[Federal Register Volume 67, Number 97 (Monday, May 20, 2002)]
[Proposed Rules]
[Pages 35449-35456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12198]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 67, No. 97 / Monday, May 20, 2002 / Proposed 
Rules  

[[Page 35449]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 108

RIN 3245-AE91


New Markets Venture Capital Program

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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

SUMMARY: The U.S. Small Business Administration (``SBA'') proposes to 
make several amendments to the regulations for the New Markets Venture 
Capital (``NMVC'') program. The majority of the proposed amendments 
make technical changes to the regulations, to correct typographical 
errors or to clarify language. SBA also proposes to make five 
substantive amendments to the regulations, which SBA believes will 
result in more efficient and effective delivery of NMVC program 
benefits to the targeted geographic areas. Generally, the five changes 
would:
    Allow a New Markets Venture Capital company (``NMVC company'') to 
include in its regulatory capital SBA-approved organizational and 
management expenses paid on behalf of the NMVC company before the 
company is finally approved;
    Allow SBA, in selecting recipients for NMVC program assistance, to 
compare applications from specialized small business investment 
companies (``SSBICs'') with NMVC company applications from the same or 
proximate low-income geographic areas (``LI areas'');
    Create rules governing fees an NMVC company or its associates may 
charge for management services provided to small businesses in which 
the NMVC company invests;
    Revise the application process for SSBICs so as to make it more 
parallel with the application process for NMVC companies; and
    Add a requirement that NMVC companies must use at least 80 percent 
of their grant funds (both funds from SBA and grant matching resources) 
to provide operational assistance to smaller enterprises located in an 
LI area at the time the operational assistance commenced.

DATES: Comments must be received on or before June 19, 2002.

ADDRESSES: Address all comments concerning this proposed rule to Austin 
Belton, Director of New Markets Venture Capital, U.S. Small Business 
Administration, 409 Third Street, SW., 6th Floor, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Peter C. Gibbs, Deputy Director of New 
Markets Venture Capital, (202) 
205-7574.

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. SBA published in the Federal 
Register a final rule implementing the Act on May 23, 2001 (66 FR 
28602) and a technical correction on June 19, 2001 (66 FR 32894).
    SBA has conducted a first application round for the NMVC program, 
and selected seven companies as conditionally approved NMVC companies. 
The amendments proposed in this rule would apply to those seven 
companies as well as to applicants for the NMVC program in future 
application round(s) and to entities SBA selects for participation in 
the NMVC program as a result of any future application round(s).

II. Section-by-Section Analysis

    SBA proposes to amend three of the definitions in Sec. 108.50. The 
definitions of ``New Markets Venture Capital Company'' and 
``Participation Agreement'' would be amended to correct typographical 
errors.
    The definition of ``Regulatory Capital'' would be amended to 
simplify it by consolidating into Sec. 108.230, which addresses private 
capital, all the current restrictions on what may be included in 
regulatory capital. The proposed definition would state that regulatory 
capital is private capital, excluding any portion of private capital 
that the NMVC company designates as grant matching resources.
    SBA proposes to amend paragraphs (b), (c), and (d) of Sec. 108.230. 
In paragraph (b), SBA proposes to make a technical change. The word 
``contributed'' would be revised to read ``paid-in,'' to indicate more 
clearly that only capital contributions actually made are considered 
``contributed capital'' for purposes of Sec. 108.230.
    SBA proposes to amend paragraph (c) by adding a new subparagraph 
(5) to move to this section language concerning questionable 
commitments that currently is in the definition of regulatory capital 
in Sec. 108.50. This is a non-substantive change.
    SBA proposes to revise paragraph (d) to allow NMVC companies to 
include in private capital SBA-approved organizational and management 
expenses paid on behalf of an NMVC company prior to SBA's final 
approval of the NMVC company. SBA intends to provide guidance on the 
limitations by percentage and/or dollar amounts on such expenses that 
SBA will approve for inclusion in private capital. Other non-cash 
assets, such as ``pre-licensing investments,'' would continue to not be 
allowed for inclusion in private capital. SBA previously determined 
that such non-cash assets would not be acceptable for inclusion in 
regulatory capital (see discussion on this subject in the preamble to 
the proposed rule implementing the Act, 66 FR 20536, April 23, 2001, 
and the preamble to the final rule implementing the Act, 66 FR 28603, 
May 23, 2001).
    SBA proposes to make technical changes to Sec. 108.310 to more 
clearly articulate what an NMVC company applicant must state in its 
application regarding the amounts of regulatory capital and grant 
matching resources it proposes to raise. The proposed amendment would 
require an applicant to state specific amounts of regulatory capital 
and grant matching resources, both of which must comply with the 
statutory minimums established by the Act. SBA also proposes to make a 
minor technical change to Sec. 108.320.
    SBA proposes to amend Sec. 108.360(k) to allow SBA, when making 
selections as to which applicants will receive conditional approval, to 
compare the applications submitted by NMVC company applicants to the 
applications submitted by SSBICs that intend to invest in the same or 
proximate LI areas. This change would allow SBA to more effectively 
utilize limited NMVC program appropriations. This change

