[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Rules and Regulations]
[Pages 8097-8098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3842]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AE70


Small Business Investment Companies--Long Term Financing

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Direct final rule.

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SUMMARY: This direct final rule brings the U.S. Small Business 
Administration's (SBA) regulations concerning the Small Business 
Investment Company (SBIC) program into conformity with the Small 
Business Investment Act, as amended (Act). Specifically, the rule would 
allow an SBIC to extend financings on terms that require a small 
business concern to repay debt or to redeem equity securities, options, 
or warrants after a minimum of one year (rather than five years, as 
currently stated in SBA's regulations).

DATES: This rule is effective on May 24, 2004, without further action 
unless adverse comment is received by March 24, 2004. If adverse 
comment is received, SBA will publish a timely withdrawal of the rule 
in the Federal Register.

ADDRESSES: Written comments should be sent to Harry Haskins, Deputy 
Associate Administrator for Investment, U.S. Small Business 
Administration, 409 3rdStreet, SW., Washington, DC 20416 or 
www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Director, Office of 
Licensing and Program Standards, Investment Division, Office of Capital 
Access, (202) 205-7559 or [email protected].

SUPPLEMENTARY INFORMATION: SBA always has interpreted section 102 of 
the Act, 15 U.S.C. 681, to require SBICs to provide long term 
financing, either in the form of loans or equity capital. Because the 
Act did not define ``long term,'' SBA had administratively defined the 
term to mean generally a financing with a minimum term of five years. 
Accordingly, SBA promulgated Sec. Sec.  107.830, 107.835, 107.845 and 
107.850, which generally require that loans and debt securities have a 
stated term of at least five years prior to maturity, subject to 
reasonable amortization requirements, and that equity securities be 
outstanding for at least five years before the issuing small business 
concern can be required to redeem them.
    The Small Business Investment Corrections Act of 2000, Public Law 
106-554 (Corrections Act), title IV, section 402(b)(3), added a new 
section 103(17) to the Act, that effectively overruled SBA's 
administrative definition by defining ``long term'' to mean any period 
of time not less than one year. Each of the regulations affected by 
this direct final rule contains references to a five-year minimum 
financing term. It should be emphasized that the Corrections Act 
established one year as the minimum financing term, but did not affect 
an SBIC's ability to offer longer term financing. Under this rule, 
SBICs will continue to be able to structure investments with longer 
maturities to accommodate the varying financial needs of small 
businesses.
    SBA is aware that the new statutory definition of ``long term'' 
from the Corrections Act may require further amendment of some of the 
affected sections beyond the changes made by this rule. SBA intends to 
make any such amendments through a proposed rule to be published at a 
later time. This rule makes no changes to the current regulations other 
than technical changes to conform the regulations to the Act, as 
amended. SBA is publishing this regulation as a direct final rule 
because it believes the rule is non-controversial since it merely 
conforms the existing rule to the provisions of the Act that became 
effective on December 21, 2000. SBA believes that this rule will not 
elicit any significant adverse comments.
    This rule is not intended to affect the rights of any parties to 
any outstanding financing or commitment whose terms were drafted in 
accordance with regulations that established a minimum five year term 
for a financing.

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

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) did not determine this 
rule to be a ``significant'' regulatory action under Executive Order 
12866. This rule only implements technical corrections to the statute 
authorizing the SBIC program and will not have an annual effect on the 
economy of $100 million or more, adversely affect the economy in a 
material way, create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency, materially alter the 
budgetary impact of loan programs or other governmental programs, or 
raise novel legal or policy issues arising out of legal mandates or the 
President's priorities.

Compliance With Executive Order 12988

    For purposes of Executive Order 12988, SBA has determined that this 
rule was 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 the 
rule 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 has determined 
that the rule does not have sufficient federalism implications to 
warrant the preparation of a Federalism Assessment.

[[Page 8098]]

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

    The rule does not impose any new information collection 
requirements from SBA which require approval by OMB under the Paperwork 
Reduction Act, 44 U.S.C. Ch. 35.

