[Federal Register Volume 66, Number 14 (Monday, January 22, 2001)]
[Rules and Regulations]
[Pages 7218-7246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1710]



[[Page 7217]]

-----------------------------------------------------------------------

Part XV





Small Business Administration





-----------------------------------------------------------------------



13 CFR Part 108



New Markets Venture Capital Program; Interim Final Rule



New Markets Venture Capital Program; Notice of Funds Availability 
Inviting Applications; Notice

  Federal Register / Vol. 66, No. 14 / Monday, January 22, 2001 / Rules 
and Regulations  

[[Page 7218]]


-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Part 108


New Markets Venture Capital Program

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Small Business Administration (``SBA'') is adding a 
new Part 108 to implement the New Markets Venture Capital Program Act 
of 2000 (``the Act''). The Act authorizes SBA to issue regulations 
necessary to implement the program. The regulations set forth the 
requirements for:
    Newly-formed venture capital companies to qualify to become New 
Markets Venture Capital (``NMVC'') companies to make developmental 
venture capital investments in smaller enterprises located in low-
income geographic areas and provide operational assistance to such 
enterprises receiving such investments; and
    Existing Specialized Small Business Investment Companies 
(``SSBICs'') to qualify for grants to provide operational assistance to 
smaller enterprises located in low-income geographic areas and which 
such SSBICs have financed or expect to finance.
    SBA will begin accepting applications for this program immediately. 
See Notice of Funds Availability published in today's Federal Register.

EFFECTIVE DATE: This regulation becomes effective on February 21, 2001.

Dates: Submit comments on or before March 23, 2001.

ADDRESSES: Written comments should be sent to Austin Belton, Investment 
Division, Office of New Markets Venture Capital, U.S. Small Business 
Administration, 409 3rd Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Austin Belton, Director, Office of New 
Markets Venture Capital, 202-205-6510.

SUPPLEMENTARY INFORMATION:

I. Background

    The New Markets Venture Capital Program Act of 2000 (``the Act'') 
was created by the Consolidated Appropriations Act of 2001, Pub. L. No. 
106-554, enacted December 21, 2000. Congress recognized that despite 
the nation's overall economic prosperity, many underserved areas in 
America have not experienced such prosperity and millions of Americans 
living in these areas do not have access to jobs or entrepreneurial 
opportunities. It enacted the New Markets Venture Capital (``NMVC'') 
Program to help create an economic infrastructure in such underserved 
areas by encouraging business growth through program-supported 
investment. This type of investing is known in the community 
development venture capital industry as ``double bottomline'' 
investing, because the investments have both an anticipated financial 
and social return. Social returns include creating sustainable jobs at 
businesses receiving investments from NMVC companies, and encouraging 
such businesses to provide much-needed new products and services within 
underserved areas.
    Congress noted that between 1997 and 1998, the median income for 
the nation's households rose 3.5 percent in real terms, yet 12.7 
percent of Americans (34.5 million people) still live below the poverty 
line. Many of these Americans live in inner city and rural areas, where 
job opportunities are scarce and there is little to attract small 
business investors. In rural and urban communities, poverty remains a 
persistent problem. Job growth is well below the national average, with 
unemployment at or above 14%. Unemployment is 7.5% in the African 
American urban community, and is 6.4% in the Hispanic urban population; 
both are nearly double the national average. Despite these statistics, 
Congress found that it is not enough to create jobs in these pockets of 
poverty, rather these communities need a new economic infrastructure to 
enable them to develop their full potential and participate fully in 
the economic mainstream. The NMVC program will encourage the growth of 
such an infrastructure by supporting new equity capital investments by 
NMVC companies and SSBICs and by providing operational assistance to 
smaller enterprises located in low-income geographic areas whose growth 
will foster the creation of wealth and job opportunities in such areas.
    SBA will enter into participation agreements with NMVC companies to 
fulfill these statutory purposes. The Act authorizes SBA to guarantee 
debentures of NMVC companies. Such debentures leverage the private 
capital that NMVC companies must raise and enable them to make the 
equity investments in low-income geographic areas contemplated by the 
Act. The Act also authorizes SBA to provide grants to NMVC companies to 
provide operational assistance to smaller enterprises in which they 
invest. In addition, the Act enhances the ability of existing SSBICs to 
invest in smaller enterprises in low-income areas by giving them grants 
to provide operational assistance to such enterprises in connection 
with such investments.
    SBA intends to enter into participation agreements with NMVC 
companies that have a solid business plan for making investments in the 
low-income geographic areas targeted by the Act, and that have the most 
likelihood of expanding economic opportunities in such areas.

II. Section by Section Analysis

    The following is a section by section analysis of SBA's regulations 
to add a new part 108 to title 13 of the Code of Federal Regulations to 
implement the Act.
    A. General Information About the Regulations.
    1. Low-Income Geographic Areas. The benefits of the NMVC program 
are targeted toward low-income geographic areas. SBA's definition of 
``Low-Income Geographic Areas'' in section 108.50 mimics the definition 
of the same term in section 351(3) of the Small Business Investment Act 
of 1958, as amended by the Act (the ``SBIAct''). SBA wishes to educate 
the public about the areas identified by Congress that will receive the 
benefits of the NMVC program. This will allow the public to better 
understand the impact of the NMVC program. Accordingly, SBA provides 
the following information concerning how you, a member of the public, 
may determine which geographic areas fall within the statutory 
definitions.
    The Act sets forth six bases for determining low-income geographic 
areas.
    (1) Any census tract or equivalent county division as defined by 
the Bureau of the Census of the United States Department of Commerce in 
which the poverty rate is 20 percent or more. The Bureau of the Census 
is the Federal agency responsible for gathering data regarding 
population and poverty levels. To determine whether a particular census 
tract or equivalent county division meets this criteria, you can visit 
the Bureau of the Census web site at http://www.census.gov/geo/www/ezstate/poverty.html. Data on this web site is based on data from the 
Bureau of the Census CPH-3 series of publications from the ``1990 
Census of Population and Housing: Population and Housing 
Characteristics for Census Tracts and Block Numbering Areas.'' The 
``1990 Population'' and ``Land Area (Square Miles)'' columns are from 
Table 1 of the CPH-3 reports. The columns ``Persons for Whom Poverty 
Status Determined'' and ``Percent Below Poverty Level'' are from CPH-3 
Table 19. You can view this same information by visiting any local 
Federal Depository

[[Page 7219]]

Library. For the location of the nearest Federal Depository Library, 
call toll-free 1-888-293-6498 or contact the Bureau of the Census, 
Washington, D.C. 20233. These resources list the poverty rate for each 
census tract and equivalent county division within each state. You will 
need to look for only those tracts or divisions in which the poverty 
rate is 20 percent or more to determine the areas that fall within a 
low-income geographic area for purposes of the NMVC program.
    (2) Any census tract or equivalent county division as defined by 
the Bureau of the Census that is located in a metropolitan area and in 
which 50 percent or more of the households in that tract or division 
have an income below 60 percent of the area median gross income. This 
criteria corresponds to the definition of ``qualified census tract'' as 
set forth in the Low Income Housing Tax Credit (LIHTC) program under 
Sec. 42 of the Internal Revenue Code. The Department of Housing and 
Urban Development (HUD) implements the LIHTC program. The Secretary of 
HUD designates the qualified census tracts by Notice published 
periodically in the Federal Register. These notices are titled 
``Statutorily Mandated Designation of Qualified Census Tracts and 
Difficult Development Areas for Section 42 of the Internal Revenue Code 
of 1986.'' The notice identifies qualified areas by census tract or 
division number. You may find a list and map of all tract and division 
numbers by visiting the Bureau of the Census web site at: http://www.census.gov.
    You can find HUD's most recent Notice regarding the LIHTC program 
at 60 FR 21246 (May 1, 1995), or by visiting HUD's web site at: http://www.huduser.org/datasets/qct/dda2000.html. You can view this same 
information by visiting any local Federal Depository Library. For the 
location of the nearest Federal Depository Library, call toll-free 1-
888-293-6498 or contact the Bureau of the Census, Washington, DC 20233.
    (3) Any census tract or equivalent county division as defined by 
the Bureau of the Census that is not located in a metropolitan area and 
in which the median household income for such tract or division does 
not exceed 80 percent of the statewide median household income. The 
Bureau of the Census is the Federal agency responsible for gathering 
data regarding households and income. You will need to put together 
several pieces of information in order to determine whether a 
particular tract or division meets this criteria.
    First, you must identify a tract or division number. You may find a 
list and map of all tract and division numbers by visiting the Bureau 
of the Census web site at: http://www.census.gov.
    Second, you must determine whether the tract or division is located 
within a metropolitan area. You may find a list of all metropolitan 
areas in Bureau of the Census publication ``State and Metropolitan Area 
Databook 1997-98,'' Table B-1. This publication is available on the 
Bureau of the Census web site at: http://www.census.gov/prod/3/98pubs/smadb-97.pdf. (You need Adobe Acrobat Reader in order to view this 
publication.) If your census tract or division is not included in this 
Table, then it is not located within a metropolitan area.
    Third, you must determine the median household income for your 
tract or division. The necessary income statistics for this 
determination are available in Bureau of the Census ``Summary Tape File 
(STF) 3A,'' Table P80A. You can access this information at the Bureau 
of the Census web site at: http://venus.census.gov/cdrom/lookup.
    Fourth, you must determine whether the median household income for 
your tract or division exceeds 80 percent of the statewide median 
household income. You may find median household income statistics, by 
state, in Bureau of the Census publication ``Historical Income Tables--
Households,'' Table H-8. You may view this Table at the Bureau of the 
Census web site at: http://www.census.gov/hhes/income/histinc/h08.html. 
All of this Bureau of the Census statistical information is available 
from any local Federal Depository Library. For the location of the 
nearest Federal Depository Library, call toll-free 1-888-293-6498 or 
contact the Bureau of the Census, Washington, DC 20233.
    (4) Any area located within a HUBZone. You may find out if an area 
is located within a HUBZone by visiting SBA's web site at: http://eweb1.sba.gov/hubzone/internet/general/findout.cfm, or visiting or 
contacting your nearest SBA office.
    (5) Any area located within an Urban Empowerment Zone (``EZ'') or 
Urban Enterprise Community (``EC''). You may find out whether an area 
is located within an Urban EZ or EC by visiting HUD's web site at: 
http://www.hud.gov/cpd/ezec/, or contacting HUD.
    (6) Any area located within an Rural EZ or Rural EC. You may find 
out whether an area is located within a Rural EZ or EC by visiting the 
United States Department of Agriculture's web site at: http://www.ers.usda.gov/epubs/other/typolog, or contacting the Department of 
Agriculture.
    2. Regulations modeled after SBIC regulations.
    As you read through the section by section analysis of particular 
regulations, you will see that we modeled many of these regulations on 
similar regulations governing SBA's Small Business Investment Company 
(``SBIC'') program, found in part 107 of this title. In addressing the 
challenge of implementing the NMVC program, SBA is able to draw upon 
the experience that it has gained over the last 43 years in 
administering the SBIC program.
    The SBIC program was created by the Small Business Investment Act 
of 1958 in response to a Federal Reserve study finding that small 
businesses in general were unable to obtain the long-term debt and 
equity funds that they needed for success. The basic objective of the 
program is to attract and supplement private capital, managed by 
private investment managers, to meet that need. SBA licenses such 
companies as SBICs, regulates their activities to ensure that they are 
financially sound and serve the program's public policy objectives, and 
supplements their private capital by guaranteeing debentures or other 
securities that they issue.
    The SBIC program has been extraordinarily successful in recent 
years and today represents a major factor in small business financing. 
It is estimated that 34 percent of all companies receiving 
institutional venture capital in 1999 obtained it from an SBIC. In 
fiscal year 2000, SBICs invested a record $5.5 billion in more than 
3,000 small growth companies. This was accomplished with a budget 
appropriation of just $24.3 million.
    A key strength of the SBIC program lies in the fact that all 
investment decisions are made by private individuals with their own 
money at first risk. However, this also represents a limitation in that 
such investment activities are profit driven and few of the small 
businesses being served are located in urban or rural areas. Urban and 
rural investments typically are smaller and more costly to make, and 
they require significantly more assistance over the investment period 
than most SBIC investments. At the same time, they generally offer a 
more limited profit potential to the investor. The NMVC program 
addresses these factors by adding to the SBIC structure an operational 
assistance grant subsidy and by recruiting managers and investors that 
have an economic development objective in addition to their financial 
one.
    Because of these many similarities between SBICs and NMVC companies 
and between these two venture capital

[[Page 7220]]

programs, SBA will incorporate into the NMVC program many of the SBIC 
regulations that SBA believes are fundamental to the safety and 
soundness of the SBIC program.
    3. Section-by-section analysis.
    Sections 108.10 through 108.50 briefly describe the NMVC program, 
state the legal basis for the program, definitions, and provide 
guidance on how to read part 108. Most of the definitions come directly 
from part 107 of this title, which governs the SBIC program. Most of 
the newly defined terms come directly from the Act, and SBA has not 
supplemented or modified them. SBA also sets forth several new 
definitions, including terms ``Low-Income Enterprise'' and ``Low-Income 
Investment'' as a shorter way to describe equity capital investments in 
a smaller enterprise that, at the time of the initial financing, has 
its principal office located in a low-income geographic area.
    Sections 108.100 through 108.160 describe the qualifications for 
the NMVC program. NMVC companies must be newly-formed, for-profit 
entities. SBA requires that NMVC companies be organized under state law 
and be either corporations, limited liability companies, or limited 
partnerships. They must have qualified management, have economic 
development as their primary mission, and identify particular low-
income geographic areas in which they propose to focus their investment 
activities. SBA models these regulations on the SBIC program, including 
the requirements that NMVC companies must have management and ownership 
diversity and that SBA will require pre-approval of all management 
expenses of a NMVC company (see Secs. 107.100 through 107.160 of this 
title).
    Sections 108.200 through 108.240 address capitalization of an NMVC 
company, including minimum capital requirements, permitted sources of 
capital, and limitations on non-cash contributions to capital. These 
regulations also are modeled on similar regulations in the SBIC program 
(see Secs. 107.200 through 107.250 of this title).
    Sections 108.300 through 108.330 sets forth policies and procedures 
for application for designation as a NMVC company. SBA will allow 
submission of applications for participation in the NMVC program only 
during a specific application period, to be set forth in a Notice of 
Funds Availability subsequently published in the Federal Register, as 
opposed to a rolling admissions process. SBA will use this method of 
selecting applicants for three reasons. One reason is that SBA believes 
this method will enable SBA to achieve the statutory directive of 
ensuring, to the extent possible and given the applications received, 
nationwide availability of developmental venture capital. SBA will 
compare applications both for quality and other criteria described in 
the regulations, and for the geographic areas they intend to cover so 
as to choose the best applications for each geographic area and avoid 
duplication within specific geographic areas. Another reason is that 
SBA has received one-year appropriated funds for operational assistance 
grants, and the statute requires SBA to distribute available 
appropriated funds evenly among NMVC companies and SSBICs that apply 
for such grants. (See discussion of Secs. 108.2000 through 108.2040 for 
more information about how SBA will administer the operational 
assistance grant program.) Submission of all applications for these 
grant funds at the same time will allow SBA to evenly distribute these 
funds among all eligible recipients. Third, SBA believes this procedure 
will allow SBA to orderly administer appropriated funds it may receive 
in subsequent fiscal years, by allowing SBA to open up the NMVC program 
to new rounds of applicants.
    SBA will require applicants for participation in the NMVC program 
to submit an application, similar to the application for the SBIC 
program but which also includes the requirement for a comprehensive 
business plan. Many of the topics SBA will require applicants to 
include in their business plans are outlined in section 354(b) of the 
Act regarding application for the NMVC program. In addition, SBA will 
use the following additional topics: market analysis of the specific 
low-income areas towards which the applicant proposes to target its 
investments and other activities, operational capacity and investment 
strategies, plans for raising capital and matching funds for 
operational assistance grants, and projected amount of investment in 
low-income areas as opposed to outside those areas. Based in part on 
the experience of other Federal agencies with similar economic 
development programs, SBA believes these additional topics will allow 
SBA to ensure that applicants understand the objectives of the NMVC 
program and have a good plan for accomplishing those objectives and for 
creating and maintaining a viable investment fund.
    SBA also will assess a fee for application for participation in the 
NMVC program to ensure that applicants are professional venture capital 
firms committed to participate in the program.
    Sections 108.340 through 108.395 describe SBA's evaluation criteria 
and selection process for participation in the NMVC program. SBA will 
consider ten criteria in its evaluation and selection of applicants for 
participation in the NVMC program. Most of the specified criteria are 
set forth in the Act. SBA will use the following additional selection 
criteria not specifically described in the Act: The quality of the 
applicant's business plan in terms of meeting the objectives of the 
program; the strength and likelihood for success of the applicant's 
operations and investment strategies; the need for developmental 
venture capital investments in the geographic areas in which the 
applicant proposes to concentrate its activities and the extent of the 
applicant's understanding of the markets in such geographic areas. 
Based in part on the experience of other Federal agencies with similar 
economic development programs, SBA believes these additional evaluation 
criteria are effective indicators of whether the objectives of the NMVC 
program will be met.
    The Act provides for SBA to conditionally approve companies for 
participation in the NMVC program, based on SBA's evaluation of their 
applications. Conditionally approved companies must raise the required 
amounts of capital and of matching funds for the operational assistance 
grant award from SBA within a time period specified by SBA. As provided 
in the Act, SBA will finally approve as NMVC companies all 
conditionally approved NMVC companies that raise the required amount of 
capital within the time period specified by SBA and sign a 
participation agreement with SBA. The regulations also set forth 
procedures under which SBA may grant to conditionally approved 
companies, as provided in the Act, an exception to the requirement to 
raise all of their required matching funds for their operational 
assistance grants before SBA designates them as finally approved NMVC 
companies.
    Sections 108.400 through 108.470 describe SBA's requirements for 
changes in ownership, control, or structure of a NMVC company. These 
regulations are modeled after similar regulations for the SBIC program 
(see Secs. 107.400 through 107.475 of this title).
    Sections 108.500 through 108.585 describe SBA's requirements for 
managing the operations of a NMVC company. These regulations are 
modeled after similar regulations for the SBIC program (see 
Secs. 107.500 through 107.590 of this title).
    Sections 108.600 through 108.680 describe SBA's record keeping, 
record