[[Page 35450]]

also would increase the potential for achieving the nationwide 
distribution of the NMVC program's benefits that the Act directs.
    SBA proposes to make three technical changes to Sec. 108.380. 
Proposed changes to subsections (a)(1)(i)(A) and (a)(1)(i)(B), would 
more clearly state that the amounts of regulatory capital and grant 
match applicants must raise before they can be finally approved are the 
exact same amounts that they said they would raise in their 
applications. SBA proposes to amend subsection (b)(3) to correct a 
typographical error.
    SBA proposes to add new Sec. 108.900, based in part on Sec. 107.900 
for the small business investment company (SBIC) program, governing 
fees for management services and similar services (for example, 
negotiating bank debt, sale of the company, or a lease, or structuring 
an employee stock ownership plan) charged by an NMVC company or its 
associates to small businesses that the NMVC company finances. The 
proposed regulation would require SBA's prior written approval of all 
such fees charged. The proposed regulation states that it does not 
apply to operational assistance that an NMVC company or its associate 
provides to a business that the NMVC company has financed or in which 
it expects to make a financing, and that the NMVC company may not 
charge the business a fee for such operational assistance. SBA expects 
an NMVC company to use its grant funds (both SBA funds and grant 
matching resources) to cover the costs of providing such operational 
assistance.
    This proposed regulation also would require that at least 50 
percent of all such fees paid to an associate (as defined in 13 CFR 
108.50) of an NMVC company by a small business must be allocated back 
to the NMVC company for its benefit. SBA understands that an NMVC 
company or its associate (for example, its management company) may want 
to provide management and other services to the NMVC company's 
portfolio companies and charge a fee for such services. It may be in 
the best interests of the small business that the NMVC company or its 
associate provide such services rather than an outside third party. 
However, SBA believes that the NMVC company's manager should share 
equally with the NMVC company the financial benefit (i.e., fees) of 
providing those services, since that relationship (of the manager to 
the NMVC company) is what brought about the opportunity for the manager 
to obtain that financial benefit. In addition, SBA believes that 
neither the NMVC company itself nor the NMVC program in general is well 
served if the focus of the NMVC company's manager is on fee generation 
rather than managing the NMVC company. SBA believes that a 50-50 
allocation of such fees between the NMVC company manager and the NMVC 
company itself strikes an appropriate balance between these objectives 
and reflects what knowledgeable private investors often require in 
commercial equity venture capital funds.
    SBA proposes to remove Sec. 108.2000 and replace it with several 
smaller, more easily readable sections, Secs. 108.2000-108.2007. 
Proposed Sec. 108.2000 (currently Sec. 108.2000(a)) would provide a 
more comprehensive list of the regulations applicable to operational 
assistance grants to NMVC companies and to SSBICs. Proposed 
Sec. 108.2001 (currently Sec. 108.2000(b)(1) and (b)(3)(i)) is 
unchanged in content.
    Proposed Sec. 108.2002 (currently Sec. 108.2000(b)(2)) includes 
several technical corrections. First, the term ``Developmental Venture 
Capital Investments'' would be replaced with ``Low-Income Investments'' 
in new subsections (a) and (c). The term ``Low-Income Investments'' 
already is defined in Sec. 108.50, and more accurately reflects the 
statutory requirement that an SSBIC must use all of its new capital 
raised for the NMVC program, to make equity capital investments in 
smaller enterprises located in LI areas. Second, the phrase ``after 
December 21, 2000'' would be added to the end of new subsection (c), to 
incorporate the NMVC program statutory effective date and make more 
clear that an SSBIC may use operational assistance grant funds only in 
connection with investments it makes after such date.
    Proposed Sec. 108.2003 (currently Sec. 108.2000(b)(3)(ii)) is 
unchanged in content. Proposed Sec. 108.2004 (currently 
Sec. 108.2000(b)(4)(i) and (ii)) would make technical changes to more 
clearly articulate what an SSBIC must state in its application 
regarding the amounts of regulatory capital and grant matching 
resources it proposes to raise. The proposed regulation would require 
that an SSBIC state specific amounts of regulatory capital and grant 
matching resources, and that the amount of grant matching resources 
comply with the statutory minimum established by the Act.
    Proposed Sec. 108.2005 (currently Sec. 108.2000(b)(4)(ii)(A) 
through (G)) would replace the term ``Developmental Venture Capital 
Investments'' with ``Low-Income Investments'' in new subsections (a), 
(c), (d) and (f), for the reasons described above. Subsections (a) and 
(d) would add new requirements that an SSBIC identify specific LI areas 
in which it intends to make investments and provide operational 
assistance, and specify how much of its investments it will make in 
each of the specified LI areas. These requirements parallel the 
information required from NMVC company applicants, and will allow SBA 
to better determine the potential impact on specific LI areas, when 
making selections as to recipients of NMVC program benefits.
    Proposed Sec. 108.2006 (currently Sec. 108.2000(b)(5)) would 
replace the term ``Developmental Venture Capital Investments'' with 
``Low-Income Investments'' in new subsection (d), for the reasons 
described above. The proposed regulation also would allow SBA to add an 
interview component to its selection process, paralleling SBA's current 
authority to require an interview with NMVC company applicants (see 13 
CFR 108.340). SBA is considering interviewing applicants in future 
application rounds. In new subsection (h), SBA proposes a change to 
allow SBA, when making selections as to which SSBICs conditionally will 
receive an operational assistance grant, to compare the applications 
submitted by SSBICs to the applications submitted by NMVC company 
applicants that intend to invest in the same or proximate LI areas. 
This change would allow SBA to more effectively utilize limited NMVC 
program appropriations. This change also would increase the potential 
for achieving the nationwide distribution of the NMVC program's 
benefits contemplated by the Act.
    Proposed Sec. 108.2007 (currently Sec. 108.2000(b)(6)) is unchanged 
in content.
    Proposed Sec. 108.2010 would add a new paragraph (b) (and 
redesignate paragraph (b) as paragraph (c)) requiring that an NMVC 
company must use at least 80 percent of its grant funds (both funds 
from SBA and grant matching resources) to provide operational 
assistance to smaller enterprises whose principal office is located in 
an LI area at the time the operational assistance commences.
    The Act explicitly requires that all operational assistance funded 
by the NMVC program go only to smaller enterprises. The proposed 
regulation would impose an additional requirement that a specific 
percentage, 80 percent, of such operational assistance provided by NMVC 
companies go to businesses located in LI areas. This requirement serves 
to maximize the impact of the operational assistance funded by SBA on 
the LI areas targeted for assistance through the NMVC program. This 
proposed 80 percent requirement also parallels the

