[Federal Register Volume 64, Number 243 (Monday, December 20, 1999)]
[Rules and Regulations]
[Pages 70992-70997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32689]


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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: This final rule implements provisions of the Small Business 
Reauthorization Act of 1997, enacted on December 2, 1997, that affect 
the Small Business Investment Company (SBIC) program, including 
provisions affecting SBICs' minimum capital requirements, leverage 
eligibility, and the timing of tax distributions by SBICs that have 
issued Participating Securities. Other provisions of the final rule 
modify regulations governing the refinancing of real estate by SBICs, 
portfolio diversification requirements, takedowns of leverage, and in-
kind distributions by Participating Securities issuers. A proposed 
regulation that would have prohibited political contributions by SBICs 
is not being finalized at this time.

DATES: This rule is effective on December 20, 1999.

FOR FURTHER INFORMATION CONTACT: Leonard W. Fagan, Investment Division, 
at (202) 205-7583.

SUPPLEMENTARY INFORMATION: On April 14, 1999, SBA published a proposed 
rule (64 FR 18375) to implement the provisions of Subtitle B of Public 
Law 105-135 (December 2, 1997), the Small Business Reauthorization Act 
of 1997, which relate to SBICs. The proposed rule also included a 
provision prohibiting political contributions by SBICs and 
modifications of regulations governing the refinancing of real estate 
by SBICs, portfolio diversification requirements, procedures for 
drawing down leverage from SBA, and in-kind distributions by SBICs that 
have issued leverage in the form of Participating Securities.
    SBA received two comments on the proposed rule during the 30-day 
comment period. This final rule includes changes based on some of the 
comments received, as explained in this preamble.

Private Capital

    Proposed Sec. 107.230(b)(3) is adopted as final. The provision 
implements a change in the statutory definition of private capital to 
include certain funds invested in a Licensee by a Federally chartered 
or Government-sponsored corporation established prior to October 1, 
1987.

Definition of ``Associate''

    The proposed technical correction in the definition of 
``Associate'' in Sec. 107.50 is adopted as final. The revised 
definition clarifies the applicability of paragraph (8)(i) of the 
definition to business concerns organized as partnerships or limited 
liability companies.

Leverageable Capital

    The proposed change in the definition of Leverageable Capital in 
Sec. 107.50 is adopted as final. The definition no longer excludes 
Qualified Non-private Funds (as defined in Sec. 107.230(d)) whose 
source is Federal funds.

Internet Access and Electronic Mail

    Proposed Sec. 107.504 is adopted with one minor change. The 
proposed rule would have required all SBICs to have Internet access and 
Internet electronic mail no later than June 30, 1999. Because of the 
time elapsed since publication of the proposed rule, the final rule 
moves the effective date of this requirement to March 31, 2000.

Political Contributions

    Proposed Sec. 107.505, which would have prohibited contributions by 
SBICs to any political campaign, party, or candidate, or to any 
political action committee, is not being finalized at this time. SBA is 
continuing to study the issue of political contributions by SBICs.

Financing of Smaller Enterprises

    Since April 1994, SBICs have been required to direct a certain 
percentage of their investment activity to businesses that fall 
significantly below the maximum size permitted for a Small Business. 
These businesses are referred to as ``Smaller Enterprises.'' The 
proposed rule included minor corrections and clarifications related to 
the financing of Smaller Enterprises that are adopted as proposed, and 
one substantive change that has been modified in the final rule.
    Section 215(b) of Public Law 105-135 increased the maximum amount 
of SBA

