[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Rules and Regulations]
[Pages 32200-32229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12731]



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Part III





Department of Agriculture





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Rural-Business Cooperative Service



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Rural Utilities Service



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7 CFR Part 4290



Rural Business Investment Program; Interim Rule



Announcement of Competitive Application Round for the Rural Business 
Investment Program (RBIP); Notice

  Federal Register / Vol. 69, No. 110 / Tuesday, June 8, 2004 / Rules 
and Regulations  

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DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Part 4290

RIN 0570-AA35


Rural Business Investment Program

AGENCY: Rural Business-Cooperative Service and Rural Utilities Service, 
U.S. Department of Agriculture.

ACTION: Interim final rule with request for comments.

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SUMMARY: In this interim final rule with comment period, the U.S. 
Department of Agriculture (USDA) is adding a new part 4290 to implement 
the Rural Business Investment Program (RBIP) which is designed to 
promote economic development and create wealth and job opportunities 
among individuals living in rural areas and help to meet the equity 
capital investment needs primarily of smaller enterprises located in 
such areas. Under the RBIP, for-profit Rural Business Investment 
Companies (RBIC) will make venture capital investments in rural areas 
with the objectives of fostering economic development in such areas and 
returning maximum profits to the RBIC's investors. These regulations 
set forth the criteria which the USDA will use to select and license 
RBICs, guarantee its debentures, and make grants to RBICs.

DATES: Effective date: This rule is effective on June 8, 2004.
    Comment date: We will consider comments on the new part 4290 if we 
receive them at the appropriate address, as provided below, no later 
than 4 p.m. on July 8, 2004. Late filed comments will be considered to 
the extent practicable.

ADDRESSES: You may submit comments on this rule by any of the following 
methods:
    Agency Web site: http://rdinit.usda.gov/regs/; follow the 
instructions for submitting comments on the Web site.
    E-mail: [email protected]; include the RIN number (RIN 0570-AA35) 
in the subject line of the email.
    Federal e-Rulemaking portal: http://www.regulations.gov; follow the 
instructions for submitting comments.
    Mail: Submit written comments via the U.S. Postal Service to Cheryl 
Thompson, Management Analyst, Regulations and Paperwork Management 
Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence 
Avenue, SW., Washington, DC 20250-0742.
    Hand-delivery/courier: Submit written comments via Federal Express 
Mail or other courier service requiring a street address to Cheryl 
Thompson, Management Analyst, Regulations and Paperwork Management 
Branch, U.S. Department of Agriculture, 300 7th Street, SW., 
Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Special Projects/Programs Oversight 
Division, U.S. Department of Agriculture, (202) 690-4100.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 6029 of the Farm Security and Rural Investment Act of 2002, 
Pub. L. 107-171, amended the Consolidated Farm and Rural Development 
Act by adding Subtitle H--Rural Business Investment Program (7 U.S.C. 
2009cc et seq.) (the ``Act''). Section 6029 requires the Secretary of 
the USDA to establish the Rural Business Investment Program (RBIP). 
Section 384B of the Act, as amended, states that the purpose of the 
RBIP is--

    (1) To promote economic development and the creation of wealth 
and job opportunities in rural areas and among individuals living in 
those areas by encouraging developmental venture capital investments 
in smaller enterprises primarily located in rural areas; and
    (2) To establish a developmental venture capital program with 
the mission of addressing the unmet equity investment needs of small 
enterprises located in rural areas.

    Section 384Q of the Act, as amended, requires the Secretary of 
Agriculture to enter into an interagency agreement under the Economy 
Act, 31 U.S.C. 1535, with ``another Federal agency'' that has 
``considerable expertise in operating a program under which capital is 
provided for equity investments in private sector companies.'' The 
Joint Explanatory Statement of the Conference Committee of the Farm 
Security and Rural Investment Act of 2002 states on page 150 that, 
``Sec. 384 Q requires the Secretary to enter into an interagency 
agreement with the U.S. Small Business Administration (SBA) to carry 
out the day-to-day management and operation of the RBIP.'' House Report 
107-424. Responsibility for the RBIP on behalf of the USDA has been 
assigned to the Rural Business-Cooperative Service (RBS), which is one 
of the USDA agencies reporting to the Under Secretary for Rural 
Development.
    The mission of the RBIP is to encourage economic growth, 
innovation, and entrepreneurship by encouraging privately owned and 
managed venture capital investment funds to achieve financial success 
by investing in America's rural enterprises, for the benefit of the 
businesses and the customers and communities they serve. USDA and SBA 
believe that the RBIP represents an opportunity to supplement the 
considerable impact on jobs and economic growth made in rural areas 
from venture capital financings of the Small Business Investment 
Company (SBIC) program administered by the SBA. With a rigorous 
business focus, this new program can contribute significantly to the 
Federal government's efforts to encourage private risk-taking and 
investment in rural America.
    The RBIP will accomplish its mission by: (1) Licensing experienced 
venture capital fund managers with exceptional ``deal flow'' who are 
capable of raising equity capital from sophisticated private investors; 
(2) creating strong multiple lines of defense to manage risk to 
taxpayers; (3) communicating understandable ground rules to program 
participants; (4) offering applicants time to raise their required 
private equity capital; (5) allowing RBICs to develop results based on 
traditional cycles of venture investing; and (6) focusing on profit 
maximization as the key to success, while providing for a grant 
assistance component as provided in the Act.
    As you read the section-by-section analysis of the regulations in 
section III of this preamble, you will note that many of the provisions 
of these regulations are modeled after regulations governing SBA's SBIC 
and New Markets Venture Capital (NMVC) programs. In addressing the 
challenge of implementing the RBIP, the USDA was able to draw upon the 
experience that SBA has gained in administering the SBIC program.
    The Small Business Investment Act of 1958 created the SBIC program 
in response to a Federal Reserve study finding that small businesses 
were generally unable to obtain the long-term debt and equity funds 
that they needed to succeed. The basic objective of the SBIC program is 
to attract and supplement private capital, managed by private 
investment managers, to meet that need. SBA licenses such companies as 
SBICs, regulates their activities to ensure that they are financially 
sound and serve the program's public policy objectives, and supplements 
their private capital by guaranteeing debentures or other securities 
that they issue.
    Congress created the NMVC program in December 2000, to address the 
unmet equity capital needs of small business

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concerns located in low-income geographic areas. SBA enters into a 
participation agreement with each NMVCC that details, among other 
things, the specific low-income areas that it will serve, how it will 
serve those areas, what results it expects to achieve, and how its 
success will be measured.
    Because of the many similarities among the SBIC, NMVC, and RBIP 
programs, USDA will incorporate into the RBIP those SBIC and NMVC 
regulations that USDA believes are fundamental to the safety and 
soundness of the RBIP.

II. Justification for Publication of Interim Final Status Rule

    USDA generally publishes a proposed rule and invites public comment 
before issuing a final rule pursuant to the Administrative Procedures 
Act (APA) (5 U.S.C. 553). However, the APA provides for exceptions to 
the general rule if the agency finds ``good cause'' to omit advance 
notice and public participation. The ``good cause'' requirement is 
satisfied when prior public procedure is ``impractical, unnecessary, or 
contrary to the public interest'' (5 U.S.C. 553(b)). For the following 
reasons, USDA has determined that it would be impractical, unnecessary 
and contrary to the public interest to delay the effectiveness of this 
rule in order to solicit prior public comments.
    As intended by Congress and noted in the Conference Manager's 
Report, this program is modeled after two existing SBA programs: the 
SBIC and NMVC programs, except this program has a rural emphasis. 
Changes to already existing regulations were made when mandated by 
statutory differences. All other changes were minimized and were 
intended to assure technical compliance. While USDA has oversight of 
this program, SBA has day-to-day management and operation of the 
program using its staff, procedures, and forms, pursuant to an 
interagency agreement, as required by the Act.
    Given the degree of similarity between this program and SBA's SBIC 
and NMVC programs, little was to be gained from a delay in implementing 
the program for public comment. USDA has attempted to minimize the 
administrative burden by adopting as much of the SBA's SBIC and NMVC 
programs as possible. Accordingly, the interim rule imposes a minimum 
number of unfamiliar requirements from the SBIC and NMVC programs and 
the rule should be very familiar to applicants currently participating 
in either of those programs.
    We are not publishing this rule as a final rule. Instead, we are 
waiving notice of proposed rulemaking and publishing this rule as an 
interim final rule with comment period. As we develop this rule, we 
welcome comments from the public on all issues set forth in this rule 
to assist us in fully considering the issues and any associated 
regulatory impacts.

III. Section-by-Section Analysis

    The following is a section by section analysis of USDA's 
regulations to add a new part 4290 to Title 7 of the Code of Federal 
Regulations to implement the Act.
    Sections 4290.10 through 4290.50 briefly describe the RBIP, state 
the legal basis for the program, define terms, and provide guidance on 
how to read part 4290. Section 4290.45 states that pursuant to a 
delegation of authority, SBA will exercise on behalf of USDA all 
responsibilities and authorities assigned to the Secretary in the new 
part 4290, unless specifically stated otherwise in a particular section 
in part 4290.
    Section 4290.50 contains the definitions applicable to the program. 
Most of the defined terms come directly from the Act and USDA did not 
supplement or modify them. USDA also establishes several new 
definitions specific to the RBIP. Several of the definitions are based 
on Title 13 of the Code of Federal Regulations which governs SBA's 
programs, including the SBIC (13 CFR part 107) and NMVC (13 CFR part 
108) programs, and sets forth size standards for determining the size 
of a smaller enterprise.
    ``Enterprise'' is a newly defined term that describes all potential 
recipients of RBIC financings. The term ``primarily operating'' has 
been adapted from section 384A(13) of the Act to help define rural 
business concerns. It will be defined as the place where the principal 
office of the enterprise is located; that term, in turn, is defined as 
the location where the greatest number of employees is located. The 
definitions also comprise several terms incorporating the concept of a 
rural area. They are unique to this program and specify an area located 
outside a standard metropolitan statistical area or a community with a 
population of 50,000 or fewer inhabitants. The definition of a 
``smaller enterprise'' is different from the definition employed in the 
SBIC and NMVC programs. In those programs the application of the term 
was limited to for-profit business concerns as defined by SBA. In the 
RBIP, the term specifically includes rural business concerns which may 
include, among other things, non-profit entities. The definition of the 
phrase, ``subordinated debt with equity features,'' is also unique to 
this program because, pursuant to section 384A(4) of the Act, this is a 
type of equity capital that RBICs are permitted to invest in smaller 
enterprises. ``Urban area'' is also defined in this section in order to 
implement section 384(I)(c)(3)(C) of the Act, which limits a RBIC's 
ability to make financings to enterprises located in such areas.
    Sections 4290.100 through 4290.165 describe the organizational 
basis for a RBIC. An applicant for a RBIC license must be a newly 
formed for-profit entity or, subject to Sec.  4290.150, a newly formed 
for-profit subsidiary of an existing entity. It must be organized under 
the law of a State solely for the purpose of performing the functions 
and conducting the activities contemplated under the Act: to make 
venture capital investments in rural areas with the objectives of 
fostering economic development in such areas and returning maximum 
profits to the RBIC's investors and to provide operational assistance 
to eligible smaller enterprises. It must have qualified management and 
agree that it will (i) make such investments, (ii) have a plan to 
invest in rural areas, and (iii) identify particular rural areas in 
which it proposes to focus its investment activities. USDA models these 
regulations on similar regulations governing the SBIC and NMVC 
programs, including the requirements that RBICs must have management 
and ownership diversity and that USDA will require pre-approval of all 
management expenses of a RBIC.
    Sections 4290.200 through 4290.240 address capitalization of a 
RBIC, including minimum capital requirements, allowable sources of 
private capital, and limitations on non-cash contributions to capital. 
These regulations are modeled on similar regulations in the SBIC and 
NMVC programs.
    Sections 4290.300 through 4290.330 set forth policies and 
procedures for the application and approval process for obtaining a 
RBIC license. USDA will allow submission of applications for 
participation in the RBIP only during a specific application period to 
be set forth in a Notice of Funds Availability published in the Federal 
Register, as opposed to a ``rolling admissions'' process. USDA will use 
this method of selecting applicants for three reasons. First, the USDA 
believes this method will enable USDA to achieve the objective of 
ensuring, to the extent possible and given the applications received, 
nationwide geographic distribution of developmental venture capital. 
USDA will compare

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applications both for quality and other criteria described in the 
regulations, and for the geographic areas they intend to cover so as to 
choose the best applications for each geographic area and avoid 
duplication within specific geographic areas. Second, USDA has a 
limited amount of funds available with which to license RBICs, based on 
a one-time authorization of funds. A competitive process will allow 
USDA to utilize those funds expeditiously and efficiently. Third, USDA 
believes this procedure will allow it to orderly administer 
appropriated funds it may receive in subsequent fiscal years by 
allowing USDA to open up the RBIP to new rounds of applicants.
    USDA will require applicants for participation in the RBIP to 
submit an application, similar to the applications for SBA's SBIC and 
NMVC programs. Key application requirements include management team 
experience, an indication of the amount of regulatory capital an 
applicant has raised or proposes to raise, and a comprehensive business 
plan. The application submission requirements are outlined in section 
384D of the Act. Based in part on the experience of other Federal 
agencies with similar economic development programs, USDA believes 
these application requirements will allow USDA to ensure that 
applicants understand the objectives of the RBIP and have a sound plan 
for accomplishing those objectives and for creating and maintaining a 
viable investment fund. USDA also will assess a ``grant issuance fee'' 
for applications to the RBIP.
    Sections 4290.340 through 4290.390 describe USDA's evaluation 
criteria and the selection and licensing process for participation in 
the RBIP. In considering applicants for licensing, USDA will review an 
applicant's application materials, conduct interviews or site visits 
(if applicable) with the applicant, and perform background 
investigations. Most of the specified criteria are set forth in the 
Act. The Secretary will not consider any application that is not 
complete or that is submitted by an applicant that does not meet the 
eligibility criteria in subpart C of this part. The Secretary will 
perform an initial review of an applicant's management team 
qualifications to determine whether the team meets the minimum 
requirements deemed by the Secretary in his or her sole discretion to 
be critical to successful venture capital investing. From among the 
applicants that have submitted eligible and complete applications and 
that have qualified management teams, the Secretary on behalf of USDA 
and the Administrator on behalf of SBA will select some, all, or none 
of such applicants to participate in the RBIP. Selection will entitle 
the applicant to proceed with obtaining a license as a RBIC, but only 
if and when the applicant meets the conditions set forth in Sec.  
4290.390.
    Sections 4290.400 through 4290.480 describe USDA's requirements in 
the event of changes in ownership, control, or structure of a RBIC. 
These regulations are modeled after similar regulations for the SBIC 
and NMVC programs.
    Sections 4290.500 through 4290.585 describe USDA's requirements for 
managing the operations of a RBIC. These regulations are modeled after 
similar regulations for the SBIC and NMVC programs.
    Sections 4290.600 through 4290.680 describe USDA's recordkeeping, 
record retention, reporting, and examination requirements for RBICs. 
These regulations are modeled after similar regulations for the SBIC 
and NMVC programs. USDA will require each RBIC to provide reports 
concerning the economic development impact of each investment it makes, 
as well as reports on its administration and use of grant funds as 
required by Circular A-110 of the Office of Management and Budget 
(OMB), ``Uniform Administrative Requirements for Grants and Agreements 
with Institutions of Higher Education, Hospitals, and other Non-Profit 
Organizations.'' USDA anticipates that to the extent not inconsistent 
with USDA's regulations for the RBIP, RBICs' administration and use of 
grant funds will be subject to OMB Circular A-110. OMB Circular A-110 
is optional for use in connection with grants to commercial 
organizations. USDA will apply it to RBICs in order to take advantage 
of existing and well-known grant administrative procedures and policies 
to facilitate USDA's orderly administration of grants to RBICs.
    Sections 4290.690 through 4290.692 describe USDA's requirements for 
examinations of RBICs for regulatory compliance. These regulations are 
modeled after similar regulations for the SBIC and NMVC programs, and 
require RBICs to submit to annual examinations.
    Section 4290.700 is key to effectuating the Act's directive to 
promote rural development. This section requires RBICs to invest at 
least 75 percent of their financings in rural business concerns and to 
have more than 50 percent of its investments in smaller enterprises 
(and, of those, at least 50 percent must be in small business 
concerns). A separate section (Sec.  4290.740) addresses the need for 
portfolio diversification. No more than 10 percent of a RBIC's 
financings may be in urban areas.
    RBICS are prohibited by Sec.  4290.720 from investing in 
enterprises that do no more than re-lend or re-invest the RBIC's funds 
or are passive enterprises, subject to certain highly specific 
exceptions. Section 4290.730 contains a prohibition on financings which 
constitute conflicts of interest.
    Sections Sec.  4290.810 through Sec.  4290.880 address a series of 
issues involved in structuring eligible RBIC financings. These sections 
govern various forms and durations of financings, applicable 
amortization and interest rates, allowable fees and expenses, and the 
subject of disposing of assets, among other issues. Although these 
regulations are largely modeled after similar regulations for the SBIC 
and NMVC programs in several aspects, in other aspects they are unique 
to the RBIP and highlight its emphasis on rural investment and economic 
development.
    Sections 4290.1100 through 4290.1720 describe USDA's requirements 
and procedures for RBICs to obtain leverage from USDA, the procedures 
governing USDA's funding of that leverage, and the use of Trust 
Certificates. These regulations are modeled after similar regulations 
for the SBIC and NMVC programs.
    Section 4290.1500 imposes certain constraints on a RBIC's powers to 
make distributions to its investors. At the same time a RBIC makes such 
a distribution, it also must make a prepayment to or for the benefit of 
the third-party holder of the debenture, ratably with the distribution 
to the RBIC's equity investors. Although this provision differs from 
existing repayment clauses in existing SBA Investment Division 
debenture programs, it is consistent with the creditor nature of the 
Government's exposure (no profit participation), and the cash flow 
nature of venture investing. This provision will reduce the 
Government's risk and thereby have a positive effect on the subsidy 
model and risk profile of the program.
    Sections 4290.1810 through 4290.1840 describe events of default and 
capital impairment and USDA's remedies upon such defaults. These 
regulations are modeled after similar regulations for the SBIC and NMVC 
programs.
    Section 4290.1900 concerns termination by a RBIC of its 
participation in the RBIP. This regulation is modeled after a similar 
regulation for the SBIC and NMVC programs.

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    Sections 4290.1910 through 4290.1930 address miscellaneous issues, 
including application for an exemption from regulatory requirements and 
the effect of regulatory changes on transactions previously 
consummated. These regulations are modeled after similar regulations 
for the SBIC and NMVC programs. Section 4290.1940 refers to other USDA 
regulations applicable to the RBIP.
    Section 4290.2000 sets forth requirements and procedures for 
operational assistance grants to RBICs. USDA will award such grants 
only after receiving and evaluating applications in response to a 
Notice of Funds Availability published in the Federal Register. Each 
qualified RBIC will receive a grant. This rule does not cover grants to 
non-RBICs; USDA will do so at a later date.
    USDA also will require RBICs to provide reports on its 
administration and use of grant funds as required by OMB Circular A-
110. USDA anticipates that to the extent not inconsistent with these 
regulations, RBICs' administration and use of grant funds will be 
subject to OMB Circular A-110.

IV. Justification for Immediate Effective Date of Interim Final Rule

    Interim rules published by USDA generally take effect 30 days after 
publication. However the APA provides that when the Agency finds good 
cause exists, the rule may take effect immediately (see 5 U.S.C. 
553(d)(3)). For the reasons set forth in the Justification of 
Publication for Interim Final Status Rule and in this part, USDA finds 
that good cause exists for making this interim final rule effective 
immediately, instead of observing the 30-day period between publication 
and effective date.
    Venture capital is needed in rural areas. This is the first 
authorization for this Department to provide venture capital funds to 
rural areas. While the SBIC and NMVC programs make a significant impact 
on non-metropolitan areas, SBA's programs are not exclusively targeted 
on rural areas. Historically most venture capital funds have not gone 
to rural areas. Rural areas have suffered significant economic declines 
over the past years and this program is needed to help offset those 
declines as soon as possible.
    The purpose of the 30 day delay in a published rule taking effect 
is to provide interested and affected members of the public sufficient 
time to adjust their behavior before the rule takes effect. There is no 
reason to delay implementation in this case because the interested and 
affected members of the public that this rule affects are either 
already participating in SBA's existing SBIC and NMVC programs or are 
familiar with the provisions of these programs. This program is modeled 
after and virtually identical to these programs and for that reason 
will require minimal changes in applicant behavior.
    Based on the long period of time before any investments can be made 
by RBICs, it is critical to initiate a fair and competitive application 
process as soon as possible. Applicants will need several months to 
assemble a qualified management team, develop their strategic 
investment objectives, prepare and submit their RBIC applications prior 
to October 1, 2004, the date which, under current congressional 
authority, the funding for licensed RBICs becomes available. The 
subsequent application review and evaluation process will require 
several more months time before selected applicants can confidently 
begin raising the requisite capital, which can take up to an additional 
year before being awarded a RBIC license. All of this has to be done 
before a licensed RBIC can make its first investment. Additionally, 
over two years has lapsed since Congress recognized the need for 
developmental venture capital in rural areas and the Act became law in 
May 2002. It would be a disservice to the public to unnecessarily delay 
the implementation of the RBIP any further given that the public 
already knows the detailed provisions of the authorizing statute and 
its similarity to the SBIC and NMVC programs and the need for 
developmental venture capital in rural America.

V. Regulatory Compliance Section--Compliance With Executive Orders 
12866 (Regulatory Planning and Review), 12988 (Civil Justice Reform) 
and 13132 (Federalism); Paperwork Reduction Act; Government Paperwork 
Elimination Act; Intergovernmental Review; Environmental Impact 
Statement; and Unfunded Mandates Reform Act

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule does not constitute a ``significant'' regulatory action under 
Executive Order 12866. Therefore, a regulatory assessment is not 
required.

