[Federal Register Volume 77, Number 76 (Thursday, April 19, 2012)]
[Rules and Regulations]
[Pages 23373-23380]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9454]



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  Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Rules 
and Regulations  

[[Page 23373]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AF86


Small Business Investment Companies--Energy Saving Qualified 
Investments

AGENCY: U.S. Small Business Administration

ACTION: Final rule.

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

SUMMARY: In this rule, the U.S. Small Business Administration (SBA) 
sets forth defined terms for ``Energy Saving Qualified Investment'' and 
``Energy Saving Activities'' for the Small Business Investment Company 
(SBIC) Program. These definitions are established to implement a 
provision of the Energy Independence and Security Act of 2007 (Energy 
Act), which allows an SBIC making an ``energy saving qualified 
investment'' to obtain SBA leverage by issuing a deferred interest 
``energy saving debenture''. This rule also implements a provision of 
the Energy Act that provides access to additional SBA leverage for 
SBICs that have made Energy Saving Qualified Investments in Smaller 
Enterprises. This final rule includes changes based on public comments 
received on the proposed rule published in the Federal Register on 
January 11, 2011. Generally, the changes allow a broader range of 
potential investments to qualify as Energy Saving Qualified Investments 
and reduce the need for SBICs to obtain pre-financing determinations of 
eligibility from SBA.

DATES: This rule is effective April 19, 2012.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Office of Investment, 
(202) 205-7559 or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The Energy Independence and Security Act of 2007, Public Law 110-
140, Title XII, section 1205(a), amended section 303 of the Small 
Business Investment Act of 1958 (SBI Act) by authorizing SBICs licensed 
after September 30, 2008, to issue Energy Saving Debentures. Section 
1205(b) of the Energy Act amended section 103 of the SBI Act by adding 
the new defined terms ``energy saving debenture'' and ``energy saving 
qualified investment.'' Section 1206 of the Energy Act amended section 
303(b)(2) of the SBI Act to make SBICs licensed after September 30, 
2008, eligible for additional leverage if they have made Energy Saving 
Qualified Investments. An SBIC making maximum use of this provision 
could have approximately 11% more leverage outstanding than would be 
permitted under the standard leverage eligibility formula.
    On January 11, 2011, SBA published a proposed rule to implement the 
SBIC-related provisions of the Energy Act (76 FR 2029). SBA received 
eleven sets of comments on the proposed rule, primarily falling into 
three areas: (1) Definitions; (2) procedures and timing when SBA must 
make a pre-financing determination of eligibility, including the 
details of SBA's collaboration with the Department of Energy (DOE); and 
(3) impact of the Energy Saving Debenture on SBIC program costs. SBA 
discusses the comments in the following section-by-section analysis.

II. Section by Section Analysis

    Section 107.50--Definitions. The Energy Act provides that Energy 
Saving Debentures are to be issued at a discount with a five- or ten-
year maturity, and require no interest payment or annual charge for the 
first five years. Although an SBIC can use other funds to make an 
Energy Saving Qualified Investment, an SBIC that issues an Energy 
Saving Debenture must use the proceeds only to make an Energy Saving 
Qualified Investment. To implement these statutory provisions, SBA 
proposed to add ``Energy Saving Qualified Investment'' and ``Energy 
Saving Activities'' as defined terms in Sec.  107.50. SBA is finalizing 
both definitions with modifications.

``Energy Saving Qualified Investment''