[[Page 35451]]

existing regulatory requirement (see 13 CFR 108.710(a)) that NMVC 
companies must use at least 80 percent of its capital (both funds from 
SBA and private capital) to make equity capital investments in smaller 
enterprises located in an LI area at the time the investment is made.
    SBA proposes to revise redesignated paragraph (c) to correct the 
title of the part of the Federal Acquisition Regulations containing the 
definition of G&A expense.
    Technical amendments are proposed to Secs. 108.2020(b), 
108.2030(c)(2)(iii), 108.2030(c)(2)(iv), 108.2030(d)(2), and 
108.2040(a) to correct cross-references to other sections in this part 
and to clarify requirements. The proposed changes to Sec. 108.2030(c) 
would allow grant matching resources to be payable over a multiyear 
period not to exceed the term of the grant from SBA, and in no event 
more than 10 years. This change would provide support for SBA to allow 
an applicant to request a specific grant term, within a range 
acceptable to SBA and as long as it did not exceed the 10 year limit 
set forth in the Act, rather than having SBA establish one allowable 
grant term for all applicants. This would give each NMVC company and 
selected SSBIC greater flexibility to determine how best to use 
operational assistance funds from SBA to accomplish its mission. This 
proposed change is made possible by a change in the law governing SBA's 
appropriation for the NMVC program. On July 24, 2001, Congress passed a 
supplemental appropriations bill (Pub. L. 107-20) that extended the 
availability of the funds appropriated to SBA for the NMVC program.

III. Regulatory Compliance Section--Compliance With Executive 
Orders 12866, 12988, and 13132; With the Paperwork Reduction Act 
(44 U.S.C. Ch. 35); and With the Regulatory Flexibility Act (5 
U.S.C. 601-612)

