[Federal Register Volume 67, Number 218 (Tuesday, November 12, 2002)]
[Rules and Regulations]
[Pages 68498-68505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28204]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 108

RIN 3245-AE91


New Markets Venture Capital Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (``SBA'') makes several 
amendments to the regulations for the New Markets Venture Capital 
(``NMVC'') program. The majority of the amendments make technical 
changes to the regulations, to correct typographical errors or to 
clarify language. SBA also makes 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 will:
    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 grant 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 grant 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: This rule is effective on December 12, 2002.

FOR FURTHER INFORMATION CONTACT: Austin J. Belton, Director of New 
Markets Venture Capital, (202) 205-7027.

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).
    On May 20, 2002, SBA published in the Federal Register a proposed 
rule making amendments to the regulations implementing the Act (67 FR 
35449). SBA received one comment on the proposed rule, which SBA 
discusses in the following section-by-section analysis. With the 
exception of a minor clarifying change to the lead-in phrase in section 
108.2005(d), SBA has made no changes to the text of the amendments to 
the regulations as published in the proposed rule.
    SBA has conducted a first application round for the NMVC program, 
and has selected seven companies as conditionally approved NMVC 
companies. The amendments 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 amends three of the definitions in Sec.  108.50. The 
definitions of ``New Markets Venture Capital Company'' and 
``Participation Agreement'' are amended to correct typographical 
errors.
    The definition of ``Regulatory Capital'' is 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 definition states that regulatory capital is private 
capital, excluding any portion of private capital that the NMVC company 
designates as grant matching resources.
    SBA amends paragraphs (b), (c), and (d) of Sec.  108.230. In 
paragraph (b), SBA makes a technical change. The word ``contributed'' 
is changed 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 amends paragraph (c) by adding a new subparagraph (5) to move 
to this section language concerning

[[Page 68499]]

questionable commitments that currently is in the definition of 
regulatory capital in Sec.  108.50. This is a non-substantive change.
    SBA revises 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 other 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 makes 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 amendment requires 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 makes a minor technical change to 
Sec.  108.320.
    SBA amends 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 will allow SBA to more effectively utilize limited 
NMVC program appropriations. This change also will increase the 
potential for achieving the nationwide distribution of the NMVC 
program's benefits that the Act directs.
    SBA makes three technical changes to Sec.  108.380. As amended, 
subsections (a)(1)(i)(A) and (a)(1)(i)(B) more clearly state that the 
amounts of regulatory capital and grant match that applicants must 
raise before they can be finally approved are the exact same amounts 
that they said they would raise in their applications. SBA amends 
subsection (b)(3) to correct a typographical error.
    SBA adds 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 regulation requires 
SBA's prior written approval of all such fees charged. The 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 regulation also requires 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.
    The commenter disagreed with the approach SBA takes in this section 
108.900. The commenter stated that a prior approval requirement would 
place an excessive burden on the NMVC company's management of small 
businesses in which it invests and that the 50-50 allocation of the 
fees would not appreciably change the economics or incentives of the 
NMVC program. The commenter suggests that NMVC companies are likely to 
want to charge their portfolio companies two types of management 
services fees, (1) regular fees of up to $2,000 per quarter per 
portfolio company, to be paid to the managers of the NMVC company for 
managing the portfolio company, and (2) more substantial fees that will 
arise ``in the ordinary course of business.'' SBA notes that while the 
commenter characterizes the amount of the first type of fee as 
``modest,'' an NMVC company could earn up to $80,000 per year from such 
fees, if one assumes the company has 10 portfolio companies paying 
$2,000 per quarter. This would allow the NMVC company to receive more 
than a third again as much as the typical annual management fee earned 
by an NMVC company (assuming it is a $5 million regulatory capital 
fund).
    The first type of fee presumes that the manager of an NMVC company 
also will be managing the day-to-day operations of the companies in 
which an NMVC company invests. SBA does not believe that this would be 
an appropriate role for an NMVC company's managers to play in most 
cases. First of all, the fact that such managers have the expertise to 
manage a venture capital fund does not mean that such managers have the 
necessary skills and ability to manage an operating business concern. 
In any event, the appropriate role of an NMVC company's managers is to 
actively oversee the affairs of the portfolio concerns, which implies a 
degree of counseling and advising as a board member or otherwise, 
usually delivered in the form of a close, informal working 
relationship. Those activities usually are compensated by an NMVC 
company's annual management fee and any profit participation received 
from its investment in the business. In addition, an NMVC company has 
the opportunity to provide management expertise, at no cost to the 
business or to the NMVC company's investors, through the expenditure of 
operational assistance grant resources. For these reasons, SBA believes 
that the first type of fees will require scrutiny and, therefore, it is 
critical that SBA have the opportunity to review in advance any such 
fees that an NMVC company proposes to charge.
    The commenter characterizes the second type of fee as for 
management services that are occasional and opportunistic, and states 
that requiring SBA's advance approval might result in an NMVC company 
losing significant opportunities to provide such services and earn such 
fees. SBA intends to require NMVC companies to complete one form (SBA 
Form 2217) requesting