[[Page 7221]]

retention, and reporting requirements for NMVC companies. These 
regulations are modeled after similar regulations for the SBIC program 
(see Secs. 107.600 through 107.680 of this title). SBA also will 
require each NMVC company to provide reports concerning the community 
development impact of each investment it makes, as well as reports on 
its administration and use of grant funds as required by Circular A-110 
of the Office of Management and Budget, ``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and other Non-Profit Organizations.'' SBA 
anticipates that to the extent not inconsistent with SBA's regulations 
for the NMVC program, NMVC companies' administration and use of grant 
funds will be subject to OMB Circular A-110 and to Part 31 of the 
Federal Acquisition Regulations, 48 CFR 31.000 et seq., ``Contract Cost 
Principles and Procedures.'' OMB Circular A-110 is optional for use in 
connection with grants to commercial organizations. SBA will apply it 
to NMVC companies in order to take advantage of existing and well-known 
grant administrative procedures and policies to facilitate SBA's 
orderly administration of grants to NMVC companies. (See the discussion 
of Secs. 108.2000 through 108.2040 concerning applicability of these 
same procedures and policies to grants to SSBICs.)
    Sections 108.690 through 108.692 describe SBA's requirements for 
SBA's examinations of NMVC companies. These regulations are modeled 
after similar regulations for the SBIC program (see Secs. 107.690 
through 107.692 of this title).
    Sections 108.700 through 108.885 describe SBA's requirements for 
determining the eligibility of financings of small businesses by NMVC 
companies, and regarding types of allowable financings. These 
regulations are modeled after similar regulations for the SBIC program 
(see Secs. 107.700 through 107.885 of this title).
    Section 108.710 sets forth the requirement that at the close of 
each year, 80 percent of the concerns that NMVC companies have financed 
must be smaller enterprises that, as of the time of the initial 
financing, had their principal office in a low-income geographic area 
and in which the NMVC companies have made equity capital investments as 
defined in the regulations (see Sec. 108.50). This regulation 
implements the requirement outlined in the definition of 
``participation agreement'' in section 351(6)(B) of the SBIAct. SBA 
interprets this statutory section as requiring 80 percent of the 
smaller enterprises in which a NMVC company invests, as opposed to 80 
percent of the dollars invested by the NMVC company. SBA believes that 
this interpretation of the 80 percent requirement gives the NMVC 
company maximum flexibility to make other investments that will ensure 
the overall economic viability of its fund.
    Sections 108.1100 through 108.1720 describe SBA's requirements and 
procedures for NMVC companies to obtain leverage from SBA and the 
procedures governing how SBA will fund leverage. These regulations are 
modeled after similar regulations for the SBIC program (see 
Secs. 107.1100 through 107.1720 of this title).
    Sections 108.1810 through 108.1840 describe defaults by NMVC 
companies on the terms and conditions governing their participation in 
the NMVC program, and SBA's remedies upon such defaults. These 
regulations are modeled after similar regulations for the SBIC program 
(see Secs. 107.1810 through 107.1840 of this title).
    Section 108.1900 concerns termination by a NMVC company of its 
participation in the NMVC program. This regulation is modeled after a 
similar regulation for the SBIC program (see Sec. 107.1900 of this 
title).
    Sections 108.1910 through 108.1930 address miscellaneous issues, 
including application for an exemption from regulatory requirements and 
the effect of regulation changes on transactions previously 
consummated. These regulations are modeled after similar regulations 
for the SBIC program (see Secs. 107.1910 through 107.1930 of this 
title).
    Section 108.1940 sets forth procedures under which SBA may 
designate additional census tracts or equivalent county divisions as 
low-income geographic areas. This regulation implements the authority 
given to SBA's Administrator in section 351(3)(A)(iii) of the SBIAct. 
SBA has designed these procedures to allow for maximum opportunity by 
interested members of the public to ask SBA to designate specific 
census tracts or equivalent county divisions as additional low-income 
geographic areas.
    Sections 108.2000 through 108.2040 sets forth requirements and 
procedures for operational assistance grants to both NMVC companies and 
to SSBICs. SBA will award such grants only after receiving and 
evaluating applications in response to a Notice of Funds Availability 
published in the Federal Register. SBA will award grants to SSBICs and 
to NMVC companies in such a way as to promote developmental venture 
capital investments nationwide and in both urban and rural areas.
    SBA also will require SSBICs to provide reports on its 
administration and use of grant funds as required by Circular A-110 of 
the Office of Management and Budget, ``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and other Non-Profit Organizations.'' SBA 
anticipates that to the extent not inconsistent with these regulations, 
SSBICs' administration and use of grant funds will be subject to OMB 
Circular A-110 and to part 31 of the Federal Acquisition Regulations, 
48 CFR 31.000 et seq., ``Contract Cost Principles and Procedures.'' OMB 
Circular A-110 is optional for use in connection with grants to 
commercial organizations. SBA will apply it to SSBICs in order to take 
advantage of existing and well-known grant administrative procedures 
and policies to facilitate SBA's orderly administration of grants to 
SSBICs.

III. Justification for Publishing Interim Final Status Rule

    In general, SBA publishes a rule for public comment before issuing 
a final rule, in accordance with the Administrative Procedure Act, 5 
U.S.C. 553 and 13 CFR 101.108. The Administrative Procedure Act, 
however, does provide an exception from that general rule where the 
agency finds good cause to omit public participation. 5 U.S.C. 
553(b)(3)(B). The good cause requirement is satisfied when prior public 
participation can be shown to be impractical or contrary to the public 
interest.
    To accomplish its statutory mandate, SBA must expeditiously 
designate and enter into participation agreements with NMVC companies. 
In December 2000, to address the equity needs of low-income 
communities, Congress passed and President Clinton signed into law 
legislation creating the NMVC program. Current funding for these grants 
lapses if not obligated prior to October 1, 2001. Therefore, SBA must 
act immediately to make NMVC company designations before that date.
    SBA finds that good cause exists to publish this rule as an interim 
final rule without first soliciting public comment, because advance 
solicitation of comment is impractical and contrary to the public 
interest for the following reason. It would be contrary to the public 
interest to delay the effectiveness of the rule based on the practical 
necessity of preparing an application for designation as an NMVC 
company and raising the capital and matching

[[Page 7222]]

resources within the timeframe allowed by the appropriation statute for 
operational assistance grants.
    NMVC companies will be newly formed, for-profit investment funds 
with private management. Their objective will be to promote economic 
development and the creation of wealth and job opportunities in low-
income geographic areas and among individuals living in such areas. 
NMVC companies will pursue this objective by making equity investments 
in smaller enterprises, primarily located in low-income geographic 
areas.
    Individuals interested in forming NMVC companies must apply for 
this designation by submitting to SBA a formal application that 
provides information about (1) their business plan and management team; 
(2) the need for developmental venture capital investments in the 
geographic areas in which they intend to invest; (3) the extent to 
which they will concentrate their activities on serving these areas and 
the anticipated impact of their activities on economic opportunities in 
these areas; (4) their plan for providing operational assistance to 
their portfolio companies; and (5) their ability to raise the required 
minimum investment capital and operational assistance funding.
    The SBA will select applicants for initial ``conditional'' approval 
after giving consideration to this information, and the need to locate 
NMVC companies nationally, and in urban and rural areas.
    Further, the conditionally approved NMVC companies must raise a 
minimum of $5,000,000 in regulatory capital and binding commitments in 
cash or in kind equal to thirty percent of their regulatory capital for 
operational assistance to their portfolio companies. SBA will then 
award matching grants to the NMVC companies for operational assistance. 
SBA will provide this matching funding in fiscal year 2001 out of 
current funding appropriated for that purpose.
    Therefore, the entities that may develop an application for 
designation need to know the requirements of the program in time to 
develop their strategic plans and begin raising required matching 
funds. Given the short time frame for SBA to collect, evaluate, and 
select NMVC companies, delay in prescribing the criteria for 
designating NMVC companies would cause undue burden on these efforts 
and make it extremely difficult for applicants to develop their 
strategic plans and raise required matching funds in a timely fashion. 
Therefore, SBA believes it is impractical and contrary to the public 
interest to further delay the benefits of the NMVC program.
    Although this rule is being published as an interim final rule 
pursuant to 5 U.S.C. 553(b)(3)(B), comments are hereby solicited from 
interested members of the public. These comments must be submitted on 
or before March 23, 2001. SBA may then consider these comments in 
making any necessary revisions to these regulations.

IV. Regulatory Compliance Section--Compliance With Executive Orders 
12866, 12988 and 13132, and the Paperwork Reduction Act (44 U.S.C. 
Ch. 35)

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) has reviewed this rule as 
a ``significant'' regulatory action under Executive Order 12866. A 
regulatory assessment is set forth below.
    Low-income communities in the United States face multiple and 
varied barriers to sustainable growth. But a common obstacle for 
virtually all such communities is that they are unable to attract 
sufficient equity capital and technical assistance for starting and 
expanding businesses. Federal Reserve Board Chair Alan Greenspan has 
observed that equity capital is crucial to the existence of an 
innovative and productive business community, especially in lower-
income communities. Yet the existing private venture-capital industry 
is heavily concentrated in affluent, high technology regions located in 
only a handful of states.
    In order to promote economic development and address the unmet 
equity needs of smaller businesses located in low-income areas, 
Congress passed and President Clinton signed into law the legislation 
creating the NMVC program. SBA will use these regulations to implement 
and administer the NMVC program. NMVC companies will be newly formed, 
for-profit investment companies with private management. Their 
objective will be to create an economic infrastructure in underserved 
areas. The NMVC companies will accomplish this by making equity 
investments in smaller enterprises, primarily located in low-income 
geographic areas. SBA anticipates that this type of investing will 
generate both financial and social returns. The social returns can 
include creating sustainable jobs at businesses receiving investments 
from NMVC companies, and encouraging such businesses to provide much-
needed new products and services within underserved areas.
    SBA estimates that the NMVC program will cost approximately $1 
million annually to administer. The cost to the government includes the 
costs of staff (including benefits) and all other overhead expenses. 
The Agency will select participants for the NMVC program and regulate 
NMVC operations to ensure that public policy objectives are being met. 
Toward that end, SBA will require NMVC companies to provide regular 
performance reports and take part in annual financial examinations.
    SBA estimates that it will cost an NMVC company approximately 
$6,000 to apply for designation as an NMVC company, not including a 
$5,000 application fee. This includes the cost of one staff person at a 
level comparable to a Federal employee at a GS-13 grade level spending 
160 hours to complete the application. After receiving designation as 
an NMVC company, the annual cost to the NMVC company will be based on 
compliance with the reporting requirements of the program. The Agency 
anticipates that compliance with the reporting requirements of the 
program will cost approximately $1,500. This includes the cost of one 
staff person at a level comparable to a Federal employee at a GS-13 
grade level spending approximately 40 hours preparing the required 
performance and financial reports. The costs to NMVC companies and 
SSBICs that choose to participate in the grant aspect of the program 
include approximately $1,500 to prepare the initial grant application 
(approximately 40 hours of work), and approximately $600 annually 
thereafter to prepare the required quarterly status reports 
(approximately 16 hours of work). Again, these costs are estimated 
based upon one staff person at a level comparable to a Federal employee 
at a GS-13 grade level. There is also a fee payable by the NMVC company 
each time SBA examines the company. This rulemaking action includes a 
base fee for the examination of $3,500.
    SBA believes that there are no alternatives to the planned 
regulatory action that could more adequately address the equity needs 
of the nation's low-income areas. In developing the regulations, 
application package and reporting materials SBA purposefully followed 
proven industry practices. Based upon the foregoing, SBA believes that 
it is implementing the congressionally-mandated NMVC program in the 
most cost effective and efficient manner.

[[Page 7223]]

Compliance With Executive Order 12988

    SBA certifies that this rule is drafted, to the extent practicable, 
in accordance with the standards set forth in section 3 of Executive 
Order 12988.

Compliance With Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined that this 
rule has no federalism implications because the legislation authorizing 
it addresses private, for-profit concerns (NMVC companies) working 
directly with entrepreneurs.

Compliance With Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, the 
collection of information (``collection'') for this program includes 
the NMVC program application package and reporting and recordkeeping 
requirements. SBA previously requested from the Office of Management 
and Budget (``OMB'') an emergency clearance of this collection. OMB 
reviewed and approved the collection and assigned OMB control number 
3245-0332.
    Simultaneously with the publication of this rule in the Federal 
Register, SBA will make available to the public the collection on SBA's 
web site at http://www.sba.gov/inv or you may request a copy by calling 
Terri Dennin at (202) 205-6234.
    The following is a list of sections of this regulation that 
describe generally the collection requirements for the NMVC program and 
reasons why SBA believes it needs to collect such information.

I. New Markets Venture Capital Companies

A. Applying for Designation as a NMVC Company

    As referenced in Sec. 108.310 (Contents of application) and 
Sec. 108.320 (Contents of a comprehensive business plan), SBA will 
request information such as basic identifying data and core data, 
management and organization information, descriptions of past and 
present performance in developmental venture capital investments in 
smaller enterprises and in low-income geographic areas, technical 
qualifications of the applicant, descriptions of activities proposed 
using debentures issued by NMVC companies, and reporting capabilities.
    SBA needs this information to evaluate applicants and to ensure 
that selections are made in furtherance of the NMVC program's 
objectives. SBA understands that the respondents to these requests will 
be limited to those organizations meeting the requirements set forth in 
Sec. 108.100 (Business form); Sec. 108.110 (Qualified management); 
Sec. 108.120 (Economic development primary mission); and Sec. 108.140 
(Management and ownership diversity requirement). Based upon the 
Agency's knowledge of the industry, SBA estimates that approximately 
15-20 applicants will apply to participate in the NMVC program. 
Respondents will need to submit the information referenced in 
Secs. 108.310 and 108.320 only at the time of application to 
participate in the NMVC program. SBA estimates that it will take 
respondents 216 hours to complete an application and to fulfill the 
reporting and record keeping requirements referenced below.

B. New Markets Venture Capital Company Reporting and Recordkeeping 
Requirements

    As referenced in Secs. 108.600 to 108.680, SBA will request 
financial information including, but not limited to, financial 
statements, economic impact and community development information, and 
portfolio financing reports and valuations.
    SBA needs this information to evaluate the performance and success 
of NMVC companies in fulfilling the objectives of their participation 
agreements and their actual venture capital investments in smaller 
enterprises located in low-income geographic areas.

