[Federal Register Volume 66, Number 100 (Wednesday, May 23, 2001)]
[Rules and Regulations]
[Pages 28602-28632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12501]



[[Page 28601]]

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Part II





Small Business Administration





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13 CFR Part 108



New Markets Venture Capital Program; Final Rule

  Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules 
and Regulations  

[[Page 28602]]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 108

RIN 3245-AE40


New Markets Venture Capital Program

AGENCY: U.S. Small Business Administration.

ACTION: Final rule; Withdrawal of interim final rule.

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SUMMARY: The U.S. Small Business Administration (``SBA'') adds a new 
regulation 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 also withdraws the interim final rule on the New Markets 
Venture Capital Program originally published on January 22, 2001, the 
effective date of which subsequently was delayed until June 22, 2001. 
Because the interim final rule is withdrawn, it will not take effect on 
June 22, 2001.

DATES: Effective Date: This final rule is effective on May 23, 2001.
    Applicability Date: This final rule applies to all applications 
received no later than the application deadline date and time.
    Withdrawal Date: The interim final rule adding 40 CFR part 108, 
which was published at 66 FR 7218 and delayed at 66 FR 10811 and 66 FR 
20530, is withdrawn as of May 23, 2001.

FOR FURTHER INFORMATION CONTACT: Austin Belton, Director, Office of New 
Markets Venture Capital, Investment Division, or Louis Cupp, Policy 
Analyst, Investment Division, at (202) 205-6510. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION:

I. Background

    The New Markets Venture Capital Program Act of 2000 (``the Act'') 
was created by the Consolidated Appropriations Act of 2001, Public Law 
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 bottom line'' 
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 will 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. Rulemaking History

    On January 22, 2001, 66 FR 7218, SBA published in the Federal 
Register an interim final rule with an effective date of February 21, 
2001. SBA subsequently published in the Federal Register on February 
20, 2001, 66 FR 10811, a delay of the effective date of the final rule 
until April 23, 2001. The delay was for the purpose of giving 
Administration officials the opportunity for further review and 
consideration of new regulations, consistent with the Assistant to the 
President and Chief of Staff memorandum entitled ``Regulatory Review 
Plan,'' published in the Federal Register on January 24, 2001.
    On April 23, 2001, 66 FR 20530, SBA published in the Federal 
Register notice of a further delay of the effective date of the interim 
final rule, to June 22, 2001. The purpose of this further delay was to 
give Administration officials additional time for further review and 
consideration of new regulations, consistent with that ``Regulatory 
Review Plan,'' before the interim final rule became effective.
    Also on April 23, 2001, 66 FR 20531, SBA published in the Federal 
Register a proposed rule implementing the NMVC program, and a proposed 
withdrawal of the previously published interim final rule. The proposed 
rule incorporated substantive changes resulting from the 
Administration's review of the interim final rule. The deadline for 
public comments on the proposed rule was May 4, 2001. SBA received one 
comment, which is addressed in Section IV.A, below.

III. Withdrawal of Interim Final Rule

    SBA withdraws the interim final rule it published in the Federal 
Register on January 22, 2001 (66 FR 7218). SBA received no comments on 
its proposed rulemaking action of withdrawing its previously published 
interim final rule

[[Page 28603]]

and implementing the NMVC program instead with this final rule. SBA 
withdraws the interim final rule before it becomes effective on June 
22, 2001, for the purpose of implementing the NMVC program instead with 
this final rule, which is based on the proposed rule SBA published in 
the Federal Register on April 23, 2001 (66 FR 20531). The purpose of 
implementing the NMVC program with this final rule instead of the 
interim final rule is to implement the program with substantive changes 
resulting from the Administration's review of the interim final rule.