[[Page 68500]]

prior approval of such fees, which SBA does not believe constitutes 
``extensive reporting.'' SBA believes that it will be sensitive to any 
time constraints on a potential deal or on an NMVC company, and be able 
to provide a timely response to such requests.
    SBA removes Sec.  108.2000 and replaces it with several smaller, 
more easily readable sections, Sec. Sec.  108.2000-108.2007. Section 
108.2000 (currently Sec.  108.2000(a)) provides a more comprehensive 
list of the regulations applicable to operational assistance grants to 
NMVC companies and to SSBICs. Section 108.2001 (currently Sec.  
108.2000(b)(1) and (b)(3)(i)) is unchanged in content.
    Section 108.2002 (currently Sec.  108.2000(b)(2)) includes several 
technical corrections. First, the term ``Developmental Venture Capital 
Investments'' is 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'' is 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.
    Section 108.2003 (currently Sec.  108.2000(b)(3)(ii)) is unchanged 
in content. Section 108.2004 (currently Sec.  108.2000(b)(4)(i) and 
(ii)) makes 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 
regulation requires 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.
    Section 108.2005 (currently Sec.  108.2000(b)(4)(ii)(A) through 
(G)) replaces 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) adds 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.
    Section 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 regulation also allows 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. New 
subsection (h), as amended, allows 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 allows SBA to more 
effectively utilize limited NMVC program appropriations. This change 
also increases the potential for achieving the nationwide distribution 
of the NMVC program's benefits contemplated by the Act.
    Section 108.2007 (currently Sec.  108.2000(b)(6)) is unchanged in 
content.
    Section 108.2010 adds a new paragraph (b) (and redesignates 
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 regulation 
imposes 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 80 percent 
requirement also parallels the 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.
    The commenter recommended that SBA determine whether the 
operational assistance provided by an NMVC company falls within the 80 
percent basket of assistance to smaller enterprises located in LI areas 
or the 20 percent basket of assistance to businesses outside those 
areas, based on the ultimate location of the business, not its location 
when the assistance commenced. In other words, consider OA provided by 
a NMVC company to a business not located in an LI area to fall within 
the 80 percent basket as long as the business moved into the LI area 
``within a reasonable period of time'' after the start of the 
assistance.
    SBA declines to implement this suggestion. As in the context of 13 
CFR 108.710(a) concerning the required percentage of capital that must 
be invested in businesses located in LI areas, SBA intends that NMVC 
companies will determine the status of the business's location at the 
time the operational assistance commences, not at some later date. SBA 
intends that NMVC companies make an assessment of the business at the 
time operational assistance commences (or at the time of its initial 
financing to the business, in the case of financial assistance) and 
determine whether its principal office is located in an LI area at that 
moment in time. The assessment of the business is set at that point in 
time, and becomes the basis to determine whether the NMVC company may 
count the assistance given to that business toward the 80 percent 
requirement. SBA considered and rejected alternative approaches when it 
developed the requirements in 13 CFR 108.710. SBA believes that this 
``snapshot'' approach is the most efficient and workable means of 
tracking both investments and operational assistance, as well as 
achieving the statutory mission of directing the majority of the 
program's resources to smaller enterprises located in LI areas. SBA 
believes that an NMVC company will have some flexibility in the way it 
structures its financial and operational assistance. For example, an 
NMVC company might provide a small amount of operational assistance to 
a business located outside an LI area (which would fall within the 20 
percent basket of assistance) and advise the business that more 
assistance will be forthcoming once the business relocates into an LI 
area.
    SBA revises redesignated paragraph (c) to correct the title of the 
part of the Federal Acquisition Regulations containing the definition 
of G&A expense.