C. Applying for Operational Assistance Grants

    As referenced in Sec. 108.2000 (Operational Assistance grants to 
NMVC Companies and SSBICs), SBA will request such basic information on 
NMVC companies which apply for operational assistance grants as how the 
applicant plans to use the grant funds to provide operational 
assistance to smaller enterprises in which it will make its 
investments, including the types of assistance it proposes to provide 
as well as the entities it intends to use to provide such services; a 
description of its plans to obtain binding commitments for 
contributions and the source of those commitments as well as the extent 
of expressions of interest to commit such funds (including the possible 
purchase of an annuity) to match SBA's funds. The request for 
operational assistance grant funds will be part of the applicant's 
application for designation as a NMVC company.
    SBA needs this information to ensure that selections are made in 
furtherance of the operational assistance grant program's objectives. 
SBA understands that the respondents to this request will be limited to 
NMVC companies. Based upon SBA's knowledge of the industry, SBA 
estimates that approximately 15-20 applicants will apply for 
operational assistance grants under the NMVC program. Grant recipients 
will have to comply with the reporting and record keeping requirements 
as set forth in OMB Circular A-110. SBA estimates that it will take 
respondents 16 hours annually to comply with the reporting and record 
keeping requirements related to such grants.

II. Specialized Small Business Investment Companies (``SSBICs'')

A. Applying for Operational Assistance Grants

    As referenced in Sec. 108.2000 (Operational Assistance grants to 
NMVC Companies and Specialized Small Business Investment Companies), 
SBA will request such basic information on SSBICs which apply for 
operational assistance grants as how the applicant plans to use the 
grant funds to provide operational assistance to smaller enterprises in 
which it will make its investments, including the types of assistance 
it proposes to provide as well as the entities it intends to use to 
provide such services; a description of its plans to obtain binding 
commitments for contributions and the source of those commitments as 
well as the extent of expressions of interest to commit such funds 
(including the possible purchase of an annuity) to match SBA's funds.
    SBA needs this information to ensure that selections are made in 
furtherance of the operational assistance grant program's objectives. 
SBA understands that the respondents to this request will be limited to 
SSBICs. Based upon SBA's knowledge of the industry, SBA estimates that 
approximately 5 SSBICs will apply for operational assistance grants 
under this program. Respondents will need to submit Standard Form 424 
to participate in the operational assistance grant program. SBA 
estimates that it will take respondents 56 hours to apply for an 
operational assistance grant and to fulfill the reporting and record 
keeping requirements related to such grants as set out in OMB Circular 
A-110.

III. Request for Comments

    With regard to each collection of information discussed above and 
contained in the collection itself, SBA is

[[Page 7224]]

seeking your comment on the following issues:
    (a) Whether the information SBA will request on the application is 
necessary for SBA's proper implementation and measurement of the 
performance of the NMVC program;
    (b) The accuracy of the burden estimate (time estimated to complete 
each collection of information request);
    (c) Ways to minimize the burden estimates, and
    (d) Ways to enhance the quality of the information being collected.
    Please send comments on or before March 23, 2001 on the data 
collection requirements to Austin Belton, Investment Division, Office 
of New Markets Venture Capital, U.S. Small Business Administration, 409 
3rd Street, SW, Washington, DC 20416.

List of Subjects in 13 CFR Part 108

    Community development, Government securities, Grant programs--
business, Securities, Small businesses.


    For the reasons stated in the preamble, the Small Business 
Administration is adding 13 CFR part 108 as follows:

PART 108--NEW MARKETS VENTURE CAPITAL (``NMVC'') PROGRAM

Sec.
Subpart A--Introduction to Part 108
108.10   Description of the New Markets Venture Capital Program.
108.20   Legal basis and applicability of this part 108.
108.30   Amendments to Act and regulations.
108.40   How to read this part 108.
Subpart B--Definition of Terms Used in Part 108
108.50   Definition of terms.
Subpart C--Qualifications for the NMVC Program

Organizing a NMVC Company

108.100   Business form.
108.110   Qualified management.
108.120   Economic development primary mission.
108.130   Identified Low Income Geographic Areas.
108.140   SBA approval of initial Management Expenses.
108.150   Management and ownership diversity requirement.
108.160   Special rules for NMVC Companies formed as limited 
partnerships.

Capitalizing a NMVC Company

108.200   Adequate capital for NMVC Companies.
108.210   Minimum capital requirements for NMVC Companies.
108.230   Private Capital for NMVC Companies.
108.240   Limitations on including non-cash capital contributions in 
Private Capital.
Subpart D--Application and Approval Process for NMVC Company 
Designation
108.300   When and how to apply for designation as a NMVC Company.
108.310   Contents of application.
108.320   Contents of comprehensive business plan.
108.330   Application fee.
Subpart E--Evaluation and Selection of NMVC Companies.
108.340   Evaluation and selection--general.
108.350   Eligibility and completeness.
108.360   Evaluation criteria.
108.370   Conditional approval.
108.380   Final approval as a NMVC Company.
Subpart F--Changes in Ownership, Structure, or Control

Changes in Control or Ownership of NMVC Company

108.400   Changes in ownership of 10 percent or more of NMVC Company 
but no change of Control.
108.410   Changes in Control of NMVC Company (through change in 
ownership or otherwise).
108.420   Prohibition on exercise of ownership or Control rights in 
NMVC Company before SBA approval.
108.430   Notification to SBA of transactions that may change 
ownership or Control.
108.440   Standards governing prior SBA approval for a proposed 
transfer of Control.
108.450   Notification to SBA of pledge of NMVC Company's shares.

Restrictions on Common Control or Ownership of Two or More NMVC 
Companies

108.460   Restrictions on Common Control or ownership of two (or 
more) NMVC Companies.

Change in Structure of NMVC Company

108.470   SBA approval of merger, consolidation, or reorganization 
of NMVC Company.
Subpart G--Managing the Operations of a NMVC Company

General Requirements

108.500   Lawful operations under the Act.
108.502   Representations to the public.
108.503   NMVC Company's adoption of an approved valuation policy.
108.504   Equipment and office requirements.
108.506   Safeguarding the NMVC Company's assets/Internal controls.
108.507   Violations based on false filings and nonperformance of 
agreements with SBA.
108.509   Employment of SBA officials.

Management and Compensation

108.510   SBA approval of NMVC Company's Investment Adviser/Manager.
108.520   Management Expenses of a NMVC Company.

Cash Management by a NMVC Company

108.530   Restrictions on investments of idle funds by NMVC 
Companies.

Borrowing by NMVC Companies From Non-SBA Sources

108.550   Prior approval of secured third-party debt of NMVC 
companies.

Voluntary Decrease in Regulatory Capital

108.585   Voluntary decrease in NMVC Company's Regulatory Capital.
Subpart H--Recordkeeping, Reporting, and Examination Requirements for 
NMVC Companies

Recordkeeping Requirements for NMVC Companies

108.600   General requirement for NMVC Company to maintain and 
preserve records.
108.610   Required certifications for Loans and Investments.

Reporting Requirements for NMVC Companies

108.630   Requirement for NMVC companies to file financial 
statements and supplementary information with SBA (SBA Form 468).
108.640   Requirement to file portfolio financing reports (SBA Form 
1031).
108.650   Requirement to report portfolio valuations to SBA.
108.660   Other items required to be filed by NMVC Company with SBA.
108.680   Reporting changes in NMVC Company not subject to prior SBA 
approval.

Examinations of NMVC Companies by SBA for Regulatory Compliance

108.690   Examinations.
108.691   Responsibilities of NMVC Company during examination.
108.692   Examination fees.
Subpart I--Financing of Small Businesses by NMVC Companies

Determining the Eligibility of a Small Business for NMVC Financing

108.700   Compliance with size standards in part 121 of this chapter 
as a condition of assistance.
108.710   Requirement to finance Low-Income Enterprises.
108.720   Small Businesses that may be ineligible for financing.
108.730   Financings which constitute conflicts of interest.
108.740   Portfolio diversification (``overline'' limitation).
108.760   How a change in size or activity of a Portfolio Concern 
affects the NMVC Company and the Portfolio Concern.

Structuring NMVC Company's Financing of Eligible Small Businesses

108.800   Financings in the form of equity interests.
108.820   Financings in the form of guarantees.
108.825   Purchasing securities from an underwriter or other third 
party.

[[Page 7225]]

Limitations on Disposition of Assets

108.885   Disposition of assets to NMVC Company's Associates.
Subpart J--SBA Financial Assistance for NMVC Companies (Leverage)

General Information About Obtaining Leverage

108.1100   Type of Leverage and application procedures.
108.1120   General eligibility requirement for Leverage.
108.1130   Leverage fees payable by NMVC Company.
108.1140   NMVC Company's acceptance of SBA remedies under 
Sec. 108.1810.

Maximum Amount of Leverage for Which a NMVC Company is Eligible

108.1150   Maximum amount of Leverage for a NMVC Company.

Conditional Commitments by SBA to Reserve Leverage for a NMVC Company

108.1200   SBA's Leverage commitment to a NMVC Company--application 
procedure, amount, and term.
108.1220   Requirement for NMVC Company to file financial statements 
at the time of request for a draw.
108.1230   Draw-downs by NMVC Company under SBA's Leverage 
commitment.
108.1240   Funding of NMVC Company's draw request through sale to 
third-party.

Funding Leverage by Use of SBA Guaranteed Trust Certificates (``TCs'')

108.1600   SBA authority to issue and guarantee Trust Certificates.
108.1610   Effect of prepayment or early redemption of Leverage on a 
Trust Certificate.
108.1620   Functions of agents, including Central Registration 
Agent, Selling Agent and Fiscal Agent.
108.1630   SBA regulation of Brokers and Dealers and disclosure to 
purchasers of Leverage or Trust Certificates.
108.1640   SBA access to records of the CRA, Brokers, Dealers and 
Pool or Trust assemblers.

Miscellaneous

108.1700   Transfer by SBA of its interest in a NMVC Company's 
Leverage security.
108.1710   SBA authority to collect or compromise its claims.
108.1720   Characteristics of SBA's guarantee.
Subpart K--NMVC Company's Noncompliance With Terms of Leverage
108.1810   Events of default and SBA's remedies for NMVC Company's 
noncompliance with terms of Debentures.

Computation of NMVC Company's Capital Impairment

108.1830   NMVC Company's Capital Impairment definition and general 
requirements.
108.1840   Computation of NMVC Company's Capital Impairment 
Percentage.
Subpart L--Ending Operations as a NMVC Company
108.1900   Termination of participation as a NMVC Company.
Subpart M--Miscellaneous
108.1910   Non-waiver of SBA's rights or terms of Leverage security.
108.1920   NMVC Company's application for exemption from a 
regulation in this part 108.
108.1930   Effect of changes in this part 108 on transactions 
previously consummated.
108.1940   Procedures for designation of additional Low-Income 
Geographic Areas
Subpart N--Requirements and Procedures for Operational Assistance 
Grants to NMVC Companies and SSBICs
108.2000   Operational Assistance grants to NMVC Companies and 
SSBICs.
108.2010   Restrictions on use of Operational Assistance grant 
funds.
108.2020   Amount of Operational Assistance grant.
108.2030   Matching requirements.
108.2040   Reporting and recordkeeping requirements.

    Authority: 15 U.S.C. 634(b)(6) and Pub. L. 106-544.

Subpart A--Introduction to Part 108


Sec. 108.10  Description of the New Markets Venture Capital Program.

    The New Markets Venture Capital (``NMVC'') Program is a 
developmental venture capital program for the purpose of promoting 
economic development and the creation of wealth and job opportunities 
in low-income geographic areas and among individuals living in such 
areas. SBA selects and then enters into participation agreements with 
selected newly formed venture capital companies, and provides leverage 
in the form of debenture guarantees to such companies to allow them to 
make equity capital investments in smaller enterprises located in low-
income geographic areas. SBA also awards grants to such companies and 
to Specialized Small Business Investment Companies so that they can 
provide operational assistance to such smaller enterprises in 
connection with such investments.


Sec. 108.20  Legal basis and applicability of this part 108.

    The regulations in this part implement Part B of Title III of the 
Small Business Investment Act of 1958, as amended. All NMVC Companies 
must comply with all applicable SBA regulations, accounting guidelines 
and valuation guidelines for NMVC Companies, available from SBA.


Sec. 108.30  Amendments to Act and regulations.

    A NMVC Company is subject to all existing and future provisions of 
the Act and parts 108 and 112 of title 13 of the Code of Federal 
Regulations.


Sec. 108.40  How to read this part 108.

    (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. 108.50 have 
initial capitalization in this part 108.
    (c) ``You.'' The pronoun ``you'' as used in this part 108 means a 
NMVC Company unless otherwise noted.

Subpart B--Definition of Terms Used in Part 108


Sec. 108.50  Definition of terms.

    Act means the Small Business Investment Act of 1958, as amended.
    Affiliate or Affiliates has the meaning set forth in Sec. 121.103 
of this chapter.
    Applicant means any entity submitting an application to SBA for 
designation as a NMVC Company under this part.
    Articles mean articles of incorporation or charter for a Corporate 
NMVC Company, the partnership agreement or certificate for a 
Partnership NMVC Company, and the operating agreement or other 
organizational documents for a LLC NMVC Company.
    Assistance or Assisted means Financing of or management services 
rendered to a Small Business by or through a NMVC Company pursuant to 
the Act and these regulations.
    Associate of a NMVC Company means any of the following:
    (1) (i) An officer, director, employee or agent of a Corporate NMVC 
Company;
    (ii) A Control Person, employee or agent of a Partnership NMVC 
Company;
    (iii) A managing member of a LLC NMVC Company;
    (iv) An Investment Adviser/Manager of any NMVC Company, including 
any Person who contracts with a Control Person of a Partnership NMVC 
Company to be the Investment Adviser/Manager of such NMVC Company; or
    (v) Any Person regularly serving a NMVC Company on retainer in the 
capacity of attorney at law.
    (2) Any Person who owns or controls, or who has entered into an 
agreement to own or control, directly or indirectly, at least 10 
percent of any class of stock of a Corporate NMVC Company or 10

[[Page 7226]]

percent of the membership interests of an LLC NMVC Company, or a 
limited partner's interest of at least 10 percent of the partnership 
capital of a Partnership NMVC Company. However, neither a limited 
partner in a Partnership NMVC Company nor a non-managing member in an 
LLC NMVC Company is 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 capital of the 
NMVC Company 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 NMVC Company.
    (5) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, any Person described in 
paragraphs (1) and (2) of this definition.
    (6) Any Close Relative of any Person described in paragraphs (1), 
(2), (4), and (5) of this definition.
    (7) Any Secondary Relative of any Person described in paragraphs 
(1), (2), (4), and (5) of this definition.
    (8) Any concern in which--
    (i) Any person described in paragraphs (1) through (6) of this 
definition is an officer; general partner, or managing member; or
    (ii) Any such Person(s) singly or collectively Control or own, 
directly or indirectly, an equity interest of at least 10 percent 
(excluding interests that such Person(s) own indirectly through 
ownership interests in the NMVC Company).
    (9) Any concern in which any Person(s) described in paragraph (7) 
of this definition singly or collectively own (including beneficial 
ownership) a majority equity interest, or otherwise have Control. As 
used in this paragraph (9), ``collectively'' means together with any 
Person(s) described in paragraphs (1) though (7) of this definition.
    (10) For the purposes of this definition, if any Associate 
relationship described in paragraphs (1) through (7) of this definition 
exists at any time within six months before or after the date that a 
NMVC Company provides Financing, then that Associate relationship is 
considered to exist on the date of the Financing.
    (11) If any NMVC Company has any ownership interest in another NMVC 
Company, the two NMVC companies are Associates of each other.
    Capital Impairment has the meaning set forth in Sec. 108.1830(b).
    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. 108.1620 and performing similar functions 
for Debentures 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.
    Commitment means a written agreement between a NMVC Company and an 
eligible Small Business that obligates the NMVC Company to provide 
Financing (except a guarantee) to that Small Business in a fixed or 
determinable sum, by a fixed or determinable future date. In this 
context the term ``agreement'' means that there has been agreement on 
the principal economic terms of the Financing. The agreement may 
include reasonable conditions precedent to the NMVC Company's 
obligation to fund the commitment, but these conditions must be outside 
the NMVC Company's control.
    Common Control means a condition where two or more Persons, either 
through ownership, management, contract, or otherwise, are under the 
Control of one group or Person. Two or more NMVC companies 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.
    Community Development Finance means debt and equity-type 
investments in low-income communities.
    Conditionally Approved NMVC Company means a company that--
    (1) Has applied for participation as a NMVC Company, and
    (2) SBA has conditionally approved to participate in the NMVC 
program for a specified period of time not to exceed two years, subject 
to the company fulfilling the requirements to be a NMVC Company within 
that specified period of time.
    Control means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a NMVC 
Company or other concern, whether through the ownership of voting 
securities, by contract, or otherwise.
    Control Person means any Person that controls a NMVC Company, 
either directly or through an intervening entity. A Control Person 
includes:
    (1) A general partner of a Partnership NMVC Company;
    (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 NMVC Company, 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 NMVC Company 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 NMVC Company;
    (4) Any Person that controls or owns, directly or through an 
intervening entity, at least 50 percent of a Partnership NMVC Company 
or any entity described in paragraphs (1) or (2) of this definition.
    Corporate NMVC Company. See definition of NMVC Company in this 
section.
    Debentures means debt obligations issued by NMVC companies pursuant 
to section 355 of the Act and held or guaranteed by SBA.
    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.
    Developmental Venture Capital means capital in the form of Equity 
Capital Investments in Smaller Enterprises made with a primary 
objective of fostering economic development in Low-Income Geographic 
Areas.
    Distribution means any transfer of cash or non-cash assets to SBA, 
its agent or Trustee, or to partners in a Partnership NMVC Company, or 
to shareholders in a Corporate NMVC Company, or to members in an LLC 
NMVC Company. Capitalization of Retained Earnings Available for 
Distribution constitutes a Distribution to the NMVC Company's non-SBA 
partners, shareholders, or members.