IV. Discussion of Comments on and Changes to the Proposed Rule

A. Public Comments

    SBA received one comment in response to the proposed rule. The 
majority of the commenter's comments concern the ways in which SBA 
changed various regulations in the proposed rule from the versions of 
those regulations in the previously published interim final rule. This 
section focuses on only those comments, and does not discuss those 
comments that reiterate comments already made and already discussed in 
the preamble to the proposed rule.
    With regard to the proposed definition of ``Relevant Venture 
Capital Finance'' in Sec. 108.50, as changed from the version of this 
definition previously published in the interim final rule, the 
commenter recommends that SBA implement its earlier version of this 
definition. The commenter believes that SBA's proposed change will 
result in SBA not considering the organizational mission of the NMVC 
company when determining the qualifications of the management team. SBA 
will implement this regulation as proposed, for the following reasons. 
First, SBA believes that the proposed definition does not have any 
effect on the separate regulatory requirement in Sec. 108.120 that in 
order to be eligible for the program, a NMVC company applicant must 
have as its primary mission the economic development of one or more 
low-income areas. Second, the change will allow applicants and SBA to 
focus on management team members' demonstrable prior equity investment 
activities in small business in low-income areas, rather than 
attempting to prove the intent behind such prior activities.
    The commenter noted that SBA eliminated from the proposed rule 
Sec. 108.240, which had been included in the previously published 
interim final rule, and recommended that SBA put that section back into 
the final rule. That section concerns the circumstances in which non-
cash assets may be included in private capital. The commenter suggested 
that the NMVC program should not be more stringent than the Small 
Business Investment Company (``SBIC'') program in this regard. SBA 
declines to implement this regulation in the final rule. SBA believes 
that, unlike SBICs, NMVC companies should not be allowed to include 
non-cash assets in their private capital. First, SBA selects SBICs 
through a non-competitive process, but will select NMVC companies 
through a competitive process in which SBA will compare applicants to 
one another. SBA will not have sufficient time in the selection process 
to first evaluate an applicant's proposed non-cash assets before that 
applicant is compared to other applicants. SBA could not ensure the 
integrity and fairness of the selection process if it were to compare 
an applicant that proposes to raise all of its capital in the form of 
cash to an applicant that proposes to have some of its capital be in 
the form of non-cash assets, without first reviewing and evaluating 
such non-cash assets. Second, even in the SBIC program, the permitted 
contribution of non-cash assets for inclusion in private capital is 
extremely limited. In practice, generally the only non-cash assets SBA 
approves are ``pre-licensing investments,'' which are not expected in 
the NMVC program.
    The commenter objected to the change SBA made in the proposed rule 
to Sec. 108.330, from the version previously published in the interim 
final rule. SBA revised a $5,000 application fee due in two 
installments, $2,000 at application submission and $3,000 at the time 
of final approval, to a $5,000 grant issuance fee due in advance at 
application submission. The commenter suggested that the only purpose 
for this change is to deter applicants. On the contrary, SBA desires to 
encourage professional venture capital funds, committed to 
participating in the program, to apply for NMVC company designation. 
SBA believes that asking applicants to pay the grant issuance fee at 
the time of application will ensure this result. As stated in the 
preamble to the proposed rule, SBA has determined that the Act 
authorizes SBA to charge a fee in connection with its issuance of a 
grant. SBA has decided to collect the entire fee in advance, as opposed 
to just a portion, in order to avoid the administrative costs of 
collecting the fee in two installments. SBA continues to believe that 
the amount of the fee is reasonable, and the fee ultimately will be 
borne only by successful applicants.
    The commenter addressed the requirements in proposed Sec. 108.710 
that 80 percent of the businesses receiving financing from a NMVC 
company be smaller enterprises, be located in low-income areas, and 
receive equity capital investments, and that 80 percent of the total 
dollars invested by a NMVC company be in the form of equity capital 
investments in smaller enterprises located in low-income areas. The 
commenter makes several recommendations: First, that SBA eliminate the 
requirement that 80 percent of businesses receive equity capital 
investments; second, that SBA eliminate the 80 percent of dollars 
requirement and replace it with a requirement that an NMVC company only 
must invest 100 percent of its leverage (but none of its regulatory 
capital) in the form of equity capital investments; and third, that SBA 
replace the proposed 80 percent of businesses and 80 percent of total 
investment dollars requirement with only an 80 percent of businesses 
requirement. Some of these suggestions reiterate comments this 
commenter made in response to the interim final rule, and some relate 
to the changes SBA made to this regulation between the version 
published in the interim final rule and the version published in the 
proposed rule.
    The commenter presents several reasons for its recommendations. 
First, it believes that the Act does not state that 80 percent of 
businesses must receive equity capital investments. Second, it states 
that NMVC companies need to have more investment flexibility to offset 
the higher risks of investments in low-income areas, including an 
ability to invest a portion of funds as amortizing debt. SBA has 
considered the commenter's suggestions and has decided to implement 
Sec. 108.710 as proposed for the following reasons.
    With regard to the requirement that 80 percent of the businesses in 
which a NMVC company invests must receive equity capital investments, 
as well as be smaller enterprises located in low-income areas, SBA 
believes that the Act requires this. This implements the requirement 
outlined in the definition of ``participation agreement'' in section 
351(6)(B) of the Small Business Investment Act (``SBI Act''), as 
amended by the Act, that a NMVC company must make investments in 
smaller enterprises at least 80 percent of which are located in low-
income areas. This also implements the legislative purposes stated in 
section 352 of the SBI Act, as amended by the Act, which include

[[Page 28604]]