    The proposed regulatory definition of Energy Saving Qualified 
Investment had several key points. First, as required by statute, an 
Energy Saving Qualified Investment can only be made by an SBIC licensed 
after September 30, 2008. Second, the investment must be made in a 
Small Business, as defined in 13 CFR part 107. Third, the investment 
must be in the form of a Loan, a Debt Security (a debt instrument that 
includes an equity feature, such as warrants or rights to convert to 
equity), or an Equity Security. Fourth, the Small Business must be 
``primarily engaged'' in business activities that reduce the use or 
consumption of non-renewable energy sources (``Energy Saving 
Activities'').
    Four commenters suggested that SBA broaden the criteria under which 
a Small Business is presumed to be ``primarily engaged'' in Energy 
Saving Activities. In the proposed rule, the presumption applied only 
to a Small Business that derived at least 50% of its revenues during 
its most recently completed fiscal year from Energy Saving Activities. 
The commenters' concern was that a Small Business would not be able to 
satisfy a historical revenue-based test if it was either a start-up or 
an established company expanding its business to include Energy Saving 
Activities. While the proposed rule would have allowed SBA to make a 
determination of eligibility in such cases, SBA agrees that a broader 
presumption of eligibility would be an effective way to encourage 
investment and reduce administrative burden. In considering how to 
expand the presumption in the final rule, SBA favored a test that would 
be simple to apply and would focus on prospective rather than 
historical activity. In the final rule, SBA has retained the proposed 
revenue-based presumption while adding a second presumption: a Small 
Business is presumed to meet the ``primarily engaged'' test if it will 
utilize 100% of the proceeds of a financing to engage in Energy Saving 
Activities.

``Energy Saving Activities''

    The proposed rule defined Energy Saving Activities largely by 
referencing certain criteria established by the Department of Energy 
and other Federal agencies to identify energy efficient products and 
services and renewable energy sources. As one example, the

[[Page 23374]]