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

    The rule directly affects all SBICs, of which there are currently 
447. SBA estimates that 75 percent of these SBICs are small entities. 
Therefore, SBA has determined that the rule will have an impact on a 
substantial number of small entities.
    However, SBA has determined that the impact on entities affected by 
the rule will not be significant. The effect of the rule will be to 
allow SBICs the flexibility to negotiate the optimal structure for 
their investments. The rule establishes one year as the minimum 
financing term, but does not affect an SBIC's ability to offer longer 
term financing. Under this rule, SBICs will continue to be able to 
structure investments with longer maturities to accommodate the varying 
financial needs of small businesses. The rule imposes no additional 
paperwork burden and no new notification or approval requirements. 
Accordingly, SBA hereby determines that this rule will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs-business, Small businesses.

0
For the reasons set forth in the preamble, amend part 107 of title 13 
of the Code of Federal Regulations as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

0
1. Revise the authority citation for Part 107 to read as follows:

    Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g, 
687m, and Pub. L. 106-554, 114 Stat. 2763.

0
2. Revise the definition of ``Short-term Financing'' in Sec.  107.50 to 
read as follows:


Sec.  107.50  Definition of Terms.

* * * * *
    Short-term Financing means Financing with a term of less than one 
year in accordance with the regulations.
* * * * *

0
3. Amend Sec.  107.830 by:
0
a. Revising paragraph (a);
0
b. Removing paragraph (b);
0
c. Redesignating paragraphs (c) and (d) as (b) and (c), respectively; 
and
0
d. Revising newly redesignated paragraphs (b), (c)(2), and (c)(3), to 
read as follows:


Sec.  107.830  Minimum duration/term of financing.

    (a) General rule. The duration/term of all your Financings must be 
for a minimum period of one year.
    (b) Restrictions on mandatory redemption of Equity Securities. If 
you have acquired Equity Securities, options or warrants on terms that 
include redemption by the Small Business, you must not require 
redemption by the Small Business within the first year of your 
acquisition except as permitted in Sec.  107.850.
    (c) * * *
    (2) Prepayment. You must permit voluntary prepayment of Loans and 
Debt Securities by the Small Business. You must obtain SBA's prior 
written approval of any restrictions on the ability of the Small 
Business to prepay other than the imposition of a reasonable prepayment 
penalty under paragraph (c)(3) of this section.
    (3) Prepayment penalties. You may charge a reasonable prepayment 
penalty which must be agreed upon at the time of the Financing. If SBA 
determines that a prepayment penalty is unreasonable, you must refund 
the entire penalty to the Small Business. A prepayment penalty equal to 
5 percent of the outstanding balance during the first year of any 
Financing, declining by one percentage point per year through the fifth 
year, is considered reasonable.

0
4. Amend Sec.  107.835 by:
0
a. Removing paragraph (d);
0
b. Redesignating paragraph (e) as paragraph (d); and
0
c. Revising the introductory text and the first sentence of paragraph 
(a) to read as follows:


Sec.  107.835  Exceptions to minimum duration/term of Financing.

    You may make a Short-term Financing for a term less than one year 
if the Financing is:
    (a) An interim Financing in contemplation of long-term Financing. * 
* *
* * * * *

0
5. Revise Sec.  107.845 to read as follows:


Sec.  107.845  Maximum rate of amortization on Loans and Debt 
Securities.

    The principal of any Loan (or the loan portion of any Debt 
Security) with a term of one year or less cannot be amortized faster 
than straight line. If the term is greater than one year, the principal 
cannot be amortized faster than straight line for the first year.

0
6. Revise Sec.  107.850(a) and (a)(2) to read as follows:


Sec.  107.850  Restrictions on redemption of Equity Securities.

    (a) A Portfolio Concern cannot be required to redeem Equity 
Securities earlier than one year from the date of the first closing 
unless:
    (1) * * *
    (2) You make a follow-on investment, in which case the new 
securities may be redeemed in less than one year, but no earlier than 
the redemption date associated with your earliest Financing of the 
concern.
* * * * *

    Dated: January 27, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-3842 Filed 2-20-04; 8:45 am]
BILLING CODE 8025-01-P