``encouraging developmental venture capital investments in smaller 
enterprises primarily located in low-income geographic areas'' and ``to 
establish a developmental venture capital program with the mission of 
addressing the unmet equity investment needs of small enterprises 
located in low-income geographic areas.'' ``Developmental venture 
capital'' is defined in section 351(1) of the SBI Act, as amended by 
the Act, as equity capital investments with the primary objective of 
fostering economic development in low-income areas. SBA believes that 
the clear purpose of the Act, read as a whole, is to promote equity 
capital investments in smaller enterprises in low-income areas. 
Accordingly, SBA believes Sec. 108.710(a)(1) is required by the Act.
    SBA also believes that the additional requirement SBA proposed in 
Sec. 108.710(a)(2), that 80 percent of the total dollars a NMVC company 
has invested also must be in the form of equity capital investments in 
smaller enterprises located in low-income areas, fulfills the purposes 
of the Act, discussed above. SBA believes that the Act as a whole 
encourages NMVC companies to take a proactive posture with respect to 
the companies in which they invest, and to take reasonable risks in 
making investments in such companies. Several features of the NMVC 
program already offset the expectation of higher risk and lower rate of 
return to a NMVC company in making equity capital investments in 
smaller enterprises located in low-income areas. First, a NMVC company 
does not have to repay interest on its guaranteed debentures during the 
first five years after issuance, which gives the company time patiently 
to allow the businesses in which it invests to grow and, thus, for its 
investments to generate returns. Second, there is no limitation on the 
amount of ownership interest a NMVC company can take in a business in 
which it invests, thus giving the company the ability to act to reduce 
the risk of the business' failure. Third, the program includes a grant 
component, which gives a NMVC company additional resources to help 
increase the potential for a return on its investment in a business.
    The commenter commented on the change SBA made in proposed 
Sec. 108.2030, from the version previously published in the interim 
final rule, regarding the acceptable length of time within which 
commitments or annuities for grant matching resources may be payable. 
The commenter suggested that SBA allow NMVC companies to expend their 
grant matching resources over a period of 10 years as originally 
stated, rather than five years as stated in the proposed rule. The 
commenter suggested that doing so is not specifically prohibited by 
statute and would give NMVC companies the ability to provide 
operational assistance throughout the term of their investments.
    SBA considered the consequences of implementing this suggestion, 
including the fact that it could result in a NMVC company expending all 
of its SBA grant funds before it expends any of its grant matching 
resources. After deliberation SBA has decided to implement the 
regulation as proposed, for several reasons.
    First, SBA believes that implicit in the Act is a requirement that 
SBA's grant funds and a NMVC company's or SSBIC's grant matching 
resources be expended simultaneously within the same period of time. 
Since SBA believes that by law it can make its grants funds available 
for expenditure only for a period of time not exceeding five years, SBA 
believes it also should place the same time restriction on the 
expenditure of grant matching resources.
    Second, from a grant administration perspective, it would not be 
the most efficient use of SBA's resources to continue to monitor grants 
to SSBICs and NMVC companies for a 10-year period when SBA's grant 
funds have been fully expended within the first five years. Pursuant to 
paragraph .71 of Circular A-110 of the Office of Management and Budget 
(``OMB''), SBA must not perform a close-out on such grants until the 
grant project is complete. Pursuant to the Act, the purpose of the 
grant is providing operational assistance to small businesses in 
connection with investments, and the grant project would not be 
complete until both the SBA grant funds and the NMVC company's or 
SSBIC's grant matching resources had been expended for this purpose.
    Third, SBA believes that simultaneous expenditure by SSBICs and 
NMVC companies of both grant funds and grant matching resources will 
give SBA the best ability to ensure proper implementation of the NMVC 
program. If SBA monitors the use of both resources simultaneously, SBA 
can ensure that grants are being used for purposes that are authorized 
by the Act and that best fulfill the objectives of the NMVC program. If 
SBA finds that such funds and resources are not being used properly, or 
if a NMVC company or SSBIC is not complying with other grant 
requirements, pursuant to paragraph .22(h) of OMB Circular A-110, SBA 
can withhold payment of further grant funds until the situation is 
remedied.