[[Page 7227]]

    Equity Capital Investments means investments 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 by one or more third parties; however, neither Equity 
Capital Investments nor such guarantee may be collateralized or 
otherwise secured. Investments classified as Debt Securities (see 
Secs. 108.800(b) and 108.815) are not precluded from qualifying as 
Equity Capital Investments. Equity Capital Investments may provide for 
royalty payments only if the royalty payments are based on the earnings 
of the concern.
    Equity Securities means stock of any class in a corporation, stock 
options, warrants, limited partnership interests in a limited 
partnership, membership interests in a limited liability company, or 
joint venture interests.
    Financing or Financed means outstanding financial assistance 
provided to a Small Business by a NMVC Company, whether through:
    (1) Loans;
    (2) Debt Securities;
    (3) Equity Securities;
    (4) Guarantees; or
    (5) Purchases of securities of a Small Business or from an 
underwriter (see Sec. 108.825).
    Guaranty Agreement means the contract entered into by SBA which is 
a guarantee backed by the full faith and credit of the United States 
Government as to timely payment of principal and interest on Debentures 
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 a NMVC Company obtains a written opinion from an investment banking 
firm acceptable to SBA stating that the non-rated debt instrument is 
equivalent in risk to the issuer's investment grade debt.
    Institutional Investor means:
    (1) Entities. Any of the following entities if the entity has a net 
worth (exclusive of unfunded commitments from investors) of at least $1 
million, or such higher amount as is specified in this paragraph (1). 
(See also Sec. 108.230(c)(4) for limitations on the amount of an 
Institutional Investor's commitment that may be included in Private 
Capital.)
    (i) A State or National bank, trust company, savings bank, or 
savings and loan association.
    (ii) An insurance company.
    (iii) A 1940 Act Investment Company or Business Development Company 
(each as defined in the Investment Company Act of 1940, as amended (15 
U.S.C. 8a-1 et seq.).
    (iv) A holding company of any entity described in paragraph (l)(i), 
(ii) or (iii) of this definition.
    (v) An employee benefit or pension plan established for the benefit 
of employees of the Federal government, any State or political 
subdivision of a State, or any agency or instrumentality of such 
government unit.
    (vi) An employee benefit or pension plan (as defined in the 
Employee Retirement Income Security Act of 1974, as amended (Pub. L. 
93-406, 88 Stat. 829), excluding plans established under section 401(k) 
of the Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
    (vii) A trust, foundation or endowment exempt from Federal income 
taxation under the Internal Revenue Code of 1986, as amended.
    (viii) A corporation, partnership or other entity with a net worth 
(exclusive of unfunded commitments from investors) of more than $10 
million.
    (ix) A State, a political subdivision of a State, or an agency or 
instrumentality of a State or its political subdivision.
    (x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors 
described in paragraphs (l)(i) through (l)(ix) of this definition, each 
of whom must have at least a 10 percent ownership interest in the 
entity.
    (xi) Any other entity that SBA determines to be an Institutional 
Investor.
    (2) Individuals. (i) Any of the following individuals if he/she is 
also a permanent resident of the United States:
    (A) An individual who is an Accredited Investor (as defined in the 
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose 
commitment to the NMVC Company 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 NMVC 
Company. 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, not including the value 
of any equity in his or her most valuable residence, 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 NMVC Company under a written 
contract executed in accordance with the provisions of Sec. 108.510.
    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 
Associate's sales or business operations.
    Leverage means financial assistance provided to a NMVC Company by 
SBA through the guaranty of a NMVC Company's Debentures, and any other 
SBA financial assistance evidenced by a security of the NMVC Company.
    Leverageable Capital means Regulatory Capital, excluding unfunded 
commitments.
    LLC NMVC Company. See definition of NMVC Company in this section.
    Loan means a transaction evidenced by a debt instrument with no 
provision for you to acquire Equity Securities.
    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.
    Low-Income Enterprise means a Smaller Enterprise that, as of the 
time of the initial Financing, has its Principal Office located in a 
Low-Income Geographic Area.
    Low-Income Geographic Area (``LI Area'') means--
    (1) any population census tract (or in the case of an area that is 
not tracted for population census tracts, the equivalent county 
division, as defined by the Bureau of the Census of the United

[[Page 7228]]

States Department of Commerce for purposes of defining poverty areas), 
if--
    (i) The poverty rate for that census tract is not less than 20 
percent;
    (ii) In the case of a tract--
    (A) That is located within a metropolitan area, 50 percent or more 
of the households in that census tract have an income equal to less 
than 60 percent of the area median gross income; or
    (B) That is not located within a metropolitan area, the median 
household income for such tract does not exceed 80 percent of the 
statewide median household income; or
    (C) As determined by the Administrator in accordance with 
Sec. 108.1940 of this part, a substantial population of Low-Income 
Individuals reside, an inadequate access to investment capital exists, 
or other indications of economic distress exist in that census tract; 
or
    (2) Any area located within--
    (i) A Historically Underutilized Business Zone (``HUBZone'') as 
defined in section 3(p) of the Small Business Act and 13 CFR 126.103;
    (ii) An Urban Empowerment Zone or Urban Enterprise Community (as 
designated by the Secretary of the United States Department of Housing 
and Urban Development); or
    (iii) A Rural Empowerment Zone or Rural Enterprise Community (as 
designated by the Secretary of the United States Department of 
Agriculture).
    Low-Income Individual means an individual whose income (adjusted 
for family size) does not exceed--
    (1) For metropolitan areas, 80 percent of the area median income; 
and
    (b) For nonmetropolitan areas, the greater of--
    (i) 80 percent of the area median income, or
    (ii) 80 percent of the statewide nonmetropolitan area median 
income.
    Low-Income Investment means an Equity Capital Investment in a Low-
Income Enterprise.
    Management Expenses has the meaning set forth in Sec. 108.520.
    NAICS Manual means the latest issue of the North American 
Industrial Classification System 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.
    New Markets Tax Credit program means the tax credit created by the 
Consolidated Appropriations Act of 2001, Pub L. No. 106-554, enacted 
December 21, 2000, to be implemented by the Internal Revenue Service, 
United States Department of Treasury.
    New Markets Venture Capital Company or NMVC Company means a 
corporation (Corporate NMVC Company), a limited partnership organized 
as required by Sec. 108.160 (Partnership NMVC Company), or a limited 
liability company (LLC NMVC Company) that--
    (a) has been granted final approval by SBA under Sec. 108.390 of 
this part, and
    (b) has entered into a Participation Agreement with SBA. For 
certain purposes, the Entity General Partner of a Partnership NMVC 
Company is treated as if it were a NMVC Company (see Sec. 108.160(a).
    1940 Act Company means a NMVC Company which is registered under the 
Investment Company Act of 1940.
    1980 Act Company means a NMVC Company which is registered under the 
Small Business Investment Incentive Act of 1980.
    Operational Assistance means management, marketing, and other 
technical assistance that assists a Small Business with its business 
development.
    Original Issue Price means the price paid by the purchaser for 
securities at the time of issuance.
    Participation Agreement means an agreement between SBA and a 
company to which SBA has granted final approval under section 108.390 
of this part, that--
    (a) details the company's operating plan and investment criteria; 
and
    (b) requires the company to make investments in Smaller Enterprises 
at least 80 percent of which Smaller Enterprises are located in LI 
Areas.
    Partnership NMVC Company. See definition of NMVC Company in this 
section.
    Person means a natural person or legal entity.
    Pool means an aggregation of SBA guaranteed Debentures approved by 
SBA.
    Portfolio means the securities representing a NMVC Company's total 
outstanding Financing of Smaller Enterprises. It does not include idle 
funds or assets acquired in liquidation of Portfolio securities.
    Portfolio Concern means a Small Business Assisted by a NMVC 
Company.
    Principal Office means the location where the greatest number of 
the concern's employees at any one location perform their work. 
However, for those concerns whose ``primary industry'' (see 13 CFR 
121.107) is service or construction (see 13 CFR 121.201), the 
determination of principal office excludes the concern's employees who 
perform the majority of their work at job-site locations to fulfill 
specific contract obligations.
    Private Capital has the meaning set forth in Sec. 108.230.
    Publicly Traded and Marketable means securities that are salable 
without restriction or that are salable within 12 months pursuant to 
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by 
the holder thereof, and are of a class which is traded on a regulated 
stock exchange, or is listed in the Automated Quotation System of the 
National Association of Securities Dealers (NASDAQ), or has, at a 
minimum, at least two market makers as defined in the relevant sections 
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et 
seq.), and in all cases the quantity of which can be sold over a 
reasonable period of time without having an adverse impact upon the 
price of the stock.
    Regulatory Capital means:
    (1) General. Regulatory Capital means Private Capital, excluding 
non-cash assets contributed to a NMVC Company, a Conditionally Approved 
NMVC Company, or an Applicant, and non-cash assets purchased by a 
Conditionally Approved NMVC Company or an 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 NMVC Company, Conditionally Approved NMVC Company, or Applicant is 
excluded from Regulatory Capital if SBA determines that the 
collectability of the commitment is questionable.
    (3) Exclusion of amounts designated for Operational Assistance 
match. Regulatory Capital excludes any portion of Private Capital that 
is designated as matching resources in accordance with 
Sec. 108.2030(b)(3).
    Relevant Venture Capital Finance means Equity Capital Investments 
with the intention of creating wealth and job opportunities in low-
income communities.
    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 NMVC Company may distribute to investors (including SBA) as a 
profit Distribution, or transfer to Private Capital.

[[Page 7229]]

    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.
    Small Business means a small business concern as defined in section 
103(5) of the Act (including its Affiliates), and which meets the 
criteria applicable to the Small Business Investment Company program as 
set forth in part 121 of this chapter.
    Smaller Enterprise means any Small 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. 121.201 of this title at the time of Financing 
for the industry in which it is then primarily engaged.
    Specialized Small Business Investment Companies (SSBICs) means any 
small business investment company that--
    (1) invests solely in small business concerns that contribute to a 
well-balanced national economy by facilitating ownership in such 
concerns by persons whose participation in the free enterprise system 
is hampered because of social or economic disadvantages; and
    (2) was licensed under section 301(d) of the Small Business 
Investment Act, as in effect before September 30, 1996.
    Trust means the legal entity created for the purpose of holding 
guaranteed Debentures and the guaranty agreement related thereto, 
receiving, holding and making any related payments, and accounting for 
such payments.
    Trust Certificate Rate means a fixed rate determined by the 
Secretary of the Treasury at the time Debentures are pooled, taking 
into consideration the current average market yield on outstanding 
marketable obligations of the United States with maturities comparable 
to the maturities of the Trust Certificates being guaranteed by SBA, 
adjusted to the nearest one-eighth of one percent.
    Trust Certificates (TCs) means certificates issued by SBA, its 
agent or Trustee and representing ownership of all or a fractional part 
of a Trust or Pool of Debentures.
    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 NMVC Company's 
valuation of each of its Loans and Investments, as determined by its 
Board of Directors or General Partner(s) in accordance with NMVC 
Company's valuation policies, exceeds the cost basis thereof.
    Unrealized Depreciation means the amount by which a NMVC Company's 
valuation of each of its Loans and Investments, as determined by its 
Board of Directors or General Partner(s) in accordance with NMVC 
Company'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 NMVC 
Company's Loans and Investments, less estimated future income tax 
expense or estimated realizable future income tax benefit, as 
appropriate.

Subpart C--Qualifications for the NMVC Program

Organizing a NMVC Company


Sec. 108.100  Business form.

    A NMVC Company must be a newly formed for-profit entity or, subject 
to Sec. 108.150, a newly formed for-profit subsidiary of an existing 
entity. It must be organized under State law solely for the purpose of 
performing the functions and conducting the activities contemplated 
under the Act. It may be organized as a corporation (``Corporate NMVC 
Company''), a limited partnership (``Partnership NMVC Company''), or a 
limited liability company (``LLC NMVC Company'').


Sec. 108.110  Qualified management.

    An Applicant must show, to the satisfaction of SBA, that its 
current or proposed management is qualified and has the knowledge, 
experience, and capability in Community Development Finance or Relevant 
Venture Capital Finance, necessary for investing in the types of 
businesses contemplated by the Act, these regulations and its business 
plan. In determining whether an Applicant's current or proposed 
management team has sufficient qualifications, SBA will consider 
information provided by the Applicant and third parties concerning the 
background, capability, education, training and reputation of its 
general partners, managers, officers, key personnel, and investment 
committee and governing board members. The Applicant must designate at 
least one individual as the official responsible for contact with SBA.


Sec. 108.120  Economic development primary mission.

    The primary mission of a NMVC Company must be economic development 
of one or more LI Areas.


Sec. 108.130  Identified Low-Income Geographic Areas.

    A NMVC Company must identify the specific LI Areas in which it 
intends to make Developmental Venture Capital investments and provide 
Operational Assistance under the NMVC program.


Sec. 108.140  SBA approval of initial Management Expenses.

    A NMVC Company must have its Management Expenses approved by SBA at 
the time of designation as a NMVC Company. (See Sec. 108.520 for the 
definition of Management Expenses.)


Sec. 108.150  Management and ownership diversity requirement.

    (a) Diversity requirement. You must have diversity between 
management and ownership in order to be a NMVC Company. To establish 
diversity, you must meet the requirements in paragraphs (b) and (c) of 
this section unless SBA approves otherwise.
    (b) Percentage ownership requirement. No Person or group of Persons 
who are Affiliates of one another may own or control, directly or 
indirectly, more than 70 percent of your Regulatory Capital or your 
Leverageable Capital.
    (c) Non-affiliation requirement. At least 30 percent of your 
Regulatory Capital and Leverageable Capital must be owned and 
controlled by Persons unaffiliated with your management and 
unaffiliated with each other, and whose investments are significant in 
dollar and percentage terms as determined by SBA. Such Persons must not 
be your Associates (except for their status as your shareholders, 
limited partners or members) and must not Control, be Controlled by, or 
be under Common Control with any of your Associates. A single 
``acceptable'' Institutional Investor may be substituted for two or 
three of the three investors who are otherwise required. The following 
Institutional Investors are ``acceptable'' for this purpose:
    (1) Entities whose overall activities are regulated and 
periodically examined by state, Federal or other governmental 
authorities satisfactory to SBA;
    (2) Entities listed on the New York Stock Exchange;

[[Page 7230]]

    (3) Entities that are publicly traded and that meet both the 
minimum numerical listing standards and the corporate governance 
listing standards of the New York Stock Exchange;
    (4) Public or private employee pension funds;
    (5) Trusts, foundations, or endowments, but only if exempt from 
Federal income taxation; and
    (6) Other Institutional Investors satisfactory to SBA.
    (d) Voting requirement. The investors required for you to satisfy 
diversity may not delegate their voting rights to any Person who is 
your Associate, or who Controls, is Controlled by, or is under Common 
Control with any of your Associates, without prior SBA approval.
    (e) Requirement to maintain diversity. You must maintain 
management-ownership diversity while you are a NMVC Company. If, at any 
time, you no longer have the required management-ownership diversity, 
you must:
    (1) Notify SBA within 10 days; and
    (2) Re-establish diversity within six months.