[[Page 68501]]

    Technical amendments are made to Sec. Sec.  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 changes to Sec.  108.2030(c) 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 provides 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 gives each NMVC company and selected SSBIC greater 
flexibility to determine how best to use operational assistance funds 
from SBA to accomplish its mission. This 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 
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 only 
one NMVC Company is operational as yet, SBA does not have relevant data 
to estimate actual dollar values for these 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, SBA has selected seven applicants as 
conditionally approved NMVC companies, and has finally approved one of 
those conditionally approved NMVC companies as an NMVC company. SBA 
anticipates a second application round, and the amendments concerning 
the application process will affect applicants in the second round. The 
amendments that concern participation in the program apply to all NMVC 
companies selected through both application rounds and SSBICs applying 
under the second application round.
    This rule makes several amendments to the existing regulations 
implementing the program. Most of the amendments are technical changes 
that 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 
makes 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 makes is to add a requirement that 
NMVC companies must use at least 80 percent 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 ensures that the primary impact of the grant will be on the 
LI areas targeted by the NMVC program. It also will have the effect of 
enabling smaller enterprises in LI areas to qualify for equity 
investment, or otherwise assisting 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 adds section 108.900 which places limits on such 
fees, requires SBA's advance approval, and requires that at least 50 
percent of any fees charged by the fund manager be for the benefit of 
the NMVC company.
    SBA also makes 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 requires 
SSBICs to identify specific LI areas they intend to target, 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 clarifies 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 is 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 will 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 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 
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 
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 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 rule imposes new information 
collection

[[Page 68502]]

requirements that require approval by OMB under the Paperwork Reduction 
Act, 44 U.S.C. 3501-3520. The 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 were described in more detail in the preamble 
to the proposed rule SBA published in the Federal Register on May 20, 
2002 (67 FR 35449).
    SBA already has provided the public with a 60-day comment period on 
this collection (67 FR 35449). SBA received no comments on the 
collection. On July 29, 2002, OMB approved, without change, the 
collection under OMB number 3245-0338.
    You may request a copy of the collections by calling Louis Cupp at 
(202) 619-0511 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.

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. SBA 
estimates that there are approximately 22.4 million small businesses in 
the United States and 867 constitutes less than \1/10\ percent 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 percent 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 
percent 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 amends 13 CFR part 108 as follows.

PART 108--NEW MARKETS VENTURE CAPITAL 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 first sentence of the definition of 
Participation Agreement from ``Sec.  108.390'' to ``Sec.  108.380''; 
and
    c. Revising the definition of Regulatory Capital; to read 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); to 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

[[Page 68503]]

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 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 second 
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 an undesignated centerhead and a new Sec.  108.900 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 section 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.-10. Revise Sec.  108.2000 and add Sec. Sec. 108.2001 through 
108.2007 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 
108, and in Sec. Sec.  108.2010 through 108.2040.
    (b) SSBICs. Regulations governing Operational Assistance grants to 
SSBICs may be found in Sec. Sec.  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.

[[Page 68504]]

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:
    (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 allocation of investments among identified 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 makes 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).

    11. Amend Sec.  108.2010 by redesignating paragraph (b) as 
paragraph

[[Page 68505]]

(c), adding a new paragraph (b), and revising redesignated paragraph 
(c), to read as follows:


Sec.  108.2010  Restrictions of 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 
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.
    12. Revise the citation in Sec.  108.2020(b) from ``Sec. Sec.  
108.2000 and 108.2030'' to ``Sec. Sec.  108.2007 and 108.2030''.

    13. 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).

    14. 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: September 3, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-28204 Filed 11-8-02; 8:45 am]
BILLING CODE 8025-01-P