B. Other Changes to the Proposed Rule

    SBA made substantive changes to Secs. 108.380(a)(1)(i)(A) and (B) 
concerning the amounts of regulatory capital and operational assistance 
grant matching resources a conditionally approved NMVC company must 
raise in order to receive from SBA final approval as a NMVC company. 
These changes implement a solution to a problem raised by a comment SBA 
received in response to the interim final rule, and already discussed 
in the preamble to SBA's proposed rule.
    The commenter had advised that if SBA over-commits its grant funds, 
it could result in SBA giving applicants less than the 30 percent 
``grant-to-private-capital ratio'' contemplated by the Act, due to the 
pro rata reduction in the amount of grant award each applicant would 
receive. The commenter suggested that SBA revise 
Sec. 108.380(a)(1)(i)(B) to limit the amount of grant matching 
resources a conditionally approved NMVC company must raise in order to 
receive final approval. The commenter suggested this limit should be an 
amount not more than the amount of operational assistance grant that 
SBA has ``conditionally designated for that NMVC company.'' In essence, 
the commenter suggested that SBA place a limit on the amount of grant 
funds SBA would award to an applicant.
    SBA proposed not to implement this suggestion for several reasons 
discussed in the preamble to the proposed rule (66 FR 20532-20533). 
However, SBA recognized that the possibility remained that an applicant 
might raise more regulatory capital and grant matching resources than 
it proposed to raise in its application, and more than SBA anticipated 
when SBA evaluated the applicant's application and made conditional 
approvals based on its selection process and the amount of appropriated 
funds available.
    SBA continues to believe that the solution suggested by the 
commenter, placing a limit on the amount of grant funds SBA will award, 
is not allowable under Sec. 358(a)(4) of the SBI Act, as amended by the 
Act. Under that section, SBA must award a grant in an amount equal to 
the amount of grant matching resources an applicant actually raises. 
Upon further deliberation, however, SBA believes it does have the 
discretion under the statutory scheme to place a limit on the amount of 
regulatory capital and grant matching resources an applicant is allowed 
to raise after filing its application. SBA believes that this

[[Page 28605]]

solution will achieve the result sought by the commenter but using a 
different approach.
    SBA's selection process will include an evaluation of the proposals 
submitted by applicants, which will include specific amounts of capital 
and grant matching resources the applicants propose to raise. SBA will 
evaluate, among other things, the extent to which an applicant will 
concentrate its resources in particular low-income geographic areas, 
and the extent to which the applicant's proposed activities will 
promote economic development and the creation of wealth and job 
opportunities in such areas. This evaluation necessarily will include 
an assessment of the amounts of capital and grant matching resources an 
applicant intends to raise and to concentrate in particular low-income 
areas, in relation to the impact those resources might have on those 
areas.
    SBA also will be selecting applicants for conditional approval so 
as to achieve the greatest extent of potential nationwide and rural/
urban impact of the program. This process necessarily will include an 
assessment of the amounts of capital and grant matching resources an 
applicant intends to raise, in relation of the number of particular 
low-income areas toward which the applicant proposes to direct its 
activities.
    For these reasons, a key factor in SBA's selection of applicants 
for conditional approval will be the amounts of capital and grant 
matching resources an applicant proposes in its application. In order 
to preserve both the integrity of the competitive selection process and 
the delicate balance between the various aspects of the applications 
SBA selects for conditional approval, SBA believes it must hold the 
selected applicants to fulfilling the plans as they have proposed in 
their applications and upon which SBA based its decision to select 
them. Accordingly, SBA has changed Secs. 108.380(a)(1)(i)(A) and (B) to 
state that in order to receive final approval from SBA, a conditionally 
approved applicant must raise amounts of capital and grant matching 
resources equal to the amounts it set forth in its application to SBA. 
An applicant must not raise more or less than such amounts.
    For these same reasons, SBA also has made similar substantive 
changes to Secs. 108.2000(b)(6) and 108.2030(d)(2) regarding the amount 
of capital and grant matching resources that SSBIC applicants must 
raise.
    SBA has made technical corrections to Secs. 108.720(c)(1)(i) and 
(ii), concerning real estate businesses that are ineligible to receive 
financings from NMVC companies. SBA modeled this regulation on 
Sec. 107.720(c), concerning real estate businesses that are ineligible 
to receive financings from SBICs. This SBIC regulation refers to 
particular major group and industry numbers contained in the Standard 
Industrial Classification (``SIC'') Manual. In promulgating a similar 
regulation for the NMVC program, SBA attempted to translate the SIC 
Manual references into equivalent references to the North American 
Industrial Classification System (NAICS) Manual, which is SBA's current 
size standard classification system. SBA re-examined this proposed 
regulation as a result of a question received by an interested member 
of the public and realized that SBA had not correctly translated the 
SIC Manual references into NAICS Manual references. This final rule 
corrects this technical error and conforms this regulation to the 
parallel regulation applicable to SBICs.

V. 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

    As you read through the section by section analysis of particular 
regulations, you will see that SBA models many of these regulations on 
similar regulations governing SBA's 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 generally are not 
targeted to small businesses located in low-income areas. Low-income 
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 programs, SBA incorporates into 
the NMVC program many of the SBIC regulations that SBA believes are 
fundamental to the safety and soundness of the SBIC program.