[[Page 70993]]

leverage for which an SBIC could be eligible (see the section of this 
preamble entitled ``Maximum Amount of Leverage''). The statute further 
required that 100 percent of any ``financings made in whole or in part 
with leverage in excess of $90,000,000'' (the previous limit) be 
invested in Smaller Enterprises. SBA's interpretation of this 
requirement in proposed Sec. 107.710(d) was that an SBIC must have 100 
percent of any outstanding leverage over $90 million invested in 
Smaller Enterprises, while also satisfying the requirement in 
Sec. 107.710(b) that 20 percent of its total investment activity be 
devoted to Smaller Enterprises.
    One commenter pointed out that the proposed rule appeared to 
prevent any leverage over $90,000,000 from being invested in businesses 
that are not Smaller Enterprises, even if an SBIC had already made 
Smaller Enterprise investments in an amount far exceeding the basic 20 
percent requirement in Sec. 107.710(b). The commenter suggested that 
SBA look instead at the composition of an SBIC's portfolio in the 
aggregate.
    SBA agrees that an aggregate test is appropriate and has modified 
the final rule so that an SBIC's required dollar amount of Smaller 
Enterprise investments is determined on that basis. The final rule also 
modifies the basic 20 percent investment requirement and the additional 
100 percent requirement for leverage over $90,000,000 so that they do 
not overlap. In other words, it eliminates the possibility that an SBIC 
investing an additional dollar would be required to increase its 
Smaller Enterprise investments by $1.20.
    In the final rule, Sec. 107.710(b)(1) is revised to exclude 
financings made in whole or in part with leverage over $90,000,000 from 
the total dollar amount of financing activity that is subject to the 20 
percent test. An SBIC that has issued leverage over $90 million then 
must determine its total required dollar amount of Smaller Enterprise 
financings under Sec. 107.710(d). This amount is determined by adding 
the minimum amount necessary to satisfy paragraph (b)(1) to the total 
dollar amount of financings made in whole or in part with leverage over 
$90,000,000. The source of funding for individual investments in 
Smaller Enterprises does not matter; the SBIC is only required to 
provide sufficient financing to Smaller Enterprises in the aggregate.
    In developing the final rule, SBA considered whether it would be 
excessively difficult for SBICs to identify financings made ``in whole 
or in part'' with leverage over $90,000,000. SBA believes that this 
would not be the case. Since SBA introduced a new interim leverage 
funding mechanism in May 1998, SBICs typically draw leverage as needed 
to fund specific investments. Thus, there should be a clear link 
between the takedown of leverage over $90,000,000 and the closing of a 
financing. SBA realizes that SBICs sometimes request leverage to 
provide themselves with ``working capital'' for general operating 
purposes. If an SBIC requests leverage over $90,000,000 for this 
purpose, but the effective use of the leverage is to free or replace 
other funds used to complete a financing, SBA will assume that the 
financing was made with the leverage proceeds.

Real Estate Refinancing

    Proposed Sec. 107.720(c)(2) is adopted as final. The provision 
allows an SBIC to provide financing to a Small Business that will use 
the proceeds to refinance debt obligations on property that it owns and 
occupies, provided the Small Business uses at least 67 percent of the 
usable square footage for an eligible business purpose.

Co-Investment With Associates

    Proposed Sec. 107.730(d)(3)(iv) is adopted as final. The provision 
concerns one set of circumstances under which an SBIC's co-investment 
with an Associate is presumed to be on terms that are equitable to the 
SBIC, so that no specific demonstration of fairness is required. As 
revised, the presumption applies only to an SBIC that intends to 
operate permanently as a non-leveraged company, rather than to any SBIC 
that is currently non-leveraged.

Portfolio Diversification Requirement (``Overline'' Limit)

    Proposed Sec. 107.740(a) is adopted as final. Under the revised 
provision, an SBIC's overline limit will be computed based on the sum 
of: (1) its Regulatory Capital at the time an investment or commitment 
is made; and (2) any distributions permitted under Sec. 107.1570(b) 
that were made within the preceding 5 years and reduced Regulatory 
Capital. A distribution made within the preceding 5 years under 
Sec. 107.585 may also be added back to Regulatory Capital for the 
purpose of the overline computation if it reduced Regulatory Capital by 
no more than 2 percent. A larger distribution under Sec. 107.585 may be 
added back with the approval of SBA.
    The final rule also clarifies that the overline limit applies to 
SBICs that do not have outstanding leverage, but which intend to issue 
leverage in the future.