design or manufacturing of products that satisfy the criteria for use 
of the Energy Star trademark label would qualify as an Energy Saving 
Activity.
    Paragraph (1) of the proposed definition provided that Energy 
Saving Activities would include not only manufacturing or research and 
development of energy-efficient final products, but also ``integral 
product components, integral material, or related software''. One 
commenter asked SBA to clarify that Small Businesses producing ``supply 
chain'' components for products eligible for federal tax credits are 
included in the definition of Energy Saving Activities. SBA intended 
paragraph (1) of the proposed definition to include the activities of 
``supply chain'' Small Businesses. SBA believes the proposed rule was 
sufficiently clear on this point and does not require modification.
    SBA received a comment to include under the definition of Energy 
Saving Activities any Small Business activity that qualifies for either 
the Residential Energy Tax Credit or an Advanced Research Project 
Agency--Energy (ARPA-E) grant award. With the agreement of DOE, SBA has 
added paragraph (1)(v) to the Energy Saving Activities definition to 
include those activities, as well as any other technology 
commercialization activity that has qualified for a DOE Small Business 
Innovation Research (SBIR) or Small Business Technology Transfer (STTR) 
award.
    SBA received, but did not adopt, a comment suggesting that 
paragraph (1)(iii) of the definition, which describes activities that 
improve ``automobile'' efficiency, should be broadened to include other 
means of transport such as trucks, buses, trains, and aircraft. This 
provision of the proposed rule was based upon DOE's specific expertise 
in energy savings activities related to passenger vehicles, whereas 
other transportation alternatives would fall across the purview of 
several Federal agencies. SBA expects that many activities aimed at 
achieving results similar to those described in paragraph (1)(iii) for 
forms of transportation other than automobiles would qualify as Energy 
Saving Activities under paragraph (4) of the definition.
    SBA received five comments suggesting the definition of Energy 
Saving Activities be expanded to specifically include the biomass 
preprocess of pyrolysis, which is one method of biomass conversion for 
the ultimate production of renewable solid fuels. Based on consultation 
with DOE, SBA did not adopt this suggestion, as each preprocess of 
biomass is situational and specific and there are currently no approved 
standards by which to evaluate all levels of biomass preprocesses and 
conversion methods. With the many possible technological permutations, 
SBA believes that potential SBIC investments involving pyrolysis or any 
type of preprocessing of biomass should be evaluated on a case-by-case 
basis under paragraph (4) of the definition.
    SBA received one comment to expand the definition of Energy Saving 
Activities to include ``earthquake disaster potential and pipeline 
safety'' of both non-renewable and renewable energy sources. While SBA 
agrees that these are important concerns, they are outside the scope of 
activities contemplated by the Energy Act.
    SBA received one comment to broaden the definition of Energy Saving 
Activities ``* * * to include all forms of commercialization of 
R[esearch] &D[evelopment], including `licensing' and `outsourcing' as 
well as revenues generated by those activities.'' Paragraphs (1) and 
(4) of the proposed definition already encompassed research and 
development activities; the commenter's suggestion would also treat the 
receipt of licensing fees, royalties, or similar payments as an Energy 
Saving Activity if such payments were generated from the results of 
previously conducted research and development that would have qualified 
as Energy Saving Activities. SBA does not believe that the passive 
receipt of payments is appropriate for inclusion in the definition. 
Furthermore, if a Small Business generates revenues solely from 
licensing or similar activities, it would be ineligible for SBIC 
financing under existing Sec.  107.720(b), which prohibits the 
financing of a passive business. It should be noted, however, that a 
Small Business that outsources the manufacturing of its products may 
still qualify for financing (and its activities may qualify as Energy 
Saving Activities) if it is actively engaged in product design or 
deployment.
    Paragraph (1)(v) of the Energy Saving Activities definition in the 
proposed rule (redesignated as paragraph (1)(vi) in the final rule) 
included activities that meet the standards for receiving Energy 
Credits as defined in Internal Revenue Code section 48, among which is 
a credit related to qualified fuel cell power plants. In the final 
rule, at the suggestion of DOE, SBA has added paragraph (1)(vii) to the 
Energy Saving Activities definition, to clarify that the definition 
includes the provision of highly efficient conversion systems for fuel 
cells that can use renewable or non-renewable fuel.
    SBA has also made non-substantive edits to improve the clarity of 
paragraphs (1)(viii) and (2)(v) of the Energy Saving Activities 
definition. Paragraph (1)(viii) concerns manufacturing or research and 
development activities that improve electricity delivery efficiency by 
supporting one or more defined smart grid functions; paragraph (2)(v) 
concerns deployment of products, services or functionalities for the 
same purpose.
    Section 107.610--Required Certifications for Loans and Investments. 
SBA received two comments on the certification requirements for Energy 
Saving Qualified Investments in proposed Sec.  107.610(f), in 
particular the requirements in paragraph (f)(2) applicable to 
investments for which SBA must make a pre-financing determination of 
eligibility. In such cases, the proposed rule would have required 
materials submitted to SBA to be certified as true and correct by both 
the Small Business and the SBIC to the best of their knowledge. The 
commenters pointed out that an SBIC might not be in a position to make 
the required certification at the date of submission because due 
diligence on the prospective investment would probably still be in its 
early stages. SBA agrees that this is a valid concern and has modified 
the final rule so that only the Small Business must provide a 
certification at the date of submission. As of the closing date of the 
Financing all due diligence should be completed, and at that time the 
SBIC would be required to certify that, to the best of its knowledge, 
it has no reason to believe that the materials submitted to SBA are 
incorrect.
    As part of its review of the certification requirements in response 
to the comments on the proposed rule, SBA noted that proposed paragraph 
(f)(1), which concerns Energy Saving Qualified Investments that do not 
require a pre-financing determination of eligibility by SBA, required a 
certification by the SBIC but not by the concern receiving the 
financing. Because not all information can be independently confirmed, 
an SBIC must rely to some degree on the integrity of the information 
that a concern provides. Therefore, in the final rule, Sec.  
107.610(f)(1)(iv) adds a requirement under which a concern receiving 
financing must certify, as true and correct to the best of its 
knowledge, any information it provided to an SBIC in connection with 
the determination that the concern was eligible to receive an Energy 
Saving Qualified Investment.

[[Page 23375]]