Compliance With Executive Order 12988

    USDA certifies that this rule is drafted, to the extent 
practicable, in accordance with the standards set forth in section 3 of 
Executive Order 12988. In accordance with this Executive Order: (1) All 
State and local laws and regulations that are in conflict with this 
rule will be preempted, (2) no retroactive effect will be given to this 
rule, and (3) administrative proceedings in accordance with RBS 
regulations at 7 CFR part 11 must be exhausted before bringing 
litigation challenging action taken under this rule unless those 
regulations specifically allow bringing suit at an earlier time.

Compliance With Executive Order 13132

    For purposes of Executive Order 13132, USDA has determined that 
this rule has no federalism implications warranting preparation of a 
federalism assessment.

Intergovernmental Review

    The Business and Industry loan programs are subject to the 
provisions of Executive Order 12372, which require intergovernmental 
consultation with State and local officials. RBS will conduct 
intergovernmental consultation in the manner delineated in 7 CFR part 
3015, subpart V.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' RBS has determined that this 
action does not constitute a major Federal action significantly 
affecting the quality of the human environment and, in accordance with 
the National Environmental Policy Act of 1969, 42 U.S.C. 4321 et seq, 
an Environmental Impact Statement is not required.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, RBS 
must prepare a written statement, including a cost-benefit analysis, 
for proposed and final rules with ``Federal mandates'' that may result 
in expenditures to State, local or tribal governments, in the 
aggregate, or to the private sector, of $100 million or more in any 1 
year. When such a statement is needed for a rule, section 205 of UMRA 
generally requires RBS to identify and consider a reasonable number of 
regulatory alternatives and adopt the least costly, more cost-
effective, or least burdensome alternative that achieves the objectives 
of the rule. This rule contains no

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Federal mandates (under the regulatory provisions of title II of the 
UMRA) for State, local, and tribal governments or the private sector. 
Thus, this rule does not trigger the requirements of sections 202 and 
205 of the UMRA.

Compliance With Paperwork Reduction Act

    USDA has determined that this rule imposes additional reporting or 
recordkeeping requirements for purposes of the Paperwork Reduction Act, 
44 U.S.C. Ch. 35. The collection of information (``collection'') for 
the RBIP includes the RBIC application package and reporting and 
recordkeeping requirements. USDA previously requested from the Office 
of Management and Budget (``OMB'') an emergency clearance of this 
collection. OMB reviewed and approved the collection and assigned OMB 
control number 0570-0051.
    Simultaneously with the publication of this rule in the Federal 
Register, USDA will make available to the public the collection on 
SBA's Web site at http://www.sba.gov/INV/RBIP or you may request a copy 
by calling Austin J. Belton, Director of New Markets Venture Capital, 
Investment Division, SBA, at (202) 205-6510.
    The following is a list of sections of this regulation that 
describe generally the collection requirements for the RBIP and reasons 
why USDA believes it needs to collect such information.

A. Applying for a License as a RBIC

    As referenced in Sec.  4290.310 (Contents of application) and Sec.  
4290.320 (Contents of a comprehensive business plan), USDA will request 
information such as basic identifying data and core data, management 
and organization information, descriptions of past and present 
performance in developmental venture capital investments in smaller 
enterprises and in rural areas, technical qualifications of the 
applicant, descriptions of activities proposed using debentures issued 
by RBICs, and reporting capabilities.
    USDA needs this information to evaluate applicants and to ensure 
that selections are made in furtherance of the RBIP's objectives. USDA 
understands that the respondents to these requests will be limited to 
those organizations meeting the requirements set forth in Sec.  
4290.100 (Business form); Sec.  4290.110 (Qualified management); Sec.  
4290.120 (Plan to invest in rural areas); and Sec.  4290.150 
(Management and ownership diversity requirement). Based upon USDA's 
knowledge of the industry, USDA estimates that approximately 25 
applicants will apply to participate in the RBIP. Respondents will need 
to submit the information referenced in Sec. Sec.  4290.310 and 
4290.320 only at the time of application to participate in the RBIP. 
USDA estimates that it will take respondents 291.75 hours to complete 
an application and to fulfill the reporting and record keeping 
requirements referenced below.

B. RBIC Reporting and Recordkeeping Requirements

    As referenced in Sec. Sec.  4290.600 to 4290.680, USDA will request 
financial information including, but not limited to, financial 
statements, economic impact and economic development information, and 
portfolio financing reports and valuations.
    USDA needs this information to evaluate the performance and success 
of RBICs in fulfilling the objectives of their participation agreements 
and their actual venture capital investments in smaller enterprises 
located in rural areas.

C. Request for Comments

    With regard to each collection of information discussed above and 
contained in the collection itself, USDA is seeking your comment on the 
following issues:
    (a) Whether the information USDA will request on the application is 
necessary for USDA's proper implementation and measurement of the 
performance of the RBIP;
    (b) The accuracy of the burden estimate (time estimated to complete 
each collection of information request);
    (c) Ways to minimize the burden estimates, and
    (d) Ways to enhance the quality of the information being collected.
    Please send written comments on or before August 9, 2004, on the 
data collection requirements to Austin J. Belton, Director of New 
Markets Venture Capital, Investment Division, SBA, 409 Third Street, 
SW., Washington, DC 20416.

Government Paperwork Elimination Act

    USDA is committed to compliance with the Government Paperwork 
Elimination Act, which requires Government agencies in general to 
provide the public the option of submitting information or transacting 
business electronically to the maximum extent possible.

List of Subjects in 7 CFR Part 4290

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

0
For the reasons stated in the preamble, the Secretary is amending 7 CFR 
chapter XLII by adding part 4290 to read as follows:

PART 4290--RURAL BUSINESS INVESTMENT COMPANY (``RBIC'') PROGRAM

Subpart A--Introduction to Part 4290
Sec.
4290.10 Description of the Rural Business Investment Company 
Program.
4290.20 Legal basis and applicability of this part 4290.
4290.30 Amendments to Act and regulations.
4290.40 How to read this part 4290.
4290.45 Responsibility for implementing this part 4290.
Subpart B--Definition of Terms Used in Part 4290
4290.50 Definition of terms.
Subpart C--Qualifications for the RBIC Program

Organizing a RBIC

4290.100 Business form.
4290.110 Qualified management.
4290.120 Plan to invest in Rural Areas.
4290.130 Identified Rural Areas.
4290.140 Approval of initial Management Expenses.
4290.150 Management and ownership diversity requirement.
4290.160 Special rules for Partnership RBICs and LLC RBICs.
4290.165 Obligations of Control Persons.

Capitalizing a RBIC

4290.200 Adequate capital for RBICs.
4290.210 Minimum capital requirements for RBICs.
4290.230 Private Capital for RBICs.
4290.240 Limitations on non-cash capital contributions in Private 
Capital.
Subpart D--Application and Approval Process for RBIC Licensing
4290.300 When and how to apply for a RBIC License.
4290.310 Contents of application.
4290.320 Contents of comprehensive business plan.
4290.330 Grant issuance fee.
Subpart E--Evaluation and Selection of RBICs
4290.340 Evaluation and selection--general.
4290.350 Eligibility and completeness.
4290.360 Initial review of Applicant's management team's 
qualifications.
4290.370 Evaluation criteria.
4290.380 Selection.
4290 390 Licensing as a RBIC.
Subpart F--Changes in Ownership, Structure, or Control

Changes in ControL or Ownership of a RBIC

4290.400 Changes in ownership of 10 percent or more of RBIC but no 
change of Control.

[[Page 32205]]

4290.410 Changes in Control of RBIC (through change in ownership or 
otherwise).
4290.420 Prohibition on exercise of ownership or Control rights in 
RBIC before approval.
4290.430 Notification of transactions that may change ownership or 
Control.
4290.440 Standards governing prior approval for a proposed transfer 
of Control.
4290.450 Notification of pledge of RBIC's shares.

Restrictions on Common Control or Ownership of Two or More RBICs

4290.460 Restrictions on Common Control or ownership of two (or 
more) RBICs.

Change in Structure of RBIC

4290.470 Prior approval of merger, consolidation, or reorganization 
of RBIC.
4290.480 Prior approval of changes to RBIC's business plan.
Subpart G--Managing the Operations of a RBIC

General Requirements

4290.500 Lawful operations under the Act.
4290.502 Representations to the public.
4290.503 RBIC's adoption of an approved valuation policy.
4290.504 Equipment and office requirements.
4290.506 Safeguarding the RBIC's assets/Internal controls.
4290.507 Violations based on false filings and nonperformance of 
agreements with the Secretary or SBA.
4290.508 Compliance with non-discrimination laws and regulations 
applicable to federally-assisted programs.
4290.509 Employment of USDA or SBA officials.

Management and Compensation

4290.510 Approval of RBIC's Investment Adviser/Manager.
4290.520 Management Expenses of a RBIC.

Cash Management by a RBIC

4290.530 Restrictions on investments of idle funds by RBICs.

Secured Borrowing by RBICs

4290.550 Prior approval of secured third-party debt of RBICs.

Voluntary Decrease in Regulatory Capital

4290.585 Voluntary decrease in RBIC's Regulatory Capital.
Subpart H--Recordkeeping, Reporting, and Examination Requirements for 
RBICs

Recordkeeping Requirements for RBICs

4290.600 General requirement for RBIC to maintain and preserve 
records.
4290.610 Required certifications for Loans and Investments.
4290.620 Requirement to obtain information from Portfolio Concerns.

Reporting Requirements for RBICs

4290.630 Requirements for RBICs to file financial statements and 
supplementary information with the Secretary (SBA Form 468).
4290.640 Requirement to file portfolio financing reports with the 
Secretary (SBA Form 1031).
4290.650 Requirement to report portfolio valuations to the 
Secretary.
4290.660 Other items required to be filed by RBIC with the 
Secretary.
4290.680 Reporting changes in RBIC not subject to prior approval.

Examinations of RBICS by the Secretary for Regulatory Compliance

4290.690 Examinations.
4290.691 Responsibilities of RBIC during examination.
4290.692 Examination fees.
Subpart I--Financing of Enterprises by RBICs

Determining Eligibility of an Enterprise for RBIC Financing

4290.700 Requirements concerning types of Enterprises to receive 
Financing.
4290.720 Enterprises that may be ineligible for Financing.
4290.730 Financings which constitute conflicts of interest.
4290.740 Portfolio diversification (``overline'' limitation).
4290.760 How a change in size or activity of a Portfolio Concern 
affects the RBIC and the Portfolio Concern.

Structuring RBIC Financing of Eligible Enterprises--Types of Financings

4290.800 Financings in the form of Equity Securities.
4290.810 Financings in the form of Loans.
4290.815 Financings in the form of Debt Securities.
4290.820 Financings in the form of guarantees.
4290.825 Purchasing securities from an underwriter or other third 
party.
4290.830 Minimum term of Financing.
4290.835 Exception to minimum term of Financing.
4290.840 Maximum term of Financing.
4290.845 Maximum rate of amortization on Loans and Debt Securities.
4290.850 Restrictions on redemption of Equity Securities.
4290.860 Financing fees and expense reimbursements a RBIC may 
receive from an Enterprise.
4290.880 Assets acquired in liquidation of Portfolio securities.

Limitations on Disposition of Assets

4290.885 Disposition of assets to RBIC's Associates or to 
competitors of Portfolio Concerns.
4290.900 Management fees for services provided to an Enterprise by 
RBIC or its Associate.
Subpart J--Financial Assistance for RBICs (Leverage)

General Information About Obtaining Leverage

4290.1100 Type of Leverage and application procedures.
4290.1120 General eligibility requirements for Leverage.
4290.1130 Leverage fees payable by RBIC.
4290.1140 RBIC's acceptance of remedies under Sec.  4290.1810.

Maximum Amount of Leverage for Which a RBIC is Eligible

4290.1150 Maximum amount of Leverage for a RBIC.

Conditional Commitments To Reserve Leverage for a RBIC

4290.1200 Leverage commitment to a RBIC--application procedure, 
amount, and term.
4290.1220 Requirement for RBIC to file financial statements at the 
time of request for a draw.
4290.1230 Draw-downs by RBIC under Leverage commitment.
4290.1240 Funding of RBIC's draw request through sale to third 
party.

Distributions by RBICs With Outstanding Leverage

4290.1500 Restrictions on distributions to RBIC investors while RBIC 
has outstanding Leverage.

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

4290.1600 Secretary's authority to issue and guarantee Trust 
Certificates.
4290.1610 Effect of prepayment or early redemption of Leverage on a 
Trust Certificate.
4290.1620 Functions of agents, including Central Registration Agent, 
Selling Agent and Fiscal Agent.
4290.1630 Regulation of Brokers and Dealers and disclosure to 
purchasers of Leverage or Trust Certificates.
4290.1640 Secretary's access to records of the CRA, Brokers, Dealers 
and Pool or Trust assemblers.

Miscellaneous

4290.1700 Secretary's transfer of interest in a RBIC's Leverage 
security.
4290.1710 Secretary's authority to collect or compromise claims.
4290.1720 Characteristics of Secretary's guarantee.
Subpart K--RBIC's Noncompliance With Terms of Leverage
4290.1810 Events of default and the Secretary's remedies for RBIC's 
noncompliance with terms of Debentures.

Computation of RBIC's Capital Impairment

4290.1830 RBIC's Capital Impairment definition and general 
requirements.
4290.1840 Computation of RBIC's Capital Impairment Percentage.
Subpart L--Ending Operations as a RBIC
4290.1900 Termination of participation as a RBIC.
Subpart M--Miscellaneous
4290.1910 Non-waiver of rights or terms of Leverage security.
4290.1920 RBIC's application for exemption from a regulation in this 
part 4290.
4290.1930 Effect of changes in this part 4290 on transactions 
previously consummated.

[[Page 32206]]

4290.1940 Integration of this part with other regulations applicable 
to USDA's programs.
Subpart N--Requirements for Operational Assistance Grants to RBICs
4290.2000 Operational Assistance grants to RBICs.

    Authority: 7 U.S.C. 1989 and 2009cc et seq.

Subpart A--Introduction to Part 4290


Sec.  4290.10  Description of the Rural Business Investment Company 
Program.

    The Rural Business Investment Company (``RBIC'') Program is a 
Developmental Venture Capital program for the purpose of promoting 
economic development and the creation of wealth and job opportunities 
in Rural Areas and among individuals living in such Areas. To this end, 
the Secretary will select and license RBIC Applicants that will agree 
to address the unmet Equity Capital needs of Smaller Enterprises 
primarily located in Rural Areas.


Sec.  4290.20  Legal basis and applicability of this part 4290.

    The regulations in this part implement Subtitle H of the 
Consolidated Farm and Rural Development Act, as amended (7 U.S.C. 
2009cc et seq.) (``Act''). All RBICs must comply with all applicable 
regulations, accounting guidelines and valuation guidelines for RBICs.


Sec.  4290.30  Amendments to Act and regulations.

    A RBIC is subject to all existing and future provisions of the Act 
and part 4290 of title 7 of the Code of Federal Regulations.


Sec.  4290.40  How to read this part 4290.

    (a) Center Headings. Center headings are descriptive and are used 
for convenience only. They have no regulatory effect.
    (b) Capitalizing defined terms. Terms defined in Sec.  4290.50 have 
initial capitalization in this part 4290.
    (c) ``You.'' The pronoun ``you'' as used in this part 4290 means a 
RBIC unless otherwise noted.
    (d) Forms. All references in this part to forms, and instructions 
for their preparation, are to the current issue of such forms.


Sec.  4290.45  Responsibility for implementing this part 4290.

    The Secretary has delegated to the U.S. Small Business 
Administration (SBA), pursuant to an agreement under the Economy Act 
(31 U.S.C. 1535), the authority to implement the RBIC program, 
including implementing and enforcing the regulations in this part 4290. 
Therefore, unless specifically stated otherwise, SBA will exercise on 
behalf of the Secretary all responsibilities and authorities assigned 
to the Secretary in this part 4290.

Subpart B--Definition of Terms Used in Part 4290


Sec.  4290.50  Definition of terms.

    Act means Subtitle H of the Consolidated Farm and Rural Development 
Act, as amended (7 U.S.C. 2009cc et seq.).
    Administrator means the Administrator of SBA.
    Affiliate or Affiliates has the meaning set forth in title 13 CFR 
121.103.
    Applicant means any entity submitting an application to be licensed 
as a RBIC.
    Articles mean articles of incorporation or charter and bylaws for a 
Corporate RBIC, the certificate and limited partnership agreement for a 
Partnership RBIC, and the operating agreement or other organizational 
documents for an LLC RBIC.
    Assistance or Assisted means Financing of or management services 
rendered to a Portfolio Concern by or through a RBIC pursuant to the 
Act and this part.
    Associate of a RBIC means any of the following:
    (1)(i) An officer, director, employee or agent of a Corporate RBIC;
    (ii) A Control Person, employee or agent of a Partnership RBIC;
    (iii) A managing member of an LLC RBIC;
    (iv) An Investment Adviser/Manager of any RBIC, including any 
Person who contracts with a Control Person of a RBIC to be the 
Investment Adviser/Manager of such RBIC; or
    (v) Any Person regularly serving a RBIC on retainer in the capacity 
of attorney at law.
    (2) Any Person who owns or controls, or who has entered into an 
agreement to own or control, directly or indirectly, at least 10 
percent of any class of stock of a Corporate RBIC or 10 percent of the 
membership interests of an LLC RBIC, or a limited partner's interest of 
at least 10 percent of the partnership capital of a Partnership RBIC. 
However, neither a limited partner in a Partnership RBIC nor a non-
managing member in an LLC RBIC is considered an Associate if such 
Person is an Entity Institutional Investor whose investment in the 
Partnership, including commitments, represents no more than 33 percent 
of the capital of the RBIC and no more than five percent of such 
Person's net worth.
    (3) Any officer, director, partner (other than a limited partner), 
manager, agent, or employee of any Associate described in paragraph (1) 
or (2) of this definition.
    (4) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, a RBIC.
    (5) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, any Person described in 
paragraphs (1) and (2) of this definition.
    (6) Any Close Relative of any Person described in paragraphs (1), 
(2), (4), and (5) of this definition.
    (7) Any Secondary Relative of any Person described in paragraphs 
(1), (2), (4), and (5) of this definition.
    (8) Any concern in which--
    (i) Any person described in paragraphs (1) through (6) of this 
definition is an officer; general partner, or managing member; or
    (ii) Any such Person(s) singly or collectively Control or own, 
directly or indirectly, an equity interest of at least 10 percent 
(excluding interests that such Person(s) own indirectly through 
ownership interests in the RBIC).
    (9) Any concern in which any Person(s) described in paragraph (7) 
of this definition singly or collectively own (including beneficial 
ownership) a majority equity interest, or otherwise have Control. As 
used in this paragraph (9), ``collectively'' means together with any 
Person(s) described in paragraphs (1) though (7) of this definition.
    (10) For the purposes of this definition, any Associate 
relationship described in paragraphs (1) through (7) of this definition 
that exists at any time within six months before or after the date that 
a RBIC provides Financing, will be considered to exist on the date of 
the Financing.
    Capital Impairment has the meaning set forth in Sec.  4290.1830(b).
    Central Registration Agent or CRA means one or more agents 
appointed for the purpose of issuing Trust Certificates (TCs) and 
performing the functions enumerated in Sec.  4290.1620 and performing 
similar functions for Debentures funded outside the pooling process.
    Close Relative of an individual means:
    (1) A current or former spouse;
    (2) A father, mother, guardian, brother, sister, son, daughter; or
    (3) A father-in-law, mother-in-law, brother-in-law, sister-in-law, 
son-in-law, or daughter-in-law.
    Commitment means a written agreement between a RBIC and an 
Enterprise that obligates the RBIC to provide Financing (except a 
guarantee) to that Enterprise in a fixed or determinable sum, by a 
fixed or determinable future date. In this context