Leverage Application Procedures and Eligibility

    The proposed technical correction in Sec. 107.1100(b) is adopted as 
final. The revision reflects recent changes in leverage funding 
procedures, under which a Licensee can issue leverage only by first 
obtaining a leverage commitment from SBA, and then drawing down funds 
against the commitment.
    Proposed Sec. 107.1120(d) contained a certification requirement for 
Licensees seeking leverage over $90,000,000. In the final rule, this 
requirement has been modified to be consistent with the changes made in 
Sec. 107.710. These changes are discussed in the section of this 
preamble entitled ``Financing of Smaller Enterprises.''

Maximum Amount of Leverage

    Proposed Secs. 107.1150(a) and (b)(1) are adopted as final, with 
one modification. The leverage eligibility table in Sec. 107.1150(a)(1) 
has been updated to reflect changes in the Consumer Price Index (CPI) 
through September 1999. In accordance with Sec. 107.1150(a)(2), SBA 
will determine the next adjustment of the current leverage ceiling 
($105,200,000) after the Bureau of Labor Statistics publishes the CPI 
for September 2000. SBA will publish the indexed maximum leverage 
amounts each year in a Notice in the Federal Register.

Draws Against SBA Leverage Commitments

    Proposed Secs. 107.1220 and 107.1230(d) are adopted as final. The 
procedural requirements in these sections have been updated to be 
consistent with the interim leverage funding mechanism, sometimes 
described as ``just-in-time'' funding, that SBA introduced in May 1998. 
The final rule makes four changes in these procedures that are 
discussed in greater detail in the preamble to the proposed rule. 
First, it eliminates the requirement that draw requests submitted 
within 30 days of the end of a Licensee's fiscal quarter be accompanied 
by updated quarterly financial statements. Second, it clarifies that 
every draw request must be accompanied by a statement certifying that 
there has been no material adverse change in the Licensee's financial 
condition since its last filing of SBA Form 468. Third, it requires a 
Licensee to provide preliminary unaudited year end financial statements 
when it submits a draw request more than 30 days

[[Page 70994]]

following the end of its fiscal year if the Licensee has not yet filed 
its audited annual financial statements. Fourth, it allows a Licensee 
to apply for a leverage draw based on operating liquidity needs, on 
specific financings it expects to close, or on a combination of the 
two.

Tax Distributions

    Section 215(c) of Public Law 105-135 amended provisions of the Act 
governing the timing of ``tax distributions'' that SBICs with 
outstanding Participating Securities may make to their private 
investors and SBA. Previously, such distributions could be made once a 
year, based on the income allocated by a Licensee to its investors for 
Federal income tax purposes for the fiscal year immediately preceding 
the distribution. The statutory change now gives a Licensee the option 
of making a tax distribution at the end of any calendar quarter based 
on a quarterly estimate of tax liability. However, if the aggregate 
quarterly distributions made during any fiscal year exceed the amount 
that the Licensee would have been permitted to make based on a single 
computation performed for the entire year, future tax distributions 
must be reduced by the amount of the excess.
    The statutory changes are implemented in Secs. 107.1550 and 
107.1575 and are finalized as proposed. The timing of tax distributions 
is addressed in Secs. 107.1550(d) and 107.1575(a). The final rule 
permits interim tax distributions to be made on the last day of a 
calendar quarter or on any succeeding day through the first Payment 
Date following the end of the quarter (Payment Dates are February 1, 
May 1, August 1, and November 1 of each year). As before, Licensees may 
make annual tax distributions as late as the second Payment Date 
following the end of their fiscal year. If the distribution is not made 
on a Payment Date, SBA's prior approval is required.
    Section 107.1550(e) implements the statutory provision concerning 
excess tax distributions. A detailed example of how the excess amount 
is computed appears in the preamble to the proposed rule.

Distributions on Other Than Payment Dates

    Proposed Sec. 107.1575 is adopted as final. The section 
incorporates a technical change to accommodate quarterly tax 
distributions by SBICs, as discussed in the section of this preamble 
entitled ``Tax Distributions.'' It also clarifies that while 
distributions on dates other than Payment Dates must normally be 
computed as of the distribution date, this requirement does not apply 
to ``annual'' distributions (i.e., those computed as of the end of an 
SBIC's fiscal year end).