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a ``significant regulatory action'' under Executive 
Order 12866. A regulatory assessment of the potential costs and 
benefits of the regulatory action follows. Because this is a new 
program and no NMVC Companies are operational yet, SBA does not have 
relevant data to estimate actual dollar values for these proposed 
amendments. However, SBA welcomes comments from the public regarding 
the potential costs and benefits of the proposed amendments.
    The NMVC program is an equity venture capital program designed to 
promote the economic development of, and address the unmet equity 
capital needs of smaller enterprises located in, LI areas. The program 
has a one-time no-year appropriation of $52 million to fund newly 
formed NMVC companies. To date, seven applicants have been selected as 
conditionally approved NMVC companies. SBA anticipates a second 
application round, and the proposed amendments concerning the 
application process would affect applicants in the second round. The 
proposed amendments that concern participation in the program would 
apply to all NMVC companies selected through both application rounds 
and SSBICs applying under the second application round.
    This rule proposes to make several amendments to the existing 
regulations implementing the program. Most of the amendments are 
technical changes that would have no impact on the costs associated 
with the program to the Government or to the program beneficiaries. 
After SBA's first year of experience in creating and administering this 
new program, SBA also proposes a few substantive changes which SBA 
believes will result in more efficient and effective delivery of NMVC 
program benefits to the targeted LI areas and businesses. SBA believes 
that these changes will result in reduced operational costs for the 
program to both the government, the NMVC companies, and to the 
beneficiary small businesses financed by the NMVC companies with SBA 
leverage.
    The most significant change SBA proposes is to add a requirement 
that NMVC companies must use at least 80% of the SBA grant funds (and 
the required match funding from non-SBA sources) to assist smaller 
enterprises whose principal office is in an LI area. This is consistent 
with the existing requirement on the use of an NMVC company's capital. 
This change would ensure that the primary impact of the grant would be 
on the LI areas targeted by the NMVC program. It also would have the 
effect of assisting smaller enterprises in LI areas to qualify for 
equity investment, or otherwise enabling such enterprises to grow at no 
cost to such businesses.
    SBA's experience over the past year indicates that some NMVC 
companies may charge management services fees to smaller enterprises in 
connection with investments made by the NMVC company, but SBA's 
existing regulations are silent in this area. SBA believes that adding 
a regulation governing such fees will give SBA the necessary tools to 
ensure that smaller enterprises are not being charged too much for such 
services and that an NMVC company's management is not motivated solely 
by fee generation. SBA proposes to add section 108.900 which would 
place limits on such fees, require SBA's advance approval, and require 
that at least 50% of any fees charged by the fund manager be for the 
benefit of the NMVC company.
    SBA also proposes several changes to clarify the application 
requirements for SSBICs to participate in the NMVC program and to do so 
on a parallel basis as NMVC companies. For example, one change would 
require SSBICs to identify specific LI areas they are targeting, 
thereby allowing comparison with any NMVC applicant for the same LI 
area and avoiding duplicative coverage of a LI area. The overall 
results of these changes are to ensure even-handed treatment of SSBICs 
and NMVC companies, maximize the nationwide impact of the NMVC program, 
and achieve greater administrative efficiency in program 
administration.
    SBA also proposes to clarify that SBA will permit SBA-approved 
organizational and management expenses incurred prior to SBA's final 
approval of the NMVC company to be credited in whole or part against 
the regulatory capital the NMVC company is required to raise. This 
credit would be in lieu of an NMVC company being required to pay out 
cash at its outset for the same pre-approved costs. This change will 
improve the efficiency of an NMVC company's operations and prevent 
unnecessary paperwork on the part of the NMVC company, which will 
streamline the program. This change also would bring the NMVC program 
in line with the SBIC program and with best practices of the private 
venture fund industry in this area.
    In sum, the proposed changes will result in more NMVC program funds 
going to smaller enterprises in LI areas, in line with the legislative 
intent, and greater cost-effectiveness and efficiency in SBA's 
administration of the NMVC program to execute the congressional 
mandate.

Compliance With Executive Order 12988

    For purposes of Executive Order 12988, SBA has determined that this 
proposed rule is drafted, to the extent practicable, in accordance with 
the standards set forth in section 3 of that order.

Compliance With Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined that this

[[Page 35452]]

proposed rule has no federalism implications because the legislation 
authorizing it addresses private, for-profit concerns (NMVC companies) 
working directly with entrepreneurs. The regulation will not have 
substantial direct effects on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among the various levels of government. Therefore, 
under Executive Order 13132, SBA determines that this proposed rule 
does not have sufficient federalism implications warranting the 
preparation of a Federalism Assessment.