Sec. 108.160  Special rules for NMVC Companies formed as limited 
partnerships.

    (a) Entity General Partner. (1) 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 NMVC 
companies.
    (2) SBA must approve any person who will serve as an officer, 
director, manager, or general partner of the Entity General Partner. 
This provision must be stated in an Entity General Partner's 
Certificate of Incorporation, operating agreement, limited partnership 
agreement or other similar governing instrument.
    (3) An Entity General Partner is subject to the same examination 
and reporting requirements as a NMVC Company under sections 361 and 362 
of the Act. The restrictions and obligations imposed upon a NMVC 
Company by Secs. 108.1810, 108.30, 108.410 through 108.450, 108.470, 
108.500, 108.510, 108.585, 108.600, 108.680, 108.690 through 108.692, 
and 108.1910 apply also to an Entity General Partner of a NMVC Company.
    (4) The general partner(s) of your Entity General Partner(s) will 
be considered your general partner.
    (5) 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. 108.50.
    (b) Other requirements for Partnership NMVC Companies. If you are a 
Partnership NMVC Company:
    (1) You must have a minimum duration of 10 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 NMVC Company may be terminated by a vote of your 
partners;
    (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 (b) 
in your limited partnership agreement.
    (c) Obligations of a Control Person. All Control Persons are bound 
by the disciplinary provisions of sections 365 and 366 of the Act and 
by the conflict-of-interest rules under Sec. 108.730. The term NMVC 
Company, as used in Secs. 108.30, 108.460, and 108.680, includes all of 
the NMVC Company's Control Persons. The conditions specified in 
Sec. 108.1810 and Sec. 108.1910 apply to all general partners.
    (d) Liability of general partner for partnership debts to SBA. 
Subject to section 365 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.
    (e) Special Leverage requirement. Before your first issuance of 
Leverage, you must furnish SBA with evidence that you qualify as a 
partnership for tax purposes, either by a ruling from the Internal 
Revenue Service or by an opinion of counsel.
Capitalizing a NMVC Company


Sec. 108.200  Adequate capital for NMVC Companies.

    You must meet the requirements of these Secs. 108.200-108.240 in 
order to qualify for designation as a NMVC Company and to receive 
Leverage.


Sec. 108.210  Minimum capital requirements for NMVC Companies.

    You must have Regulatory Capital of at least $5,000,000 and 
Leverageable capital of at least $500,000 to become a NMVC Company.


Sec. 108.230  Private Capital for NMVC Companies.

    (a) General. Private Capital means the contributed capital of a 
NMVC Company, plus unfunded binding commitments by Institutional 
Investors (including commitments evidenced by a promissory note) to 
contribute capital to a NMVC Company.
    (b) Contributed capital. For purposes of this section, contributed 
capital means the paid-in capital and paid-in surplus of a Corporate 
NMVC Company, the members' contributed capital of a LLC NMVC Company, 
or the partners' contributed capital of a Partnership NMVC Company, in 
each case subject to the limitations in paragraph (c) of this section.
    (c) Exclusions from Private Capital. Private Capital does not 
include:
    (1) Funds borrowed by a NMVC Company from any source.
    (2) Funds obtained through the issuance of Leverage.
    (3) Funds obtained directly from any Federal agency or department.
    (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.
    (d) Non-cash capital contributions. Capital contributions in a form 
other than cash are subject to the limitations in Sec. 108.240.
    (e) Contributions with borrowed funds. 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. 108.240  Limitations on including non-cash capital contributions 
in Private Capital.

    Non-cash capital contributions to a NMVC Company or 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 and approved by SBA.
    (c) Tangible assets used in your operations, priced at no more than 
their fair market value.
    (d) Other non-cash assets approved by SBA.

[[Page 7231]]

Subpart D--Application and Approval Process for NMVC Company 
Designation


Sec. 108.300  When and how to apply for designation as a NMVC Company.

    (a) Notice of Funds Availability (``NOFA''). SBA will publish a 
NOFA in the Federal Register, advising potential applicants of the 
availability of funds for the NMVC program. An entity may then submit 
an application for designation as a NMVC Company. When submitting its 
application, an Applicant must comply with both these regulations and 
any requirements specified in the NOFA, including submission deadlines. 
The NOFA may specify limitations, special rules, procedures, and 
restrictions for a particular funding round.
    (b) Application form. An Applicant must apply for designation as a 
NMVC Company using the application packet provided by SBA. Upon receipt 
of an application, SBA may request clarifying or technical information 
on the materials submitted as part of the application.


Sec. 108.310  Contents of application.

    Each Applicant must submit a complete application, including the 
following:
    (a) Amounts. The Applicant must indicate the amounts of--
    (1) Regulatory Capital it proposes to raise;
    (2) Binding commitments for contributions in cash or in-kind it 
proposes to raise, and/or an annuity it proposes to purchase, in 
accordance with the requirements of Sec. 108.2030, as its matching 
resources for its Operational Assistance grant award (the aggregate of 
which must be not less than 30 percent of the Regulatory Capital it 
proposes to raise under paragraph (a)(1) of this section).
    (b) Comprehensive business plan. The Applicant must submit a 
comprehensive business plan covering at least a five-year period, 
addressing the specific items described in Sec. 108.320, and which 
demonstrates that the Applicant has the capacity to operate 
successfully as a NMVC Company.
    (c) New Markets Tax Credit program. Applicant must address if and 
to what extent it intends to conform its activities to the New Markets 
Tax Credit laws. If Applicant plans to seek a New Markets Tax Credit, 
Applicant also must state the amount of tax credit allocation it 
intends to seek.


Sec. 108.320  Contents of comprehensive business plan.

    (a) Executive summary. The executive summary must include a 
description of--
    (1) The Applicant;
    (2) Its strategy for how it proposes to make successful 
Developmental Venture Capital investments in identified LI Areas;
    (3) The markets in the LI Areas it proposes to serve; and
    (4) How it intends to work with community organizations in and be 
accountable to the residents of identified LI Areas in order to 
facilitate its Developmental Venture Capital investments.
    (b) Capacity, skills, and experience of the management team. An 
Applicant must provide information generally as to the background, 
capability, education, reputation and training of its general partners, 
managers, officers, key personnel, investment committee and governing 
board members. The Applicant also must provide information specifically 
on these individuals' qualifications and reputation in the areas of 
Community Development Finance and/or Relevant Venture Capital Finance, 
including the impact of these individuals' activities in these areas.
    (c) Market analysis. An Applicant must provide an analysis of the 
LI Areas in which it intends to focus its Developmental Venture Capital 
investments and Operational Assistance to Smaller Enterprises, 
demonstrating that the Applicant understands the market and the unmet 
capital needs in such areas and how its activities will meet these 
unmet capital needs through Developmental Venture Capital investments 
and will have a positive economic impact on those areas. The analysis 
must include a description of the extent of the economic distress in 
the identified LI Areas. An Applicant also must analyze the extent of 
the demand in such areas for Developmental Venture Capital investments 
and any factors or trends that may affect the Applicant's ability to 
make effective Developmental Venture Capital investments.
    (d) Operational capacity and investment strategies. An Applicant 
must submit information concerning its policies and procedures for 
underwriting and approving its Developmental Venture Capital 
investments, monitoring its portfolio, and maintaining internal 
controls and operations.
    (e) Regulatory Capital. An Applicant must include a detailed 
description of how it plans to raise its Regulatory Capital. An 
Applicant must discuss its potential sources of Regulatory Capital, the 
estimated timing on raising such funds, and the extent of the 
expressions of interest to commit such funds to the Applicant.
    (f) Plan for providing Operational Assistance. An Applicant must 
describe how it plans to use its grant funds to provide Operational 
Assistance to Smaller Enterprises in which it will make Developmental 
Venture Capital investments. Its plan must address the types of 
Operational Assistance it proposes to provide, and whether and to what 
extent it intends to provide the Operational Assistance through the use 
of licensed professionals, either from its own staff or from outside 
entities.
    (g) Matching resources for Operational Assistance grant. An 
Applicant must include a detailed description of how it plans to obtain 
binding commitments for contributions in cash or in-kind, and/or to 
purchase an annuity, to match the funds requested from SBA for the 
Applicant's Operational Assistance grant. If it proposes to obtain 
commitments for cash or in-kind contributions, it also must estimate 
the ratio of cash to in-kind contributions (in no event may in-kind 
contributions exceed 50 percent of the total contributions). Applicant 
must discuss its potential sources of matching resources, the estimated 
timing on raising such funds, and the extent of the expressions of 
interest to commit such funds to the Applicant. Potential sources of 
matching resources must satisfy the requirements in 
Sec. 108.2030(b)(1).
    (h) Projected Amount of Investment in LI Areas. An Applicant must 
describe the amount of its total Regulatory Capital and Leverage that 
it proposes to invest in Smaller Enterprises located in LI Areas, as 
compared to the amount that it proposes to invest in Small Businesses 
located outside of LI Areas.
    (i) Projected impact. An Applicant must describe the criteria and 
economic measurements to be used to evaluate whether and to what extent 
it has met the objectives of the NMVC program. It must include:
    (1) A description of the extent to which it will concentrate its 
Developmental Venture Capital investments and Operational Assistance 
activities in identified LI Areas;
    (2) An estimate of the social, economic, and community development 
benefits to be created within identified LI Areas over the next five 
years or more as a result of its activities;
    (3) A description of the criteria to be used to measure the 
benefits created as a result of its activities;

[[Page 7232]]

    (4) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
NMVC program.
    (j) Affiliates and business relationships. Applicant must submit 
information regarding the management and financial strength of any 
parent or holding entity, affiliated firm or entity, or any other firm 
or entity essential to the success of the Applicant's business plan.


Sec. 108.330  Application fee.

    An Applicant must pay to SBA an application processing fee of 
$5,000, of which $2,000 is payable at the time of application 
submission and the remaining $3,000 of which is payable if and when SBA 
designates the Applicant as a NMVC Company.

Subpart E--Evaluation and Selection of NMVC Companies.


Sec. 108.340  Evaluation and selection--general.

    SBA will evaluate and select an Applicant to participate in the 
NMVC program solely at SBA's discretion, based on SBA's review of the 
Applicant's application materials, interviews or site visits with the 
Applicant, and background investigations conducted by SBA and other 
Federal agencies. SBA's evaluation and selection process is intended 
to--
    (a) Ensure that Applicants are evaluated on a competitive basis and 
in a fair and consistent manner;
    (b) Take into consideration the unique proposals presented by 
Applicants;
    (c) Ensure that each Applicant that SBA designates as a NMVC 
Company can fulfill successfully the goals of its comprehensive 
business plan; and
    (d) Ensure that SBA selects Applicants in such a way as to promote 
Developmental Venture Capital investments nationwide and in both urban 
and rural areas.


Sec. 108.350  Eligibility and completeness.

    SBA will not consider any application that is not complete or that 
is submitted by an Applicant that does not meet the eligibility 
criteria described in subpart C of this part. SBA, at its sole 
discretion, may request from an Applicant additional information 
concerning eligibility criteria or easily completed portions of the 
application in order to allow SBA to consider that Applicant's 
application.


Sec. 108.360  Evaluation criteria.

    SBA will evaluate and select an Applicant for participation in the 
NMVC program by considering the following criteria--
    (a) The quality of the Applicant's comprehensive business plan in 
terms of meeting the objectives of the NMVC program;
    (b) The likelihood that the Applicant will fulfill the goals 
described in its comprehensive business plan;
    (c) The capability of the Applicant's management team;
    (d) The strength and likelihood for success of the Applicant's 
operations and investment strategies;
    (e) The need for Developmental Venture Capital investments in the 
LI Areas in which the Applicant intends to invest;
    (f) The extent to which the Applicant will concentrate its 
activities on serving the LI Areas in which it intends to invest, 
including the ratio of resources that it proposes to invest in such 
areas as compared to other areas;
    (g) The Applicant's demonstrated understanding of the markets in 
the LI Areas in which it intends to focus its activities;
    (h) The likelihood that and the time frame within which the 
Applicant will be able to--
    (1) Raise the Regulatory Capital it proposes to raise for its 
investments, and
    (2) Obtain the binding commitments for contributions in cash or in-
kind and/or an annuity it proposes to obtain as its matching resources 
for its Operational Assistance grant award;
    (i) The strength of the Applicant's proposal to provide Operational 
Assistance to Smaller Enterprises in which it plans to invest;
    (j) The extent to which the activities proposed by the Applicant 
will promote economic development and the creation of wealth and job 
opportunities in the LI Areas in which it intends to invest and among 
individuals living in LI Areas; and
    (k) The strength of the Applicant's application compared to 
applications submitted by other Applicants intending to invest in the 
same or proximate LI Areas.


Sec. 108.370  Conditional approval.

    From among the Applicants submitting eligible and complete 
applications, SBA will select a number of Applicants and will 
conditionally approve such selected Applicants to participate in the 
NMVC program. SBA will give each such Conditionally Approved NMVC 
Company a specific period of time, not to exceed two years, to satisfy 
the requirements to become a NMVC Company.


Sec. 108.380  Final approval as a NMVC Company.

    (a) General rule. With respect to each Conditionally Approved NMVC 
Company, SBA will either:
    (1) Grant final approval to participate in the NMVC program and 
designate such company as a NMVC Company, if such Conditionally 
Approved NMVC Company:
    (i) Within the specific period of time SBA gave to it when SBA 
conditionally approved it for participation in the NMVC program, has 
raised:
    (A) At least $5,000,000 of Regulatory Capital; and
    (B) At least $1,500,000 of matching resources for its Operational 
Assistance grant award or 30 percent of the Regulatory Capital it 
raised, whichever is greater; and
    (ii) Enters into a Participation Agreement with SBA; or
    (2) Revoke SBA's conditional approval of the company, at which time 
it is no longer a Conditionally Approved NMVC Company and must not 
participate in the NMVC program or represent itself as a Conditionally 
Approved NMVC Company.
    (b) Exception to requirement to raise matching resources.
    (1) General. At its discretion and based upon a showing of good 
cause, SBA may consider a Conditionally Approved NMVC Company to have 
satisfied the requirement in paragraph (a)(1)(i)(B) of this section to 
raise matching resources in the amount of at least 30 percent of its 
Regulatory Capital if the Conditionally Approved NMVC Company--
    (i) Already has raised at least 20 percent of the total amount of 
required matching resources; and
    (ii) Has a viable plan that reasonably projects its capacity to 
raise the remainder of the required amount of matching resources.
    (2) Request for exception. Before the expiration of the time period 
given to it by SBA to meet the requirements to become a NMVC Company, a 
Conditionally Approved NMVC Company may submit to SBA a request that 
SBA grant the exception described in paragraph (b)(1) of this section. 
Such Conditionally Approved NMVC must present to SBA evidence of good 
cause for such request, as well as evidence supporting the elements of 
the exception described in such paragraph.
    (3) No applicability to Regulatory Capital. The exception described 
in this section applies only to matching resources for the Operational 
Assistance grant award. Under no circumstances will SBA designate a 
Conditionally Approved NMVC Company as a NMVC

[[Page 7233]]

Company if such Conditionally Approved NMVC Company does not raise the 
required minimum amount of Regulatory Capital within the time period 
SBA gave it to do so.

Subpart F--Changes in Ownership, Structure, or Control

Changes in Control or Ownership of NMVC Company


Sec. 108.400  Changes in ownership of 10 percent or more of NMVC 
Company but no change of Control.

    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, 
partnership capital or membership interests.


Sec. 108.410  Changes in Control of NMVC Company (through change in 
ownership or otherwise).

    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.


Sec. 108.420  Prohibition on exercise of ownership or Control rights in 
NMVC Company 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 meeting of shareholders, partners or members);
    (c) Permit the proposed new owner(s) to participate in any manner 
in the conduct of your affairs (including exercising control over your 
books, records, funds or other assets; participating directly or 
indirectly in any disposition thereof; or serving as an officer, 
director, partner, manager, employee or agent); or
    (d) Allow ownership or Control to pass to another Person.


Sec. 108.430  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. 108.440  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, 
including compliance with the requirements for minimum capital and 
management-ownership diversity as in effect at such time for new NMVC 
Companies.