[[Page 32207]]

the term ``agreement'' means that there has been agreement on the 
principal economic terms of the Financing. The agreement may include 
reasonable conditions precedent to the RBIC's obligation to fund the 
Commitment, but these conditions must be outside the RBIC's control.
    Common Control means a condition such that two or more Persons, 
either through ownership, management, contract, or otherwise, are under 
the Control of one group or Person. Two or more RBICs are presumed to 
be under Common Control if they are Affiliates of each other by reason 
of common ownership or common officers, directors, or general partners; 
or if they are managed or their investments are significantly directed 
either by a common independent Investment Advisor/Manager or managerial 
contractor, or by two or more such advisors or contractors that are 
Affiliates of each other. This presumption may be rebutted by evidence 
satisfactory to the Secretary.
    Community Development Finance means debt or equity-type investments 
in Rural Areas.
    Control means the possession, direct or indirect, of the power to 
direct or cause, or the power to stop or hinder (also referred to as 
``negative Control''), the direction of the management and policies of 
a RBIC or other concern, whether through the ownership of voting 
securities, by contract, or otherwise.
    Control Person means any Person that controls a RBIC, either 
directly or through an intervening entity. A Control Person includes:
    (1) A general partner of a Partnership RBIC;
    (2) Any Person serving as a general partner (in the case of a 
partnership), an officer or director (in the case of a corporation), or 
a manager (in the case of a limited liability company) of any entity 
that controls a RBIC, either directly or through an intervening entity;
    (3) Any Person that--
    (i) Controls or owns, directly or through an intervening entity, at 
least 10 percent of a Partnership RBIC, a LLC RBIC, or any entity 
described in paragraphs (1) or (2) of this definition; and
    (ii) Participates in the investment decisions of a general partner 
of such Partnership RBIC or of a managing member of such LLC RBIC;
    (4) Any Person that controls or owns, directly or through an 
intervening entity, at least 50 percent of a RBIC or any entity 
described in paragraphs (1) or (2) of this definition.
    Corporate RBIC has the meaning set forth in the definition of RBIC 
in this section.
    Debenture means a debt obligation issued by RBICs pursuant to 
section 384E of the Act and held or guaranteed by the Secretary.
    Debt Securities means instruments evidencing a loan with an option 
or any other right to acquire Equity Securities in an Enterprise or its 
Affiliates, or a loan which by its terms is convertible into an equity 
position. Consideration must be paid for all options acquired.
    Developmental Venture Capital means Equity Capital invested in 
Rural Business Concerns, with an objective of fostering economic 
development in Rural Areas.
    Distribution means any transfer of cash or non-cash assets to the 
Secretary, the Secretary's agent or Trustee, or to partners in a 
Partnership RBIC, or to shareholders in a Corporate RBIC, or to members 
in an LLC RBIC. Capitalization of Retained Earnings Available for 
Distribution constitutes a Distribution to the RBIC's partners, 
shareholders, or members.
    Enterprise means a Person engaged in a business or commercial 
activity which charges for the goods and services it provides, whether 
such Person is operating for profit or is subject to any legal 
restrictions on the distribution of profits to its owners, members, or 
suppliers of its equity or quasi-equity capital. An Enterprise 
includes:
    (1) A public, private, or cooperative for-profit or non-profit 
organization;
    (2) A for-profit or nonprofit business controlled by an Indian 
tribe on a Federal or State reservation or other federally recognized 
Indian tribal group; or
    (3) Any other Person.
    Entity General Partner has the meaning set forth in Sec.  4290.160.
    Entity Managing Member has the meaning set forth in Sec.  4290.160.
    Equity Capital means Equity Securities or Subordinated Debt With 
Equity Features.
    Equity Securities means stock of any class in a corporation, stock 
options, warrants, limited partnership interests in a limited 
partnership, membership interests in a limited liability company, or 
joint venture interests.
    Farm Credit System Institution means an institution defined in 
section 1.2(a) of the Farm Credit Act of 1971 (12 U.S.C. 2002(a)).
    Financing or Financed means outstanding financial assistance 
provided to a Portfolio Concern by a RBIC, whether through:
    (1) Loans, with or without a right to acquire Equity Securities;
    (2) Debt Securities;
    (3) Equity Securities;
    (3) Subordinated Debt With Equity Features;
    (4) Guarantees; or
    (5) Purchases of securities of an Enterprise through or from an 
underwriter as permitted by Sec.  4290.825.
    Guaranty Agreement means the contract entered into by the Secretary 
which is a guarantee backed by the full faith and credit of the United 
States Government as to timely payment of principal and interest on 
Debentures and the Secretary's rights in connection with such 
guarantee.
    Includible Non-Cash Gains means those non-cash gains (as reported 
on SBA Form 468) that are realized in the form of Publicly Traded and 
Marketable securities or investment grade debt instruments. For 
purposes of this definition, investment grade debt instruments means 
those instruments that are rated ``BBB'' or ``Baa'', or better, by 
Standard & Poor's Corporation or Moody's Investors Service, 
respectively. Non-rated debt may be considered to be investment grade 
if a RBIC obtains a written opinion from an investment banking firm 
acceptable to the Secretary stating that the non-rated debt instrument 
is equivalent in risk to the issuer's investment grade debt.
    Institutional Investor means Entity Institutional Investor or 
Individual Institutional Investor, each defined as follows:
    (1) Entity Institutional Investors. Any of the following entities 
if the entity has a net worth (exclusive of unfunded commitments from 
investors) of at least $1 million, or such higher amount as is 
specified in this paragraph (1). (See also Sec.  4290.230(c)(4) for 
limitations on the amount of an Entity Institutional Investor's 
commitment that may be included in Private Capital.)
    (i) A State or National bank, Farm Credit System Institution, trust 
company, savings bank, or savings and loan association.
    (ii) An insurance company.
    (iii) A 1940 Act Investment Company or Business Development Company 
(each as defined in the Investment Company Act of 1940, as amended (15 
U.S.C. 80a-1 et seq.).
    (iv) A holding company of any entity described in paragraph (l)(i), 
(ii) or (iii) of this definition.
    (v) An employee benefit or pension plan established for the benefit 
of employees of the Federal government, any State or political 
subdivision of a State, or any agency or instrumentality of such 
government unit.
    (vi) An employee benefit or pension plan (as defined in the 
Employee

[[Page 32208]]

Retirement Income Security Act of 1974, as amended (Public Law 93-406, 
88 Stat. 829), excluding plans established under Sec.  401(k) of the 
Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
    (vii) A trust, foundation or endowment exempt from Federal income 
taxation under the Internal Revenue Code of 1986, 26 U.S.C. 1, as 
amended.
    (viii) A corporation, partnership or other entity with a net worth 
(exclusive of unfunded commitments from investors) of more than $10 
million.
    (ix) A State, a political subdivision of a State, or an agency or 
instrumentality of a State or its political subdivision.
    (x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors 
described in paragraphs (l)(i) through (ix) of this definition, each of 
whom must have at least a 10 percent ownership interest in the entity.
    (xi) Any other entity that the Secretary determines to be an 
Institutional Investor.
    (2) Individual Institutional Investor. (i) Any of the following 
individuals if he/she is also a permanent resident of the United 
States:
    (A) An individual who is an Accredited Investor (as defined in the 
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose 
commitment to the RBIC is backed by a letter of credit from a State or 
National bank acceptable to the Secretary.
    (B) An individual whose personal net worth is at least $2 million 
and at least ten times the amount of his or her commitment to the RBIC. 
The individual's personal net worth must not include the value of any 
equity in his or her most valuable residence.
    (C) An individual whose personal net worth, not including the value 
of any equity in his or her most valuable residence, is at least $10 
million.
    (ii) Any individual who is not a permanent resident of the United 
States but who otherwise satisfies paragraph (2)(i) of this definition 
provided such individual has irrevocably appointed an agent within the 
United States for the service of process.
    Investment Adviser/Manager means any Person who furnishes advice or 
assistance with respect to operations of a RBIC under a written 
contract executed in accordance with the provisions of Sec.  4290.510.
    Lending Institution means a concern that is operating under 
regulations of a state or Federal licensing, supervising, or examining 
body, or whose shares are publicly traded and listed on a recognized 
stock exchange or is listed in the Automated Quotation System of the 
National Association of Securities Dealers (NASDAQ) and which has 
assets in excess of $500 million; and which, in either case, holds 
itself out to the public as engaged in the making of commercial and 
industrial loans and whose lending operations are not for the purpose 
of financing its own or an Associate's sales or business operations.
    Leverage means financial assistance provided to a RBIC by the 
Secretary either through the purchase or guaranty of a RBIC's 
Debentures and any other SBA financial assistance evidenced by a 
security of the RBIC.
    Leverageable Capital means Regulatory Capital, excluding unfunded 
commitments.
    LLC RBIC has the meaning set forth in the definition of RBIC in 
this section.
    Loan means a transaction evidenced by a debt instrument with no 
provision for you to acquire Equity Securities.
    Loans and Investments means Portfolio securities, assets acquired 
in liquidation of Portfolio securities, operating Enterprises acquired, 
and notes and other securities received, as set forth in the Statement 
of Financial Position on SBA Form 468.
    Management Expenses has the meaning set forth in Sec.  4290.520.
    NAICS Manual means the latest issue of the North American 
Industrial Classification System (NAICS) Manual, prepared by the Office 
of Management and Budget, and available from the U.S. Government 
Printing Office, Superintendent of Documents, P.O. Box 371954, 
Pittsburgh, PA, 15250-7954.
    1940 Act Company means a RBIC which is registered under the 
Investment Company Act of 1940.
    1980 Act Company means a RBIC which is registered under the Small 
Business Investment Incentive Act of 1980.
    Operational Assistance means management, marketing, and other 
technical assistance that assists a Smaller Enterprise with its 
business development.
    Original Issue Price means the price paid by the purchaser for 
securities at the time of issuance.
    Participation Agreement means an agreement between the Secretary 
and an Applicant licensed as a RBIC pursuant to Sec.  4290.390 of this 
part, that details the RBIC's operating plan and investment criteria 
and requires the RBIC to operate pursuant to the Act and this part.
    Partnership RBIC has the meaning set forth in the definition of 
RBIC in this section.
    Person means a natural person or legal entity.
    Pool means an aggregation of guaranteed Debentures approved by the 
Secretary.
    Portfolio means the securities representing a RBIC's total 
outstanding Financings of Enterprises. It does not include idle funds 
or assets acquired in liquidation of Portfolio securities.
    Portfolio Concern means any Enterprise Assisted by a RBIC.
    Principal Office means the location where the greatest number of 
the Enterprise's employees at any one location perform their work. 
However, for those Enterprises whose ``primary industry'' (see 13 CFR 
121.107) is service or construction (see 13 CFR 121.201), the 
determination of principal office excludes the Enterprise's employees 
who perform the majority of their work at job-site locations to fulfill 
specific contract obligations.
    Private Capital has the meaning set forth in Sec.  4290.230.
    Publicly Traded and Marketable means securities that are salable 
without restriction or that are salable within 12 months pursuant to 
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by 
the holder thereof, and are of a class which is traded on a regulated 
stock exchange, or is listed in NASDAQ, or has, at a minimum, at least 
two market makers as defined in the relevant sections of the Securities 
Exchange Act of 1934, as amended (15 U.S.C. 77b et seq.), and in all 
cases the quantity of which can be sold over a reasonable period of 
time without having an adverse impact upon the price of the stock.
    Qualified Non-private Funds means:
    (1) Funds directly or indirectly invested in any RBIC or Applicant 
on or after May 13, 2002 by any Federal agency other than USDA under a 
provision of law explicitly mandating the inclusion of those funds in 
the definition of ``Private Capital;'' and
    (2) The aggregate amount of funds invested in any Applicant or RBIC 
by one or more States, or any political subdivisions, agencies or 
instrumentalities thereof, including any guarantee extended by such 
entities.
    Regulatory Capital means Private Capital, excluding non-cash assets 
contributed to a RBIC or an Applicant unless such assets have been 
converted to cash or have been approved by the Secretary for inclusion 
in Regulatory Capital. For purposes of this definition, sales of 
contributed non-cash assets with recourse or borrowings against such 
assets shall not constitute a conversion to cash.

[[Page 32209]]

    Relevant Venture Capital Finance means Equity Capital in Rural 
Business Concerns or benefiting Rural Areas.
    Retained Earnings Available for Distribution means Undistributed 
Net Realized Earnings less any Unrealized Depreciation on Loans and 
Investments (as reported on SBA Form 468), and represents the amount 
that a RBIC may distribute to investors as a profit Distribution, or 
transfer to Private Capital.
    Rural Area means an area that is located outside a standard 
metropolitan statistical area, or within a community that has a 
population of 50,000 or less inhabitants. As used in this definition, 
``community'' means any area outside of a metropolitan statistical area 
(MSA) or any territory within an MSA that is not within an urbanized 
area, all as defined by the Bureau of the Census of the United States 
Department of Commerce (Census Bureau) at the last decennial census.
    Rural Business Concern means an Enterprise whose Principal Office 
is located in a Rural Area.
    Rural Business Concern Investment means a Financing in a Rural 
Business Concern whose Principal Office was located in a Rural Area at 
the time of the initial Financing.
    Rural Business Investment Company or RBIC means a corporation 
organized as required by Sec.  4290.100 (Corporate RBIC), a limited 
partnership organized as required by Sec. Sec.  4290.100 and 4290.160 
(Partnership RBIC), or a limited liability company organized as 
required by Sec. Sec.  4290.100 and 4290.160 (LLC RBIC), that has been 
licensed as a RBIC pursuant to Sec.  4290.390.
    SBA means the U.S. Small Business Administration, an agency of the 
Federal Government headquartered at 409 Third Street, SW, Washington, 
DC 20416.
    Secondary Relative of an individual means:
    (1) A grandparent, grandchild, or any other ancestor or lineal 
descendent who is not a Close Relative;
    (2) An uncle, aunt, nephew, niece, or first cousin; or
    (3) A spouse of any person described in paragraph (1) or (2) of 
this definition.
    Secretary means the Secretary of Agriculture.
    Small Business Concern means a for-profit Smaller Enterprise that 
meets the definition of ``business concern'' in 13 CFR 121.105 and 
that, together with its Affiliates, meets the small business size 
standards set forth in 13 CFR 121.201 or 13 CFR 121.301(c) for the 
industry in which it is primarily engaged on the date the Financing is 
made (the term ``primarily engaged'' for purposes of this definition is 
defined in 13 CFR 121.107).
    Small Business Concern Investments means a Financing in the form of 
Equity Capital in an Enterprise that qualified as both a Smaller 
Enterprise and a Small Business Concern at the time of the initial 
Financing.
    Small Business Investment Company or SBIC means a Licensee, as that 
term is defined in 13 CFR 107.50.
    Smaller Enterprise means any Rural Business Concern that, together 
with its Affiliates and by itself--
    (1) Meets the size standard established by SBA in 13 CFR 121.201, 
corresponding to each type of economic activity or industry described 
in the NAICS Manual for the industry in which it is primarily engaged 
on the date on which the Financing is made (the term ``primarily 
engaged'' for purposes of this definition is defined in 13 CFR 
121.107); or
    (2) Has--
    (i) A net financial worth of not more than $6,000,000 as of the 
date on which the Financing is made; and
    (ii) An average net income for the two year period preceding the 
date on which the Financing is made of not more than $2,000,000, after 
Federal income taxes (excluding any carryover losses), except that, for 
purposes of this clause, if the Rural Business Concern is not required 
by law to pay Federal income taxes at the enterprise level, but is 
required to pass income through to the shareholders, partners, 
beneficiaries, or other equitable owners of the Rural Business Concern, 
its net income is determined by allowing a deduction in an amount equal 
to the total of--
    (A) If it is not required by law to pay State (and local, if any) 
income taxes at the enterprise level, the net income (determined 
without regard to this paragraph (2)(ii)(A)) multiplied by the marginal 
State income tax rate (or by the combined State and local income tax 
rates, as applicable) that would have applied if the Rural Business 
Concern were a corporation; and
    (B) The net income (so determined) less any deduction for State 
(and local) income taxes calculated under paragraph (2)(ii)(A) of this 
definition multiplied by the marginal Federal income tax rate that 
would have applied if the Rural Business Concern were a corporation.
    Smaller Enterprise Investment means a Financing in the form of 
Equity Capital in an Enterprise that qualified as a Smaller Enterprise 
at the time of the initial Financing.
    State means each of the 50 States, the District of Columbia, the 
Commonwealth of Puerto Rico, Guam, the Virgin Islands of the United 
States, American Samoa, the Commonwealth of the Northern Mariana 
Islands, the Trust Territory of the Pacific Islands, and the Federated 
States of Micronesia.
    Subordinated Debt means a debt of a debtor, common to more than one 
creditor, that is the subject of an agreement between two groups of 
creditors (whose claims would otherwise be in parity) setting forth the 
circumstances under which the claims of one group (senior creditors) 
shall be satisfied out of the resources of the common debtor that would 
otherwise be available for the payment of the claims of the other group 
(junior creditors).
    Subordinated Debt With Equity Features means a Subordinated Debt 
obligation that gives to the junior creditor such additional 
compensation as warrants, conversion rights, any other interest in the 
debtor's equity, profits, increased future revenue, or a royalty 
interest.
    Trust means a legal entity created for the purpose of holding 
guaranteed Debentures and the guaranty agreement related thereto, 
receiving, holding and making any related payments, and accounting for 
such payments.
    Trust Certificate Rate means a fixed rate determined at the time 
Debentures are pooled.
    Trust Certificates (TCs) means certificates issued by the 
Secretary, the Secretary's agent or Trustee and representing ownership 
of all or a fractional part of a Trust or Pool of Debentures.
    Trustee means the trustee or trustees of a Trust.
    Undistributed Net Realized Earnings means Undistributed Realized 
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
    Unrealized Appreciation means the amount by which a RBIC's 
valuation of each of its Loans and Investments, as determined by its 
board of directors, general partner(s), or managing member(s) in 
accordance with the RBIC's valuation policies, exceeds the cost basis 
thereof.
    Unrealized Depreciation means the amount by which a RBIC's 
valuation of each of its Loans and Investments, as determined by its 
board of directors, general partner(s), or managing member(s) in 
accordance with the RBIC's valuation policies, is below the cost basis 
thereof.
    Unrealized Gain (Loss) on Securities Held means the sum of the 
Unrealized Appreciation and Unrealized Depreciation on all of a RBIC's 
Loans and Investments, less estimated future income tax expense or 
estimated

[[Page 32210]]

realizable future income tax benefit, as appropriate.
    Urban Area means an area containing a city (or its equivalent), or 
any equivalent geographic area determined by the Census Bureau and 
adopted by the Secretary for purposes of this definition (about which 
the Secretary will publish a document in the Federal Register from time 
to time), which had a population of over 150,000 in the last decennial 
census and the urbanized areas containing or adjacent to that city, 
both as determined by the Census Bureau for the last decennial census.
    Urban Area Investment means a Financing in an Enterprise whose 
Principal Office was located in an Urban Area at the time of the 
initial Financing.
    USDA means the U.S. Department of Agriculture, a department of the 
Federal government headquartered at 1400 Independence Avenue, SW., 
Washington, DC 20250.

Subpart C--Qualifications for the RBIC Program

Organizing a RBIC


Sec.  4290.100  Business form.

    (a) Newly-formed for-profit. An Applicant for a RBIC license must 
be a newly formed for-profit entity or, subject to Sec.  4290.150, a 
newly formed for-profit subsidiary of an existing entity. It must be 
organized under the law of a State. An Applicant may be organized as a 
corporation (``Corporate RBIC''), a limited partnership (``Partnership 
RBIC''), or a limited liability company (``LLC RBIC'').
    (b) Purpose. An Applicant must be organized solely for the purpose 
of performing the functions and conducting the activities contemplated 
under the Act: making Developmental Venture Capital investments and 
providing Operational Assistance to eligible Smaller Enterprises.
    (c) Articles. The RBIC's Articles--
    (1) Must specify in general terms:
    (i) The purposes for which the RBIC is formed;
    (ii) The name of the RBIC;
    (iii) The Rural Area or Areas in which it will operate;
    (iv) The place where the RBIC's headquarters will be located; and
    (v) The amount and classes of the RBIC's ownership interests.
    (2) May contain any other provisions consistent with the Act that 
the RBIC may determine is appropriate to adopt to regulate its business 
and the conduct of its affairs.
    (3) Are subject to the Secretary's approval.
    (d) Duration. (1) Partnership RBICs. If you are a Partnership RBIC:
    (i) You must have a minimum duration of 10 years, or two years 
following the maturity of your last-maturing Leverage security, 
whichever is longer. After 10 years, if all Leverage has been repaid or 
redeemed and all amounts due the Secretary, his or her agent, or 
Trustee have been paid, the Partnership RBIC may be terminated by a 
vote of your partners;
    (ii) None of your general partner(s) may be removed or replaced by 
your limited partners without prior written approval of the Secretary;
    (iii) Any transferee of, or successor in interest to, your general 
partner shall have only the rights and liabilities of a limited partner 
prior to the Secretary's written approval of such transfer or 
succession; and
    (iv) You must incorporate all the provisions in this paragraph (d) 
in your limited partnership agreement.
    (2) LLC RBICs. If you are a LLC RBIC, you must have a minimum 
duration of 10 years, or two years following the maturity of your last-
maturing Leverage security, whichever is longer. After 10 years, if all 
Leverage has been repaid or redeemed and all amounts due the Secretary, 
his or her agent, or Trustee have been paid, the LLC RBIC may be 
terminated by a vote of your members.
    (3) Corporate RBICs. If you are a Corporate RBIC, you must have a 
duration of not less than 30 years unless earlier dissolved by the 
shareholders, except that the Corporate RBIC must not dissolve until at 
least two years following the maturity of your last-maturing Leverage 
security.


Sec.  4290.110  Qualified management.

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


Sec.  4290.120  Plan to invest in Rural Areas.

    An Applicant must agree that if licensed as a RBIC, it will make 
Developmental Venture Capital investments in Enterprises that will 
create wealth and job opportunities in Rural Areas and among 
individuals living in those areas.


Sec.  4290.130  Identified Rural Areas.

    A RBIC must identify the specific Rural Area or Areas in which it 
intends to make Developmental Venture Capital investments and provide 
Operational Assistance under the RBIC program. The scope of the 
identified areas must be consistent with Applicant's business plan, 
especially as the plan relates to the Applicant's ability to operate 
actively, soundly, and profitably in such areas.


Sec.  4290.140  Approval of initial Management Expenses.

    A RBIC must have its Management Expenses approved by the Secretary 
at the time it is licensed. (See Sec.  4290.520 for the definition of 
Management Expenses.)


Sec.  4290.150  Management and ownership diversity requirement.

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

[[Page 32211]]

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


Sec.  4290.160  Special rules for Partnership RBICs and LLC RBICs.