B. 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 13 CFR part 107, which governs the SBIC program. Most of the newly 
defined terms come directly from the Act, and SBA does not supplement 
or modify them. SBA also adds several new definitions, including the 
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. Under the Act, 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. SBA requires that they

[[Page 28606]]

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 13 CFR 107.100 through 107.160).
    Sections 108.200 through 108.240 address capitalization of a 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 13 CFR 107.200 through 107.250).
    Sections 108.300 through 108.330 set 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 published in the Federal Register, as opposed to a 
rolling admissions process. SBA will use this method of selecting 
applicants for three reasons. First, 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. Second, SBA has received 
one-year appropriated funds for operational assistance grants, and the 
statute requires SBA to distribute available appropriated funds pro 
rata 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 proposes to administer the operational assistance grant 
program.) Submission of all applications for these grant funds at the 
same time will allow SBA to distribute these funds among all eligible 
and qualified 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 
SBI Act, as amended by 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 receiving a grant under 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. Section 108.380(b) also sets 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 13 CFR 107.400 through 107.475).
    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 13 CFR 
107.500 through 107.590).
    Sections 108.600 through 108.680 describe SBA's record keeping, 
record retention, and reporting requirements for NMVC companies. These 
regulations are modeled after similar regulations for the SBIC program 
(see 13 CFR 107.600 through 107.680). 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 part 31, ``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

[[Page 28607]]

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 13 CFR 107.690 
through 107.692).
    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 13 CFR 107.700 through 107.885).
    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 proposed Sec. 108.50). This regulation 
implements the requirement outlined in the definition of 
``participation agreement'' in section 351(6)(B) of the SBI Act. SBA 
interprets this statutory section to refer to 80 percent of the 
businesses in which a NMVC company invests. Section 108.710 also 
requires that for all financings extended by a NMVC company, the NMVC 
company must have invested at least 80 percent (in total dollars) in 
low-income investments. In other words, 80 percent of the dollars used 
to finance business concerns must be invested in equity capital 
investments in smaller enterprises located in low-income areas. This 
provision will require that a substantial portion of a NMVC company's 
capital and leverage go toward making equity investments in smaller 
enterprises located in low-income areas. SBA believes that this will 
fulfill one of the Act's purposes--to address the unmet equity 
investment needs of businesses located in low-income areas.
    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 13 CFR 
107.1100 through 107.1720).
    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 13 CFR 107.1810 through 107.1840).
    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 13 CFR 107.1900).
    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 13 CFR 107.1910 through 107.1930).
    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 SBI Act, 
as amended by the Act. 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 set 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 OMB Circular A-
110, ``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 part 31, ``Contract Cost Principles and 
Procedures.'' OMB Circular A-110 is optional for use in connection with 
grants to commercial organizations (some SSBICs are for-profit, others 
are non-profit). 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.

VI. Justification for Immediate Effective Date of Final Rule

    The Administrative Procedures Act (``APA'') requires that 
``publication or service of a substantive rule shall be made not less 
than 30 days before its effective date, except * * * as otherwise 
provided by the agency for good cause found and published with the 
rule.'' 5 U.S.C. 553(d)(3). SBA finds that good cause exists to make 
this final rule become effective immediately the same day it is 
published in the Federal Register.
    The purpose of this APA provision is to provide interested and 
affected members of the public sufficient time to adjust their behavior 
before the rule takes effect. Potential NMVC company and SSBIC 
applicants have had since January 22, 2001 to consider, digest, and 
understand these regulations, the vast majority of which have not 
changed from the form in which they were published on January 22, 2001. 
Potential applicants and other interested parties also have had two 
opportunities to participate in notice and comment proceedings 
concerning these regulations. For these reasons, SBA believes that 
potential applicants and other interested parties have had ample time 
to adjust their behavior to comply with these regulations. In addition, 
SBA believes that potential applicants have a strong interest in seeing 
this rule get implemented in final form so that they may apply for the 
benefits of the NMVC program and so that SBA may select applicants and 
award appropriated funds before such funds expire at the end of this 
fiscal year.
    SBA first published these regulations in the Federal Register on 
January 22, 2001, in the form of an interim final rule. On that same 
date, SBA made available to the public, via its web site, the 
application forms for NMVC company designation. SBA has made available 
to potential SSBIC applicants the appropriate application forms upon 
request.
    Despite the fact that the regulations originally were promulgated 
as an interim final rule, SBA offered a 60-day comment period that 
expired on March 23, 2001. SBA received three public comments.
    SBA republished these regulations, with several limited substantive 
and technical changes, as a proposed rule in the Federal Register on 
April 23, 2001. Some of the changes SBA made were the result of its 
consideration of