Sec. 108.450  Notification to SBA of pledge of NMVC Company'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. 108.400 or Sec. 108.410, as appropriate.
Restrictions on Common Control or Ownership of Two or More NMVC 
Companies


Sec. 108.460  Restrictions on Common Control or ownership of two (or 
more) NMVC Companies.

    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:
    (a) An officer, director, manager, Control Person, or owner (with a 
direct or indirect ownership interest of at least 10 percent) of 
another NMVC Company; or
    (b) An officer or director of any Person that directly or 
indirectly controls, or is controlled by, or is under Common Control 
with, another NMVC Company.
Change in Structure of NMVC Company


Sec. 108.470  SBA approval of merger, consolidation, or reorganization 
of NMVC Company.

    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. 108.440.

Subpart G--Managing the Operations of a NMVC Company

General Requirements


Sec. 108.500  Lawful operations under the Act.

    You must engage only in the activities contemplated by the Act and 
in no other activities.


Sec. 108.502  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 NMVC Company'' or that ``Your capital is safe because SBA's 
experts review proposed investments to make sure they are safe for the 
NMVC Company.''


Sec. 108.503  NMVC Company's adoption of an approved valuation policy.

    (a) Valuation guidelines. You must prepare, document and report the 
valuations of your Loans and Investments in accordance with the 
Valuation Guidelines for SBICs issued by SBA. These guidelines may be 
obtained from SBA's Investment Division.
    (b) SBA approval of valuation policy. You must have a written 
valuation policy approved by SBA for use in determining the value of 
your Loans and Investments. You must either:
    (1) Adopt without change the model valuation policy set forth in 
section III of the Valuation Guidelines for SBICs; or
    (2) Obtain SBA's prior written approval of an alternative valuation 
policy.
    (c) Responsibility for valuations. Your board of directors, 
managing members, or general partner(s) will be solely responsible for 
adopting your valuation policy and for using it to prepare valuations 
of your Loans and Investments for submission to SBA. If SBA reasonably 
believes that your valuations, individually or in the

[[Page 7234]]

aggregate, are materially misstated, it reserves the right to require 
you to engage, at your expense, an independent third party acceptable 
to SBA to substantiate the valuations.
    (d) Frequency of valuations.
    (1) 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) On a case-by-case basis, SBA may require you to perform 
valuations more frequently.
    (3) You must report material adverse changes in valuations at least 
quarterly, within thirty days following the close of the quarter.
    (e) Review of valuations by independent public accountant.
    (1) For valuations performed as of the end of your fiscal year, 
your independent public accountant must review your valuation 
procedures and the implementation of such procedures, including 
adequacy of documentation.
    (2) The independent public accountant's report on your audited 
annual financial statements (SBA Form 468) must include a statement 
that your valuations were prepared in accordance with your approved 
valuation policy.


Sec. 108.504  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, 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.


Sec. 108.506  Safeguarding the NMVC Company'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. 108.507  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 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 that is necessary to make a statement not misleading in light of 
the circumstances under which the statement was made.


Sec. 108.509  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 SBA Assistance.
Management and Compensation


Sec. 108.510  SBA approval of NMVC Company's Investment Adviser/
Manager.

    You may employ an Investment Adviser/Manager who will be subject to 
the supervision of your board of directors, managing members, or 
general partner. If you have Leverage or plan to seek Leverage, you 
must obtain SBA's prior written approval of the management contract. 
SBA's approval of an Investment Adviser/Manager for one NMVC Company 
does not indicate approval of that manager for any other NMVC Company.
    (a) Management contract. The contract must:
    (1) Specify the services the Investment Adviser/Manager will render 
to you and to the Small Businesses in your Portfolio, and
    (2) Indicate the basis for computing Management Expenses.
    (b) Material change to approved management contract. If there is a 
material change, both you and SBA must approve such change in advance. 
If you are uncertain if the change is material, submit the proposed 
revision to SBA.


Sec. 108.520  Management Expenses of a NMVC Company.

    SBA must approve any increases in your Management Expenses.
    (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.
Cash Management by a NMVC Company


Sec. 108.530  Restrictions on investments of idle funds by NMVC 
Companies.

    (a) Permitted investments of idle funds. Funds not invested in 
Small Businesses must be maintained in:
    (1) Direct obligations of, or obligations guaranteed as to 
principal and interest by, the United States, which mature within 15 
months from the date of the investment, or
    (2) Repurchase agreements with federally insured institutions, with 
a maturity of seven days or less. The securities underlying the 
repurchase agreements must be direct obligations of, or obligations 
guaranteed as to principal and interest by, the United States. The 
securities must be maintained in a custodial account at a federally 
insured institution; or
    (3) Certificates of deposit with a maturity of one year or less, 
issued by a federally insured institution; or
    (4) A deposit account in a federally insured institution, subject 
to a withdrawal restriction of one year or less; or
    (5) A checking account in a federally insured institution; or
    (6) A reasonable petty cash fund.
    (b) 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.
    (c) Deposit of funds in Associate institution. A deposit in, or a 
repurchase

[[Page 7235]]

agreement with, a federally insured institution that is your Associate 
is not considered a Financing of such Associate under Sec. 108.730, 
provided the terms of such deposit or repurchase agreement are no less 
favorable than those available to the general public.
Borrowing by NMVC Companies From Non-SBA Sources


Sec. 108.550  Prior approval of secured third-party debt of NMVC 
companies.

    (a) Definition. In this Sec. 108.550, ``secured third-party debt'' 
means any non-SBA debt secured by any of your assets, including secured 
guarantees and other contingent obligations that you voluntarily assume 
and secured lines of credit.
    (b) General rule. You must get SBA's written approval before you 
incur any secured third-party debt or refinance any debt with secured 
third-party debt, including any renewal of a secured line of credit, 
increase in the maximum amount available under a secured line of 
credit, or expansion of the scope of a security interest or lien. For 
purposes of this paragraph (b), ``expansion of the scope of a security 
interest or lien'' does not include the substitution of one asset or 
group of assets for another, provided the asset values (as reported on 
your most recent annual Form 468) are comparable.
    (c) Conditions for SBA approval. As a condition of granting its 
approval under this Sec. 108.550, 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 2:1;
    (3) 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.
Voluntary Decrease in Regulatory Capital


Sec. 108.585  Voluntary decrease in NMVC Company's Regulatory Capital.

    You must obtain SBA's prior written approval to reduce your 
Regulatory Capital by more than two percent in any fiscal year. At all 
times, you must retain sufficient Regulatory Capital to meet the 
minimum capital requirements in the Act and Sec. 108.210, and 
sufficient Leverageable Capital to avoid having excess Leverage in 
violation of section 355(d) of the Act.

Subpart H--Recordkeeping, Reporting, and Examination Requirements 
for NMVC Companies

Recordkeeping Requirements for NMVC Companies


Sec. 108.600  General requirement for NMVC Company 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 SBICs, 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 NMVC Company or LLC NMVC Company, 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 NMVC Company 
application.
    (iii) All documents evidencing ownership of the NMVC Company 
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)(l) 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).
    (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).
    (d) Additional requirement. You must comply with the recordkeeping 
and record retention requirements set forth in Circular A-110 of the 
Office of Management and Budget.


Sec. 108.610  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) 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.
    (d) For each Low-Income Investment, a certification by the concern 
you are financing as to the basis for its qualification as a Low-Income 
Enterprise.

[[Page 7236]]

Sec. 108.620  Requirements to obtain information from Portfolio 
Concerns.

    All the information required by this section is subject to the 
requirements of Sec. 108.600 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, projections, and such community economic 
development information about the company, 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 and community economic development 
information.
    (1) The terms of each Financing must require the Portfolio Concern 
to provide, at least annually, sufficient financial and community 
economic development 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;
    (iii) Verify the use of Financing proceeds; and
    (iv) Evaluate the community economic development impact of the 
Financing.
    (2) The president, chief executive officer, treasurer, chief 
financial officer, general partner, or proprietor of the Portfolio 
Concern must certify the information submitted to you.
    (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. 108.825). In that case, you must keep copies of all reports 
furnished by the Portfolio Concern to the holders of its securities.
    (c) Information required for examination purposes. You must obtain 
any information requested by SBA's examiners for the purpose of 
verifying the certifications made by a Portfolio Concern under 
Sec. 108.610. 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 NMVC Companies


Sec. 108.630  Requirement for NMVC companies to file financial 
statements and supplementary information with SBA (SBA Form 468).

    (a) Annual filing of Form 468. For each fiscal year, you must 
submit to SBA financial statements and supplementary information 
prepared on SBA Form 468. You must file Form 468 on or before the last 
day of the third month following the end of your fiscal year, except 
for the information required under paragraphs (e) and (f) of this 
section, which must be filed on or before the last day of the fifth 
month following the end of your fiscal year.
    (1) Audit of Form 468. An independent public accountant acceptable 
to SBA must audit the annual Form 468.
    (2) Insurance requirement for public accountant. Unless SBA 
approves otherwise, your independent public accountant must carry at 
least $1,000,000 of Errors and Omissions insurance, or be self-insured 
and have a net worth of at least $1,000,000.
    (b) Interim filings of Form 468. When requested by SBA, you must 
file interim reports on Form 468. SBA may require you to file the 
entire form or only certain statements and schedules. You must file 
such reports on or before the last day of the month following the end 
of the reporting period. When you submit a request for a draw under an 
SBA Leverage commitment, you must also comply with any applicable 
filing requirements set forth in Sec. 108.1220.
    (c) Standards for preparation of Form 468. You must prepare SBA 
Form 468 in accordance with SBA's Accounting Standards and Financial 
Reporting Requirements for Small Business Investment Companies.
    (d) Where to file Form 468. Submit all filings of Form 468 to the 
Office of New Markets Venture Capital in the Investment Division of 
SBA.
    (e) Reporting of social, economic, or community development impact 
information on Form 468. Your annual filing of SBA Form 468 must 
include an assessment of the social, economic, or community development 
impact of each Financing. This assessment must specify the fulltime 
equivalent jobs created, the impact of the Financing on the revenues 
and profits of the business and on taxes paid by the business and its 
employees, and a listing of the number and percentage of employees who 
reside in LI Areas.
    (f) Reporting of community development information. For each 
Financing of a Low-Income Enterprise, your Form 468 must include an 
assessment of such Financing with respect to:
    (1) The social, economic or community development benefits achieved 
as a result of the Financing;
    (2) How and to what extent such benefits fulfilled the goals of 
your comprehensive business plan and Participation Agreement;
    (3) Whether you consider the Financing or the results of the 
Financing to have fulfilled the objectives of the NMVC program; and
    (4) Whether, and if so, how you achieved accountability to the 
residents of the LI Area in connection with that Financing.


Sec. 108.640  Requirement to file portfolio financing reports (SBA Form 
1031).

    For each Financing you make (excluding guarantees), you must submit 
a Portfolio Financing Report on SBA Form 1031 within 30 days of the 
closing date.


Sec. 108.650  Requirement to report portfolio valuations to SBA.

    You must determine the value of your Loans and Investments in 
accordance with Sec. 108.503. 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 adverse changes in valuations at 
least quarterly, within thirty days following the close of the quarter.


Sec. 108.660  Other items required to be filed by NMVC Company 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.

[[Page 7237]]

    (2) SBA may require you to submit copies of the pleadings and other 
documents SBA may specify.
    (3) Where proceedings have been terminated by settlement or final 
judgment, you must promptly advise SBA of the terms.
    (4) This paragraph (c) does not apply to collection actions or 
proceedings to enforce your ordinary creditors' rights.
    (d) Notification of criminal charges. If any officer, director, or 
general partner of the NMVC Company, or any other person who was 
required by SBA to complete a personal history statement, is charged 
with or convicted of any criminal offense other than a misdemeanor 
involving a minor motor vehicle violation, you must report the incident 
to SBA within 5 calendar days. Such report must fully describe the 
facts that pertain to the incident.
    (e) Reports concerning Operational Assistance grant funds. You must 
comply with all reporting requirements set forth in Circular A-110 of 
the Office of Management and Budget and any grant award document 
executed between you and SBA.
    (f) Other reports. You must file any other reports SBA may require 
in writing.


Sec. 108.680  Reporting changes in NMVC Company 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.
    (b) Approval by SBA. You may consider any change submitted under 
this section Sec. 108.680 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 NMVC Companies by SBA for Regulatory Compliance


Sec. 108.690  Examinations.

    All NMVC companies must submit to annual examinations by or at the 
direction of SBA for the purpose of evaluating regulatory compliance.


Sec. 108.691  Responsibilities of NMVC Company 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. 108.620(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. 108.692  Examination fees.

    (a) General. SBA will assess fees for examinations in accordance 
with this Sec. 108.692. Unless SBA determines otherwise on a case by 
case basis, SBA will not assess fees for special examinations to obtain 
specific information.
    (b) Base fee. A base fee of $3,500 will be assessed, subject to 
adjustment in accordance with paragraph (c) of this section.
    (c) Adjustments to base fee. The base fee will be decreased based 
on the following criteria:
    (1) If you have no outstanding regulatory violations at the time of 
the commencement of the examination and SBA did not identify any 
violations as a result of the most recent prior examination, you will 
receive a 15% discount on your base fee; and
    (2) If you were fully responsive to the letter of notification of 
examination (that is, you provided all requested documents and 
information within the time period stipulated in the notification 
letter in a complete and accurate manner, and you prepared and had 
available all information requested by the examiner for on-site 
review), you will receive a 10% discount on your base fee.
    (d) 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 of your records, SBA may assess an additional fee of up 
to $500 per day.

Subpart I--Financing of Small Businesses by NMVC Companies

Determining the Eligibility of a Small Business for NMVC Financing


Sec. 108.700  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 
meets the size standards for a Small Business, you may use either the 
financial size standards in Sec. 121.301(c)(1) of this chapter or the 
industry standard covering the industry in which the applicant is 
primarily engaged, as set forth in Sec. 121.301(c)(2) of this chapter.


Sec. 108.710  Requirement to finance Low-Income Enterprises.

    (a) Low-Income Enterprise Financings. At the close of each of your 
fiscal years, at least 80 percent of your Portfolio Concerns must be 
Low-Income Enterprises in which you have an Equity Capital Investment.
    (b) Non-compliance with this section. If you have not reached the 
percentage required in paragraph (a) of this section at the end of any 
fiscal year, then you must be in compliance by the end of the following 
fiscal year. However, you will not be eligible for additional Leverage 
until such time as you reach the required percentage (see 
Sec. 108.1120).


Sec. 108.720  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. 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.
    (b) Passive Businesses. You are not permitted to finance a passive 
business.
    (1) Definition. A business is passive if:
    (i) It is not engaged in a regular and continuous business 
operation (for purposes of this paragraph (b), the mere receipt of 
payments such as dividends, rents, lease payments, or royalties is not 
considered a regular and continuous business operation); or
    (ii) Its employees are not carrying on the majority of day to day 
operations, and the company does not provide effective control and 
supervision, on a day to day basis, over persons employed under 
contract; or
    (iii) It passes through substantially all of the proceeds of the 
Financing to another entity.
    (2) Exception for pass-through of proceeds to subsidiary. You may 
finance a passive business if it is a Small Business and it passes 
substantially all the proceeds through to one or more subsidiary 
companies, each of which is an eligible Small Business that is not 
passive. For the purpose of this paragraph (b) (2), ``subsidiary 
company'' means a company in which at least 50 percent of the 
outstanding voting securities are owned by the Financed passive 
business.
    (3) Exception for certain Partnership NMVC companies. With the 
prior written approval of SBA, if you are a Partnership NMVC Company, 
you may form one or more wholly owned corporations in accordance with 
this paragraph (b) (3). The sole purpose of

[[Page 7238]]

such corporation(s) must be to provide Financing to one or more 
eligible, unincorporated Small Businesses. You may form such 
corporation(s) only if a direct Financing to such Small Businesses 
would cause any of your investors to incur unrelated business taxable 
income under section 511 of the Internal Revenue Code of 1986, as 
amended (26 U.S.C. 511). Your investment of funds in such 
corporation(s) will not constitute a violation of Sec. 108.730(a).
    (c) Real Estate Businesses.
    (1) You are not permitted to finance:
    (i) Any business classified under sector 233 (Building, Developing, 
and Contracting) of the NAICS Manual, or
    (ii) Any business listed under sector 531 (Real Estate) unless at 
least 80 percent of the revenue is derived from non-Affiliate sources.
    (2) You are not permitted to finance a business, regardless of 
NAICS 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.
    (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 farmland. Farmland means land, which is or is intended 
to be used for agricultural or forestry purposes, such as the 
production of food, fiber, or wood, or is so taxed or zoned.
    (f) Public interest. You are not permitted to finance any business 
if the proceeds are to be used for purposes contrary to the public 
interest, including but not limited to activities which are in 
violation of law, or inconsistent with free competitive enterprise.
    (g) Foreign investment.--(1) General rule. You are not permitted to 
finance a business if:
    (i) The funds will be used substantially for a foreign operation; 
or
    (ii) At the time of the Financing or within one year thereafter, 
more than 49 percent of the employees or tangible assets of the Small 
Business are located outside the United States (unless you can show, to 
SBA's satisfaction, that the Financing was used for a specific domestic 
purpose).
    (2) Exception. This paragraph (g) does not prohibit a Financing 
used to acquire foreign materials and equipment or foreign property 
rights for use or sale in the United States.
    (h) Financing NMVC companies. 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 NMVC Company; or
    (2) To repay an indebtedness incurred for the purpose of investing 
in a NMVC Company.