    (a) Entity General Partner or Entity Managing Member. (1) A general 
partner of a Partnership RBIC which is a corporation, limited liability 
company or partnership (an ``Entity General Partner''), or a managing 
member of an LLC RBIC which is a corporation, limited liability 
company, or partnership (an ``Entity Managing Member'') shall be 
organized under State law solely for the purpose of serving as the 
general partner or managing member of one or more RBICs, and shall be 
organized for profit.
    (2) The Secretary must approve any person who will serve as an 
officer, director, manager, or general partner of the Entity General 
Partner or Entity Managing Member and of an entity that Controls the 
Entity General Partner or Entity Managing Member. This provision must 
be stated in an Entity General Partner's or Entity Managing Member's 
articles of incorporation or charter and bylaws if a corporation, 
operating agreement if a limited liability company, or partnership 
agreement if a partnership.
    (3) An Entity General Partner or Entity Managing Member is subject 
to the same examination and reporting requirements as a RBIC under 
sections 384K and 384L of the Act. The restrictions and obligations 
imposed upon a RBIC by Sec. Sec.  4290.1810, 4290.30, 4290.410 through 
4290.450, 4290.470, 4290.500, 4290.510, 4290.585, 4290.600, 4290.680, 
4290.690 through 4290.692, and 4290.1910 apply also to an Entity 
General Partner or Entity Managing Member of a RBIC.
    (4) The general partner(s) of your Entity General Partner(s) or 
Entity Managing Member(s) will be considered your general partner.
    (5) If your Entity General Partner or Entity Managing Member is a 
limited partnership, its limited partners may be considered your 
Control Person(s) if they meet the definition for Control Person in 
Sec.  4290.50.
    (b) Liability of general partner of Partnership RBIC. Subject to 
section 384O(b) of the Act, your general partner(s) is not liable 
solely by reason of its status as a general partner for repayment of 
any Leverage or debts you owe to the Secretary unless the Secretary, in 
the exercise of reasonable investment prudence, and with regard to your 
financial soundness, determines otherwise prior to the purchase or 
guaranty of your Leverage. The conditions specified in Sec.  4290.1810 
and Sec.  4290.1910 apply to all general partners.
    (c) Special Leverage requirement for Partnership RBICs and LLC 
RBICs. Before your first issuance of Leverage, you must furnish the 
Secretary with evidence that you qualify as a partnership for tax 
purposes, either by a ruling from the Internal Revenue Service or by an 
opinion of counsel.


Sec.  4290.165  Obligations of Control Persons.

    All Control Persons are bound by the provisions of sections 384O 
and 384P of the Act and by the conflict-of-interest rules under Sec.  
4290.730. The term RBIC, as used in Sec. Sec.  4290.30, 4290.460, and 
4290.680, includes all of the RBIC's Control Persons.

Capitalizing a RBIC


Sec.  4290.200  Adequate capital for RBICs.

    You must meet the requirements of Sec. Sec.  4290.200 through 
4290.230 in order to qualify as a RBIC and to receive Leverage.


Sec.  4290.210  Minimum capital requirements for RBICs.

    (a) General Rule. You must have Regulatory Capital of at least 
$10,000,000, or such lesser amount (but not less than $5,000,000) as 
the Secretary may prescribe by notice published from time to time in 
the Federal Register, and Leverageable Capital of at least $500,000, to 
become a RBIC.
    (b) Exception. (1) The Secretary in his or her sole discretion and 
based on a showing of special circumstances and good cause may license 
an Applicant with Regulatory Capital of at least $2,500,000, but only 
if the Applicant:
    (i) Has satisfied all eligibility criteria for licensing as a RBIC 
as described in Sec.  4290.390(a) of this part, except the capital 
requirement specified in paragraph (a)(1) of that section, as 
determined solely by the Secretary;
    (ii) Has a viable business plan reasonably projecting profitable 
operations; and
    (iii) Has a reasonable timetable for achieving Regulatory Capital 
of at least $10,000,000.

    (2) A RBIC licensed under this exception is not eligible to receive 
Leverage until it has complied with paragraph (a) of this section.


Sec.  4290.230  Private Capital for RBICs.

    (a) General. Private Capital means the contributed capital of a 
RBIC, plus unfunded binding commitments by Institutional Investors 
(including commitments evidenced by a promissory note) to contribute 
capital to a RBIC.
    (b) Contributed capital. For purposes of this section, contributed 
capital means the paid-in capital and paid-in surplus of a Corporate 
RBIC, the members' contributed capital of a LLC RBIC, or the partners' 
contributed capital of a Partnership RBIC, in each case subject to the 
limitations in paragraph (c) of this section.
    (c) Exclusions from Private Capital. Private Capital does not 
include:
    (1) Funds borrowed by an Applicant or a RBIC from any source.
    (2) Funds obtained through the issuance of Leverage.
    (3) Funds obtained directly or indirectly from the Federal 
government or any State (including by a political subdivision, agency 
or instrumentality of the Federal government or a State), except that 
the following categories of such funds are not excluded from Private 
Capital--
    (i) Funds obtained directly or indirectly from the business 
revenues (excluding any governmental appropriation) of any federally-
chartered or government-sponsored enterprise established prior to May 
13, 2002;
    (ii) Funds invested by an employee welfare benefit plan or pension 
plan; and
    (iii) Qualified Non-private Funds in an amount not to exceed 33 
percent of the total Private Capital of any Applicant or RBIC, 
provided, however, that in no event may any investor or

[[Page 32212]]

investors of Qualified Non-private Funds have the power to Control, 
directly or indirectly, the management, board of directors, general 
partners, or members of the RBIC.
    (4) Any portion of an unfunded commitment from an Institutional 
Investor with a net worth of less than $10 million that exceeds 10 
percent of such Institutional Investor's net worth.
    (5) An unfunded commitment from an investor if the Secretary 
determines that the collectibility of the commitment is questionable.
    (d) Non-cash capital contributions. Capital contributions in a form 
other than cash are subject to the limitations in Sec.  4290.240 of 
this part.
    (e) Contributions with borrowed funds. You may not accept any 
capital contribution made with funds borrowed by a Person seeking to 
own an equity interest (whether direct or indirect, beneficial or of 
record) of at least 10 percent of your Private Capital. This exclusion 
does not apply if:
    (1) Such Person's net worth is at least twice the amount borrowed; 
or
    (2) The Secretary gives his or her prior written approval of the 
capital contribution.


Sec.  4290.240  Limitations on non-cash capital contributions in 
Private Capital.

    Non-cash capital contributions to a RBIC or Applicant are included 
in Private Capital only if they are approved by the Secretary and they 
fall into one of the following categories:
    (a) Direct obligations of, or obligations guaranteed as to 
principal and interest by, the United States having a term of no more 
than one year.
    (b) Services rendered or to be rendered to you, priced at no more 
than their fair market value.
    (c) Other non-cash assets approved by the Secretary.

Subpart D--Application and Approval Process for RBIC Licensing


Sec.  4290.300  When and how to apply for a RBIC License.

    (a) Notice of Funds Availability (``NOFA''). The Secretary will 
publish a NOFA in the Federal Register advising potential applicants of 
the availability of funds for the RBIC program and inviting the 
submission of applications. The NOFA may specify limitations, special 
rules, procedures, and restrictions for a particular funding round. 
When submitting its application, an Applicant must comply with both 
this part 4290 and any requirements specified in the NOFA, including 
the opening and closing dates for submission of an application.
    (b) Application form. An Applicant must apply for a RBIC license 
using the application packet provided by the Secretary. Upon receipt of 
a completed application packet, the Secretary may request clarifying or 
technical information on the materials submitted as part of the 
application.


Sec.  4290.310  Contents of application.

    Each Applicant must submit a complete application, including the 
following:
    (a) Management team experience. The Applicant must provide 
information generally as to the background, capability, education, 
reputation and training of its management team, including general 
partners, managers, officers, key personnel, and investment committee 
and governing board members. The Applicant also must provide 
information specifically on these individuals' qualifications and 
reputation in the areas of Community Development Finance and/or 
Relevant Venture Capital Finance, including the impact of these 
individuals' activities in these areas.
    (b) Amount of Regulatory Capital. The Applicant must indicate the 
amount of Regulatory Capital it has raised or proposes to raise, which 
amount must satisfy the requirements of Sec.  4290.210(a) of this part, 
unless the Applicant indicates that it has raised or proposes to raise 
at least $2,500,000 and is applying for an exception pursuant to Sec.  
4290.210(b) of this part and includes in its application--
    (1) A showing of special circumstances and good cause for the 
exception:
    (2) Will satisfy all eligibility criteria for licensing as a RBIC 
as set forth in Sec.  4290.390(a) of this part, except the capital 
requirement specified in paragraph (a)(1) of that section, as 
determined solely by the Secretary;
    (3) Has a viable business plan reasonably projecting profitable 
operations; and
    (4) Has a reasonable timetable for achieving Regulatory Capital in 
an amount that satisfies the requirements of Sec.  4290.210(a) of this 
part.
    (c) Comprehensive business plan. The Applicant must submit a 
comprehensive business plan covering at least a five-year period, 
addressing the specific items described in Sec.  4290.320, and which 
demonstrates that the Applicant has the capacity to operate 
successfully as a RBIC.


Sec.  4290.320  Contents of comprehensive business plan.

    (a) Plan for Developmental Venture Capital investing. The Applicant 
must describe its plans and strategies for how it proposes to make 
successful Developmental Venture Capital investments in identified 
Rural Areas.
    (b) Working with Rural Area community-based organizations. The 
Applicant must describe how it intends to work with community-based 
organizations and local entities (including local economic development 
companies, local lenders, and local investors) in order to facilitate 
its Developmental Venture Capital investments.
    (c) Market analysis. The Applicant must provide an analysis of the 
Rural Areas in which it intends to focus its Developmental Venture 
Capital investments and Operational Assistance to Smaller Enterprises, 
demonstrating that the Applicant understands the market and the unmet 
Equity Capital needs in such areas and how its activities will meet 
these unmet needs and will have a positive economic impact on those 
areas. The Applicant also must analyze the extent of the demand in such 
areas for Developmental Venture Capital investments and any factors or 
trends that may affect the Applicant's ability to make effective 
Developmental Venture Capital investments.
    (d) Operational capacity and investment strategies. The Applicant 
must submit information concerning its policies and procedures for 
underwriting and approving its Developmental Venture Capital 
investments, monitoring its portfolio, and maintaining internal 
controls and operations.
    (e) Plan to raise Regulatory Capital. The Applicant must include a 
detailed description of how it plans to raise its Regulatory Capital if 
it has not yet done so at the time of application. The Applicant must 
discuss its potential sources of Regulatory Capital, the estimated 
timing for raising such funds, and the extent of the expressions of 
interest to commit such funds to the Applicant.
    (f) Plan for providing Operational Assistance. The Applicant must 
describe how it plans to use its grant funds to provide Operational 
Assistance to Smaller Enterprises in which it makes or expects to make 
Developmental Venture Capital investments. Its plan must address the 
types of Operational Assistance it proposes to provide, and how it 
plans to provide the Operational Assistance through the use of licensed 
professionals, when necessary, either from its own staff or from 
outside entities.
    (g) Projected amount of investment in Rural Areas. The Applicant 
must

[[Page 32213]]

describe how it proposes to meet the requirements set forth in Sec.  
4290.700. An Applicant must project the amount of its total Regulatory 
Capital and Leverage that it proposes to invest in Smaller Enterprises 
and in Rural Business Concerns that are not Smaller Enterprises. The 
Applicant also must describe the amount of its total Regulatory Capital 
and Leverage that it proposes to invest in Urban Area Investments.
    (h) Projected impact. The Applicant must describe the criteria and 
economic measurements to be used to evaluate whether and to what extent 
it has met the objectives of the RBIC program. It must include:
    (1) A description of the extent to which it will concentrate its 
Developmental Venture Capital investments and Operational Assistance 
activities in identified Rural Areas;
    (2) An estimate of the economic development benefits to be created 
within identified Rural Areas over the next five years or more as a 
result of its activities;
    (3) A description of the criteria to be used to measure the 
benefits created as a result of its activities;
    (4) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
RBIC program.
    (i) Affiliates and business relationships. The Applicant must 
submit information describing the management and financial strength of 
any parent or holding entity, affiliated firm or entity, or any other 
firm or entity essential to the success of the Applicant's business 
plan.


Sec.  4290.330  Grant issuance fee.

    The Applicant must pay to the Secretary a grant issuance fee of 
$5,000. An Applicant must submit this fee in advance, at the time of 
application submission.

Subpart E--Evaluation and Selection of RBICs


Sec.  4290.340  Evaluation and selection--general.

    The Secretary on behalf of USDA and the Administrator on behalf of 
SBA, in their sole discretion, will evaluate and select an Applicant to 
participate in the RBIC program based on a review of the Applicant's 
application materials, interviews or site visits with the Applicant (if 
any), and background investigations conducted by the Secretary and 
other Federal agencies. The Secretary's evaluation and selection 
process is intended to--
    (a) Ensure that Applicants are evaluated on a competitive basis and 
in a fair and consistent manner;
    (b) Take into consideration the unique proposals presented by 
Applicants;
    (c) Ensure that each Applicant licensed as a RBIC can fulfill 
successfully the goals of its comprehensive business plan; and
    (d) Ensure that the Secretary selects Applicants in such a way as 
to promote nationwide geographic distribution of Developmental Venture 
Capital investments.


Sec.  4290.350  Eligibility and completeness.

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


Sec.  4290.360  Initial review of Applicant's management team's 
qualifications.

    The Secretary will review the information submitted by the 
Applicant concerning the qualifications of the Applicant's management 
team to determine in his or her sole discretion whether the team meets 
the minimum requirements deemed by the Secretary to be critical to 
successful venture capital investing. In making this determination, the 
Secretary will consider, among other things, the general business 
reputation of the owners and managers of the Applicant. Only those 
Applicants considered to have a management team qualified for venture 
capital investing will be further considered for selection as a RBIC.


Sec.  4290.370  Evaluation criteria.

    Of those Applicants whose management team is considered qualified 
for venture capital investing and who have submitted an eligible and 
complete application, the Secretary on behalf of USDA and the 
Administrator on behalf of SBA, in their sole discretion, will evaluate 
and select an Applicant for participation in the RBIC program by 
considering the following criteria--
    (a) Whether the Applicant's management team has the knowledge, 
experience, and capability necessary to manage a sound, economically 
viable RBIC and to comply with the Act;
    (b) The quality of the Applicant's comprehensive business plan in 
terms of meeting the objectives of the RBIC program;
    (c) The likelihood that the Applicant will achieve the goals 
described in its comprehensive business plan;
    (d) The strength and likelihood for success of the Applicant's 
operations and investment strategies, including whether the Applicant 
has projected adequate profitability and financial soundness;
    (e) Whether the Applicant will be able to operate soundly and 
profitably over the long term;
    (f) Whether the Applicant will be able to operate actively in its 
identified Rural Areas in accordance with its business plan;
    (g) The need for Developmental Venture Capital investments in the 
Rural Areas in which the Applicant intends to invest;
    (h) The extent to which the Applicant will concentrate its 
activities on serving Smaller Enterprises and Small Business Concerns 
located in the Rural Areas in which it intends to invest, including the 
ratio of resources that it proposes to invest in such Enterprises as 
compared to other Enterprises;
    (i) The Applicant's demonstrated understanding of the markets in 
the Rural Areas in which it intends to focus its activities;
    (j) The likelihood that and the time frame within which the 
Applicant will be able to raise the Regulatory Capital it proposes to 
raise for its investments;
    (k) The strength of the Applicant's proposal to provide Operational 
Assistance to Smaller Enterprises in which it plans to invest;
    (l) The extent to which the activities proposed by the Applicant 
will promote economic development and the creation of wealth and job 
opportunities in the Rural Areas in which it intends to invest and 
among individuals living in such Areas; and
    (m) The strength of the Applicant's application compared to 
applications submitted by other Applicants intending to invest in the 
same or proximate Rural Areas.


Sec.  4290.380  Selection.

    From among the Applicants that have submitted eligible and complete 
applications, the Secretary on behalf of USDA and the Administrator on 
behalf of SBA, in their sole discretion, will select some, all, or none 
of such Applicants to participate in the RBIC program. Selection will 
entitle the Applicant to proceed with obtaining a license as a RBIC but 
only if the Applicant also meets the conditions set forth in Sec.  
4290.390.


Sec.  4290.390  Licensing as a RBIC.

    (a) Eligibility criteria for licensing as a RBIC. Each selected 
Applicant must

[[Page 32214]]

meet the following conditions before it is eligible to be licensed as a 
RBIC:
    (1) Raise, within a time period specified by the Secretary but not 
to exceed 12 months after selection under Sec.  4290.380 the specific 
amount of Regulatory Capital that the Applicant had projected in its 
application that it would raise (see Sec.  4290.210 for additional 
information);
    (2) Raise $500,000 in Leverageable Capital as required by Sec.  
4290.210;
    (3) Complete and submit to the Secretary all legal and other 
documentation concerning the RBIC, including but not limited to its 
Articles and updated financial information concerning the RBIC in order 
to qualify for a Leverage commitment; and
    (4) Enter into a Participation Agreement with the Secretary.
    (b) Licensing as a RBIC. If the selected Applicant has 
satisfactorily met all the conditions specified in paragraph (a) of 
this section, as determined within the sole discretion of the 
Secretary, then the Secretary on behalf of USDA and the Administrator 
on behalf of SBA will license the Applicant as a RBIC.
    (c) Failure to meet eligibility criteria for licensing. Each 
selected Applicant that does not meet the eligibility criteria for 
licensing described in paragraph (a) of this section, within a time 
period specified by the Secretary, will not be licensed as a RBIC. 
Failure to meet any of those conditions, including but not limited to 
failure to raise the projected Regulatory Capital within the required 
time period, will cause the Applicant's selection to lapse. The 
Secretary will not restore the selection of such an Applicant after the 
expiration of that time period. After the expiration of that time 
period, an Applicant that is not licensed as a RBIC must cease to 
represent itself as a participant or potential participant in the RBIC 
program.
    (d) Effect of a RBIC license. The Participation Agreement executed 
by the Secretary with each Applicant licensed as a RBIC will include 
the following:
    (1) Approval to operate as a RBIC under the Act;
    (2) A commitment of Leverage; and
    (3) An Operational Assistance grant award.

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

Changes in Control or Ownership of RBIC


Sec.  4290.400  Changes in ownership of 10 percent or more of RBIC but 
no change of Control.

    You must obtain the Secretary's prior written approval for any 
proposed transfer or issuance of ownership interests that results in 
the ownership (beneficial or of record) by any Person, or group of 
Persons acting in concert, of at least 10 percent of any class of your 
stock, partnership capital or membership interests.


Sec.  4290.410  Changes in Control of RBIC (through change in ownership 
or otherwise).

    You must obtain the Secretary's prior written approval for any 
proposed transaction or event that results in Control by any Person(s) 
not previously approved by the Secretary.


Sec.  4290.420  Prohibition on exercise of ownership or Control rights 
in RBIC before approval.

    Without the Secretary's prior written approval, no change of 
ownership or Control may take effect and no officer, director, employee 
or other Person acting on your behalf shall:
    (a) Register on your books any transfer of ownership interest to 
the proposed new owner(s);
    (b) Permit the proposed new owner(s) to exercise voting rights with 
respect to such ownership interest (including directly or indirectly 
procuring or voting any proxy, consent or authorization as to such 
voting rights at any meeting of shareholders, partners or members);
    (c) Permit the proposed new owner(s) to participate in any manner 
in the conduct of your affairs (including exercising control over your 
books, records, funds or other assets; participating directly or 
indirectly in any disposition thereof; or serving as an officer, 
director, partner, manager, employee or agent); or
    (d) Allow ownership or Control to pass to another Person.


Sec.  4290.430  Notification of transactions that may change ownership 
or Control.

    You must promptly notify the Secretary as soon as you have 
knowledge of transactions or events that may result in a transfer of 
Control or ownership of at least 10 percent of your Regulatory Capital. 
If the effect of a particular transaction or event is unclear, you must 
report all pertinent facts to the Secretary.


Sec.  4290.440  Standards governing prior approval for a proposed 
transfer of Control.

    The Secretary's approval of a proposed transfer of Control is 
contingent upon full disclosure of the real parties in interest, the 
source of funds for the new owners' interest, and other data requested 
by the Secretary. As a condition of approving a proposed transfer of 
control, the Secretary may:
    (a) Require an increase in your Regulatory Capital;
    (b) Require the new owners or the transferee's Control Person(s) to 
assume, in writing, personal liability for your Leverage, effective 
only in the event of their direct or indirect participation in any 
transfer of Control not approved by the Secretary; or
    (c) Require compliance with any other conditions set by the 
Secretary, including compliance with the requirements for minimum 
capital and management-ownership diversity in effect at such time for 
new RBICs.


Sec.  4290.450  Notification of pledge of RBIC's shares.

    (a) You must notify the Secretary in writing, within 30 calendar 
days, of the terms of any transaction in which:
    (1) Any Person, or group of Persons acting in concert, pledges 
shares of your stock (or equivalent ownership interests) as collateral 
for indebtedness; and
    (2) The shares pledged constitute at least 10 percent of your 
Regulatory Capital.
    (b) If the transaction creates a change of ownership or Control, 
you must comply with Sec.  4290.400 or Sec.  4290.410, as appropriate.

Restrictions on Common Control or Ownership of Two or More RBICs


Sec.  4290.460  Restrictions on Common Control or ownership of two (or 
more) RBICs.

    Without the Secretary's prior written approval, you must not have 
an officer, director, manager, Control Person, or owner (with a direct 
or indirect ownership interest of at least 10 percent) who is also:
    (a) An officer, director, manager, Control Person, or owner (with a 
direct or indirect ownership interest of at least 10 percent) of 
another RBIC; or
    (b) An officer or director of any Person that directly or 
indirectly controls, or is controlled by, or is under Common Control 
with, another RBIC.

Change in Structure of RBIC


Sec.  4290.470  Prior approval of merger, consolidation, or 
reorganization of RBIC.

    You may not merge, consolidate, change form of organization

[[Page 32215]]

(corporation, limited liability company, or limited partnership) or 
reorganize without the Secretary's prior written approval. Any such 
merger, consolidation, or change of form is subject to Sec.  4290.440.


Sec.  4290.480  Prior approval of changes to RBIC's business plan.

    Without the Secretary's prior written approval, no change in your 
business plan, upon which you were selected and licensed as a RBIC, may 
take effect.

Subpart G--Managing the Operations of a RBIC

General Requirements


Sec.  4290.500  Lawful operations under the Act.

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


Sec.  4290.502  Representations to the public.