In-Kind Distributions

    SBA proposed two substantive changes in Sec. 107.1580, which 
governs in-kind distributions by SBICs that have issued Participating 
Securities. First, under proposed Sec. 107.1580(a)(2), only 
``Distributable Securities'' could be distributed in kind. This new 
term, which was defined in proposed Sec. 107.50, would replace the term 
``Publicly Traded and Marketable'' in Sec. 107.1580. Although the two 
terms are technically different, SBA did not expect the change to have 
a major effect on Licensees' ability to distribute securities.
    SBA received one comment on paragraph (3) of the definition, which 
requires that the quantity of securities distributed to SBA must be 
able to be sold ``over a reasonable period of time without having an 
adverse impact upon the price of the security.'' The commenter felt 
that because of the subjective nature of this provision, SBICs might 
find it difficult to determine whether a particular security will meet 
the requirement. SBA acknowledges that the requirement involves the 
application of judgment, but is finalizing paragraph (3) of the 
definition as proposed. The identical language appeared in the 
definition of ``Publicly Traded and Marketable,'' which has been in use 
with respect to in-kind distributions since the inception of the 
Participating Securities program. Based on its experience so far, SBA 
is satisfied that the requirement is workable and appropriate.
    The second change involved proposed Sec. 107.1580(a)(1), under 
which all in-kind distributions would have required SBA's prior 
approval. In SBA's view, this change represented a minor expansion of 
the current requirement in Sec. 107.1570(a) that SBA approve all 
distributions made on dates other than one of the quarterly Payment 
Dates (February 1, May 1, August 1, and November 1). However, SBA 
received a comment, from a trade association representing a significant 
number of SBICs, expressing concern that ``SBA would substitute its 
judgment for that of the private experts managing SBICs as to when [an 
in-kind] distribution should take place or whether it might take place 
at all.''
    SBA did not intend to create a fundamental change in the conditions 
under which in-kind distributions can be made. SBA proposed the rule 
change to ensure that it would have sufficient opportunity to ascertain 
whether a proposed distribution satisfies the regulatory definition of 
``Distributable Securities.'' This type of review is an essential part 
of SBA's regulatory oversight responsibilities. Nevertheless, SBA does 
not wish to create a perception that it will readily overrule business 
decisions made by SBIC managers. Therefore, in the final rule, the 
requirement for prior approval of all in-kind distributions has been 
eliminated from Sec. 107.1580. All distributions on dates other than 
Payment Dates, whether in cash or in kind, will continue to require 
prior approval under Sec. 107.1575(b)(1).
    To further clarify its role in reviewing in-kind distributions, SBA 
has also modified the introductory text of the definition of 
Distributable Securities. The final rule states that SBA determines 
whether securities qualify as Distributable Securities, but in so doing 
obtains the advice of a third party with expertise in the marketing of 
securities. This provision has a dual purpose. First, it emphasizes 
SBA's responsibility to ensure that a proposed distribution is 
consistent with regulatory requirements. Second, it formalizes SBA's 
current practice of seeking the advice of appropriate experts as it 
conducts its regulatory review. SBA is willing to commit itself to this 
procedure as a means of assuring the SBIC industry that it will not 
arbitrarily or capriciously reject proposed in-kind distributions.
    The final rule also adopts a non-substantive change in 
Sec. 107.1580(a)(4), which deals with SBA's use of agents to dispose of 
the securities it receives. This provision appeared in the proposed 
rule as Sec. 107.1580(a)(5).

Compliance With Executive Orders 12866, 12988, and 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the 
Paperwork Reduction Act (44 U.S.C. Ch. 35).