[[Page 28608]]

comments received on the interim final rule. Again, SBA provided an 
opportunity for public comment, and SBA received one comment. This 
final rule implements the regulations as proposed, with the exception 
of one technical change that arose from a question received from an 
interested member of the public, and one substantive change that arose 
from a public comment. Accordingly, SBA believes that interested 
members of the public have had ample opportunity to participate 
formally in SBA's rulemaking process as well as to influence informally 
SBA's development of these governing regulations and administrative 
procedures.
    In addition to the four months since January 22, 2001, when these 
regulations first were published, potential applicants also will have 
an additional time period of approximately one week between the 
effective date of the final rule and SBA's anticipated application 
deadline. This will allow potential applicants to review their behavior 
and applications and determine whether they wish or need to make any 
adjustments before submitting their applications.
    SBA also believes, based on its contacts with interested members of 
the public, that there is stronger interest in the immediate 
implementation of the NMVC program, than in a further 30-day delay in 
program implementation. In addition to its formal rulemaking 
activities, over the past three months SBA officials have talked and 
met with many potential applicants, investors, and donors of grant 
matching resources, and other interested parties, to explain the 
application forms, the regulations, and SBA's proposed administration 
of the NMVC program. SBA is aware of many potential applicants that 
have been putting together their application packages, contacting and 
obtaining commitments from potential investors and donors, and working 
with counsel on legal documentation, since January 22, 2001.
    SBA also believes that interested members of the public are fully 
aware of the time constraints upon its implementation of the NMVC 
program during this fiscal year. SBA posted on its web site on January 
22, 2001, a preliminary overview of the NMVC program. The overview 
describes the NMVC program generally and its implementation during 
SBA's fiscal year 2001 specifically. As a result of this overview and 
of the many contacts SBA staff have had with interested members of the 
public, potential applicants are fully aware of the fact that SBA 
believes its funds for operational assistance grant awards, 
appropriated to SBA for fiscal year 2001, expire on September 30, 2001. 
SBA believes that potential applicants are fully aware of the 
implication of this limitation on SBA's appropriated funds. SBA must 
evaluate and select applicants for conditional approval, provide time 
for conditionally approved applicants to raise capital and grant 
matching resources, and finalize legal documentation and agreements 
with finally selected applicants, in the time period between the 
application deadline and September 30, 2001. An additional 30-day delay 
will only shorten this extremely tight time frame. For these reasons, 
SBA believes that potential applicants have a stronger interest in the 
immediate implementation of the NMVC program, than in a further 30-day 
delay in program implementation.

VII. Regulatory Compliance Section--Compliance With Executive 
Orders 12866, 12988 and 13132, the Regulatory Flexibility Act (5 
U.S.C. 601-612), 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. 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. 
SBA proposes to select participants for the NMVC program and regulate 
NMVC operations to ensure that public policy objectives are being met. 
Toward that end, SBA proposes to require NMVC companies to provide 
regular performance reports and take part in annual financial 
examinations.
    SBA estimates that it will cost a NMVC company approximately $6,000 
to apply for designation as a NMVC company, not including a $5,000 
grant issuance fee due in advance at the time of application. 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 a NMVC company, the 
annual cost to the NMVC company will be based on compliance with the 
reporting requirements of the program. SBA 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 also is 
a fee payable by the NMVC company each time SBA examines the company. 
This rule sets forth a base fee for the examination of $3,500.
    SBA believes that there are no alternatives to this regulatory 
action that

[[Page 28609]]

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 its rule 
implements the congressionally mandated NMVC program in the most cost 
effective and efficient manner.

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 Regulatory Flexibility Act, 5 U.S.C. 601-612

    The NMVC program is expected to result in the creation of 
approximately 15-20 NMVC companies. The program's impact will be felt 
to a greater extent on the small businesses that the NMVC companies 
invest in and assist through this program. However, SBA has determined 
that this rule will not have a significant economic impact on a 
substantial number of small entities within the meaning of the 
Regulatory Flexibility Act, 5 U.S.C. 601-612.
    The legislation creating the NMVC program authorizes $100 million 
to guarantee debentures to NMVC companies and $30 million for 
operational assistance grants to NMVC companies and SSBICs. In 
addition, NMVC companies must raise capital totaling $100 million, and 
NMVC companies and SSBICs must raise grant matching resources totaling 
$30 million. Thus, the total funding allocation for the NMVC program, 
including matching funds raised by NMVC companies and SSBICs, is $260 
million. These funds have been authorized for use over a period of five 
years. Based upon industry practices, it is highly unlikely that the 
funds will be disbursed in total in one year. A NMVC company's minimum 
life is 10 years and NMVC companies' investments are typically made 
during their first five to seven years of existence. Generally, a NMVC 
company will fund three or at most four businesses in one year out of 
the 20 to 30 businesses it will fund over its life.
    The average size of an investment by a community development 
company is approximately $300,000. Based upon a total funding 
allocation of $260 million and an average investment in a small 
business of $300,000, approximately 867 small businesses will be 
affected by this program during the lives of the NMVC companies 
authorized with this legislation. Based upon 1997 Economic Census data, 
SBA estimates that there are approximately 5 million small businesses 
in the United States and 867 constitutes less than 1% of those 
businesses.
    Further, NMVC companies must invest in ``smaller enterprises'' 
which are defined as businesses with a net worth not greater than $6 
million and average net income of not greater than $2 million. Based 
upon an average investment of $300,000, an investment in a business 
with a net worth of $6 million would equate to 5% of the business's net 
worth. A 5% investment is not likely to have a significant effect on a 
small business. Additionally, industry practices indicate that while 
the average investment in a particular business is $300,000, this 
amount may not be disbursed all at once. The average investment per 
round in the industry is approximately $185,000, which is only 3% of 
the business's net worth.