    You may not represent or imply to anyone that the Secretary, the 
U.S. Government, or any of its agencies or officers has approved any 
ownership interests you have issued, obligations you have incurred, or 
Financings you have made. You must include a statement to this effect 
in any solicitation provided to investors. Example: You may not 
represent or imply that ``USDA stands behind the RBIC'' or that ``Your 
capital is safe because the Secretary's experts review proposed 
investments to make sure they are safe for the RBIC.''


Sec.  4290.503  RBIC's adoption of an approved valuation policy.

    (a) Valuation guidelines. You must prepare, document and report the 
valuations of your Loans and Investments in accordance with the 
Valuation Guidelines for SBICs issued by SBA. These guidelines may be 
obtained from SBA's Investment Division or at http://www.sba.gov/INV/valuation.pdf.
    (b) The Secretary's approval of valuation policy. You must have a 
written valuation policy approved by the Secretary for use in 
determining the value of your Loans and Investments. You must either:
    (1) Adopt without change the model valuation policy set forth in 
section III of the Valuation Guidelines for SBICs; or
    (2) Obtain the Secretary's prior written approval of an alternative 
valuation policy.
    (c) Responsibility for valuations. Your board of directors, 
managing member(s), or general partner(s) will be solely responsible 
for adopting your valuation policy and for using it to prepare 
valuations of your Loans and Investments for submission to the 
Secretary. If the Secretary reasonably believes that your valuations, 
individually or in the aggregate, are materially misstated, he or she 
reserves the right to require you to engage, at your expense, an 
independent third party acceptable to the Secretary to substantiate the 
valuations.
    (d) Frequency of valuations. (1) You must value your Loans and 
Investments at the end of the second quarter of your fiscal year, and 
again at the end of your fiscal year.
    (2) On a case-by-case basis, the Secretary may require you to 
perform valuations more frequently.
    (3) You must report material adverse changes in valuations at least 
quarterly, within 30 days following the close of the quarter.
    (e) Review of valuations by independent public accountant. (1) For 
valuations performed as of the end of your fiscal year, your 
independent public accountant must review your valuation procedures and 
the implementation of such procedures, including adequacy of 
documentation.
    (2) The independent public accountant's report on your audited 
annual financial statements (SBA Form 468) must include a statement 
that your valuations were prepared in accordance with your approved 
valuation policy.


Sec.  4290.504  Equipment and office requirements.

    (a) Computer capability. You must have a personal computer with 
access to the Internet and be able to use this equipment to prepare 
reports, for which you will receive the necessary software, and 
transmit such reports to the Secretary. In addition, you must have the 
capability to send and receive electronic mail.
    (b) Facsimile capability. You must be able to receive facsimile 
messages 24 hours per day at your primary office.
    (c) Accessible office. You must maintain an office that is 
convenient to the public and is open for business during normal working 
hours.


Sec.  4290.506  Safeguarding the RBIC's assets/Internal controls.

    You must adopt a plan to safeguard your assets and monitor the 
reliability of your financial data, personnel, Portfolio, funds and 
equipment. You must provide your bank and custodian with a certified 
copy of your resolution or other formal document describing your 
control procedures.


Sec.  4290.507  Violations based on false filings and nonperformance of 
agreements with the Secretary or SBA.

    The following shall constitute a violation of this part:
    (a) Nonperformance. Failure to perform any of the requirements of 
any Debenture or of any written agreement with the Secretary or SBA.
    (b) False statement. In any document submitted to the Secretary or 
SBA:
    (1) Any false statement knowingly made; or
    (2) Any misrepresentation of a material fact; or
    (3) Any failure to state a material fact.
    (4) A material fact is any fact that is necessary to make a 
statement not misleading in light of the circumstances under which the 
statement was made.


Sec.  4290.508  Compliance with non-discrimination laws and regulations 
applicable to federally-assisted programs.

    In conducting your operations and providing Assistance to your 
Portfolio Concerns, you must comply with Title VI of the Civil Rights 
Act of 1964 (42 U.S.C. 2000d-1 et seq.), the Age Discrimination Act of 
1975 (Pub. L. 94-135, Title III), and Title V of the Equal Credit 
Opportunity Act (15 U.S.C. 1691 et seq.) and the following regulations 
promulgated by USDA to implement and enforce such laws: 7 CFR part 15.


Sec.  4290.509  Employment of USDA or SBA officials.

    (a) Without the Secretary's prior written approval, for a period of 
two years after the date of your most recent issuance of Leverage or 
after the receipt of any assistance as defined in paragraph (b) of this 
section, you are not permitted to employ, offer employment to, or 
retain for professional services, any person who:
    (1) Served as an officer, attorney, agent, or employee of SBA or 
USDA within one year before such date; and
    (2) In that capacity, occupied a position or engaged in activities 
which, in SBA's or the Secretary's determination, involved discretion 
with respect to the issuing of Leverage or the granting of such 
assistance.
    (b) For purposes of this section, ``assistance'' means financial, 
contractual, grant, managerial, or other aid, including licensing, 
certifications, and other eligibility determinations made by USDA or 
SBA, and any express decision to compromise or defer possible 
litigation or other adverse action.

[[Page 32216]]

Management and Compensation


Sec.  4290.510  Approval of RBIC's Investment Adviser/Manager.

    (a) General. You may employ an Investment Adviser/Manager who will 
be subject to the supervision of your board of directors, managing 
member(s), or general partner(s). If you have Leverage or plan to seek 
Leverage, you must obtain the Secretary's prior written approval of the 
management contract. Approval of an Investment Adviser/Manager for one 
RBIC does not indicate approval of that manager for any other RBIC.
    (b) Management contract. The contract must:
    (1) Specify the services the Investment Adviser/Manager will render 
to you and to your Portfolio Concerns; and
    (2) Indicate the basis for computing Management Expenses.
    (c) Material change to approved management contract. Any proposed 
material change must be approved by both you and the Secretary in 
advance. If you are uncertain whether the change is material, submit 
the proposed revision to the Secretary.


Sec.  4290.520  Management Expenses of a RBIC.

    The Secretary must approve your initial Management Expenses and any 
increases in your Management Expenses.
    (a) Definition of Management Expenses. Management Expenses include:
    (1) Salaries;
    (2) Office expenses;
    (3) Travel;
    (4) Business development, including finders' fees;
    (5) Office and equipment rental;
    (6) Bookkeeping; and
    (7) Expenses related to developing, investigating and monitoring 
investments.
    (b) Management Expenses do not include services provided by 
specialized outside consultants, outside lawyers and independent public 
accountants, if they perform services not generally performed by a 
venture capital company.

Cash Management by a RBIC


Sec.  4290.530  Restrictions on investments of idle funds by RBICs.

    (a) Permitted investments of idle funds. Funds not invested in 
Portfolio Concerns must be maintained in:
    (1) Direct obligations of, or obligations guaranteed as to 
principal and interest by, the United States, which mature within 15 
months from the date of the investment; or
    (2) Repurchase agreements with federally insured institutions, with 
a maturity of seven days or less. The securities underlying the 
repurchase agreements must be direct obligations of, or obligations 
guaranteed as to principal and interest by, the United States. The 
securities must be maintained in a custodial account at a federally 
insured institution; or
    (3) Certificates of deposit with a maturity of one year or less, 
issued by a federally insured institution; or
    (4) A deposit account in a federally insured institution, subject 
to a withdrawal restriction of one year or less; or
    (5) A checking account in a federally insured institution; or
    (6) A reasonable petty cash fund.
    (b) Deposit of funds in excess of the insured amount. (1) General 
rule. You are permitted to deposit in a federally insured institution 
funds in excess of the institution's insured amount, but only if the 
institution is ``well capitalized'' in accordance with the definition 
set forth in regulations of the Federal Deposit Insurance Corporation 
(12 CFR 325.103).
    (2) Exception. You may make a temporary deposit (not to exceed 30 
days) in excess of the insured amount, in a transfer account 
established to facilitate the receipt and disbursement of funds or to 
hold funds necessary to honor Commitments issued.
    (c) Deposit of funds in Associate institution. A deposit in, or a 
repurchase agreement with, a federally insured institution that is your 
Associate is not considered a Financing of such Associate under Sec.  
4290.730, provided the terms of such deposit or repurchase agreement 
are no less favorable than those available to the general public.

Secured Borrowing by RBICs


Sec.  4290.550  Prior approval of secured third-party debt of RBICs.

    (a) Definition. In this Sec.  4290.550, ``secured third-party 
debt'' means any debt that is secured by any of your assets and not 
guaranteed by the Secretary, including secured guarantees and other 
contingent obligations that you voluntarily assume and secured lines of 
credit.
    (b) General rule. You must get the Secretary's written approval 
before you incur any secured third-party debt or refinance any debt 
with secured third-party debt, including any renewal of a secured line 
of credit, increase in the maximum amount available under a secured 
line of credit, or expansion of the scope of a security interest or 
lien. For purposes of this paragraph (b), ``expansion of the scope of a 
security interest or lien'' does not include the substitution of one 
asset or group of assets for another, provided the asset values (as 
reported on your most recent annual SBA Form 468) are comparable.
    (c) Conditions for approval. As a condition of granting its 
approval under this Sec.  4290.550, the Secretary may impose such 
restrictions or limitations as he or she deems appropriate, taking into 
account your historical performance, current financial position, 
proposed terms of the secured debt and amount of aggregate debt you 
will have outstanding (including Leverage). The Secretary will not 
favorably consider any requests for approval which include a blanket 
lien on all your assets, or a security interest in your investor 
commitments in excess of 125 percent of the proposed borrowing.
    (d) Thirty-day approval. Unless the Secretary notifies you 
otherwise within 30 days after he or she receives your request, you may 
consider your request automatically approved if:
    (1) You are in regulatory compliance;
    (2) The security interest in your assets is limited to either those 
assets being acquired with the borrowed funds or an asset coverage 
ratio of no more than 2:1;
    (3) Your request is for approval of a secured line of credit that 
would not cause your total outstanding borrowings (not including 
Leverage) to exceed 50 percent of your Leverageable Capital.

Voluntary Decrease in Regulatory Capital


Sec.  4290.585  Voluntary decrease in RBIC's Regulatory Capital.

    You must obtain the Secretary's prior written approval to reduce 
your Regulatory Capital by more than two percent in any fiscal year. At 
all times, you must retain sufficient Regulatory Capital to meet the 
minimum capital requirements in the Act and Sec.  4290.210, and 
sufficient Leverageable Capital to avoid having excess Leverage in 
violation of section 384E(d) of the Act.

Subpart H--Recordkeeping, Reporting, and Examination Requirements 
for RBICs

Recordkeeping Requirements for RBICs


Sec.  4290.600  General requirement for RBIC to maintain and preserve 
records.

    (a) Maintaining your accounting records. You must establish and 
maintain your accounting records using SBA's standard chart of accounts 
for SBICs, unless the Secretary approves otherwise. You may obtain this 
chart of accounts from SBA or at http://www.sba.gov/INV/chartof.pdf.

[[Page 32217]]

    (b) Location of records. You must keep the following records at 
your principal place of business or, in the case of paragraph (b)(3) of 
this section, at the branch office that is primarily responsible for 
the transaction:
    (1) All your accounting and other financial records;
    (2) All minutes of meetings of directors, stockholders, executive 
committees, partners, members, or other officials; and
    (3) All documents and supporting materials related to your business 
transactions, except for any items held by a custodian under a written 
agreement between you and a Portfolio Concern or lender, or any 
securities held in a safe deposit box, or by a licensed securities 
broker in an amount not exceeding the broker's per-account insurance 
coverage.
    (c) Preservation of records. You must retain all the records that 
are the basis for your financial reports. Such records must be 
preserved for the periods specified in this paragraph (c) and must 
remain readily accessible for the first two years of the preservation 
period.
    (1) You must preserve for at least 15 years or, in the case of a 
Partnership RBIC or LLC RBIC, at least two years beyond the date of 
liquidation:
    (i) All your accounting ledgers and journals, and any other records 
of assets, asset valuations, liabilities, equity, income, and expenses;
    (ii) Your Articles, bylaws, minute books, and RBIC application; and
    (iii) All documents evidencing ownership of the RBIC including 
ownership ledgers and ownership transfer registers.
    (2) You must preserve for at least six years all supporting 
documentation (such as vouchers, bank statements, or canceled checks) 
for the records listed in paragraph (b)(l) of this section.
    (3) After final disposition of any item in your Portfolio, you must 
preserve for at least six years:
    (i) Financing applications and Financing instruments;
    (ii) All loan, participation, and escrow agreements;
    (iii) All certifications listed in Sec.  4290.610 of this part;
    (iv) Any capital stock certificates and warrants of the Portfolio 
Concern that you did not surrender or exercise; and
    (v) All other documents and supporting material relating to the 
Portfolio Concern, including correspondence.
    (4) You may substitute a microfilm or computer-scanned or generated 
copy for the original of any record covered by this paragraph (c).
    (d) Additional requirement. You must comply with the recordkeeping 
and record retention requirements set forth in Circular A-110 of the 
Office of Management and Budget. (OMB Circulars are available from the 
addresses listed in 5 CFR 1310.3 and at http://www.whitehouse.gov/omb/circulars/index.html.)


Sec.  4290.610  Required certifications for Loans and Investments.

    For each of your Loans and Investments, you must have the documents 
listed in this section. You must keep these documents in your files and 
make them available to the Secretary upon request.
    (a) For each Financing made to a Rural Business Concern or Smaller 
Enterprise, a certification by the Portfolio Concern stating the basis 
for its qualification as a Rural Business Concern or Smaller 
Enterprise.
    (b) For each Financing made to a Small Business Concern, Size 
Status Declaration (SBA Form 480), executed both by you and by the 
Portfolio Concern certifying that the concern is a Small Business 
Concern. For securities purchased from an underwriter in a public 
offering, you may substitute a prospectus showing that the concern is a 
Small Business Concern.
    (c) A certification by the Portfolio Concern that it will not 
discriminate in violation of Title VI of the Civil Rights Act of 1964, 
the Age Discrimination Act of 1975, and Title V of the Equal Credit 
Opportunity Act.
    (d) A certification by the Portfolio Concern of the intended use of 
the proceeds. For securities purchased from an underwriter in a public 
offering, you may substitute a prospectus indicating the intended use 
of proceeds.


Sec.  4290.620  Requirements to obtain information from Portfolio 
Concerns.

    All the information required by this section is subject to the 
requirements of Sec.  4290.600 and must be in English.
    (a) Information for initial Financing decision. Before extending 
any Financing, you must require the Enterprise to submit such financial 
statements, plans of operation (including intended use of financing 
proceeds), cash flow analyses, projections, and such economic 
development information about the Enterprise, as are necessary to 
support your investment decision. The information submitted must be 
consistent with the size and type of the Enterprise and the amount of 
the proposed Financing.
    (b) Updated financial and economic development information. (1) The 
terms of each Financing must require the Portfolio Concern to provide, 
at least annually, sufficient financial and economic development 
information to enable you to perform the following required procedures:
    (i) Evaluate the financial condition of the Portfolio Concern for 
the purpose of valuing your investment;
    (ii) Determine the continued eligibility of the Portfolio Concern;
    (iii) Verify the use of Financing proceeds;
    (iv) Evaluate the economic development impact of the Financing; and
    (v) In the case of any Portfolio Concern that is not a Rural 
Business Concern, the number and percentage of its employees residing 
in Rural Areas.
    (2) The president, chief executive officer, treasurer, chief 
financial officer, general partner, or proprietor of the Portfolio 
Concern must certify the information submitted to you.
    (3) For financial and valuation purposes, you may accept a complete 
copy of the Federal income tax return filed by the Portfolio Concern 
(or its proprietor) in lieu of financial statements, but only if 
appropriate for the size and type of the Enterprise involved.
    (4) The requirements in this paragraph (b) do not apply when you 
acquire securities from an underwriter in a public offering (see Sec.  
4290.825). In that case, you must keep copies of all reports furnished 
by the Portfolio Concern to the holders of its securities.
    (c) Information required for examination purposes. You must obtain 
any information requested by the Secretary's examiners for the purpose 
of verifying the certifications made by a Portfolio Concern under Sec.  
4290.610. In this regard, your Financing documents must contain 
provisions requiring the Portfolio Concern to give you and/or the 
Secretary's examiners access to its books and records for such purpose.

Reporting Requirements for RBICs


Sec.  4290.630  Requirement for RBICs to file financial statements and 
supplementary information with the Secretary (SBA Form 468).

    (a) Annual filing of SBA Form 468. For each fiscal year, you must 
submit financial statements and supplementary information prepared on 
SBA Form 468. You must file Form 468 on or before the last day of the 
third month following the end of your fiscal year, except for the 
information required under paragraphs (e) and (f) of this section, 
which must be filed on or before the last day of the fifth month 
following the end of your fiscal year.
    (1) Audit of Form 468. An independent public accountant

[[Page 32218]]

acceptable to the Secretary must audit the annual Form 468.
    (2) Insurance requirement for public accountant. Unless the 
Secretary approves otherwise, your independent public accountant must 
carry at least $1,000,000 of Errors and Omissions insurance, or be 
self-insured and have a net worth of at least $1,000,000.
    (b) Interim filings of Form 468. When requested by the Secretary, 
you must file interim reports on Form 468. The Secretary may require 
you to file the entire form or only certain statements and schedules. 
You must file such reports on or before the last day of the month 
following the end of the reporting period. When you submit a request 
for a draw under a Leverage commitment, you must also comply with any 
applicable filing requirements set forth in Sec.  4290.1220.
    (c) Standards for preparation of Form 468. You must prepare SBA 
Form 468 in accordance with SBA's Accounting Standards and Financial 
Reporting Requirements for SBICs, which you may obtain from SBA or at 
http://www.sba.gov/INV/standards.pdf.
    (d) Where to file Form 468. Submit all filings of Form 468 to the 
Investment Division of SBA.
    (e) Reporting of economic development impact information for each 
Financing on Form 468. Your annual filing of SBA Form 468 must include 
an assessment of the economic development impact of each Financing. 
This assessment must specify the fulltime equivalent jobs created, the 
impact of the Financing on the revenues and profits of the business and 
on taxes paid by the business and its employees, and a listing of the 
number and percentage of employees who reside in Rural Areas.
    (f) Reporting of economic development information for certain 
Financings. For each Rural Business Concern Investment and each Smaller 
Enterprise Investment, your Form 468 must include an assessment of each 
such Financing with respect to:
    (1) The economic development benefits achieved as a result of the 
Financing;
    (2) How and to what extent such benefits fulfilled the goals of 
your comprehensive business plan and Participation Agreement; and
    (3) Whether you consider the Financing or the results of the 
Financing to have fulfilled the objectives of the RBIC program.


Sec.  4290.640  Requirement to file portfolio financing reports with 
the Secretary (SBA Form 1031).

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


Sec.  4290.650  Requirement to report portfolio valuations to the 
Secretary

    You must determine the value of your Loans and Investments in 
accordance with Sec.  4290.503. You must report such valuations to the 
Secretary within 90 days of the end of the fiscal year in the case of 
annual valuations, and within 30 days following the close of other 
reporting periods. You must report material adverse changes in 
valuations at least quarterly, within 30 days following the close of 
the quarter.


Sec.  4290.660  Other items required to be filed by RBIC with the 
Secretary.

    (a) Reports to owners. You must give the Secretary a copy of any 
report you furnish to your investors, including any prospectus, letter, 
or other publication concerning your financial operations or those of 
any Portfolio Concern.
    (b) Documents filed with SEC. You must give the Secretary a copy of 
any report, application or document you file with the Securities and 
Exchange Commission.
    (c) Litigation reports. When you become a party to litigation or 
other proceedings, you must give the Secretary a report within 30 days 
that describes the proceedings and identifies the other parties 
involved and your relationship to them.
    (1) The proceedings covered by this paragraph (c) include any 
action by you, or by your security holder(s) in a personal or 
derivative capacity, against an officer, director, Investment Adviser/
Manager or other Associate of yours for alleged breach of official 
duty.
    (2) The Secretary may require you to submit copies of the pleadings 
and other documents he or she may specify.
    (3) Where proceedings have been terminated by settlement or final 
judgment, you must promptly advise the Secretary of the terms.
    (4) This paragraph (c) does not apply to collection actions or 
proceedings to enforce your ordinary creditors' rights.
    (d) Notification of criminal charges. If any officer, director, 
general partner, or managing member of the RBIC, or any other person 
who was required by the Secretary to complete a personal history 
statement, is charged with or convicted of any criminal offense other 
than a misdemeanor involving a minor motor vehicle violation, you must 
report the incident to the Secretary within 5 calendar days. Such 
report must fully describe the facts that pertain to the incident.
    (e) Reports concerning Operational Assistance grant funds. You must 
comply with all reporting requirements set forth in Circular A-110 of 
the Office of Management and Budget and any grant award document 
executed between you and the Secretary.
    (f) Other reports. You must file any other reports the Secretary 
may require in writing.


Sec.  4290.680  Reporting changes in RBIC not subject to prior 
approval.

    (a) Changes to be reported for post-approval. This section applies 
to any changes in your Articles, ownership, capitalization, management, 
operating area, or investment policies that do not require the 
Secretary's prior approval. You must report such changes to the 
Secretary within 30 days after the change, for post approval.
    (b) Approval by the Secretary. You may consider any change 
submitted under this Sec.  4290.680 to be approved unless the Secretary 
notifies you to the contrary within 90 days after receiving it. 
Approval is contingent upon your full disclosure of all relevant facts 
and is subject to any conditions the Secretary may prescribe.

Examinations of RBICs by the Secretary for Regulatory Compliance


Sec.  4290.690  Examinations.

    All RBICs must submit to annual examinations by or at the direction 
of the Secretary for the purpose of evaluating regulatory compliance.


Sec.  4290.691  Responsibilities of RBIC during examination.

    You must make all books, records and other pertinent documents and 
materials available for the examination, including any information 
required by the examiner under Sec.  4290.620(c). In addition, the 
agreement between you and the independent public accountant performing 
your audit must provide that any information in the accountant's 
working papers be made available to the examiners upon request.