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

    SBA has determined that this proposed rule imposes new information 
collection requirements that require approval by OMB under the 
Paperwork Reduction Act, 44 U.S.C. 3501-3520. The proposed rule 
includes two new collections of information: (1) A request for prior 
SBA approval of management services fees and other fees and (2) 
concerning the application process for SSBICs, an additional component 
to the plan for use of the operational assistance grant, and an 
interview component. These information collections are described in 
more detail below.
    Simultaneously with the publication of this rule in the Federal 
Register, SBA will make the collection available to the public by 
posting it on SBA's Web site at http://www.sba.gov/inv. You also may 
request a copy by calling Peter Gibbs at (202) 205-7574 or writing to 
him at Office of New Markets Venture Capital, Investment Division, U.S. 
Small Business Administration, 409 Third Street, SW., 6th Floor, 
Washington, DC 20416.
    SBA seeks comment on: (1) Whether the proposed collection of 
information is necessary for the proper performance of SBA's functions, 
including whether the information will have practical utility; (2) the 
accuracy of SBA's estimate of the burden of the proposed collection of 
information; (3) ways to enhance the quality, utility, and clarity of 
the information SBA proposed to collect; and (4) ways to minimize the 
burden on respondents of the proposed collection of information, 
including through the use of automated collection techniques or other 
forms of information technology.
    Please send comments, by the closing date for comment on this 
proposed rule, to David Rostker, Office of Information and Regulatory 
Affairs, Office of Management and Budget, 725 17th Street, NW., 
Washington, DC 20503, and to Austin Belton, Director of New Markets 
Venture Capital, Investment Division, U.S. Business Administration, 409 
Third Street, SW., Washington, DC 20416.
    1. SBA proposes the following new information collection, 
applicable only to NMVC companies finally approved by SBA for 
participation in the NMVC program:
    Title: Request for SBA Approval of Management Services Fees and 
Other Fees (SBA Form Number not yet assigned; see proposed Sec. 108.900 
for reference).
    Need and purpose: Through the use of this new form, SBA will 
collect information from an NMVC company that seeks SBA's prior 
approval for the NMVC company or its associates to charge certain fees 
to small businesses that the NMVC company finances (i.e., fees for 
management services, services on a business's board, or services 
related to certain kinds of transactions). SBA will collect this 
information at the time the NMVC company requests SBA prior approval of 
such fees. SBA will use the information collected to evaluate the NMVC 
company's request.
    Burden: An NMVC company will complete this information collection 
only when it desires to charge certain fees to small businesses. Some 
NMVC companies may not desire to charge such fees to the small 
businesses it finances; others may desire to charge such fees to every 
such small business. SBA estimates that each NMVC company (SBA 
estimates that there will be 15 NMVC companies participating in the 
program) may complete this collection one time per year, for a total of 
15 respondents per year. SBA estimates that the time needed to complete 
this collection will average four hours, and that the cost to complete 
this collection will be approximately $75.00 per hour, for a total 
estimated aggregated burden of 60 hours per year costing an aggregated 
$4,500.00 per year.
    2. SBA proposes the following two new information collections, 
applicable only to SSBICs applying for an operational assistance grant 
under the NMVC program:
    a. SBA proposes to add one item to the list of topics an SSBIC 
applicant must address in its plan for use of the operational 
assistance grant.
    Title: Identification of LI Areas (no SBA Form Number will be 
assigned; see proposed Sec. 108.2005(c) for reference).
    Need and purpose: SBA will collect information from an SSBIC 
applicant concerning the specific geographic areas in which the SSBIC 
intends to make investments and provide operational assistance under 
the NMVC program. SBA will collect this information at the time the 
SSBIC applies for an operational assistance grant. SSBIC applicants 
will be directed to use a geographic mapping/searching function, 
available on SBA's Web site, to create maps and related information in 
order to respond to this information collection. SBA will use the 
information collected to evaluate the potential impact of the SSBIC's 
proposed activities on low-income geographic areas identified by the 
SSBIC, when SBA makes selections of which applicants will receive NMVC 
program benefits.
    Burden: An SSBIC applicant will complete this information 
collection only once, when it applies for a grant under the NMVC 
program. SBA estimates that three SSBIC applicants likely will submit 
applications in response to any subsequent application rounds that SBA 
holds, for a total of three respondents per year (during a year in 
which SBA holds an application round). SBA estimates that the time 
needed to complete this collection will average 15 minutes, and that 
the cost to complete this collection will be approximately $75.00 per 
hour, for a total estimated aggregated burden of 45 minutes per year 
costing an aggregated $56.00 per year.
    b. SBA proposes to add an interview component to the application 
process for SSBIC applicants.
    Title: Interview Questions for NMVC Company and SSBIC Applicants 
(SBA Form Number not yet assigned; see proposed Sec. 108.2006 for 
reference).
    Need and purpose: SBA will collect information from an SSBIC 
applicant through an interview, during which SBA will ask a set of 
standardized questions of all SSBIC applicants (SBA will ask a slightly 
different set of standardized questions of all NMVC company 
applicants). The questions will concern the applicant's proposed use of 
operational assistance grant resources to develop small businesses 
located in low-income geographic areas. SBA will collect this 
information during a 90-minute interview with an SSBIC applicant's 
self-selected representatives, shortly after the SSBIC applies for an 
operational assistance grant. SBA will use the information collected to 
evaluate the potential impact of the SSBIC's proposed activities on 
low-income geographic areas identified by the SSBIC, when SBA makes 
selections of which applicants will receive NMVC program benefits.
    Burden: An SSBIC applicant will complete this information 
collection

[[Page 35453]]

only once, when it applies for a grant under the NMVC program. SBA 
estimates that three SSBIC applicants likely will submit applications 
in response to any subsequent application rounds that SBA holds, for a 
total of three respondents per year (during a year in which SBA holds 
an application round). SBA estimates that the time needed to complete 
this collection will average 90 minutes, and that the cost to complete 
this collection will be approximately $75.00 per hour, for a total 
estimated aggregated burden of 4.5 hours per year costing an aggregated 
$338.00 per year.

Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-602

    Under the Regulatory Flexibility Act (RFA), SBA has determined that 
this rule does not have a significant economic impact on a substantial 
number of small entities, within the meaning of the RFA, for the 
following reasons.
    The NMVC program is expected to result in the creation of fewer 
than 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. The Act authorizes $150 million to 
guarantee debentures to NMVC companies, which will result in a 
discounted amount of approximately $100 million with which NMVC 
companies can make investments, 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 net funding for the NMVC program, including matching 
funds raised by NMVC companies and SSBICs, is $260 million. Based upon 
industry practices, it is likely that the funds will be disbursed over 
a five to seven year period. 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. Therefore, NMVC program funds 
will flow out to businesses at a rate of approximately $50 million per 
year.
    The average size of an investment by a community development 
company is approximately $300,000. Based upon total funding 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 by the Act. Based 
upon 1997 Economic Census data, SBA estimates that there are 
approximately 25 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. 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.

List of Subjects in 13 CFR Part 108

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

    For the reasons stated in the preamble, the Small Business 
Administration proposes to amend 13 CFR part 108 as follows.

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

    1. The authority citation for part 108 continues to read as 
follows:

    Authority: 15 U.S.C. 689--689q.

    2. Amend Sec. 108.50 by:
    a. Revising the citation in paragraph (1) of the definition of New 
Markets Venture Capital Company or NMVC Company from ``Sec. 108.390'' 
to ``Sec. 108.380'';
    b. Revising the citation in the introductory text of the definition 
of Participation Agreement from ``Sec. 108.390'' to ``Sec. 108.380''; 
and
    c. Revising the definition of Regulatory Capital.
    The revision reads as follows:


Sec. 108.50  Definition of terms.

* * * * *
    Regulatory Capital means Private Capital, excluding any portion of 
Private Capital that is designated as matching resources in accordance 
with Sec. 108.2030(b)(3).
* * * * *
    3. Amend Sec. 108.230 by:
    a. Revising paragraph (b);
    b. Adding paragraph (c)(5); and
    c. Revising paragraph (d).
    The addition and revisions read as follows:


Sec. 108.230  Private Capital for NMVC Companies.

* * * * *
    (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' paid-in capital of a LLC NMVC Company, or 
the partners' paid-in capital of a Partnership NMVC Company, in each 
case subject to the limitations in paragraph (c) of this section.
    (c) * * *
    (5) A commitment from an investor if SBA determines that the 
collectability of the commitment is questionable.
    (d) Limitations on including non-cash capital contributions in 
Private Capital. Private Capital does not include capital contributions 
in a form other than cash, except as provided in this paragraph (d). 
Subject to SBA's prior approval, Private Capital may include payments 
made on behalf of an Applicant or Conditionally Approved NMVC Company 
before the Applicant or Conditionally Approved NMVC Company becomes a 
NMVC Company for organizational expenses and Management Expenses 
incurred by the Applicant or the Conditionally Approved NMVC Company 
prior to its becoming a NMVC Company.
* * * * *
    4. Revise Sec. 108.310(a) to read as follows:


Sec. 108.310  Contents of application.

* * * * *
    (a) Amounts. The Applicant must indicate--
    (1) The specific amount of Regulatory Capital it proposes to raise 
(which amount must be at least $5,000,000); and
    (2) The specific amount of 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 $1,500,000 or 30 percent of 
the Regulatory Capital it proposes to raise under paragraph (a)(1) of 
this section, whichever is greater).
* * * * *
    5. Revise the second sentence of Sec. 108.320(g) to read as 
follows:


Sec. 108.320  Contents of comprehensive business plan.

* * * * *
    (g) * * * If it proposes to obtain commitments for cash and in-kind 
contributions, it also must estimate the ratio of cash to in-kind 
contributions (in no event may in-kind contributions

[[Page 35454]]

exceed 50 percent of the total contributions). * * *
* * * * *
    6. Revise Sec. 108.360(k) to read as follows:


Sec. 108.360  Evaluation criteria.