    SBA has determined that this final rule does not constitute a 
significant rule within the meaning of Executive Order 12866 since it 
will not have an annual effect on the economy of $100 million or more, 
and that it will 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 purpose of the 
final rule is to implement provisions of Public Law 105-135 which 
relate to small business investment companies, and to make certain 
other changes, primarily technical corrections and clarifications, to 
the regulations governing SBICs. There are 352 SBICs, not all of which 
are small businesses. In addition, the changes will have little or no 
effect on

[[Page 70995]]

small businesses seeking funding from SBICs; rather they would only 
affect definitions for and activities of the SBICs.
    For purposes of Executive Order 12988, SBA has determined that this 
final rule is drafted, to the extent practicable, in accordance with 
the standards set forth in Section 3 of that Order.
    For purposes of Executive Order 13132, SBA has determined that this 
final rule has no federalism implications.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
has determined that this final rule contains no new reporting or 
recordkeeping requirements.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.
    For the reasons set forth in the preamble, SBA amends 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. In Sec. 107.50, revise paragraph (8)(i) of the definition of 
Associate, revise the definition of Leverageable Capital, and add, in 
alphabetical order, a new definition of Distributable Securities to 
read as follows:


Sec. 107.50  Definitions of terms.

* * * * *
    Associate of a Licensee means any of the following:
* * * * *
    (8) * * *
    (i) Any person described in paragraphs (1) through (6) of this 
definition is an officer, general partner, or managing member; or
* * * * *
    Distributable Securities means equity securities that are 
determined by SBA (with the advice of a third party expert in the 
marketing of securities) to meet each of the following requirements:
    (1) The securities (which may include securities that are salable 
pursuant to the provisions of Rule 144 (17 CFR 230.144) under the 
Securities Act of 1933, as amended) are salable immediately without 
restriction under Federal and state securities laws;
    (2) The securities are of a class:
    (i) Which is listed and registered on a national securities 
exchange, or
    (ii) For which quotation information is disseminated in the 
National Association of Securities Dealers Automated Quotation System 
and as to which transaction reports and last sale data are disseminated 
pursuant to Rule 11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities 
Exchange Act of 1934, as amended; and
    (3) The quantity of such securities to be distributed to SBA can be 
sold over a reasonable period of time without having an adverse impact 
upon the price of the security.
* * * * *
    Leverageable Capital means Regulatory Capital, excluding unfunded 
commitments.
* * * * *
    3. In Sec. 107.230, revise paragraph (b)(3) to read as follows:


Sec. 107.230  Permitted sources of Private Capital for Licensees.

* * * * *
    (b) Exclusions from Private Capital. * * *
    (3) Funds obtained directly or indirectly from any Federal, State, 
or local government agency or instrumentality, except for:
    (i) Funds invested by a public pension fund;
    (ii) Funds obtained from the business revenues (excluding any 
governmental appropriation) of any federally chartered or government-
sponsored corporation established before October 1, 1987, to the extent 
that such revenues are reflected in the retained earnings of the 
corporation; and
    (iii) ``Qualified Non-private Funds'' as defined in paragraph (d) 
of this section.
* * * * *
    4. Revise Sec. 107.504 to read as follows:


Sec. 107.504  Equipment and office requirements.

    (a) Computer capability. You must have a personal computer with a 
modem, and be able to use this equipment to prepare reports (using SBA-
provided software) and transmit them to SBA. In addition, by March 31, 
2000, you must have access to the Internet and the capability to send 
and receive electronic mail via the Internet.
    (b) Facsimile capability. You must be able to receive facsimile 
messages 24 hours per day at your primary office.
    (c) Accessible office. You must maintain an office that is 
convenient to the public and is open for business during normal working 
hours.
    5. Remove Sec. 107.508.


Sec. 107.508  [Removed]

    6. In Sec. 107.710, revise paragraphs (b)(1), (c)(1)(i), and 
(c)(1)(ii), redesignate paragraphs (d) and (e) as paragraphs (e) and 
(f), revise the last sentence of redesignated paragraph (f), and add a 
new paragraph (d) to read as follows:


Sec. 107.710  Requirement to Finance Smaller Enterprises.