Sec.  4290.692  Examination fees.

    (a) General. The Secretary will assess fees for examinations in 
accordance with this Sec.  4290.692. Unless the Secretary determines 
otherwise on a case by case basis, he or she will not assess fees for 
special examinations to obtain specific information.
    (b) Base fee. A base fee of $9,200 + 0.015 percent of your assets 
will be assessed, subject to adjustment in

[[Page 32219]]

accordance with paragraph (c) of this section.
    (c) Adjustments to base fee. The base fee will be decreased based 
on the following criteria:
    (1) If you have no outstanding regulatory violations at the time of 
the commencement of the examination or the Secretary did not identify 
any violations as a result of the most recent prior examination, you 
will receive a 15% discount on your base fee; and
    (2) If you were fully responsive to the letter of notification of 
examination (that is, you provided all requested documents and 
information within the time period stipulated in the notification 
letter in a complete and accurate manner, and you prepared and had 
available all information requested by the examiner for on-site 
review), you will receive a 10% discount on your base fee.
    (d) Delay fee. If, in the sole discretion of the Secretary, the 
time required to complete your examination is delayed due to your lack 
of cooperation or the condition of your records, the Secretary may 
assess an additional fee of up to $500 per day.

Subpart I--Financing of Enterprises by RBICs

Determining Eligibility of an Enterprise for RBIC Financing


Sec.  4290.700  Requirements concerning types of Enterprises to receive 
Financing.

    (a) Rural Business Concern Investments. At the close of each of 
your fiscal years--
    (1) At least 75 percent of your Portfolio Concerns must have 
received a Rural Business Concern Investment; and
    (2) For all Financings you have extended, you must have invested at 
least 75 percent (in total dollars) in Rural Business Concern 
Investments.
    (b) Smaller Enterprise Investments. At the close of each of your 
fiscal years--
    (1) More than 50 percent of your Portfolio Concerns must be Smaller 
Enterprises that, at the time of the initial Financing to such 
Enterprise, meet either the net worth/net income test or the size 
standard set forth in the ``Smaller Enterprise'' definition in Sec.  
4290.50 of this part; and
    (2) For all Financings that you have extended, you must have 
invested more than 50 percent (in total dollars) in Financings in the 
form of Equity Capital in such Enterprises.
    (c) Small Business Concern Investments. At the close of each of 
your fiscal years--
    (1) At least 50 percent of the Portfolio Concerns referenced in 
paragraph (b)(1) of this section must be Small Business Concerns; and
    (2) For all Financings referenced in paragraph (b)(2) of this 
section, you must have invested at least 50 percent (in total dollars) 
in Small Business Concerns.
    (d) Urban Area Investments. At the close of each of your fiscal 
years--
    (1) No more than 10 percent of your Portfolio Concerns must have 
received Urban Area Investments; and
    (2) For all Financings you have extended, you must not have 
invested more than 10 percent (in total dollars) in Urban Area 
Investments.
    (e) Non-compliance with this section. If you have not met the 
percentages required in paragraphs (a), (b), (c), or (d) of this 
section at the end of any fiscal year, then you must be in compliance 
by the end of the following fiscal year. However, you will not be 
eligible for additional Leverage until such time as you meet the 
required percentages (see Sec.  4290.1120).


Sec.  4290.720  Enterprises that may be ineligible for Financing.

    (a) Re-lenders or re-investors. You are not permitted to finance 
any Enterprise that is a re-lender or re-investor. The primary business 
activity of re-lenders or re-investors involves, directly or 
indirectly, providing funds to others, purchasing debt obligations, 
factoring, or long-term leasing of equipment with no provision for 
maintenance or repair.
    (b) Passive Enterprises. You are not permitted to finance a passive 
Enterprise.
    (1) Definition. An Enterprise is passive if:
    (i) It is not engaged in a regular and continuous business 
operation (for purposes of this paragraph (b), the mere receipt of 
payments such as dividends, rents, lease payments, or royalties is not 
considered a regular and continuous business operation); or
    (ii) Its employees are not carrying on the majority of day to day 
operations, and the Enterprise does not provide effective control and 
supervision, on a day to day basis, over persons employed under 
contract; or
    (iii) It passes through substantially all of the proceeds of the 
Financing to another entity.
    (2) Exception for pass-through of proceeds to subsidiary. With the 
prior written approval of the Secretary, you may finance a passive 
Enterprise if it passes substantially all of the proceeds through to 
one or more subsidiary companies, each of which is an eligible 
Enterprise that is not passive. For the purpose of this paragraph 
(b)(2), ``subsidiary company'' means a company in which at least 50 
percent of the outstanding voting securities are owned by the Financed 
passive Enterprise.
    (3) Exception for certain Partnership RBICs or LLC RBICs. With the 
prior written approval of the Secretary, if you are a Partnership RBIC 
or LLC RBIC, you may form one or more wholly owned corporations in 
accordance with this paragraph (b)(3). The sole purpose of such 
corporation(s) must be to provide Financing to one or more eligible, 
unincorporated Enterprise. You may form such corporation(s) only if a 
direct Financing to such Enterprise would cause any of your investors 
to incur unrelated business taxable income under section 511 of the 
Internal Revenue Code of 1986, as amended (26 U.S.C. 511). Your 
investment of funds in such corporation(s) will not constitute a 
violation of Sec.  4290.730(a).
    (c) Real Estate Enterprises. (1) You are not permitted to finance:
    (i) Any Enterprise classified under sector 233 (Building, 
Developing, and General Contracting) of the NAICS Manual, or
    (ii) Any Enterprise listed under sector 531 (Real Estate) unless at 
least 80 percent of its revenue is derived from non-Affiliate sources.
    (2) You are not permitted to finance an Enterprise, regardless of 
NAICS classification, if the Financing is to be used to acquire or 
refinance real property, unless the Enterprise:
    (i) Is acquiring an existing property and will use at least 51 
percent of the usable square footage for an eligible business or 
commercial purpose; or
    (ii) Is constructing or renovating a building and will use at least 
67 percent of the usable square footage for an eligible business or 
commercial purpose; or
    (iii) Occupies the subject property and uses at least 67 percent of 
the usable square footage for an eligible business or commercial 
purpose.
    (d) Project Financing. You are not permitted to finance an 
Enterprise if:
    (1) The assets of the Enterprise are to be reduced or consumed, 
generally without replacement, as the life of the Enterprise 
progresses, and the nature of the Enterprise requires that a stream of 
cash payments be made to the Enterprise's financing sources, on a basis 
associated with the continuing sale of assets. Examples include real 
estate development projects, oil and gas wells, wind farms, or power 
facilities (including solar, geothermal, hydroelectric, or biomass 
power facilities); or
    (2) The primary purpose of the Financing is to fund production of a

[[Page 32220]]

single item or defined limited number of items, generally over a 
defined production period, and such production will constitute the 
majority of the activities of the Enterprise. Examples include motion 
pictures.
    (e) Farm land purchases. You are not permitted to finance the 
acquisition of farmland. Farmland means land which is or is intended to 
be used for agricultural or forestry purposes such as the production of 
food, fiber, or wood, or is so taxed or zoned.
    (f) Public interest. You are not permitted to finance any business 
if the proceeds are to be used for purposes contrary to the public 
interest, including but not limited to or activities which are in 
violation of law, or inconsistent with free competitive enterprise.
    (g) Foreign investment. (1) General rule. You are not permitted to 
finance an Enterprise if:
    (i) The funds will be used substantially for a foreign operation; 
or
    (ii) At the time of the Financing or within one year thereafter, 
more than 49 percent of the employees or tangible assets of the 
Enterprise are located outside the United States (unless you can show, 
to the Secretary's satisfaction, that the Financing was used for a 
specific domestic purpose).
    (2) Exception. This paragraph (g) does not prohibit a Financing 
used to acquire foreign materials and equipment or foreign property 
rights for use or sale in the United States.
    (h) Financing RBICs, SBICs, or New Markets Venture Capital 
Companies (NMVC Companies). (1) You are not permitted to provide funds, 
directly or indirectly, that will be used:
    (i) To purchase stock in or otherwise provide capital to a RBIC, 
SBIC or NMVC Company; or
    (ii) To repay an indebtedness incurred for the purpose of investing 
in a RBIC, SBIC, or NMVC Company.
    (2) ``NMVC Company'' is defined in 13 CFR 108.50.
    (i) Entities ineligible for Farm Credit System Assistance. If one 
or more Farm Credit System Institutions or their Affiliates owns 15 
percent or more of your Regulatory Capital, you may not provide 
Financing to any entity that is not otherwise eligible to receive 
Financing from the Farm Credit System under the Farm Credit Act of 1971 
(12 U.S.C. 2001 et seq.).
    (j) Gaming establishments. You are not permitted to Finance an 
Enterprise that derives, or is expected to derive, more than one-third 
of its gross annual revenue from legal gaming activities.
    (k) Change of ownership of an Enterprise. You are not permitted to 
Finance a change of ownership of an Enterprise unless otherwise 
approved by the Secretary.


Sec.  4290.730  Financings which constitute conflicts of interest.

    (a) General rule. You must not self-deal to the prejudice of an 
Enterprise, the RBIC, its shareholders, partners or, members, or the 
Secretary. Unless you obtain a prior written exemption from the 
Secretary for special instances in which a Financing may further the 
purposes of the Act despite presenting a conflict of interest, you must 
not directly or indirectly:
    (1) Provide Financing to any of your Associates, except for an 
Enterprise that satisfies all of the following conditions:
    (i) Your Associate relationship with the Enterprise is described by 
paragraph (8) or (9) of the definition of Associate in Sec.  4290.50,
    (ii) No Person triggering the Associate relationship identified in 
paragraph (a)(1)(i) of the definition of Associate in Sec.  4290.50 is 
a Close Relative or Secondary Relative of any Person described in 
paragraphs (1), (2), (4), or (5) of the definition of Associate in 
Sec.  4290.50, and
    (iii) No single Associate of yours has either a voting interest or 
an economic interest in the Enterprise exceeding 20 percent, and no two 
or more of your Associates have either a voting interest or an economic 
interest exceeding 33 percent. Economic interests shall be computed on 
a fully diluted basis, and both voting and economic interests shall 
exclude any interest owned through the RBIC.
    (2) Provide Financing to an Associate of another RBIC if one of 
your Associates has received or will receive any direct or indirect 
Financing or a Commitment from that RBIC or any other RBIC (including 
Financing or Commitments received under any understanding, agreement, 
or cross dealing, reciprocal or circular arrangement).
    (3) Borrow money from:
    (i) An Enterprise Financed by you;
    (ii) An officer, director, or owner of at least a 10 percent equity 
interest in such Enterprise; or
    (iii) A Close Relative of any such officer, director, or equity 
owner.
    (4) Provide Financing to an Enterprise to discharge an obligation 
to your Associate or free other funds to pay such obligation. This 
paragraph (a)(4) does not apply if the obligation is to an Associate 
Lending Institution and is a line of credit or other obligation 
incurred in the normal course of business.
    (b) Rules applicable to Associates. Without the Secretary's prior 
written approval, your Associates must not, directly or indirectly:
    (1) Borrow money from any Person described in paragraph (a)(3) of 
this section.
    (2) Receive from an Enterprise any compensation or anything of 
value in connection with Assistance you provide (except as permitted 
under Sec.  4290.825(c)), or anything of value for procuring, 
attempting to procure, or influencing your action with respect to such 
Assistance.
    (c) Applicability of other laws. You are also bound by Federal or 
State laws applicable to you that govern conflicts of interest and 
fiduciary obligations.
    (d) Financings with Associates. (1) Financings with Associates 
requiring prior approval. Without the Secretary's prior written 
approval, you may not Finance any Enterprise in which your Associate 
has either a voting equity interest or total equity interests 
(including potential interests) of at least five percent, or effective 
control, except as otherwise permitted under paragraph (a)(1) of this 
section.
    (2) Other Financings with Associates. If you and an Associate 
provide Financing to the same Enterprise, either at the same time or at 
different times, you must be able to demonstrate to the Secretary's 
satisfaction that the terms and conditions are (or were) fair and 
equitable to you, taking into account any differences in the timing of 
each party's financing transactions.
    (3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A 
Financing that falls into one of the following categories is exempt 
from the prior approval requirement in paragraph (d)(1) of this section 
or is presumed to be fair and equitable to you for the purposes of 
paragraph (d)(2) of this section, as appropriate:
    (i) Your Associate is a Lending Institution that is providing 
financing under a credit facility in order to meet the operational 
needs of the Enterprise and the terms of such financing are usual and 
customary.
    (ii) Your Associate invests in the Enterprise on the same terms and 
conditions and at the same time as you.
    (iii) Both you and your Associate are RBICs.
    (e) Use of Associates to manage Portfolio Concerns. To protect your 
investment, you may designate an Associate to serve as an officer, 
director, or other participant in the management of a Portfolio 
Concern. You must identify any such Associate in your records available 
for the Secretary's review under Sec.  4290.600. Without the 
Secretary's prior written approval, such Associate must not:

[[Page 32221]]

    (1) Have any other direct or indirect financial interest in the 
Portfolio Concern that exceeds, or has the potential to exceed, the 
percentages of the Portfolio Concern's equity set forth in paragraph 
(a)(1) of this section.
    (2) Receive any income or anything of value from the Portfolio 
Concern unless it is for your benefit, with the exception of director's 
fees, expenses, and distributions based upon the Associate's ownership 
interest in the Concern.
    (f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940 
or 1980 Act Company and you receive an exemption from the Securities 
and Exchange Commission for a transaction described in this Sec.  
4290.730, you need not obtain the Secretary's approval of the 
transaction. However, you must promptly notify the Secretary of the 
transaction.
    (g) Restriction on options obtained by RBIC's management and 
employees. Your employees, officers, directors, managing members or 
general partners, or the general partners or managing members of the 
Investment Adviser/Manager that is providing services to you or to your 
general partner or managing member, may obtain options in a Portfolio 
Concern only if:
    (1) They participate in the Financing on a pari passu basis with 
you; or
    (2) The Secretary gives prior written approval; or
    (3) The options received are compensation for service as a member 
of the board of directors of the Portfolio Concern, and such 
compensation does not exceed that paid to other outside directors. In 
the absence of such directors, fees must be reasonable when compared 
with amounts paid to outside directors of similar companies.


Sec.  4290.740  Portfolio diversification (``overline'' limitation).

    (a) Without the Secretary's prior written approval, you may provide 
Financing or a Commitment to an Enterprise only if the resulting amount 
of your aggregate outstanding Financings and Commitments to that 
Enterprise and its Affiliates does not exceed 20 percent of the sum of:
    (1) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (2) Any permitted Distribution(s) you made during the five years 
preceding the date of the Financing or Commitment which reduced your 
Regulatory Capital.
    (b) For the purposes of paragraph (a) of this section, you must 
measure each outstanding Financing at its current cost plus any amount 
of the Financing that was previously written off.


Sec.  4290.760  How a change in size or activity of a Portfolio Concern 
affects the RBIC and the Portfolio Concern.

    (a) Effect on RBIC of a change in size of a Portfolio Concern. If a 
Portfolio Concern was a Smaller Enterprise or Small Business Concern at 
the time of the initial Financing but no longer qualifies as such under 
the size standard applicable to such entity, you may keep your 
investment in the Portfolio Concern and:
    (1) Subject to the overline limitations of Sec.  4290.740, you may 
provide additional Financing to the Portfolio Concern up to the time it 
makes a public offering of its securities.
    (2) Even after the Portfolio Concern makes a public offering, you 
may exercise any stock options, warrants, or other rights to purchase 
Equity Securities which you acquired before the public offering, or 
fund Commitments you made before the public offering.
    (b) Effect of a change in business activity occurring within one 
year of RBIC's initial Financing. (1) Retention of Financing. Unless 
you receive the Secretary's written approval, you may not keep your 
Financing in a Portfolio Concern which becomes ineligible for financing 
by a RBIC by reason of a change in its business or commercial activity 
or for any other reason within one year of your initial Financing in 
the Portfolio Concern.
    (2) Request for approval to retain Financing. If you request that 
the Secretary approve the retention of your investment, your request 
must include sufficient evidence to demonstrate that the change in 
business or commercial activity was caused by an unforeseen change in 
circumstances and was not contemplated at the time the Financing was 
made.
    (3) Additional Financing. If the Secretary approves your request to 
retain a Financing under paragraph (b)(2) of this section, you may 
provide additional Financing to the Portfolio Concern to the extent 
necessary to protect against the loss of the amount of your original 
investment, subject to the overline limitations of Sec.  4290.740.
    (c) Effect of a change in business activity occurring more than one 
year after the initial Financing. If a Portfolio Concern becomes 
ineligible because of a change in business activity more than one year 
after your initial Financing you may:
    (1) Retain your investment; and
    (2) Provide additional Financing to the Portfolio Concern to the 
extent necessary to protect against the loss of the amount of your 
original investment, subject to the overline limitations of Sec.  
4290.740.

Structuring RBIC Financing of Eligible Enterprises--Types of Financings


Sec.  4290.800  Financings in the form of Equity Securities.

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


Sec.  4290.810  Financings in the form of Loans.

    You are permitted to make Loans to an Enterprise only if:
    (a) The maturity or term of the Loan is five years or less; and
    (b) You determine that making the Loan is necessary to preserve an 
existing Financing (other than a Loan) in that same Enterprise.


Sec.  4290.815  Financings in the form of Debt Securities.

    (a) General rule. You may purchase Debt Securities from an 
Enterprise.
    (b) Restriction of options obtained by RBIC's management and 
employees. If you have outstanding Leverage or plan to obtain Leverage, 
your employees, officers, directors, general partners, or managing 
members, or the general partners or managing members of your Investment 
Advisor/Manager, may obtain options in a Portfolio Concern only if:
    (1) They participate in the Financing on a pari passu basis with 
you; or
    (2) The Secretary gives its prior written approval; or
    (3) The options received are compensation for services as a member 
of the board of directors of the Enterprise, and such compensation does 
not exceed that paid to other outside directors. In the absence of such 
directors, fees must be reasonable when compared with amounts paid to 
outside directors of similar Enterprises.


Sec.  4290.820  Financings in the form of guarantees.

    (a) General rule. At the request of an Enterprise or where 
necessary to protect your existing Financing in a Portfolio Concern, 
you may guarantee the monetary obligation of an Enterprise to any non-
Associate creditor.
    (b) Exception. You may not issue a guaranty if:
    (1) You would become subject to State regulation as an insurance, 
guaranty or surety business; or
    (2) The amount of the guaranty plus any direct Financings to the 
Enterprise

[[Page 32222]]

exceed the overline limitations of Sec.  4290.740, except that a pledge 
of the Equity Securities of the issuer or a subordination of your lien 
or creditor position does not count toward your overline.
    (c) Pledge of RBIC's assets as guaranty. For purposes of this 
section, a guaranty with recourse only to specific asset(s) you have 
pledged is equal to the fair market value of such asset(s) or the 
amount of the debt guaranteed, whichever is less.


Sec.  4290.825  Purchasing securities from an underwriter or other 
third party.

    (a) Securities purchased through or from an underwriter. You may 
purchase the securities of an Enterprise through or from an underwriter 
if:
    (1) You purchase such securities within 90 days of the date the 
public offering is first made;
    (2) Your purchase price is no more than the original public 
offering price; and
    (3) The amount paid by you for the securities (less ordinary and 
reasonable underwriting charges and commissions) has been, or will be, 
paid to the issuer, and the underwriter certifies in writing that this 
requirement has been met.
    (b) Recordkeeping requirements. You must keep records available for 
the Secretary's inspection which show the relevant details of the 
transaction, including but not limited to, date, price, commissions, 
and the underwriter's certifications required under paragraphs (a)(3) 
and (c) of this section.
    (c) Underwriter's requirements. The underwriter must certify 
whether it is your Associate. You may pay reasonable and customary 
commissions and expenses to an Associate underwriter for the portion of 
an offering that you purchase.
    (d) Securities purchased from another RBIC. You may purchase from, 
or exchange with, another RBIC, Portfolio securities (or any interest 
therein). Such purchase or exchange may only be made on a non-recourse 
basis. You may not have more than one-third of your total assets 
(valued at cost) invested in such securities. If you have previously 
sold Portfolio securities (or any interest therein) on a recourse 
basis, you must include the amount for which you may be contingently 
liable in your overline computation.
    (e) Purchases of securities from other non-issuers. You may 
purchase securities of an Enterprise from a non-issuer not previously 
described in this Sec.  4290.825 if such acquisition is a reasonably 
necessary part of the overall sound Financing of the Enterprise.


Sec.  4290.830  Minimum term of Financing.

    (a) General rule. The minimum term of each of your Financings is 
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 Portfolio Concern, you must not require 
redemption by the Portfolio Concern within the first year of your 
acquisition except as permitted in Sec.  4290.850.
    (c) Special rules for Loans and Debt Securities. (1) Term. The 
minimum term for Loans and Debt Securities starts with the first 
disbursement of the Financing.
    (2) Prepayment. You must permit voluntary prepayment of Loans and 
Debt Securities by the Portfolio Concern. You must obtain the 
Secretary's prior written approval of any restrictions on the ability 
of the Portfolio Concern 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 the 
Secretary determines that a prepayment is unreasonable, you must refund 
the entire penalty to the Portfolio Concern. A prepayment penalty equal 
to five 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 the maximum reasonable amount.


Sec.  4290.835  Exceptions to minimum term of Financing.

    You may make a Financing with a term of less than one year but only 
if such Financing is in contemplation of another Financing, with a term 
of one year or more, to the same Enterprise.


Sec.  4290.840  Maximum term of Financing.

    The maximum term of any Debt Security must be no longer than 20 
years.


Sec.  4290.845  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.


Sec.  4290.850.  Restrictions on redemption of Equity Securities.