Sec. 108.730  Financings which constitute conflicts of interest.

    (a) General rule. You must not self-deal to the prejudice of a 
Small Business, the NMVC Company, 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, except for a Small 
Business that satisfies all of the following conditions:
    (i) Your Associate relationship with the Small Business is 
described by paragraph (8) or (9) of the definition of Associate in 
Sec. 108.50,
    (ii) No Person triggering the Associate relationship identified in 
paragraph (a)(1)(i) of this section is a Close Relative or Secondary 
Relative of any Person described in paragraphs (1), (2), (4), or (5) of 
the definition of Associate in Sec. 108.50, and
    (iii) No single Associate of yours has either a voting interest or 
an economic interest in the Small Business exceeding 20 percent, and no 
two or more of your Associates have either a voting interest or an 
economic interest exceeding 33 percent. Economic interests shall be 
computed on a fully diluted basis, and both voting and economic 
interests shall exclude any interest owned through the NMVC Company.
    (2) Provide Financing to an Associate of another NMVC Company if 
one of your Associates has received or will receive any direct or 
indirect Financing or a Commitment from that NMVC Company or a third 
NMVC Company (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.
    (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 
Sec. 108.825(c)), 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, except as otherwise permitted 
under paragraph (a)(1) of this section.
    (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.

[[Page 7239]]

    (3) Exceptions to paragraphs (d)(l) 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 NMVC companies.
    (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. 108.600. 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, the 
percentages of the Portfolio Concern's equity set forth in paragraph 
(a)(1) of this section.
    (2) 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. 108.730, you need not obtain SBA's approval of the transaction. 
However, you must promptly notify SBA of the transaction.
    (g) Restriction on options obtained by NMVC Company's management 
and employees. Your employees, officers, directors, managing members or 
general partners, or the general partners of the management company 
that is providing services to you or to your general partner, may 
obtain options in a Financed Small Business only if:
    (1) They participate in the Financing on a pari passu basis with 
you; or
    (2) SBA gives its prior written approval; or
    (3) The options received are compensation for service as a member 
of the board of directors of the Small Business, and such compensation 
does not exceed that paid to other outside directors. In the absence of 
such directors, fees must be reasonable when compared with amounts paid 
to outside directors of similar companies.


Sec. 108.740  Portfolio diversification (``overline'' limitation).

    (a) 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 20 percent of the sum of:
    (1) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (2) Any permitted Distribution(s) you made during the five years 
preceding the date of the Financing or Commitment which reduced your 
Regulatory Capital.
    (b) 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.


Sec. 108.760  How a change in size or activity of a Portfolio Concern 
affects the NMVC Company and the Portfolio Concern.

    (a) Effect on NMVC Company 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. 108.740, you may 
provide additional Financing to the concern up to the time it makes a 
public offering of its securities.
    (2) Even after the concern makes a public offering, you may 
exercise any stock options, warrants, or other rights to purchase 
Equity Securities which you acquired before the public offering, or 
fund Commitments you made before the public offering.
    (b) Effect of a change in business activity occurring within one 
year of NMVC Company's initial Financing.
    (1) Retention of Investment. Unless you receive SBA's written 
approval, you may not keep your investment in a Portfolio Concern, 
small or otherwise, which becomes ineligible by reason of a change in 
its business activity within one year of your initial investment.
    (2) Request for SBA's approval to retain investment. If you request 
that SBA approve the retention of your investment, your request must 
include sufficient evidence to demonstrate that the change in business 
activity was caused by an unforeseen change in circumstances and was 
not contemplated at the time the Financing was made.
    (3) Additional Financing. If SBA approves your request to retain an 
investment under paragraph (b)(2) of this section, you may provide 
additional Financing to the Portfolio Concern to the extent necessary 
to protect against the loss of the amount of your original investment, 
subject to the overline limitations of Sec. 108.740.
    (c) Effect of a change in business activity occurring more than one 
year after the initial Financing. If a Portfolio Concern becomes 
ineligible because of a change in business activity more than one year 
after your initial Financing you may:
    (1) Retain your investment: and
    (2) Provide additional Financing to the Portfolio Concern to the 
extent necessary to protect against the loss of the amount of your 
original investment, subject to the overline limitations of 
Sec. 108.740.
Structuring NMVC Company's Financing of Eligible Small Businesses


Sec. 108.800  Financings in the form of equity interests.

    You may not, inadvertently or otherwise:
    (a) Become a general partner in any unincorporated business; or
    (b) Become jointly or severally liable for any obligations of an 
unincorporated business.


Sec. 108.820  Financings in the form of guarantees.

    (a) General rule. 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.
    (b) Exception. You may not issue a guaranty if:
    (1) You would become subject to State regulation as an insurance, 
guaranty or surety business; or
    (2) The amount of the guaranty plus any direct Financings to the 
Small Business exceed the overline limitations of Sec. 108.740, 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.
    (c) Pledge of NMVC Company'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. 108.825  Purchasing securities from an underwriter or other third 
party.

    (a) Securities purchased through or from an underwriter. You may 
purchase

[[Page 7240]]

the securities of a Small Business through or from an underwriter if:
    (1) You purchase such securities within 90 days of the date the 
public offering is first made;
    (2) Your purchase price is no more than the original public 
offering price; and
    (3) The amount paid by you for the securities (less ordinary and 
reasonable underwriting charges and commissions) has been, or will be, 
paid to the Small Business, and the underwriter certifies in writing 
that this requirement has been met.
    (b) Recordkeeping requirements. 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 
whether it is your Associate. You may pay reasonable and customary 
commissions and expenses to an Associate underwriter for the portion of 
an offering that you purchase.
    (d) Securities purchased from another NMVC Company or from SBA. You 
may purchase from, or exchange with, another NMVC Company, 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. 108.825 if such acquisition is a 
reasonably necessary part of the overall sound Financing of the Small 
Business.
Limitations on Disposition of Assets


Sec. 108.885  Disposition of assets to NMVC Company's Associates.

    Except with SBA's prior written approval, you are not permitted to 
dispose of assets (including assets acquired in liquidation) to any 
Associate. 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.

Subpart J--SBA Financial Assistance for NMVC Companies (Leverage)

General Information About Obtaining Leverage


Sec. 108.1100  Type of Leverage and application procedures.

    (a) Type of Leverage available. You may apply for Leverage from SBA 
in the form of a guarantee of your Debentures.
    (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. 108.1200 
through 108.1240.
    (c) Where to send your application. Send all Leverage applications 
to SBA, Investment Division Office of New Markets Venture Capital, 409 
Third Street, S.W., Washington, DC 20416.


Sec. 108.1120  General eligibility requirement for Leverage.

    To be eligible for Leverage, you must be in compliance with the 
Act, the regulations in this part, and your Participation Agreement.


Sec. 108.1130  Leverage fees payable by NMVC Company.

    There is no fee for the issuance of Debentures by a NMVC Company.


Sec. 108.1140  NMVC Company's acceptance of SBA remedies under 
Sec. 108.1810.

    If you issue Leverage, you automatically agree to the terms and 
conditions in Sec. 108.1810 as it exists 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 NMVC Company is Eligible


Sec. 108.1150  Maximum amount of Leverage for a NMVC Company.

    The face amount of a NMVC Company's outstanding Debentures may not 
exceed 150 percent of its Leverageable Capital.
Conditional Commitments by SBA to Reserve Leverage for a NMVC Company


Sec. 108.1200  SBA's Leverage commitment to a NMVC Company--application 
procedure, amount, and term.

    (a) General. Under the provisions in Secs. 108.1200 through 
108.1240, you may apply for SBA's conditional commitment to reserve a 
specific amount and type of Leverage for your future use. You may then 
apply to draw down Leverage against the commitment.
    (b) Applying for a Leverage commitment. SBA will notify you when it 
is accepting requests for Leverage commitments. Upon receipt of your 
request, SBA will send you a complete application package.
    (c) Limitations on the amount of a Leverage commitment. The amount 
of a Leverage commitment must be a multiple of $5,000. SBA, in its 
discretion, may determine a minimum dollar amount for Leverage 
commitments. Any such minimum amounts will be published in Notices in 
the Federal Register from time to time.
    (d) Term of Leverage commitment. SBA's Leverage commitment will 
automatically lapse on the expiration date stated in the commitment 
letter issued to you by SBA.


Sec. 108.1220  Requirement for NMVC Company to file financial 
statements at the time of request for a draw.

    (a) If you submit a request for a draw against SBA's Leverage 
commitment more than 90 days since your submission of an annual Form 
468 or a Form 468 (Short Form), you must:
    (1) Give SBA a financial statement on Form 468 (Short Form), and
    (2) File a statement of no material adverse change in your 
financial condition since your last filing of Form 468.
    (b) You will not be eligible for a draw if you are not in 
compliance with this Sec. 108.1220.


Sec. 108.1230  Draw-downs by NMVC Company under SBA's Leverage 
commitment.

    (a) NMVC Company's authorization of SBA to guarantee securities. By 
submitting a request for a draw against SBA's Leverage commitment, you 
authorize SBA, or any agent or trustee SBA designates, to guarantee 
your Debenture and to sell it with SBA's guarantee.
    (b) Limitations on amount of draw. The amount of a draw must be a 
multiple of $5,000. SBA, in its discretion, may determine a minimum 
dollar amount for draws against SBA's Leverage commitments. Any such 
minimum amounts will be published in Notices in the Federal Register 
from time to time.
    (c) Effect of regulatory violations on NMVC Company'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) and your Participation Agreement.
    (2) Exception to general rule. If you are not in compliance, you 
may still be eligible for draws if:

[[Page 7241]]

    (i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations or your Participation 
Agreement and that you have not repeatedly violated any non-substantive 
provisions; or
    (ii) You have agreed with SBA on a course of action to resolve your 
violations and such agreement does not prevent you from issuing 
Leverage.
    (d) Procedures for funding draws. You may request a draw at any 
time during the term of the commitment. With each request, submit the 
following documentation:
    (1) A statement certifying that there has been no material adverse 
change in your financial condition since your last filing of SBA Form 
468 (see also Sec. 108.1220 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. 108.630(a), 
a preliminary unaudited annual financial statement on SBA Form 468 
(Short Form).
    (3) A statement certifying that to the best of your knowledge and 
belief, you are in compliance with all provisions of the Act and SBA 
regulations (i.e., no unresolved regulatory or statutory violations) 
and your Participation Agreement, 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 NMVC Company;
    (ii) An officer of a corporate general partner of the NMVC Company; 
or
    (iii) An individual who is authorized to act as or for a general 
partner of the NMVC Company.
    (4) A statement that the proceeds are needed to fund one or more 
particular Small Businesses or to provide liquidity for your 
operations. If required by SBA, the statement must include the name and 
address of each Small Business, and the amount and anticipated closing 
date of each proposed Financing.
    (e) Reporting requirements after drawing funds.
    (1) Within 30 calendar days after the actual closing date of each 
Financing funded with the proceeds of your draw, you must file an SBA 
Form 1031 confirming the closing of the transaction.
    (2) If SBA required you to provide information concerning a 
specific planned Financing under paragraph (d)(3) of this section, and 
such Financing has not closed within 60 calendar days after the 
anticipated closing date, you must give SBA a written explanation of 
the failure to close.
    (3) If you do not comply with this paragraph (e), you will not be 
eligible for additional draws. SBA may also determine that you are not 
in compliance with the terms of your Leverage under Secs. 108.1810.


Sec. 108.1240  Funding of NMVC Company's draw request through sale to 
third-party.

    (a) NMVC Company's authorization of SBA to arrange sale of 
securities to third-party. By submitting a request for a draw of 
Debenture 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 to a third-party at a rate approved 
by SBA; and
    (2) The purchase of your security from the third-party and the 
pooling of your security with other securities with the same maturity 
date.
    (b) Sale of Debentures to a third-party. If SBA arranges for the 
sale of your Debenture to a third-party, the sale price may be an 
amount discounted from the face amount of the Debenture.
Funding Leverage by Use of SBA Guaranteed Trust Certificates (``TCs'')


Sec. 108.1600  SBA authority to issue and guarantee Trust Certificates.

    (a) Authorization. Section 356 of the Act authorizes SBA to issue 
TCs and to guarantee the timely payment of the principal and interest 
thereon. Any guarantee by SBA of such TC is limited to the principal 
and interest due on the Debentures 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) 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, aggregations 
of Debentures, or Pools or Trusts of Debentures.
    (c) Pass-through provisions. TCs shall provide for a pass-through 
to their holders of all amounts of principal and interest paid on the 
Debentures in the Pool or Trust against which they are issued.
    (d) 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. 108.1610  Effect of prepayment or early redemption of Leverage on 
a Trust Certificate.

    (a) The rights, if any, of a NMVC Company to prepay any Debenture 
is established by the terms of such security, 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.
    (c) Any prepayment of a Debenture pursuant to the terms of the 
Guaranty Agreement relating to such security shall reduce the SBA 
guarantee of timely payment of principal and interest on a TC in 
proportion to the amount of principal that such prepaid Debenture 
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 shall accrue only through the 
date of prepayment.
    (f) In the event that all Debentures 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 NMVC 
Company pursuant to the terms of the Debenture.


Sec. 108.1620  Functions of agents, including Central Registration 
Agent, Selling Agent and Fiscal Agent.

    (a) Agents. SBA may appoint or cause to be appointed agent(s) to 
perform functions necessary to market and service Debentures or TCs 
pursuant to this part.
    (1) Selling Agent. As a condition of guaranteeing a Debenture, SBA 
may cause each NMVC Company to appoint a Selling Agent to perform 
functions that include, but are not limited to:
    (i) Selecting qualified entities to become pool or Trust assemblers 
(``Poolers'').

[[Page 7242]]

    (ii) Receiving guaranteed Debentures as well as negotiating the 
terms and conditions of sales or periodic offerings of Debentures and/ 
or TCs on behalf of NMVC companies.
    (iii) Directing and coordinating periodic sales of Debentures and/
or TCs.
    (iv) Arranging for the production of Offering Circulars, 
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.
    (iii) Monitor the performance of the Selling Agent, Poolers, CRA, 
and the Trustee.
    (iv) Perform such other functions as SBA, from time to time, may 
prescribe.
    (3) Central Registration Agent. Pursuant to a contract entered into 
with SBA, the CRA, as SBA's agent, will do the following with respect 
to the Pools or Trust Certificates for the Debentures:
    (i) Form an SBA-approved Pool or Trust
    (ii) Issue the TCs in the form prescribed by SBA;
    (iii) Transfer the TCs upon the sale of original issue TCs in any 
secondary market transaction;
    (iv) Receive payments from NMVC companies;
    (v) Make periodic payments as scheduled or required by the terms of 
the TCs, and pay all amounts required to be paid upon prepayment of 
Debentures;
    (vi) Hold, safeguard, and release all Debentures constituting 
Trusts or Pools upon instructions from SBA;
    (vii) Remain custodian of such other documentation as SBA shall 
direct by written instructions;
    (viii) Provide for the registration of all pooled Debentures, all 
Pools and Trusts, and all TCs;
    (ix) Perform such other functions as SBA may deem necessary to 
implement the provisions of this section.
    (b) Functions. Either SBA or an agent appointed by SBA may perform 
the function of locating purchasers, and negotiating and closing the 
sale of Debentures and TCs. Nothing in the regulations in this part 
shall be interpreted to prevent the CRA from acting as SBA's agent for 
this purpose.