* * * * *
    (k) The strength of the Applicant's application compared to 
applications submitted by other Applicants and by SSBICs intending to 
invest in the same or proximate LI Areas.
    7. Revise Sec. 108.380(a)(1)(i)(A), (a)(1)(i)(B), and the last 
sentence in (b)(3) to read as follows:


Sec. 108.380  Final approval as a NMVC Company.

    (a) * * *
    (1) * * *
    (i) * * *
    (A) The amount of Regulatory Capital set forth in its application, 
pursuant to Sec. 108.310(a)(1); 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); and
* * * * *
    (b) * * *
    (3) * * * 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 amount of Regulatory Capital 
within the time period SBA gave it to do so.
    8. Add a new undesignated centerheading and Sec. 108.900 to subpart 
I to read as follows:

Management Services and Fees


Sec. 108.900  Fees for management services provided to a Small Business 
by a NMVC Company or its Associate.

    (a) General. This Sec. 108.900 applies to management services that 
you or your Associate provide to a Small Business during the term of a 
Financing or prior to a Financing. It does not apply to management 
services that your Associate provides to a Small Business that you do 
not finance. It also does not apply to Operational Assistance that you 
or your Associate provide to a Smaller Enterprise that you have 
Financed or in which you expect to make a Financing, for which neither 
you nor your Associate may charge the Smaller Enterprise.
    (b) SBA approval. You must obtain SBA's prior written approval of 
any management services fees and other fees described in this section 
that you or your Associate charge.
    (c) Permitted management services fees. You or your Associate may 
provide management services to a Small Business financed by you if:
    (1) You or your Associate have entered into a written contract with 
the Small Business;
    (2) The fees charged are for services actually performed;
    (3) Services are provided on an hourly fee, project fee, or other 
reasonable basis;
    (4) You can demonstrate to SBA, upon request, that the rate does 
not exceed the prevailing rate charged for comparable services by other 
organizations in the geographic area of the Small Business; and
    (5) At least 50 percent of any management services fees paid to 
your Associate by a Small Business for management services provided by 
the Associate is allocated back to you for your benefit.
    (d) Fees for service as a board member. You or your Associate may 
charge a Small Business Financed by you for services provided as 
members of the Small Business' board of directors. The fees must not 
exceed those paid to other outside board members. In the absence of 
such board members, fees must be reasonable when compared with amounts 
paid to outside directors of similar companies. Fees may be in the form 
of cash, warrants, or other payments. At least 50 percent of any such 
fees paid to your Associate by a Small Business for service by the 
Associate as a board member must be allocated back to you for your 
benefit.
    (e) Transaction fees. (1) You or your Associate may charge 
reasonable transaction fees for work performed such as preparing a 
Small Business for a public offering, private offering, or sale of all 
or part of the business, and for assisting with the transaction. Fees 
may be in the form of cash, notes, stock, and/or options. At least 50 
percent of any such fees paid to your Associate by a Small Business for 
transactions work done by the Associate must be allocated back to you 
for your benefit.
    (2) Your Associate may charge market rate investment banking fees 
to a Small Business on that portion of a Financing that you do not 
provide.
    (f) Recordkeeping requirements. You must keep a record of hours 
spent and amounts charged to the Small Business, including expenses 
charged.
    9. Revise Sec. 108.2000 and add new Secs. 108.2001 through 108.2007 
to read as follows:


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

    (a) NMVC Companies. Regulations governing Operational Assistance 
grants to NMVC Companies may be found in subparts D and E of this part, 
and in Secs. 108.2010 through 108.2040.
    (b) SSBICs. Regulations governing Operational Assistance grants to 
SSBICs may be found in Secs. 108.2001 through 108.2040.


Sec. 108.2001  When and how SSBICs may apply for Operational Assistance 
grants.

    (a) 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 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.
    (b) Application form. 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.


Sec. 108.2002  Eligibility of SSBICs to apply for Operational 
Assistance grants.

    An SSBIC is eligible to apply for an Operational Assistance grant 
if:
    (a) It intends to increase its Regulatory Capital, as in effect on 
December 21, 2000, and to make Low-Income Investments in the amount of 
such increase;
    (b) 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 (a) of this section; and
    (c) 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 Low-Income Investments after 
December 21, 2000.


Sec. 108.2003  Grant issuance fee for SSBICs.

    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.


Sec. 108.2004  Contents of application submitted by SSBICs.

    Each application submitted by an SSBIC for an Operational 
Assistance grant must contain the information specified in the 
application packet provided by SBA, including the following 
information:

[[Page 35455]]

    (a) Amounts. An SSBIC must specify the amount of Regulatory Capital 
it intends to raise after December 21, 2000, and the amount of 
Operational Assistance grant funds it seeks from SBA, which must be at 
least 30 percent of its intended increase in its Regulatory Capital 
since December 21, 2000.
    (b) Plan. An SSBIC must submit a plan addressing the specific items 
described in Sec. 108.2005.