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.
    SBA has made the collection available to the public on SBA's web 
site at http://www.sba.gov/inv and by calling Terri Dennin at (202) 
205-6234. SBA already has provided the public with a 60-day comment 
period on this collection (66 FR 7218). SBA received no comments on the 
collection.

List of Subjects in 13 CFR Part 108

    Community development, Government securities, Grant programs--
business, Reporting and recordkeeping requirements, Securities, Small 
businesses.

    For the reasons stated in the preamble, the Small Business 
Administration adds 13 CFR part 108 to read as follows:

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

Subpart A--Introduction to Part 108

Sec.
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 This 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.
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   Grant issuance 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.

[[Page 28610]]

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.
108.620   Requirements to obtain information from Portfolio 
Concerns.

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.

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. 689-689q and Pub. L. 106-554, 114 Stat. 
2762A.

[[Page 28611]]

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 (15 U.S.C. 661 et 
seq.). 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 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 (available from Investment Division, SBA). 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 This Part 108


Sec. 108.50  Definition of terms.

    The following definitions apply to this part 108:
    Act means the Small Business Investment Act of 1958, as amended (15 
U.S.C. 661 et seq.).
    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 this part.
    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 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

[[Page 28612]]

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.
    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 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 through 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 (Public Law 
93-406, 88

[[Page 28613]]

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 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
    (2) 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, Public Law 106-554 (114 Stat. 
2762A), 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--
    (1) Has been granted final approval by SBA under Sec. 108.390, and
    (2) 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 (15 U.S.C. 80a-1 et seq.).
    1980 Act Company means a NMVC Company which is registered under the 
Small Business Investment Incentive Act of 1980 (Public Law 96-447, 94 
Stat. 2275).
    Operational Assistance means management, marketing, and other 
technical assistance that assists a Small Business with its business 
development.

[[Page 28614]]

    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 Sec. 108.390, 
that--
    (1) Details the company's operating plan and investment criteria; 
and
    (2) 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 
in small businesses in low-income communities or benefiting 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.
    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.
    Small Business Investment Company (SBIC) means a Licensee, as that 
term is defined in Sec. 107.50 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 chapter 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 at the time 
Debentures are pooled.
    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.

[[Page 28615]]

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 team 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, the regulations in this part 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.
    (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;
    (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

[[Page 28616]]

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 Secs. 108.200-108.230 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 excluded from Private Capital.
    (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.

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.

[[Page 28617]]

    (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 how it plans to 
provide the Operational Assistance through the use of licensed 
professionals, when necessary, 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 cash or in-kind contributions, 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;
    (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  Grant issuance fee.

    An Applicant must pay to SBA a grant issuance fee of $5,000. An 
Applicant must submit this fee in advance, at the time of application 
submission. If SBA does not select an Applicant as a Conditionally 
Approved NMVC Company or designate an Applicant as a NMVC Company, SBA 
will refund this fee to the Applicant.

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 (if any), 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

[[Page 28618]]

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) The amount of Regulatory Capital set forth in its application, 
pursuant to Sec. 108.310(a)(1), which must be at least $5,000,000; and
    (B) The amount of matching resources for its Operational Assistance 
grant award set forth in its application, pursuant to 
Sec. 108.310(a)(2), which must be at least $1,500,000 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 paragraph (b)(1) of this section.
    (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 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.

[[Page 28619]]

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 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:

[[Page 28620]]

    (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 your initial Management Expenses and 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 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 section, ``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 section, 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. You may obtain this chart of 
accounts from SBA.
    (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

[[Page 28621]]

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)(1) of this section.
    (3) After final disposition of any item in your Portfolio, you must 
preserve for at least six years:
    (i) Financing applications and Financing instruments.
    (ii) All loan, participation, and escrow agreements.
    (iii) Size status declarations (SBA Form 480).
    (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. (OMB circulars are available from the 
addresses in 5 CFR 1310.3.)


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.


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

[[Page 28622]]

Requirements for Small Business Investment Companies, which you may 
obtain from SBA.
    (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.
    (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 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 section. 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.

