necessary to verify the location of an LMI 
Enterprise or its employees will average less than one hour per LMI 
Investment. The reporting requirements are de minimis since current 
forms will only be changed to reflect LMI Investments. SBA further 
estimates that SBICs may make approximately 500 LMI Investments per 
year. SBA believes this information is necessary for the proper 
performance of the function of the agency.
    For purposes of Executive Order 12612, SBA certifies that this rule 
will 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.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs-business, Reporting and 
recordkeeping requirements, Small businesses.

    For the reasons set forth above, SBA is amending 13 CFR part 107 as 
follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

    1. The authority citation for part 107 continues to read as 
follows:

    Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g 
and 687m.

    2. Amend Sec. 107.50 to add definitions of LMI Enterprise, LMI 
Investment, and LMI Zone, to read as follows:


Sec. 107.50  Definitions of terms.

* * * * *
    LMI Enterprise means:
    (1) A Small Business that has at least 50% of its employees or 
tangible assets located in LMI Zone(s) or in which at least 35% of the 
full-time employees have primary residences in LMI Zone(s), in either 
case determined as of the time of application for SBIC financing; or
    (2) A Small Business that does not meet the requirements of 
paragraph (1) of this definition as of the time of application for SBIC 
financing but that certifies at such time that it intends to meet the 
requirements within 180 days after the closing of the SBIC financing. A 
Small Business qualifying under this paragraph (2) will no longer be an 
LMI Enterprise as of the 180th day after the closing of the SBIC 
financing unless, on or before such date, at least 50% of its employees 
or tangible assets are located in LMI Zones or at least 35% of its 
full-time employees have primary residences in LMI Zones.
    LMI Investment means a financing of an LMI Enterprise, made after 
September 30, 1999, in the form of equity securities or debt securities 
that are junior to all existing or future secured borrowings of the 
business. The debt securities may be guaranteed and may be secured by 
the assets of the LMI Enterprise, but the guarantee may not be 
collateralized or otherwise secured.
    LMI Zone means any area located within a HUBZone (as defined in 13 
CFR 126.103), an Urban Empowerment Zone or Urban Enterprise Community 
(as designated by the Secretary of the Department of Housing and Urban 
Development), a Rural Empowerment Zone or Rural Enterprise Community 
(as designated by the Secretary of the Department of Agriculture), an 
area of Low Income or Moderate Income (as recognized by the Federal 
Financial Institutions Examination Council), or a county with 
Persistent Poverty (as classified by the Economic Research Service of 
the Department of Agriculture).
* * * * *

[[Page 52646]]

    3. In Sec. 107.610, add paragraph (e) to read as follows:


Sec. 107.610  Required Certifications for Loans and Investments.

* * * * *
    (e) For each LMI Investment:
    (1) A certification by the concern, dated as of the date of 
application for SBIC financing, as to the basis for its qualification 
as an LMI Enterprise,
    (2) If the concern qualifies as an LMI Enterprise as defined in 
paragraph (2) of the definition of LMI Enterprise in Sec. 107.50, an 
additional certification dated no later than the date 180 days after 
the closing of the LMI Investment, as to the location of the concern's 
employees or tangible assets or the principal residences of its full-
time employees as of the date of such certification, and
    (3) Certification(s) by the SBIC, made contemporaneously with the 
certification(s) of the concern, that the concern qualifies as an LMI 
Enterprise as of the date(s) of the concern's certification(s) and the 
basis for such qualification.
    4. In Sec. 107.835, redesignate paragraph (d) as paragraph (e) and 
add paragraph (d) to read as follows:


Sec. 107.835  Exceptions to minimum duration/term of Financing.

* * * * *
    (d) An LMI Investment with a term of at least one year; or
* * * * *
    5. In Sec. 107.850, revise the introductory text of paragraph (a) 
to read as follows:


Sec. 107.850  Restrictions on redemption of Equity Securities.

    (a) A Portfolio Concern cannot be required to redeem Equity 
Securities earlier than five years (or one year in the case of an LMI 
Investment) from the date of the first closing unless:
* * * * *
    6. In Sec. 107.855, add paragraph (g)(12) to read as follows:


Sec. 107.855  Interest rate ceiling and limitations on fees charged to 
Small Businesses (``Cost of Money'').

* * * * *
    (g) Charges excluded from the Cost of Money. * * *
    (12) Royalty payments received under any LMI Investment if the 
royalty is based on improvement in the performance of the Small 
Business after the date of the financing.
    7. In Sec. 107.865, remove the ``or'' at the end of paragraph 
(d)(3), replace the period at the end of paragraph (d)(4) with ``; 
or'', add paragraph (d)(5), and revise paragraph (e)(3) to read as 
follows:


Sec. 107.865  Restrictions on Control of a Small Business by a 
Licensee.

* * * * *
    (d) Temporary Control permitted. * * *
    (5) If your financing of the Small Business is an LMI Investment.
    (e) Control certification. * * *
    (3) Your agreement to relinquish Control within five years 
(although you may, under extraordinary circumstances, request SBA's 
approval of an extension beyond five years). In the case of an LMI 
Investment with a term of less than five years, you must agree to 
relinquish Control within the term of the financing.
* * * * *
    Dated: May 27, 1999.
Aida Alvarez,
Administrator.
[FR Doc. 99-25244 Filed 9-29-99; 8:45 am]
BILLING CODE 8025-01-U