Sec. 108.2005  Contents of plan submitted by SSBICs.

    (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 Low-Income 
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 and 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) Identification of LI Areas. The SSBIC must identify the 
specific LI Areas in which it intends to make Low-Income Investments 
and provide Operational Assistance under the NMVC program.
    (d) Projected amount of investment in LI Areas. The SSBIC must 
describe the amount of Low-Income Investments it intends to make in 
each of the identified LI Areas.
    (e) 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.
    (f) Market analysis. The SSBIC must provide an analysis of the LI 
Areas in which it intends to make its Low-Income 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 Low-Income 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 Low-
Income Investments and any factors or trends that may affect the 
SSBIC's ability to make effective Low-Income Investments.
    (g) 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.
    (h) 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; and
    (3) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
NMVC program.


Sec. 108.2006  Evaluation and selection of SSBICs.

    SBA will evaluate and select an SSBIC for an Operational Assistance 
grant award under the NMVC program solely at SBA's discretion, based on 
SBA's review of the SSBIC's application materials, interviews or site 
visits with the SSBIC (if any), and information in SBA's records 
relating to the SSBIC's regulatory compliance status and track record 
as an SSBIC. 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 by considering the following 
criteria:
    (a) 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;
    (b) The SSBIC's regulatory compliance status and past track record 
in being able to accomplish program goals through its investment 
activity;
    (c) The likelihood that and the time frame within which the SSBIC 
will be able to raise the Regulatory Capital it intends to raise and 
obtain the matching resources described in Sec. 108.2005(b) and (g);
    (d) The need for Low-Income Investments in the LI Areas in which 
the SSBIC intends to invest;
    (e) The SSBIC's demonstrated understanding of the markets in the LI 
Areas in which it intends to invest;
    (f) 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;
    (g) The likelihood that the SSBIC will fulfill the goals described 
in its application and meet the objectives of the NMVC program; and
    (h) The strength of the SSBIC's application compared to 
applications submitted by other SSBICs and by Applicants intending to 
invest in the same or proximate LI Areas.


Sec. 108.2007  Grant award to SSBICs.

    An SSBIC selected for an Operational Assistance grant award will 
receive a grant award only if, by a date established by SBA, it 
increases its Regulatory Capital in the specific amount set forth in 
its application, pursuant to Sec. 108.2004(a), and raises matching 
resources for the grant in the amount required by Sec. 108.2030(d)(2).
    10. Amend Sec. 108.2010 by redesignating paragraph (b) as paragraph 
(c) and revising it and adding a new paragraph (b) to read as follows:


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

* * * * *
    (b) Restrictions applicable only to NMVC Companies. A NMVC Company 
must use at least 80 percent of both grant funds awarded by SBA and its 
matching resources to provide Operational Assistance to Smaller 
Enterprises whose Principal Office at the time the Operational 
Assistance commences is located in an LI Area.
    (c) Restrictions applicable to NMVC Companies and SSBICs. A NMVC

[[Page 35456]]

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, ``Definitions of Words and Terms,'' 48 CFR 
2.101.


Sec. 108.2020  [Amended]

    11. Revise the citation in Sec. 108.2020(b) from ``Secs. 108.2000 
and 108.2030'' to ``Secs. 108.2007 and 108.2030''.
    12. Revise Sec. 108.2030(c)(2)(iii), (c)(2)(iv), and (d)(2) to read 
as follows:


Sec. 108.2030  Matching requirements.

* * * * *
    (c) * * *
    (2) * * *
    (iii) Binding commitments for cash or in-kind contributions that 
may be payable over a multiyear period acceptable to SBA (but not to 
exceed the term of the Operational Assistance grant from SBA and in no 
event more than 10 years); and/or
    (iv) An annuity, purchased with funds other than Regulatory 
Capital, from an insurance company acceptable to SBA and that may be 
payable over a multiyear period acceptable to SBA (but not to exceed 
the term of the Operational Assistance grant from SBA and in no event 
more than 10 years).
    (d) * * *
    (2) SSBICs. The amount of matching resources required of an SSBIC 
is equal to the amount of Operational Assistance grant funds requested 
by the SSBIC, as set forth in its application pursuant to 
Sec. 108.2004(a).
    13. Revise Sec. 108.2040(a) to read as follows:


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. NMVC Companies also must comply with 
all reporting, record retention, and recordkeeping requirements set 
forth in Circular A-110 of the Office of Management and Budget (For 
availability, see 5 CFR 1310.3.) and any grant award document executed 
between SBA and the NMVC Company.
* * * * *

    Dated: May 9, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-12198 Filed 5-17-02; 8:45 am]
BILLING CODE 8025-01-P