Sec. 108.1630  SBA regulation of Brokers and Dealers and disclosure to 
purchasers of Leverage or Trust Certificates.

    (a) 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) of this section) and shall provide a 
fidelity bond or insurance in such amount as SBA may require.
    (b) Suspension and/or termination of Broker or Dealer. SBA shall 
exclude from the sale and all other dealings in Debentures 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, SBA will suspend such 
broker or dealer for the duration of such suspension by the supervisory 
agency.
    (2) If such broker or dealer has been indicted or otherwise 
formally charged with a misdemeanor or felony bearing on its fitness, 
such broker or dealer may be suspended while the charge is pending. 
Upon conviction, participation may be terminated.
    (3) If such broker or dealer has suffered an adverse final civil 
judgment holding that such broker or dealer has committed a breach of 
trust or violation of law or regulation protecting the integrity of 
business transactions or relationships, participation in the market for 
Debentures or TCs may be terminated.
    (c) Termination/suspension proceedings. A broker's or dealer's 
participation in the market for Debentures or TCs will be conducted in 
accordance with part 134 of this chapter. SBA may, for any of the 
reasons stated in paragraphs (b) (1) through (b)(3) of this section, 
suspend the privilege of any broker or dealer to participate in this 
market. SBA shall give written notice at least ten (10) business days 
prior to the effective date of such suspension. Such notice shall 
inform the broker or dealer of the opportunity for a hearing pursuant 
to part 134 of this chapter.


Sec. 108.1640  SBA access to records of the CRA, Brokers, Dealers and 
Pool or Trust assemblers.

    The CRA and any broker, dealer and Pool or Trust assembler 
operating under the regulations in this part shall make all books, 
records and related materials associated with Debentures 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. 108.1700  Transfer by SBA of its interest in a NMVC Company's 
Leverage security.

    Upon such conditions and for such consideration as it deems 
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any 
Debenture held by or on behalf of SBA. Upon notice by SBA, a NMVC 
Company will make all payments of principal and interest as shall be 
directed by SBA. A NMVC Company will be liable for all damage or loss 
which SBA may sustain by reason of such disposal, up to the amount of 
the NMVC Company's liability under such security, plus court costs and 
reasonable attorney's fees incurred by SBA.


Sec. 108.1710  SBA authority to collect or compromise its claims.

    SBA may, upon such conditions and for such consideration as it 
deems reasonable, collect or compromise all claims relating to 
obligations held or guaranteed by SBA, and all legal or equitable 
rights accruing to SBA.


Sec. 108.1720  Characteristics of SBA's guarantee.

    If SBA agrees to guarantee a NMVC Company's Debentures, such 
guarantee will be unconditional, irrespective of the validity, 
regularity or enforceability of the Debentures or any other 
circumstances that 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.

Subpart K--NMVC Company's Noncompliance With Terms of Leverage


Sec. 108.1810  Events of default and SBA's remedies for NMVC Company's 
noncompliance with terms of Debentures.

    (a) Applicability of this section. By issuing 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.
    (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.

[[Page 7243]]

    (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 363(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 that 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 U.S.C. 548.
    (3) Willful conflicts of interest. You willfully violate 
Sec. 108.730.
    (4) Willful non-compliance. You willfully violate one or more of 
the substantive provisions of the Act or any substantive regulation 
promulgated under the Act or any substantive provision of your 
Participation Agreement.
    (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 that results in another 
occurrence of the same event of default.
    (6) Transfer of Control. You willfully violate Sec. 108.410, and as 
a result of such violation you undergo a transfer of Control.
    (7) Non-cooperation under Sec. 108.1810(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 363 (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 Secs. 108.510 and 108.520.
    (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. 108.585; and
    (ii) Payments from Retained Earnings Available for Distribution 
based on either the shareholders' pro-rata interests or the provisions 
for profit distributions in your partnership agreement, as appropriate.
    (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 Sec. 108.585.
    (5) Capital Impairment. You have a condition of Capital Impairment 
as determined under Sec. 108.1830.
    (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 (including 
your Participation 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 or any substantive regulation 
promulgated under the Act.
    (9) Failure to maintain diversity. You fail to maintain diversity 
between management and ownership as required by Sec. 108.150.
    (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 363(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 each NMVC Company must 
include the following provisions as a condition to

[[Page 7244]]

the purchase or guarantee by SBA of 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 NMVC Company, 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 NMVC Company or an LLC NMVC 
Company, upon written notice, to require you to remove the person(s) 
responsible for such occurrence and/or to remove the general partner or 
manager of the NMVC Company, which general partner or manager shall 
then be replaced in accordance with NMVC Company's Articles by a new 
general partner or manager approved by SBA; and/or
    (3) With respect to a Corporate or Partnership or LLC NMVC Company, 
to obtain the appointment of SBA or its designee as your receiver under 
section 363(c) of the Act for the purpose of continuing your 
operations. The appointment of a receiver to liquidate a NMVC Company 
is not within such consent, but is governed instead by the relevant 
provisions of the Act.
Computation of NMVC Company's Capital Impairment


Sec. 108.1830  NMVC Company's Capital Impairment definition and general 
requirements.

    (a) 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 Sec. 108.1810(g).
    (b) Definition of Capital Impairment condition. You have a 
condition of Capital Impairment if your Capital Impairment Percentage, 
as computed in Sec. 108.1840, exceeds 70 percent.
    (c) 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.
    (d) SBA's right to determine NMVC Company's Capital Impairment 
condition. SBA may make its own determination of your Capital 
Impairment condition at any time.


Sec. 108.1840  Computation of NMVC Company's Capital Impairment 
Percentage.

    (a) General. This section contains the procedures you must use to 
determine your Capital Impairment Percentage. You must compare your 
Capital Impairment Percentage to the maximum permitted under 
Sec. 108.1830(b) 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. 108.1840. 
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 I 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 table in 
Sec. 107.1840(d)(4).
    (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, up to the amount of the Unrealized Appreciation on the 
securities.

Subpart L--Ending Operations as a NMVC Company


Sec. 108.1900  Termination of participation as a NMVC Company.

    You may not terminate your participation as a NMVC Company 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 NMVC 
Company.

Subpart M--Miscellaneous


Sec. 108.1910  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 Sec. 108.1810 does not constitute

[[Page 7245]]

a waiver of any succeeding breach of such term or provision or 
condition.


Sec. 108.1920  NMVC Company's application for exemption from a 
regulation in this part 108.

    (a) General. 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.
    (b) Contents of application. Your application must be accompanied 
by supporting evidence that demonstrates to SBA's satisfaction that:
    (1) The proposed action is fair and equitable; and
    (2) The exemption requested is reasonably calculated to advance the 
best interests of the NMVC program in a manner consistent with the 
policy objectives of the Act and the regulations in this part.


Sec. 108.1930  Effect of changes in this part 108 on transactions 
previously consummated.

    The legality of a transaction covered by the regulations in this 
part is governed by the regulations in this part 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.


Sec. 108.1940  Procedures for designation of additional Low-Income 
Geographic Areas.

    (a) General. On its own initiative or upon written request by a 
Person which addresses the relevant factor(s) set forth in paragraph 
(b) of this section, SBA may consider whether to designate additional 
census tracts (or equivalent county divisions) as LI Areas.
    (b) Criteria. SBA will consider one or more of the following 
factors in determining whether to designate a particular census tract 
(or equivalent county division) as an additional LI Area:
    (1) A substantial number of Low-Income Individuals reside in that 
census tract (or equivalent county division).
    (2) As adequately supported by studies or other analyses or 
reliable data, that census tract (or equivalent county division) has a 
pattern of unmet needs for investment capital.
    (3) As adequately supported by studies or other analyses or 
reliable data, that census tract (or equivalent county division) has 
indications of economic distress.
    (c) Procedure for designation. (1) If SBA decides to consider the 
designation of an additional LI Area, SBA will publish in the Federal 
Register a notice that it is considering such designation. SBA will 
advise the public that it will consider any comments supporting or 
opposing the designation, submitted within a specified time period.
    (2) In making a final decision on whether to designate a particular 
census tract (or equivalent county division) as an additional LI Area, 
SBA will consider evidence submitted by any requester, SBA's own 
research, any public comments submitted, and any other information 
deemed relevant by SBA.
    (3) If SBA designates a particular census tract (or equivalent 
county division) as an additional LI Area, SBA will publish a notice in 
the Federal Register and, if appropriate, will amend this part 108 to 
include the additional LI Area.

Subpart O--Requirements and Procedures for Operational Assistance 
Grants to NMVC Companies and SSBICs


Sec. 108.2000  Operational Assistance Grants to NMVC Companies and 
SSBICs.

    (a) NMVC Companies. Regulations governing Operational Assistance 
grants to NMVC Companies may be found in subparts D and E of this part 
108.
    (b) SSBICs.--(1) Notice of Funds Availability (``NOFA''). SBA will 
publish a NOFA in the Federal Register, advising SSBICs of the 
availability of funds for Operational Assistance grants to SSBICs. This 
NOFA will be the same as the NOFA described in Sec. 108.300(a), or will 
be published simultaneously with that NOFA. An SSBIC may submit an 
application for an Operational Assistance grant only during the time 
period specified for such purpose in the NOFA.
    (2) Eligibility. An SSBIC is eligible to apply for an Operational 
Assistance grant if:
    (i) It intends to increase its Regulatory Capital, as in effect on 
December 21, 2000, and to make Low-Income Investments in the amount of 
such increase;
    (ii) It intends to raise binding commitments for contributions in 
cash or in-kind, and/or to purchase an annuity, in an amount not less 
than 30 percent of the intended increase in its Regulatory Capital 
described in paragraph (b)(2)(i) of this section; and
    (iii) It has a plan describing how it intends to use the requested 
grant funds to provide Operational Assistance to Smaller Enterprises in 
which it has made or expects to make Developmental Venture Capital 
Investments.
    (3) How to Apply. An SSBIC must apply for an Operational Assistance 
grant using the application packet provided by SBA. Upon receipt of an 
application, SBA may request clarifying or technical information on the 
materials submitted as part of the application.
    (4) Contents of Application. Each application must contain the 
information specified in the application packet provided by SBA, 
including the following information:
    (i) Amounts. An SSBIC must specify the amount of Operational 
Assistance grant funds it seeks from SBA and the amount of Regulatory 
Capital it intends to raise after December 21, 2000.
    (ii) Plan. An SSBIC must submit a plan addressing the following 
issues:
    (A) The SSBIC must describe how it plans to use its grant funds to 
provide Operational Assistance to Smaller Enterprises in which it will 
make Developmental Venture Capital investments. Its plan must address 
the types of Operational Assistance it proposes to provide, and whether 
and to what extent it intends to provide the Operational Assistance 
through the use of licensed professionals, either from its own staff or 
from outside entities.
    (B) The SSBIC must include a detailed description of how it plans 
to obtain binding commitments for contributions in cash or in-kind, 
and/or to purchase an annuity, to match the funds requested from SBA 
for the SSBIC's Operational Assistance grant. If it proposes to obtain 
commitments for cash or in-kind contributions, it also must estimate 
the ratio of cash to in-kind contributions (in no event may in-kind 
contributions exceed 50 percent of the total contributions). The SSBIC 
must discuss its potential sources of matching resources, the estimated 
timing on raising such match, and the extent of the expressions of 
interest to commit such match to the SSBIC.
    (C) The SSBIC must describe the amount of Low-Income Investments it 
intends to make.
    (5) Evaluation and selection. SBA's evaluation and selection 
process is intended to ensure that SSBIC requests are evaluated on a 
competitive basis and in a fair and consistent manner. SBA will 
evaluate and select SSBICs for an Operational Assistance grant award 
solely at SBA's discretion, by considering the following criteria:
    (A) The strength of the SSBIC's application, including the strength 
of its proposal to provide Operational

[[Page 7246]]

Assistance to Smaller Enterprises in which it intends to invest;
    (B) The SSBIC's regulatory compliance status; and
    (C) The likelihood that and the time frame within which the SSBIC 
will be able to raise the Regulatory Capital it intends to raise and 
obtain the matching resources described in paragraph (b)(4)(B) of this 
section.
    (6) Grant award. An SSBIC selected for an Operational Assistance 
grant award will receive a grant award only if it increases its 
Regulatory Capital and raises the matching resources required in 
Sec. 108.2030 by a date established by SBA.


Sec. 108.2010  Restrictions on use of Operational Assistance grant 
funds.

    (a) Restrictions applicable only to SSBICs. An SSBIC that receives 
an Operational Assistance grant must use both grant funds awarded by 
SBA and its matching resources only to provide Operational Assistance 
in connection with a Low-Income Investment made by the SSBIC with 
Regulatory Capital raised after December 21, 2000.
    (b) Restrictions applicable to NMVC Companies and SSBICs. A NMVC 
Company or a SSBIC that receives an Operational Assistance grant must 
not use either grant funds awarded by SBA or its matching resources for 
``general and administrative expense,'' as defined in the Federal 
Acquisition Regulations, ``Contract Cost Principles and Procedures,'' 
48 CFR 31.001.


Sec. 108.2020  Amount of Operational Assistance grant.

    (a) Amount of grant to NMVC Company. NMVC Companies are eligible 
for an Operational Assistance grant award equal to the amount of 
matching resources raised by the NMVC Company in accordance with 
Secs. 108.380(a)(10)(i)(B) and 108.2030.
    (b) Amount of grant to SSBIC. SSBICs are eligible for an 
Operational Assistance grant award equal to the amount of matching 
resources raised by the SSBIC in accordance with Secs. 108.2000 and 
108.2030.
    (c) Pro rata reductions. In the event that the total amount of 
funds available to SBA for purposes of making Operational Assistance 
grant awards to NMVC Companies and SSBICs is not sufficient to award 
grants in the amounts described in subsections (a) and (b), SBA will 
make pro rata reductions in the amounts otherwise awarded to each such 
NMVC Company and SSBIC.


Sec. 108.2030  Matching requirements.

    (a) General. All Operational Assistance grant funds SBA awards to 
an NMVC Company or a SSBIC must be matched on a dollar for dollar basis 
with funds or other resources raised by the NMVC Company or SSBIC.
    (b) Allowable sources. (1) Any source other than SBA is an 
allowable source of matching resources for an Operational Assistance 
grant award.
    (2) Neither a NMVC Company nor a SSBIC may use funds or other 
resources that it has used to satisfy a legal requirement for obtaining 
funds under any other Federal program, to satisfy the matching 
resources requirements described in this part 108.
    (3) A portion of Private Capital may be designated as matching 
resources if the designated funds are used to purchase an annuity 
pursuant to paragraph (c)(2)(iv) of this section or are otherwise 
segregated in a manner acceptable to SBA.
    (c) Type and form of matching resources. (1) Matching resources may 
come from cash contributions or in-kind contributions. In-kind 
contributions cannot exceed 50 percent of the total amount of match 
raised by the NMVC Company or SSBIC.
    (2) Matching resources may be in the form of:
    (i) Cash,
    (ii) In-kind contributions,
    (iii) Binding commitments for cash or in-kind contributions that 
may be payable over a multiyear period acceptable to SBA (but not to 
exceed 10 years), and/or
    (iv) An annuity, purchased with funds other than Regulatory 
Capital, from an insurance company acceptable to SBA and that may be 
payable over a multiyear period acceptable to SBA (but not to exceed 10 
years).
    (d) Amount of matching resources.
    (1) NMVC Companies. The amount of matching resources required of an 
NMVC Company is set forth in Sec. 108.380(a)(1)(i)(B).
    (2) SSBICs. The amount of matching resources required of an SSBIC 
is 30 percent of the increase in its Regulatory Capital since December 
21, 2000, with which it has made or will make Low-Income Investments.


Sec. 108.2040  Reporting and recordkeeping requirements.

    (a) NMVC Companies. Policies governing reporting, record retention, 
and recordkeeping requirements applicable to NMVC Companies may be 
found in subpart H of this part 108.
    (b) SSBICs. An SSBIC receiving an Operational Assistance grant 
award must comply with all reporting, record retention and 
recordkeeping requirements set forth in Circular A-110 of the Office of 
Management and Budget and any grant award document executed between SBA 
and the SSBIC, as well as the reporting requirements in Sec. 108.630(f) 
and the filing requirement in Sec. 108.640.

    Dated: January 12, 2001.
Aida Alvarez,
Administrator.
[FR Doc. 01-1710 Filed 1-19-01; 8:45 am]
BILLING CODE 8025-01-P