[[Page 28623]]

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--
    (1) At least 80 percent of your Portfolio Concerns must be Low-
Income Enterprises in which you have an Equity Capital Investment; and
    (2) For all Financings you have extended, you must have invested at 
least 80 percent (in total dollars) in Equity Capital Investments in 
Low-Income Enterprises.
    (b) Non-compliance with this section. If you have not reached the 
percentages 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 percentages (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. With the 
prior written approval of SBA, 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 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 subsector 5311 (Lessors of Real 
Estate) of the NAICS Manual; or
    (ii) Any business listed under subsector 5312 (Offices of Real 
Estate Agents and Brokers) 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 or SBICs. 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 
SBIC; or
    (2) To repay an indebtedness incurred for the purpose of investing 
in a NMVC Company or SBIC.


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

[[Page 28624]]

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 paragraph (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.
    (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 section, 
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.

[[Page 28625]]

    (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 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 paragraphs (a)(3) and (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 section 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, SW., 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.

[[Page 28626]]

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 section.


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:
    (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;
    (iii) An individual who is authorized to act as or for a general 
partner of the NMVC Company; or
    (iv) An individual who is authorized to act as or for a member-
manager 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)(4) 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 Sec. 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

[[Page 28627]]

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'').
    (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

[[Page 28628]]

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.
    (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 paragraph (h) of this section. 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

[[Page 28629]]

    (ii) Payments from Retained Earnings Available for Distribution 
based on either the shareholders' or members' 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)(l) 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 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 section. 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.

[[Page 28630]]

    (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) of this chapter.
    (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 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 to 
include the additional LI Area.

Subpart N--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

[[Page 28631]]

to NMVC Companies may be found in subparts D and E of this part.
    (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 Developmental Venture Capital 
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) Application requirements. (i) 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.
    (ii) Grant issuance fee. An SSBIC must pay to SBA a grant issuance 
fee of $5,000. An SSBIC must submit this fee in advance, at the time of 
application submission. If SBA does not award a grant to the SSBIC, SBA 
will refund this fee to the SSBIC.
    (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) Plan for providing Operational Assistance. 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 how it plans to 
provide the Operational Assistance through the use of licensed 
professionals, when necessary, either from its own staff or from 
outside entities.
    (B) Matching resources for Operational Assistance grant. 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) Projected amount of investment in LI Areas. The SSBIC must 
describe the amount of Developmental Venture Capital investments it 
intends to make.
    (D) Track record of management team in obtaining public policy 
results through investments. The SSBIC must provide information 
concerning the past track record of the SSBIC in making investments 
that have had a demonstrable impact on the socially or economically 
disadvantaged businesses targeted by the SSBIC program (for example, 
new businesses created, jobs created, or wealth created). Such 
information might include case studies or examples of the SSBIC's 
successful Financings.
    (E) Market analysis. The SSBIC must provide an analysis of the LI 
Areas in which it intends to makes its Developmental Venture Capital 
investments and provide its Operational Assistance to Smaller 
Enterprises, demonstrating that the SSBIC 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 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. The SSBIC 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 SSBIC's 
ability to make effective Developmental Venture Capital investments.
    (F) Regulatory Capital. The SSBIC must include a detailed 
description of how it plans to raise its Regulatory Capital. The SSBIC 
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 SSBIC.
    (G) Projected impact. The SSBIC 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) 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;
    (2) A description of the criteria to be used to measure the 
benefits created as a result of its activities;
    (3) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
NMVC program.
    (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:
    (i) The strength of the SSBIC's application, including the strength 
of its proposal to provide Operational Assistance to Smaller 
Enterprises in which it intends to invest;
    (ii) The SSBIC's regulatory compliance status and past track record 
in being able to accomplish program goals through its investment 
activity;
    (iii) 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)(ii)(B) of 
this section;
    (iv) The need for Developmental Venture Capital investments in the 
LI Areas in which the SSBIC intends to invest;
    (v) The SSBIC's demonstrated understanding of the markets in the LI 
Areas in which it intends to invest;
    (vi) The extent to which the activities proposed by the SSBIC 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;
    (vii) The likelihood that the SSBIC will fulfill the goals 
described in its

[[Page 28632]]

application and meet the objectives of the NMVC program; and
    (viii) The strength of the SSBIC's application compared to 
applications submitted by other SSBICs intending to invest in the same 
or proximate LI Areas.
    (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 amount of matching resources set 
forth in its application, pursuant to paragraph (b)(4)(i) of this 
section, which must be at least the amount required in 
Sec. 108.2030(d)(2), 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)(1)(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 paragraphs (a) and (b) of this 
section, 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.
    (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 five 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 
five 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, as set forth in its application pursuant to 
Sec. 108.2000(b)(4)(i), 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.
    (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: May 8, 2001.
John Whitmore,
Acting Administrator.
[FR Doc. 01-12501 Filed 5-22-01; 8:45 am]
BILLING CODE 8025-01-P