    As discussed earlier in this preamble, SBA has revised the 
definition of Energy Saving Qualified Investment by adding a 
presumption that a Small Business will be considered ``primarily 
engaged'' in Energy Saving Activities if it intends to use all of the 
proceeds of a proposed financing for such activities. In connection 
with that revision, SBA has added post-investment requirements for 
documentation of the actual use of proceeds in Sec.  107.610(f)(5). 
Under these provisions, the Small Business must provide the SBIC with 
documentation of the use of proceeds no later than six months after the 
closing date of the financing; if some or all of the proceeds have not 
yet been spent, further updates would be required at six-month 
intervals. SBA expects, given the substantial investment amounts 
typically involved, that an SBIC would monitor use of proceeds at least 
this frequently in the ordinary course of business. The SBIC would be 
responsible for reviewing the information submitted by the Small 
Business and documenting that it had reasonably determined that the 
financing proceeds were used appropriately to fund Energy Saving 
Activities.
    SBA has also slightly reorganized Sec.  107.610(f) for greater 
clarity; in the final rule, Sec.  107.610(f)(2) includes only the 
requirements for an SBIC seeking a determination from SBA that an 
activity in which a concern is engaged is an Energy Saving Activity. 
The requirements for an SBIC seeking a determination from SBA that a 
concern is ``primarily engaged'' in Energy Saving Activities appear 
separately in Sec.  107.610(f)(3). The requirement for certification by 
the SBIC as of the closing date of the financing appears in Sec.  
107.610(f)(4).
    SBA also received three comments dealing more generally with the 
process and timeframe for obtaining a pre-financing determination of 
eligibility from SBA. Commenters suggested that SBA allow SBICs to 
submit materials electronically and develop an expected timeline for 
consideration for SBA to reach a decision in consultation with DOE.
    SBA has and will continue to consult with DOE technical experts on 
an as-needed basis when evaluating whether certain small business 
concerns are primarily engaged in an energy saving activity (per 
request of an SBIC as part of the pre-financing determination of 
eligibility of use for the Energy Savings Debenture program). As 
discussed in the ``Paperwork Reduction Act'' section of this preamble, 
SBA will electronically collect information from an SBIC through the 
``Financing Eligibility Statement for Usage of Energy Saving 
Debenture''.
    Section 107.1150--Maximum Amount of Leverage for a Section 301(c) 
Licensee. New paragraph (d) implements a provision of the Energy Act 
that may provide additional leverage eligibility to SBICs licensed on 
or after October 1, 2008, that make Energy Saving Qualified Investments 
in Smaller Enterprises. SBA received no comments on this provision and 
is finalizing the section as proposed.
    Other Comments. In addition to the comments received on specific 
provisions of the proposed rule, SBA received four comments suggesting 
that SBA report on various topics, including among others: Energy 
Saving Debenture usage, number of Small Businesses financed, resulting 
breakthroughs in technology, comparative studies quantifying energy 
savings, and performance of Small Businesses financed. While SBA is 
concerned about minimizing any increases in the reporting burden placed 
on SBICs and Small Businesses, SBA recognizes a particular need to 
monitor the performance of investments financed with the proceeds of 
Energy Saving Debentures, because of their potential impact on fees 
charged to all SBICs utilizing debenture leverage. SBA plans to ask 
SBICs to identify each financing that is an Energy Saving Qualified 
Investment through a certification made at the time of such financing 
and through quarterly and annual financial reports to SBA. SBICs will 
also be asked to indicate whether an Energy Saving Qualified Investment 
was financed with the proceeds of an Energy Saving Debenture or a 
standard debenture. With these identifiers, SBA will be able to track 
the performance of Energy Saving Qualified Investments and the SBICs 
that have made them. SBA expects to make the information collected 
available to the public in aggregated form.