    (a) Restriction on redemption. A Portfolio Concern cannot be 
required to redeem Equity Securities earlier than one year from the 
date of the first closing unless:
    (1) The Portfolio Concern makes a public offering, or has a change 
of management or control, or files for protection under the provisions 
of the Bankruptcy Code, or materially breaches your Financing 
agreement; or
    (2) You make a follow-on Financing, 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 
Portfolio Concern.
    (b) Redemption price. The redemption price must be either:
    (1) A fixed amount that is no higher than the price you paid for 
the securities; or
    (2) An amount that cannot be fixed or determined before the time of 
the redemption. In this case, the redemption price must be based on:
    (i) A reasonable formula that reflects the performance of the 
Portfolio Concern (such as one based on earnings or book value); or
    (ii) The fair market value of the Portfolio Concern at the time of 
redemption, as determined by a professional appraisal performed under 
an agreement acceptable to both parties.
    (c) Method. Any method for determining the redemption price must be 
agreed upon no later than the date of the first (or only) closing of 
the Financing.


Sec.  4290.860  Financing fees and expense reimbursements a RBIC may 
receive from an Enterprise.

    (a) General rule. You may collect Financing fees and receive 
expense reimbursements from an Enterprise only as permitted under this 
Sec.  4290.860.
    (b) Application fee. You may collect a nonrefundable application 
fee from an Enterprise to review its Financing application. The 
application fee may be collected at the same time as the closing fee 
under paragraph (d) or (e) of this section, or earlier. The fee must 
be:
    (1) No more than one percent of the amount of Financing requested 
(or, if two or more RBICs participate in the Financing, their combined 
application fees are no more than one percent of the total Financing 
requested); and
    (2) Agreed to in writing by the Financing applicant.
    (c) The Secretary's review of application fees. For any fiscal 
year, if the number of application fees you collect is more than twice 
the number of Financings closed, the Secretary in its sole discretion 
may determine that you are engaged in activities not contemplated by 
the Act, in violation of Sec.  4290.500.
    (d) Closing fee--Loans. You may charge a closing fee on a Loan if:

[[Page 32223]]

    (1) The fee is no more than two percent of the Financing amount 
(or, if two or more RBICs participate in the Financing, their combined 
closing fees are no more than two percent of the total Financing 
amount); and
    (2) You charge the fee no earlier than the date of the first 
disbursement.
    (e) Closing fee--Debt or Equity Financings. You may charge a 
Closing Fee on a Debt Security or Equity Security Financing if:
    (1) The fee is no more than four percent of the Financing amount 
(or, if two or more RBICs participate in the Financing, their combined 
closing fees are no more than four percent of the total Financing 
amount); and
    (2) You charge the fee no earlier than the date of the first 
disbursement.
    (f) Limitation on dual fees. If another RBIC or an Associate of 
yours collects a transaction fee under Sec.  4290.900(e) in connection 
with your Financing of an Enterprise, the sum of the transaction fee 
and your application and closing fees cannot exceed the maximum 
application and closing fees permitted under this Sec.  4290.860.
    (g) Expense reimbursements. You may charge an Enterprise for the 
reasonable out-of-pocket expenses, other than Management Expenses, that 
you incur to process its Financing application. If the Secretary 
determines that any of your reimbursed expenses are unreasonable or are 
Management Expenses, the Secretary will require you to refund them to 
the Enterprise.
    (h) Breakup fee. If an Enterprise accepts your Commitment and then 
fails to close the Financing because it has accepted funds from another 
source, you may charge a ``breakup fee'' equal to the closing fee that 
you would have been permitted to charge under paragraph (d) or (e) of 
this section.


Sec.  4290.880  Assets acquired in liquidation of Portfolio securities.

    (a) General rule. You may acquire assets in full or partial 
liquidation of a Portfolio Concern's obligation to you under the 
conditions permitted by this Sec.  4290.880. The assets may be acquired 
from the Portfolio Concern, a guarantor of its obligation, or another 
party.
    (b) Timely disposition of assets. You must dispose of assets 
acquired in liquidation of a Portfolio security within a reasonable 
period of time.
    (c) Permitted expenditures to preserve assets. (1) You may incur 
reasonably necessary expenditures to maintain and preserve assets 
acquired.
    (2) You may incur reasonably necessary expenditures for 
improvements to render such assets saleable.
    (3) You may make payments of mortgage principal and interest 
(including amounts in arrears when you acquired the asset), pay taxes 
when due, and pay for necessary insurance coverage.
    (d) The Secretary approval of expenditures. This paragraph (d) 
applies if you have outstanding Leverage or are applying for Leverage. 
Any application for the Secretary's approval under this paragraph must 
specify all expenses estimated to be necessary pending disposal of the 
assets. Without the Secretary's prior written approval:
    (1) Your total expenditures under paragraphs (c)(1) and (c)(2) of 
this section plus your total Financing(s) to the Portfolio Concern must 
not exceed your overline limit under Sec.  4290.740; and
    (2) Your total expenditures under paragraph (b) of this section 
plus your total Financing(s) to the Portfolio Concern must not exceed 
35 percent of your Regulatory Capital.

Limitations on Disposition of Assets


Sec.  4290.885  Disposition of assets to RBIC's Associates or to 
competitors of Portfolio Concerns.

    Except with the Secretary's prior written approval, you are not 
permitted to dispose of assets (including assets acquired in 
liquidation) to any Associate or to competitors of Portfolio Concerns 
if you have outstanding Leverage. As a prerequisite to such approval, 
you must demonstrate that the proposed terms of disposal are at least 
as favorable to you as the terms obtainable elsewhere.


Sec.  4290.900  Management fees for services provided to an Enterprise 
by RBIC or its Associate.

    (a) General. This Sec.  4290.900 applies to management services 
that you or your Associate provide to a Portfolio Concern during the 
term of a Financing or prior to Financing. It does not apply to 
management services that you or your Associate provide to an Enterprise 
that you do not finance.
    (b) The Secretary's approval. You must obtain the Secretary'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 fees. You or your Associate may provide 
management services to a Portfolio Concern financed by you if:
    (1) You or your Associate have entered into a written contract with 
the Portfolio Concern;
    (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 the Secretary, upon request, that the 
rate does not exceed the prevailing rate charged for comparable 
services by other organizations in the geographic area of the Portfolio 
Concern; and
    (5) All of the management services fees paid to your Associate by a 
Portfolio Concern for management services provided by the Associate are 
allocated back to you for your benefit.
    (d) Fees for service as a board member. You or your Associate may 
receive fees in the form of cash, warrants, or other payments, for 
services provided as members of the board of directors of a Portfolio 
Concern Financed by you. 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. At least 50 percent of any board member services 
fees paid to your Associate by a Portfolio Concern for board member 
services provided by the Associate must be allocated back to you for 
your benefit.
    (e) Approval required. You must obtain the Secretary's prior 
written approval of any management contract that does not satisfy 
paragraphs (c) or (d) of this section.
    (f) Transaction fees. (1) You or your Associate may charge 
reasonable transaction fees for work performed preparing an Enterprise 
for a public offering, private offering, or sale of all or part of the 
business, and for assisting with the transaction. Compensation may be 
in the form of cash, notes, stock, and/or options. All of the 
transaction services fees paid to your Associate by a Portfolio Concern 
for transaction services provided by the Associate must be allocated 
back to you for your benefit.
    (2) Your Associate may charge market rate investment banking fees 
to a Portfolio Concern on that portion of a Financing that you do not 
provide.
    (g) Recordkeeping Requirements. You must keep a record of hours 
spent and amounts charged to the Portfolio Concern, including expenses 
charged.

Subpart J--Financial Assistance for RBICs (Leverage)

General Information About Obtaining Leverage


Sec.  4290.1100  Type of Leverage and application procedures.

    (a) Type of Leverage available. You may apply for Leverage from the

[[Page 32224]]

Secretary in the form of a guarantee of your Debentures.
    (b) Applying for Leverage. The Leverage application process has two 
parts. You must first apply for the Secretary's conditional commitment 
to reserve a specific amount of Leverage for your future use. You may 
then apply to draw down Leverage against the commitment. See Sec. Sec.  
4290.1200 through 4290.1240.
    (c) Where to send your application. Send all Leverage draw-down 
applications to Funding Control Officer, Investment Division, U.S. 
Small Business Administration, 409 Third Street, SW., Suite 6300, Mail 
Code 7050, Washington, DC 20416.


Sec.  4290.1120  General eligibility requirements for Leverage.

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


Sec.  4290.1130  Leverage fees payable by RBIC.

    (a) Leverage fee. You must pay the Secretary a non-refundable 
leverage fee for each issuance of a Debenture. The fee is 3 percent of 
the face amount of the Debenture issued, and will be deducted from the 
proceeds remitted to you.
    (b) Additional charge. You must pay the Secretary an additional 
annual charge of 1 percent of the outstanding amount of your Debenture.
    (c) Other Leverage fees. The Secretary may establish a fee 
structure for services performed by the Central Registration Agent 
(CRA). The Secretary will not collect any fee for its guarantee of TCs.


Sec.  4290.1140  RBIC's acceptance of remedies under Sec.  4290.1810.

    If you issue Leverage, you automatically agree to the terms and 
conditions in Sec.  4290.1810 as it exists at the time of issuance. The 
effect of these terms and conditions is the same as if they were fully 
incorporated in the terms of your Leverage.

Maximum Amount of Leverage for Which a RBIC Is Eligible


Sec.  4290.1150  Maximum amount of Leverage for a RBIC.

    The face amount of a RBIC's outstanding Debentures may not exceed 
the lesser of 200 percent of its Leverageable Capital or $105,000,000.

Conditional Commitments To Reserve Leverage for a RBIC


Sec.  4290.1200  Leverage commitment to a RBIC--application procedure, 
amount, and term.

    (a) General. Under the provisions in Sec. Sec.  4290.1200 through 
4290.1240, you may apply for the Secretary's conditional commitment to 
reserve a specific amount of Leverage and type of Debenture (standard 
or discounted) for your future use. You may then apply to draw down 
Leverage against the commitment.
    (b) Applying for a Leverage commitment. The Secretary will notify 
you when requests for Leverage commitments are being accepted, and upon 
receipt of your request, will send you a complete application package.
    (c) Limitations on the amount of a Leverage commitment. The amount 
of a Leverage commitment must be a multiple of $5,000. The Secretary in 
his or her discretion may determine a minimum dollar amount for 
Leverage commitments. Any such minimum amounts will be published in 
Notices in the Federal Register from time to time.
    (d) Term of Leverage commitment. Your Leverage commitment will 
automatically lapse on the expiration date stated in the commitment 
letter issued to you by the Secretary. The Secretary's Leverage 
commitment will be included in the Participation Agreement at the time 
of your licensing as a RBIC, under Sec.  4290.390.


Sec.  4290.1220  Requirement for RBIC to file financial statements at 
the time of request for a draw.

    (a) If you submit a request for a draw against your Leverage 
commitment more than 90 days following your submission of an annual SBA 
Form 468 or a SBA Form 468 (Short Form), you must:
    (1) Give the Secretary a financial statement on Form 468 (Short 
Form), and
    (2) File a statement of no material adverse change in your 
financial condition since your last filing of SBA Form 468.
    (b) You will not be eligible for a draw if you are not in 
compliance with this Sec.  4290.1220.


Sec.  4290.1230  Draw-downs by RBIC under Leverage commitment.

    (a) RBIC's authorization of the Secretary to guarantee securities. 
By submitting a request for a draw against the Leverage commitment, you 
authorize the Secretary, or the Secretary's designated agent or 
trustee, to guarantee your Debenture and to sell it with the 
Secretary's guarantee.
    (b) Limitations on amount of draw. The amount of a draw must be a 
multiple of $5,000. The Secretary, in his or her discretion, may 
determine a minimum dollar amount for draws against Leverage 
commitments. Any such minimum amounts will be published in Notices in 
the Federal Register from time to time.
    (c) Effect of regulatory violations on RBIC's eligibility for 
draws. (1) General rule. You are eligible to make a draw against your 
Leverage commitment only if you are in compliance with all applicable 
provisions of the Act and this part (i.e., no unresolved statutory or 
regulatory violations) and your Participation Agreement.
    (2) Exception to general rule. If you are not in compliance, you 
may still be eligible for draws if:
    (i) The Secretary determines that your outstanding violations are 
of non-substantive provisions of the Act or this part or your 
Participation Agreement and that you have not repeatedly violated any 
non-substantive provisions; or
    (ii) You have agreed with the Secretary in writing on a course of 
action to resolve your violations and such agreement does not prevent 
you from issuing Leverage.
    (d) Procedures for funding draws. You may request a draw at any 
time during the term of the commitment. With each request, submit the 
following documentation:
    (1) A statement certifying that there has been no material adverse 
change in your financial condition since your last filing of SBA Form 
468 (see also Sec.  4290.1220 for SBA Form 468 filing requirements).
    (2) If your request is submitted more than 30 days following the 
end of your fiscal year, but before you have submitted your annual 
filing of SBA Form 468 in accordance with Sec.  4290.630(a), a 
preliminary unaudited annual financial statement on SBA Form 468 (Short 
Form).
    (3) A statement certifying that to the best of your knowledge and 
belief, you are in compliance with all provisions of the Act and this 
part (i.e., no unresolved regulatory or statutory violations) and your 
Participation Agreement, or a statement listing any specific violations 
you are aware of. Either statement must be executed by one of the 
following:
    (i) An officer of the RBIC;
    (ii) An officer of a corporate general partner or managing member 
of the RBIC;
    (iii) An individual who is authorized to act as or for a general 
partner of the RBIC; or
    (iv) An individual who is authorized to act as or for a managing 
member of the RBIC.
    (4) A statement that the proceeds are needed to fund one or more 
particular Enterprises or to provide liquidity for your operations. If 
required by the Secretary, the statement must include the name and 
address of each Enterprise, and the amount and

[[Page 32225]]

anticipated closing date of each proposed Financing.
    (e) Reporting requirements after drawing funds. (1) Within 30 
calendar days after the actual closing date of each Financing funded 
with the proceeds of your draw, you must file an SBA Form 1031 
confirming the closing of the transaction.
    (2) If the Secretary required you to provide information concerning 
a specific planned Financing under paragraph (d)(4) of this section, 
and such Financing has not closed within 60 calendar days after the 
anticipated closing date, you must provide a written explanation of the 
failure to close.
    (3) If you do not comply with this paragraph (e), you will not be 
eligible for additional draws. The Secretary may also determine that 
you are not in compliance with the terms of your Leverage under Sec.  
4290.1810.


Sec.  4290.1240  Funding of RBIC's draw request through sale to third-
party.

    (a) RBIC's authorization of the Secretary to arrange sale of 
Debentures to third-party. By submitting a request for a draw of 
Debenture Leverage, you authorize the Secretary, or any agent or 
trustee the Secretary designates, to enter into any agreements (and to 
bind you to such agreements) necessary to accomplish:
    (1) The sale of your Debenture to a third-party at a price approved 
by the Secretary; and
    (2) The purchase of your Debenture from the third-party and the 
pooling of your Debenture with other Debentures with the same maturity 
date.
    (b) Sale of Debentures to a third-party. If the Secretary arranges 
for the sale of your Debenture to a third-party, the sale price may be 
an amount discounted from the face amount of the Debenture.

Distributions by RBICs With Outstanding Leverage


Sec.  4290.1500  Restrictions on distributions to RBIC investors while 
RBIC has outstanding Leverage.

    (a) Restriction on distribution. If you have outstanding Leverage, 
whenever you make a distribution to your investors you must make, at 
the same time, a prepayment to or for the benefit of the third-party 
holder of the Debenture sold pursuant to Sec.  4290.1240 of this part, 
accrued unpaid interest and the principal, in whole or in part, of one 
or more of your Debentures outstanding as of the date of the 
distribution (subject to the terms of such Debentures).
    (b) Amount of prepayment. You must calculate the amount due the 
third-party holder by multiplying the total amount you intend to 
distribute by a fraction whose numerator is the outstanding principal 
of your Debenture(s) immediately preceding your distribution, and whose 
denominator is the sum of your Leverageable Capital as of that time 
plus the outstanding principal amount of your Debentures. For purposes 
of the preceding sentence ``principal'' means both the net proceeds and 
interest accrued to date of a discounted Debenture. The amount of any 
payment received under this section will be credited first against 
unpaid interest accrued to the date of distribution and then to the 
principal in whole or in part of the first Debenture you select to 
prepay and then to the interest and principal in whole or in part of 
such other Debenture(s) as you select to prepay. You may elect to 
prepay in whole any discounted Debenture under this section only within 
five years of its maturity date. Payments under this section must be 
made on the next occurring March 1 or September 1.
    (c) Effect of prepayment. Subject to the terms of the Debenture(s), 
you may voluntarily prepay additional principal, but neither mandatory 
nor voluntary prepayment will increase your future Leverage 
eligibility.

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


Sec.  4290.1600  Secretary's authority to issue and guarantee Trust 
Certificates.

    (a) Authorization. Section 384F of the Act authorizes the Secretary 
to issue TCs and to guarantee the timely payment of the principal and 
interest thereon. Any such guarantee of such TC is limited to the 
principal and interest due on the Debentures in any Trust or Pool 
backing such TC. The full faith and credit of the United States is 
pledged to the payment of all amounts due under the guarantee of any 
TC.
    (b) Authority to arrange public or private fundings of Leverage. 
The Secretary in his or her discretion may arrange for public or 
private financing under his or her guarantee authority. Such financing 
may be accomplished by the sale of individual Debentures, aggregations 
of Debentures, or Pools or Trusts of Debentures.
    (c) Pass-through provisions. TCs shall provide for a pass-through 
to their holders of all amounts of principal and interest paid on the 
Debentures in the Pool or Trust against which they are issued.
    (d) Formation of a Pool or Trust holding Leverage Securities. The 
Secretary shall approve the formation of each Pool or Trust. The 
Secretary may, in his or her discretion, establish the size of the 
Pools and their composition, the interest rate on the TCs issued 
against Trusts or Pools, fees, discounts, premiums and other charges 
made in connection with the Pools, Trusts, and TCs, and any other 
characteristics of a Pool or Trust he or she deems appropriate.


Sec.  4290.1610  Effect of prepayment or early redemption of Leverage 
on a Trust Certificate.

    (a) The rights, if any, of a RBIC to prepay any Debenture is 
established by the terms of such security, and no such right is created 
or denied by the regulations in this part.
    (b) The Secretary's rights to purchase or prepay any Debenture 
without premium are established by the terms of the Guaranty Agreement 
relating to the Debenture.
    (c) Any prepayment of a Debenture pursuant to the terms of the 
Guaranty Agreement relating to such security shall reduce the 
Secretary's guarantee of timely payment of principal and interest on a 
TC in proportion to the amount of principal that such prepaid Debenture 
represents in the Trust or Pool backing such TC.
    (d) The Secretary shall be discharged from his or her guarantee 
obligation to the holder or holders of any TC, or any successor or 
transferee of such holder, to the extent of any such prepayment, 
whether or not such successor or transferee shall have notice of any 
such prepayment.
    (e) Interest on prepaid Debentures shall accrue only through the 
date of prepayment.
    (f) In the event that all Debentures constituting a Trust or Pool 
are prepaid, the TCs backed by such Trust or Pool shall be redeemed by 
payment of the unpaid principal and interest on the TCs; provided, 
however, that in the case of the prepayment of a Debenture pursuant to 
the provisions of the Guaranty Agreement relating to the Debenture, the 
Central Registration Agent (CRA) shall pass through pro rata to the 
holders of the TCs any such prepayments including any prepayment 
penalty paid by the obligor RBIC pursuant to the terms of the 
Debenture.


Sec.  4290.1620  Functions of agents, including Central Registration 
Agent, Selling Agent and Fiscal Agent.

    (a) Agents. The Secretary may appoint or cause to be appointed 
agent(s) to perform functions necessary to market and service 
Debentures or TCs pursuant to this part.
    (1) Selling Agent. As a condition of guaranteeing a Debenture, the 
Secretary may cause each RBIC to appoint a

[[Page 32226]]

Selling Agent to perform functions that include, but are not limited 
to:
    (i) Selecting qualified entities to become pool or Trust assemblers 
(``Poolers'').
    (ii) Receiving guaranteed Debentures as well as negotiating the 
terms and conditions of sales or periodic offerings of Debentures and/
or TCs on behalf of RBICs.
    (iii) Directing and coordinating periodic sales of Debentures and/
or TCs.
    (iv) Arranging for the production of Offering Circulars, 
certificates, and such other documents as may be required from time to 
time.
    (2) Fiscal Agent. The Secretary shall appoint a Fiscal Agent to:
    (i) Establish performance criteria for Poolers.
    (ii) Monitor and evaluate the financial markets to determine those 
factors that will minimize or reduce the cost of funding Debentures.
    (iii) Monitor the performance of the Selling Agent, Poolers, CRA, 
and the Trustee.
    (iv) Perform such other functions as the Secretary, from time to 
time, may prescribe.
    (3) Central Registration Agent. Pursuant to a contract entered into 
with the Secretary, the CRA, as the Secretary's agent, will do the 
following with respect to the Pools or Trust Certificates for the 
Debentures:
    (i) Form an approved Pool or Trust;
    (ii) Issue the TCs in the prescribed form;
    (iii) Transfer the TCs upon the sale of original issue TCs in any 
secondary market transaction;
    (iv) Receive payments from RBICs;
    (v) Make periodic payments as scheduled or required by the terms of 
the TCs, and pay all amounts required to be paid upon prepayment of 
Debentures;
    (vi) Hold, safeguard, and release all Debentures constituting 
Trusts or Pools upon instructions from the Secretary;
    (vii) Remain custodian of such other documentation as the Secretary 
shall direct by written instructions;
    (viii) Provide for the registration of all pooled Debentures, all 
Pools and Trusts, and all TCs; and
    (ix) Perform such other functions as the Secretary may deem 
necessary to implement the provisions of this section.
    (b) Functions. Either the Secretary or an agent appointed by the 
Secretary may perform the function of locating purchasers, and 
negotiating and closing the sale of Debentures and TCs. Nothing in the 
regulations in this part shall be interpreted to prevent the CRA from 
acting as the Secretary's agent for this purpose.