* * * * *
    (b) * * *
    (1) General rule. At the close of each of your fiscal years, for 
all Financings you extended since April 25, 1994, excluding Financings 
made in whole or in part with Leverage in excess of $90,000,000, at 
least 20 percent (in total dollars) must have been invested in Smaller 
Enterprises. If you were licensed after April 25, 1994, the 20 percent 
requirement applies to the Financings you extended since you were 
licensed, excluding Financings made in whole or in part with Leverage 
in excess of $90,000,000, plus any pre-licensing investments approved 
by SBA for inclusion in your Regulatory Capital. For purposes of this 
paragraph (b)(1), Leverage in excess of $90,000,000 includes aggregate 
Leverage over $90,000,000 issued by two or more Licensees under Common 
Control. See also paragraph (d) of this section.
* * * * *
    (c) * * *
    (1) * * *
    (i) Less than $10,000,000 if such Leverage included Participating 
Securities; or
    (ii) Less than $5,000,000 if such Leverage was Debentures only.
* * * * *
    (d) Special requirement for Leverage over $90,000,000. If you have 
issued Leverage over $90,000,000 (including aggregate Leverage over 
$90,000,000 issued by two or more Licensees under Common Control), at 
the end of each of your fiscal years the cumulative Financings you 
extended to Smaller Enterprises must equal at least:
    (1) The dollar amount necessary to satisfy paragraph (b) of this 
section; plus
    (2) 100 percent of the amount of all Financings made in whole or in 
part with Leverage over $90,000,000.
* * * * *
    (f) Non-compliance with this section. * * * However, you will not 
be eligible for additional Leverage until you reach the required 
percentage (see Sec. 107.1120(c) through (e)).
    7. In Sec. 107.720, revise paragraph (c)(2) to read as follows:


Sec. 107.720  Small Businesses that may be ineligible for Financing.

* * * * *
    (c) * * *
    (2) You are not permitted to finance a business, regardless of SIC

[[Page 70996]]

classification, if the Financing is to be used to acquire or refinance 
real property, unless the Small Business:
    (i) Is acquiring an existing property and will use at least 51 
percent of the usable square footage for an eligible business purpose; 
or
    (ii) Is building or renovating a building and will use at least 67 
percent of the usable square footage for an eligible business purpose; 
or
    (iii) Occupies the subject property and uses at least 67 percent of 
the usable square footage for an eligible business purpose.
* * * * *
    8. In Sec. 107.730, revise paragraph (d)(3)(iv) to read as follows:


Sec. 107.730  Financing which constitute conflicts of interest.

* * * * *
    (d) * * *
    (3) * * *
    (iv) You have no outstanding Leverage and do not intend to issue 
Leverage in the future, and your Associate either is not a Licensee or 
has no outstanding Leverage and does not intend to issue Leverage in 
the future.
* * * * *
    9. In Sec. 107.740, revise paragraph (a) to read as follows:


Sec. 107.740  Portfolio diversification (``overline'' limitation).

    (a) General rule. This Sec. 107.740 applies if you have outstanding 
Leverage or intend to issue Leverage in the future.
    Without SBA's prior written approval, you may provide Financing or 
a Commitment to a Small Business only if the resulting amount of your 
aggregate outstanding Financings and Commitments to such Small Business 
and its Affiliates does not exceed:
    (1) For a Section 301(c) Licensee, 20 percent of the sum of:
    (i) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (ii) Any Distribution(s) you made under Sec. 107.1570(b), during 
the five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital; plus
    (iii) Any Distribution(s) you made under Sec. 107.585, during the 
five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital by no more than two percent or which 
SBA approves for inclusion in the sum determined in this paragraph 
(a)(1).
    (2) For a Section 301(d) Licensee, 30 percent of a sum determined 
in the manner set forth in paragraph (a)(1)(i) through (iii) of this 
section.
* * * * *
    10. In Sec. 107.1100, revise the section heading and paragraph (b) 
to read as follows:


Sec. 107.1100  Types of Leverage and application procedures.

* * * * *
    (b) Applying for Leverage. The Leverage application process has two 
parts. You must first apply for SBA's conditional commitment to reserve 
a specific amount of Leverage for your future use. You may then apply 
to draw down Leverage against the commitment. See Secs. 107.1200 
through 107.1240.
* * * * *
    11. In Sec. 107.1120, redesignate paragraphs (d) through (g) as 
paragraphs (e) through (h) and add a new paragraph (d) to read as 
follows:


Sec. 107.1120  General eligibility requirements for Leverage.