Energy Saving Debenture

    As discussed in the preamble to the proposed rule, section 1205(b) 
of the Energy Act provided for SBA leverage in the form of an ``energy 
saving debenture'', which would be a five- or ten-year debenture issued 
at a discount so as to be, in effect, a ``zero coupon'' debenture for 
the first five years. SBA leverage fees would be paid as required under 
current Sec.  107.1130, except for the annual charge in Sec.  
107.1130(d) which would be deferred for the first five years and 
thereafter be payable semi-annually along with the debenture interest. 
For example, an SBIC issuing a $1,000,000 ten-year debenture with a 
combined interest rate and annual charge of 6% would receive roughly 
$750,000 upon issuance and would make no payments of interest or annual 
charge for the first five years. Starting with the sixth year, the SBIC 
would make semi-annual payments of interest and charges on the 
debenture's face amount of $1,000,000. At maturity the SBIC would pay 
the $1,000,000 face amount of the debenture.
    Each SBIC licensed after September 30, 2008, that is eligible to 
issue debentures under current regulations would be eligible to issue 
an Energy Saving Debenture for the purpose of making an Energy Saving 
Qualified Investment. No regulatory changes are necessary to implement 
this new type of debenture. However, SBA did receive a number of 
comments concerning the Energy Saving Debenture.
    SBA received two comments stating that SBA should clarify how an 
SBIC will be able to calculate the net proceeds it can expect to 
receive when it issues an Energy Saving Debenture. The same two 
commenters also asked whether the interest rate on an Energy Saving 
Debenture could change after issuance if SBA were to include the 
debenture in a pool of securities offered for public or private sale, 
and if so whether the change might affect the funds available to the 
SBIC.
    As discussed elsewhere in this preamble, the cash received by an 
SBIC issuing an Energy Saving Debenture would be the face value of the 
debenture discounted by the present value of the interest and annual 
Charge for the five-year discount period. SBA currently maintains a 
calculator that an SBIC can use to estimate the net proceeds of an LMI 
debenture, which has the same structure as the Energy Saving Debenture. 
The LMI calculator can be accessed through http://www.sba.gov/content/lmi-debenture-calculator.
    SBA does not anticipate that Energy Saving Debentures will be 
pooled. SBICs can expect the interest rate on such debentures to remain 
fixed for their entire term.
    SBA received two comments stating that SBICs planning to use Energy 
Saving Debentures must be able to understand how SBA intends to 
apportion availability. Beginning in fiscal year 2012, SBA expects to 
hold annual Energy Saving Debenture allocations on a semi-annual basis, 
authorizing up to half of the overall annual allocation amount in the 
first allocation period and the remainder in the second period. SBA 
will limit the maximum initial Energy Saving Debenture allocation for 
an individual

[[Page 23376]]

SBIC to an amount equal to the SBIC's Regulatory Capital (i.e., one 
tier of leverage) in any fiscal year. If aggregate demand at one tier 
of leverage is greater than the amount available, SBA will scale back 
SBICs' leverage requests as necessary. An SBIC that received an 
allocation of Energy Saving Debenture leverage in the first allocation 
period may seek an additional allocation in the second period, subject 
to availability.
    Finally, SBA received two comments regarding the impact of the 
Energy Saving Debenture on program costs; these comments are discussed 
in the section of this preamble concerning compliance with Executive 
Order 12866.

Electronic Access to Criteria for Evaluation of ``Energy Saving 
Activities''

    As discussed in the preamble to the proposed rule, SBA intends to 
link its Investment Division Web site (www.sba.gov/inv) to other 
government Web sites that will assist users in determining whether a 
company providing or developing particular products or services is 
engaged in Energy Saving Activities. Some sites allow users to search 
for a specific product by name, while others provide performance 
criteria or outcomes that a qualifying product or service must satisfy. 
The current addresses for these sites are repeated here for the 
convenience of the reader:
1. Energy Star
www.energystar.gov/products
2. Federal Energy Management Program
www1.eere.energy.gov/femp/technologies/eep_purchasingspecs.html
3. Renewable Electricity Production Tax Credit (Internal Revenue Code 
Section 45)
http://www.irs.gov/irb/2010-18_IRB/ar11.html
4. Energy Credit (Internal Revenue Code Section 48)
http://frwebgate.access.gpo.gov/cgi-bin/
usc.cgi?ACTION=RETRIEVE&FILE=$$xa$$busc26.wais&start=1688508&SIZE=98870&
TYPE=PDF
5. Installation-Related Federal Tax Credits for Consumer Energy 
Efficiency
http://www.energystar.gov/index.cfm?c=tax_credits.tx_index

III. Justification for Immediate Effective Date

    The Administrative Procedure Act (APA), 5 U.S.C. 553(d)(3), 
requires that ``publication or service of a substantive rule shall be 
made not less than 30 days before its effective date, except * * * as 
otherwise provided by the agency for good cause found and published 
with the rule.''
    The purpose of this provision is to provide interested and affected 
members of the public sufficient time to adjust their behavior before 
the rule takes effect. In the case of this rulemaking, however, there 
should be no need for any member of the public, including any SBIC, to 
make any changes in order to prepare for the rule taking effect. This 
rule implements changes to the SBIC program to encourage financings in 
Energy Saving Qualified Investments, which are expected to contribute 
to the important goal of reducing U.S. dependence on non-renewable 
fuels. Any further delay in making leverage available to SBICs in the 
form of Energy Saving Debentures will only hold back the potential 
benefits of investment in small business engaged in Energy Saving 
Activities. SBA therefore finds that there is good cause for making 
this rule effective immediately instead of observing the 30-day period 
between publication and effective date.