Sec.  4290.1630  Regulation of Brokers and Dealers and disclosure to 
purchasers of Leverage or Trust Certificates.

    (a) Brokers and Dealers. Each broker, dealer, and Pool or Trust 
assembler approved by the Secretary pursuant to these regulations shall 
either be regulated by a Federal financial regulatory agency, or be a 
member of the National Association of Securities Dealers (NASD), and 
shall be in good standing in respect to compliance with the financial, 
ethical, and reporting requirements of such body. It also shall be in 
good standing with the Secretary as determined by the SBA official with 
delegated authority to made this determination (see paragraph (c) of 
this section) and shall provide a fidelity bond or insurance in such 
amount as the Secretary may require.
    (b) Suspension and/or termination of Broker or Dealer. The 
Secretary shall exclude from the sale and all other dealings in 
Debentures or TCs any broker or dealer:
    (1) If such broker's or dealer's authority to engage in the 
securities business has been revoked or suspended by a supervisory 
agency. When such authority has been suspended, the Secretary will 
suspend such broker or dealer for the duration of such suspension by 
the supervisory agency.
    (2) If such broker or dealer has been indicted or otherwise 
formally charged with a misdemeanor or felony bearing on its fitness, 
such broker or dealer may be suspended while the charge is pending. 
Upon conviction, participation may be terminated.
    (3) If such broker or dealer has suffered an adverse final civil 
judgment holding that such broker or dealer has committed a breach of 
trust or violation of law or regulation protecting the integrity of 
business transactions or relationships, participation in the market for 
Debentures or TCs may be terminated.
    (c) Termination/suspension proceedings. A broker's or dealer's 
participation in the market for Debentures or TCs will be conducted in 
accordance with 7 CFR part 11. The Secretary may, for any of the 
reasons stated in paragraphs (b)(1) through (3) of this section, 
suspend the privilege of any broker or dealer to participate in this 
market. The Secretary shall give written notice at least ten business 
days prior to the effective date of such suspension. Such notice shall 
inform the broker or dealer of the opportunity for a hearing pursuant 
to 7 CFR part 11.


Sec.  4290.1640  Secretary's access to records of the CRA, Brokers, 
Dealers and Pool or Trust assemblers.

    The CRA and any broker, dealer and Pool or Trust assembler 
operating under the regulations in this part shall make all books, 
records and related materials associated with Debentures and TCs 
available to the Secretary for review and copying purposes. Such access 
shall be at such party's primary place of business during normal 
business hours.

Miscellaneous


Sec.  4290.1700  Secretary's transfer of interest in a RBIC's Leverage 
security.

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


Sec.  4290.1710  Secretary's authority to collect or compromise claims.

    The Secretary may, upon such conditions and for such consideration 
as he or she deems reasonable, collect or compromise all claims 
relating to obligations he or she holds or has guaranteed, and all 
legal or equitable rights accruing to him or her.


Sec.  4290.1720  Characteristics of Secretary's guarantee.

    If the Secretary agrees to guarantee a RBIC's Debentures, such 
guarantee will be unconditional, irrespective of the validity, 
regularity or enforceability of the Debentures or any other 
circumstances that might constitute a legal or equitable discharge or 
defense of a guarantor. Pursuant to its guarantee, the Secretary will 
make timely payments of principal and interest on the Debentures.

Subpart K--RBIC's Noncompliance With Terms of Leverage


Sec.  4290.1810  Events of default and the Secretary's remedies for 
RBIC's noncompliance with terms of Debentures.

    (a) Applicability of this section. By issuing Debentures, you 
automatically agree to the terms, conditions and remedies in this 
section, as in effect at the time of issuance and as if fully set forth 
in the Debentures.

[[Page 32227]]

    (b) Automatic events of default. The occurrence of one or more of 
the events in this paragraph (b) causes the remedies in paragraph (c) 
of this section to take effect immediately.
    (1) Insolvency. You become equitably or legally insolvent.
    (2) Voluntary assignment. You make a voluntary assignment for the 
benefit of creditors without the Secretary's prior written approval.
    (3) Bankruptcy. You file a petition to begin any bankruptcy or 
reorganization proceeding, receivership, dissolution or other similar 
creditors' rights proceeding, or such action is initiated against you 
and is not dismissed within 60 days.
    (c) Remedies for automatic events of default. Upon the occurrence 
of one or more of the events in paragraph (b) of this section:
    (1) Without notice, presentation or demand, the entire indebtedness 
evidenced by your Debentures, including accrued interest, and any other 
amounts owed with respect to your Debentures, is immediately due and 
payable; and
    (2) You automatically consent to the appointment of the Secretary 
or his or her designee, as your receiver under section 384M of the Act.
    (d) Events of default with notice. For any occurrence (as 
determined by the Secretary) of one or more of the events in this 
paragraph (d), the Secretary may avail him or herself of one or more of 
the remedies in paragraph (e) of this section.
    (1) Fraud. You commit a fraudulent act that causes detriment to the 
Secretary's position as a creditor or guarantor.
    (2) Fraudulent transfers. You make any transfer or incur any 
obligation that is fraudulent under the terms of 11 U.S.C. 548.
    (3) Willful conflicts of interest. You willfully violate Sec.  
4290.730.
    (4) Willful non-compliance. You willfully violate one or more of 
the substantive provisions of the Act or any substantive regulation 
promulgated under the Act or any substantive provision of your 
Participation Agreement.
    (5) Repeated Events of Default. At any time after being notified of 
the occurrence of an event of default under paragraph (f) of this 
section, you engage in similar behavior that results in another 
occurrence of the same event of default.
    (6) Transfer of Control. You willfully violate Sec.  4290.410, and 
as a result of such violation you undergo a transfer of Control.
    (7) Non-cooperation under Sec.  4290.1810(h). You fail to take 
appropriate steps, satisfactory to the Secretary, to accomplish any 
action the Secretary may have required under paragraph (h) of this 
section.
    (8) Non-notification of Events of Default. You fail to notify the 
Secretary as soon as you know or reasonably should have known that any 
event of default exists under this section.
    (9) Non-notification of defaults to others. You fail to notify the 
Secretary in writing within ten days from the date of a declaration of 
an event of default or nonperformance under any note, debenture or 
indebtedness of yours, issued to or held by anyone other than the 
Secretary.
    (e) Remedies for events of default with notice. Upon written notice 
to you of the occurrence (as determined by the Secretary) of one or 
more of the events in paragraph (d) of this section:
    (1) The Secretary may declare the entire indebtedness evidenced by 
your Debentures, including accrued interest and/or any other amounts 
owed the Secretary with respect to your Debentures, immediately due and 
payable: and
    (2) The Secretary may avail himself or herself of any remedy 
available under the Act, specifically including institution of 
proceedings for his or her, or his or her designee's appointment as 
your receiver under section 384M(c) of the Act.
    (f) Events of default with opportunity to cure. For any occurrence 
(as determined by the Secretary) of one or more of the events in this 
paragraph (f), the Secretary may avail him or herself of one or more of 
the remedies in paragraph (g) of this section.
    (1) Excessive Management Expenses. Without the Secretary's prior 
written consent, you incur Management Expenses in excess of those 
permitted under Sec. Sec.  4290.510 and 4290.520.
    (2) Improper Distributions. You make any Distribution to your 
shareholders or partners, except with the Secretary's prior written 
consent, other than:
    (i) Distributions permitted under Sec.  4290.585; and
    (ii) Payments from Retained Earnings Available for Distribution 
based on either the shareholders' or members' pro-rata interests or the 
provisions for profit distributions in your partnership agreement, as 
appropriate.
    (3) Failure to make payment. Unless otherwise approved by the 
Secretary, you fail to make timely payment of any amount due under any 
security or obligation of yours that is issued to, held or guaranteed 
by the Secretary.
    (4) Failure to maintain Regulatory Capital. You fail to maintain 
the minimum Regulatory Capital required under these regulations or, 
without the Secretary's prior written consent, you reduce your 
Regulatory Capital except as permitted by Sec.  4290.585.
    (5) Capital Impairment. You have a condition of Capital Impairment 
as determined under Sec.  4290.1830.
    (6) Cross-default. An obligation of yours that is greater than 
$100,000 becomes due or payable (with or without notice) before its 
stated maturity date, for any reason including your failure to pay any 
amount when due. This provision does not apply if you pay the amount 
due within any applicable grace period or contest the payment of the 
obligation in good faith by appropriate proceedings.
    (7) Nonperformance. You violate or fail to perform one or more of 
the terms and conditions of any security or obligation of yours that is 
issued to, held or guaranteed by the Secretary, or of any agreement 
(including your Participation Agreement) with or conditions imposed by 
the Secretary in the administration of the Act and the regulations 
promulgated under the Act.
    (8) Noncompliance. Except as otherwise provided in paragraph (d)(5) 
of this section, the Secretary determines that you have violated one or 
more of the substantive provisions of the Act or any substantive 
regulation promulgated under the Act.
    (9) Failure to maintain diversity. You fail to maintain diversity 
between management and ownership as required by Sec.  4290.150.
    (g) Remedies for events of default with opportunity to cure. (1) 
Upon written notice to you of the occurrence (as determined by the 
Secretary) of one or more of the events of default in paragraph (f) of 
this section, and subject to the conditions in paragraph (g)(2) of this 
section:
    (i) The Secretary may declare the entire indebtedness evidenced by 
your Debentures, including accrued interest, and/or any other amounts 
owed the Secretary with respect to your Debentures, immediately due and 
payable; and
    (ii) The Secretary may avail himself or herself of any remedy 
available under the Act, specifically including institution of 
proceedings for the appointment of the Secretary or a designee as your 
receiver under Sec.  348M of the Act.
    (2) The Secretary may invoke the remedies in paragraph (g)(1) of 
this section only if:
    (i) You have been given at least 15 days to cure the default(s); 
and

[[Page 32228]]

    (ii) You fail to cure the default(s) to the Secretary's 
satisfaction within the allotted time.
    (h) Repeated non-substantive violations. If you repeatedly fail to 
comply with one or more of the non-substantive provisions of the Act or 
any non-substantive regulation promulgated under the Act, the 
Secretary, after written notification to you and until you cure such 
condition to the Secretary's satisfaction, may deny you additional 
Leverage and/or require you to take such actions as the Secretary may 
determine to be appropriate under the circumstances.
    (i) Consent to removal of officers, directors, or general partners 
and/or appointment of receiver. The Articles of each RBIC must include 
the following provisions as a condition to the purchase or guarantee of 
Leverage. Upon the occurrence of any of the events specified in 
paragraphs (d)(1) through (d)(6) or (f)(l) through (f)(3) of this 
section as determined by the Secretary, the Secretary shall have the 
right, and you consent to the Secretary's exercise of such right:
    (1) With respect to a Corporate RBIC, upon written notice, to 
require you to replace, with individuals approved by the Secretary, one 
or more of your officers and/or such number of directors of your board 
of directors as is sufficient to constitute a majority of such board; 
or
    (2) With respect to a Partnership RBIC or an LLC RBIC, upon written 
notice, to require you to remove the person(s) responsible for such 
occurrence and/or to remove the general partner or manager of the RBIC, 
which general partner or manager shall then be replaced in accordance 
with the RBIC's Articles by a new general partner or manager approved 
by the Secretary; and/or
    (3) With respect to a Corporate RBIC, Partnership RBIC, or LLC 
RBIC, to obtain the appointment of the Secretary or his or her designee 
as your receiver under section 384M of the Act for the purpose of 
continuing your operations. The appointment of a receiver to liquidate 
an RBIC is not within such consent, but is governed instead by the 
relevant provisions of the Act.

Computation of RBIC'S Capital Impairment


Sec.  4290.1830  RBIC's Capital Impairment definition and general 
requirements.

    (a) Significance of Capital Impairment condition. If you have a 
condition of Capital Impairment, you are not in compliance with the 
terms of your Leverage. As a result, the Secretary has the right to 
impose the applicable remedies for noncompliance in Sec.  4290.1810(g).
    (b) Definition of Capital Impairment condition. You have a 
condition of Capital Impairment if your Capital Impairment Percentage, 
as computed pursuant to the procedures set forth in Sec.  4290.1840, 
exceeds 70 percent.
    (c) Quarterly computation requirement and procedure. You must 
determine whether you have a condition of Capital Impairment as of the 
end of each fiscal quarter. You must notify the Secretary promptly if 
you are Capitally Impaired.
    (d) The Secretary's right to determine RBIC's Capital Impairment 
condition. The Secretary may make his or her own determination of your 
Capital Impairment condition at any time.


Sec.  4290.1840  Computation of RBIC's Capital Impairment Percentage.

    (a) General. This section contains the procedures you must use to 
determine your Capital Impairment Percentage. You must compare your 
Capital Impairment Percentage to the maximum permitted under Sec.  
4290.1830(b) to determine whether you have a condition of Capital 
Impairment.
    (b) Preliminary impairment test. If you satisfy the preliminary 
impairment test, your Capital Impairment Percentage is zero and you do 
not have to perform any more procedures in this Sec.  4290.1840. 
Otherwise, you must continue with paragraph (c) of this section. You 
satisfy the test if each of the following amounts is zero or greater:
    (1) The sum of Undistributed Net Realized Earnings, as reported on 
SBA Form 468, and Includible Non-Cash Gains.
    (2) Unrealized Gain (Loss) on Securities Held.
    (c) How to compute your Capital Impairment Percentage. (1) If you 
have an Unrealized Gain on Securities Held, compute your Adjusted 
Unrealized Gain using paragraph (d) of this section. If you have an 
Unrealized Loss on Securities Held, continue with paragraph (c)(2) of 
this section.
    (2) Add together your Undistributed Net Realized Earnings, your 
Includible Non-cash Gains, and either your Unrealized Loss on 
Securities Held or your Adjusted Unrealized Gain.
    (3) If the sum in paragraph (c)(2) of this section is zero or 
greater, your Capital Impairment Percentage is zero.
    (4) If the sum in paragraph (c)(2) of this section is less than 
zero, drop the negative sign, divide by your Regulatory Capital 
(excluding Treasury Stock), and multiply by 100. The result is your 
Capital Impairment Percentage.
    (d) How to compute your Adjusted Unrealized Gain.
    (1) Subtract Unrealized Depreciation from Unrealized Appreciation. 
This is your ``Net Appreciation''.
    (2) Determine your Unrealized Appreciation on Publicly Traded and 
Marketable securities. This is your ''Class I Appreciation''.
    (3) Determine your Unrealized Appreciation on securities that are 
not Publicly Traded and Marketable and meet the following criteria, 
which must be substantiated to the Secretary's satisfaction (this is 
your ``Class 2 Appreciation''):
    (i) The Portfolio Concern that issued the security received a 
significant subsequent equity financing by an investor whose objectives 
were not primarily strategic and at a price that conclusively supports 
the Unrealized Appreciation;
    (ii) Such financing represents a substantial investment in the form 
of an arm's-length transaction by a sophisticated new investor in the 
issuer's securities; and
    (iii) Such financing occurred within 24 months of the date of the 
Capital Impairment computation, or the Portfolio Concern's pre-tax cash 
flow from operations for its most recent fiscal year was at least 10 
percent of its average contributed capital for such fiscal year.
    (4) Perform the appropriate computation from the table in 13 CFR 
107.1840(d)(4).
    (5) Reduce the gain computed in paragraph (d)(4) of this section by 
your estimate of related future income tax expense. Subject to any 
adjustment required by paragraph (d)(6) of this section, the result is 
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this 
section.
    (6) If any securities that are the source of either Class 1 or 
Class 2 Appreciation are pledged or encumbered in any way, you must 
reduce the Adjusted Unrealized Gain computed in paragraph (d)(5) of 
this section by the amount of the related borrowing or other 
obligation, up to the amount of the Unrealized Appreciation on the 
securities.

Subpart L--Ending Operations as a RBIC


Sec.  4290.1900  Termination of participation as a RBIC.

    You may not terminate your participation as a RBIC without the 
Secretary's prior written approval. Your request for approval must be 
accompanied by an offer of immediate repayment of all of your 
outstanding

[[Page 32229]]

Leverage (including any prepayment penalties thereon), or by a plan 
satisfactory to the Secretary for the orderly liquidation of the RBIC.

Subpart M--Miscellaneous


Sec.  4290.1910  Non-waiver of rights or terms of Leverage security.

    The Secretary's failure to exercise or delay in exercising any 
right or remedy under the Act or the regulations in this part does not 
constitute a waiver of such right or remedy. The Secretary's failure to 
require you to perform any term or provision of your Leverage does not 
affect the Secretary's right to enforce such term or provision. 
Similarly, the Secretary's waiver of, or failure to enforce, any term 
or provision of your Leverage or of any event or condition set forth in 
Sec.  4290.1810 does not constitute a waiver of any succeeding breach 
of such term or provision or condition.


Sec.  4290.1920  RBIC's application for exemption from a regulation in 
this part 4290.

    (a) General. You may file an application in writing with the 
Secretary to have a proposed action exempted from any procedural or 
substantive requirement, restriction, or prohibition to which it is 
subject under this part, unless the provision is mandated by the Act. 
The Secretary may grant an exemption for such applicant, conditionally 
or unconditionally, provided the exemption would not be contrary to the 
purposes of the Act.
    (b) Contents of application. Your application must be accompanied 
by supporting evidence that demonstrates to the Secretary's 
satisfaction that:
    (1) The proposed action is fair and equitable; and
    (2) The exemption requested is reasonably calculated to advance the 
best interests of the RBIC program in a manner consistent with the 
policy objectives of the Act and the regulations in this part.


Sec.  4290.1930  Effect of changes in this part 4290 on transactions 
previously consummated.

    The legality of a transaction covered by the regulations in this 
part is governed by the regulations in this part in effect at the time 
the transaction was consummated, regardless of later changes. Nothing 
in this part bars enforcement action with respect to any transaction 
consummated in violation of provisions applicable at the time, but no 
longer in effect.


Sec.  4290.1940  Integration of this part with other regulations 
applicable to USDA's programs.

    (a) Intergovernmental review. To the extent applicable to this 
part, the Secretary will comply with subpart V of 7 CFR part 3015, 
``Intergovernmental Review of Department of Agriculture Programs and 
Activities.'' The Secretary has not delegated this responsibility to 
SBA pursuant to Sec.  4290.45 of this part.
    (b) National flood insurance. To the extent applicable to this 
part, the Secretary will comply with subpart B of 7 CFR part 1806. The 
Secretary has not delegated this responsibility to SBA pursuant to 
Sec.  4290.45 of this part.
    (c) Clean Air Act and Water Pollution Control Act requirements. To 
the extent applicable to this part, the Secretary will comply with the 
requirements of the Clean Air Act, section 306; the Clean Water Act, 
section 508; Executive Order 11738; and 40 CFR part 32. The Secretary 
has not delegated this responsibility to SBA pursuant to Sec.  4290.45 
of this part.
    (d) Historic preservation requirements. To the extent applicable to 
this part, the Secretary will comply with subpart F of 7 CFR part 1901. 
The Secretary has not delegated this responsibility to SBA pursuant to 
Sec.  4290.45 of this part.
    (e) Lead-based paint requirements. To the extent applicable to this 
part, the Secretary will comply with subpart A of 7 CFR part 1924. The 
Secretary has not delegated this responsibility to SBA pursuant to 
Sec.  4290.45 of this part.
    (f) Conflict of interest. To the extent applicable to this part, 
the Secretary will comply with subpart D of 7 CFR part 1900 and RD 
Instruction 2045-BB. The Secretary has not delegated this 
responsibility to SBA pursuant to Sec.  4290.45 of this part.
    (g) Civil rights impact analysis. To the extent applicable to this 
part, the Secretary will comply with RD Instruction 2006-P, ``Civil 
Rights Impact Analysis.'' The Secretary has not delegated this 
responsibility to SBA pursuant to Sec.  4290.45 of this part.
    (h) Environmental requirements. To the extent applicable to this 
part, the Secretary will comply with subpart G of 7 CFR part 1940. The 
Secretary has not delegated this responsibility to SBA pursuant to 
Sec.  4290.45 of this part.
    (i) Appeals to the National Appeals Division for review of adverse 
decisions. Applicants and RBICs have the right to request review by the 
National Appeals Division within the USDA of adverse decisions, as 
defined in 7 CFR 11.1, pursuant to 7 CFR part 11.

Subpart N--Requirements for Operational Assistance Grants to RBICs


Sec.  4290.2000  Operational Assistance Grants to RBICs.

    (a) Regulations governing. Regulations governing Operational 
Assistance grants to RBICs may be found in subparts D and E of this 
part 4290 and in this Sec.  4290.2000.
    (b) Restrictions on use. A RBIC must use Operational Assistance 
grant funds only to provide Operational Assistance to Smaller 
Enterprises to which it either has made, or expects to make, a 
Financing.
    (c) Amount of grant. Each RBIC will receive an Operational 
Assistance grant award equal to the lesser of 10 percent of the 
Regulatory Capital raised by the RBIC at the time of licensing or 
$1,000,000.
    (d) Term. Operational Assistance grants made under this part will 
be made for a multiyear period (not to exceed 10 years) under such 
terms as the Secretary may require.
    (e) Reporting and recordkeeping requirements. Policies governing 
reporting, record retention, and recordkeeping requirements applicable 
to RBICs may be found in subpart H of this part 4290.

    Dated: June 1, 2004.
Gilbert Gonzalez,
Acting Under Secretary for Rural Development.
[FR Doc. 04-12731 Filed 6-3-04; 3:09 pm]
BILLING CODE 3410-XY-P