* * * * *
    (d) Certify, if applicable, that you will satisfy the requirement 
in Sec. 107.710(d) to provide Financing to Smaller Enterprises.
* * * * *
    12. In Sec. 107.1150, revise paragraph (a) and the first sentence 
of paragraph (b)(1) to read as follows:


Sec. 107.1150  Maximum amount of Leverage for a Section 301(c) 
Licensee.

    (a) Maximum amount of Leverage. (1) Amounts before indexing. If you 
are a Section 301(c) Licensee, the following table shows the maximum 
amount of Leverage you may have outstanding at any time, subject to the 
indexing adjustment set forth in paragraph (a)(2) of this section:

------------------------------------------------------------------------
                                             Then your maximum leverage
     If your leverageable capital is:                    is:
------------------------------------------------------------------------
(1) Not over $17,500,000..................  300 percent of Leverageable
                                             Capital
(2) Over $17,500,000 but not over           $52,500,000 + [2 x
 $35,100,000.                                (Leverageable Capital -
                                             $17,500,000)]
(3) Over $35,100,000 but not over           $87,700,000 + (Leverageable
 $52,600,000.                                Capital -$35,100,000)
(4) Over $52,600,000......................  $105,200,000
------------------------------------------------------------------------

    (2) Indexing of maximum amount of Leverage. SBA will adjust the 
amounts in paragraph (a) of this section annually to reflect increases 
through September in the Consumer Price Index published by the Bureau 
of Labor Statistics. SBA will publish the indexed maximum Leverage 
amounts each year in a Notice in the Federal Register.
    (b) Exceptions to maximum Leverage provisions. (1) Licensees under 
Common Control. Two or more Licensees under Common Control may have 
aggregate outstanding Leverage over $105,200,000 (subject to indexing 
as set forth in paragraph (a)(2) of this section) only if SBA gives 
them permission to do so. * * *
* * * * *
    13. Revise Sec. 107.1220 to read as follows:


Sec. 107.1220  Requirement for Licensee to file quarterly financial 
statements.

    As long as any part of SBA's Leverage commitment is outstanding, 
you must give SBA a Financial Statement on SBA Form 468 (Short Form) as 
of the close of each quarter of your fiscal year (other than the fourth 
quarter, which is covered by your annual filing of Form 468 under 
Sec. 107.630(a)). You must file this form within 30 days after the 
close of the quarter. You will not be eligible for a draw if you are 
not in compliance with this Sec. 107.1220.
    14. In Sec. 107.1230, revise paragraph (d)(1), redesignate 
paragraphs (d)(2) and (d)(3) as paragraphs (d)(3) and (d)(4), add a new 
paragraph (d)(2), and revise the first sentence of redesignated 
paragraph (d)(4) to read as follows:


Sec. 107.1230  Draw-downs by Licensee under SBA's Leverage commitment.

* * * * *
    (d) * * *
    (1) A statement certifying that there has been no material adverse 
change in your financial condition since your last filing of SBA Form 
468 (see also Sec. 107.1220 for SBA Form 468 filing requirements).
    (2) If your request is submitted more than 30 days following the 
end of your fiscal year, but before you have submitted your annual 
filing of SBA Form 468 (Long Form) in accordance with Sec. 107.630(a), 
a preliminary unaudited annual financial statement on SBA Form 468 
(Short Form).
* * * * *
    (4) A statement that the proceeds are needed to fund one or more 
particular Small Businesses or to provide liquidity for your 
operations. * * *
* * * * *
    15. In Sec. 107.1550, revise the first sentence of the introductory 
text, paragraph (b)(1), and paragraph (d), and add a new paragraph (e) 
to read as follows:


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

[[Page 70997]]

are a limited partnership, ``S Corporation,'' or equivalent pass-
through entity for tax purposes, you may make ``tax Distributions'' to 
your investors in accordance with this Sec. 107.1550, whether or not 
they have an actual tax liability. * * *
* * * * *
    (b) How to compute the Maximum Tax Liability. (1) You may compute 
your Maximum Tax Liability for a full fiscal year or for any calendar 
quarter. Use the following formula:

M = (TOI  x  HRO) + (TCG  x  HRC)
where:
M = Maximum Tax Liability
TOI = Net ordinary income allocated to your partners or other owners 
for Federal income tax purposes for the fiscal year or calendar quarter 
for which the Distribution is being made, excluding Prioritized 
Payments allocated to SBA.
HRO = The highest combined marginal Federal and State income tax rate 
for corporations or individuals on ordinary income, determined in 
accordance with paragraphs (b)(2) through (b)(4) of this section.
TCG = Net capital gains allocated to your partners or other owners for 
Federal income tax purposes for the fiscal year or calendar quarter for 
which the Distribution is being made, excluding Prioritized Payments 
allocated to SBA.
HRC = The highest combined marginal Federal and State income tax rate 
for corporations or individuals on capital gains, determined in 
accordance with paragraphs (b)(2) through (b)(4) of this section.
* * * * *
    (d) Paying a tax Distribution. You may make an annual tax 
Distribution on the first or second Payment Date following the end of 
your fiscal year. You may make a quarterly tax Distribution on the 
first Payment Date following the end of the calendar quarter for which 
the Distribution is being made. See also Sec. 107.1575(a).
    (e) Excess tax Distributions. (1) As of the end of your fiscal 
year, you must determine whether you made any excess tax Distributions 
for the year in accordance with paragraph (e)(2) of this section. Any 
tax Distributions that you make for a subsequent period must be reduced 
by the excess amount distributed.
    (2) Determine your excess tax Distributions by adding together all 
your quarterly tax Distributions for the year (ignoring any required 
reductions for excess tax Distributions made in prior years), and 
subtracting the maximum tax Distribution that you would have been 
permitted to make based upon a single computation performed for the 
entire fiscal year. The result, if greater than zero, is your excess 
tax Distribution for the year.
    16. In Sec. 107.1575, revise paragraphs (a)(1) and (b)(2) and add a 
new paragraph (a)(4) to read as follows:


Sec. 107.1575  Distributions on other than Payment Dates.

    (a) * * *
    (1) Required annual Distributions under Sec. 107.1540(a)(1), annual 
Distributions under Sec. 107.1550, and any Distributions under 
Sec. 107.1560 must be made no later than the second Payment Date 
following the end of your fiscal year.
* * * * *
    (4) Quarterly Distributions under Sec. 107.1550 must be made no 
earlier than the last day of the calendar quarter for which the 
Distribution is being made and no later than the first Payment Date 
following the end of such calendar quarter.
    (b) * * *
* * * * *
    (2) The ending date of the period for which you compute your 
Earmarked Profits, Prioritized Payments, Adjustments, Charges, Profit 
Participation, Retained Earnings Available for Distribution, liquidity 
ratio, Capital Impairment, and any other applicable computations 
required under Secs. 107.1500 through 107.1570, must be:
    (i) The distribution date, or
    (ii) If your Distribution includes annual Distributions under 
Secs. 107.1540(a)(1), 107.1550 and/or 107.1560, your most recent fiscal 
year end;
* * * * *
    17. In Sec. 107.1580, revise the heading for paragraph (a) 
introductory text, and revise paragraphs (a)(1), (a)(4), and (b)(2) to 
read as follows:


Sec. 107.1580  Special rules for In-Kind Distributions by Licensees.

    (a) In-Kind Distributions while Licensee has outstanding 
Participating Securities. * * *
    (1) You may distribute only Distributable Securities.
* * * * *
    (4) You must deposit SBA's share of securities being distributed 
with a disposition agent designated by SBA. As an alternative, if you 
agree, SBA may direct you to dispose of its shares. In this case, you 
must promptly remit the proceeds to SBA.
    (b) * * *
    (2) You must obtain SBA's prior written approval of any In-Kind 
Distribution of Earmarked Assets that are not Distributable Securities, 
specifically including approval of the valuation of the assets.

    Dated: December 10, 1999.
Fred P. Hochberg,
Acting Administrator.
[FR Doc. 99-32689 Filed 12-17-99; 8:45 am]
BILLING CODE 8025-01-P