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

    OMB has determined that this rule is a ``significant'' regulatory 
action under Executive Order 12866. In the proposed rule, SBA set forth 
its initial regulatory impact analysis, which addressed the following: 
Necessity of the regulation; alternative approaches to the proposed 
rule; and the potential benefits and costs of the regulation. SBA 
received comments which addressed both alternative approaches to and 
potential costs of the regulation. Those comments are discussed in the 
final Regulatory Impact Analysis set forth below:
1. Necessity of Regulation
    This regulatory action implements sections 1205 and 1206 of the 
Energy Independence and Security Act of 2007, Public Law 110-140. The 
statutory revisions provide an SBIC seeking to make an ``energy saving 
qualified investment'' with a new SBA leverage option in the form of an 
``energy saving debenture.''
2. Alternative Approaches to Regulation
    Because the regulatory definition of Energy Saving Qualified 
Investment must be consistent with the statutory definition, SBA had a 
limited ability to consider alternatives. The statute defines ``energy 
saving qualified investment'' as an ``investment in a small business 
concern that is primarily engaged in researching, manufacturing, 
developing, or providing products, goods, or services that reduce the 
use or consumption of non-renewable energy resources.'' The SBA 
considered adopting this statutory definition without modification. 
However, SBA did not select this approach due to concerns that without 
some interpretation of the broad statutory language, it would be 
difficult to evaluate (a) whether qualifying investments would actually 
contribute to the energy-saving objectives of the statute and (b) what 
constitutes ``primarily engaged''.
    In considering alternatives for determining whether a qualifying 
investment would likely contribute to the energy-saving objectives of 
the statute, the SBA conferred with DOE to consider two options besides 
using the broad statutory definition: (1) Defining a list of specific 
industries and (2) referencing existing standards developed for Federal 
programs that promote energy efficiency. SBA did not adopt the first 
option to identify a list of specific industries because (1) ``energy 
saving'' efforts take place across a broad spectrum of industries; (2) 
the North American Industrial Classification System (NAICS) codes, 
typically used to identify industries, are inadequate for capturing 
whether a business is involved in ``energy saving'' across this 
spectrum; and (3) developing a static list does not adequately allow 
for either a full range of products and services or the rapid growth in 
this area that might further the statutory goals. Given the number of 
Federal programs already directed towards ``energy saving'' activities, 
SBA chose to adopt the second option in order to improve 
standardization across agencies, allow growth as DOE and other agencies 
update program standards to reflect new ``energy saving'' initiatives, 
and to address the broadest spectrum of products and services. Towards 
those goals, SBA recognizes that SBICs may wish to invest in Small 
Businesses that are manufacturing or researching products or performing 
services that have not been identified by existing Federal standards. 
Therefore, SBA will also consider other investments on a case by case 
basis, based on the SBIC's ability to demonstrate energy savings 
associated with the Small Business's activities.
    To determine whether a concern is ``primarily engaged'' in Energy 
Saving Activities, SBA considered using either

[[Page 23377]]

a specific quantitative standard or an evaluation based on total facts 
and circumstances. For simplicity, the proposed rule presumed that a 
business is ``primarily engaged'' if it derived at least 50% of 
revenues during its most recently completed fiscal year from Energy 
Saving Activities. As a result of comments received, SBA supplemented 
this historical test with an alternative, prospective test; in the 
final rule, a Small Business that will use 100% of the financing 
proceeds for Energy Saving Activities will also be presumed to be 
``primarily engaged'' in such activities. SBA believes this change will 
encourage SBICs to make Energy Saving Qualified Investments by reducing 
the associated administrative burden. As in the proposed rule, an SBIC 
may also ask SBA to determine whether a concern is ``primarily 
engaged'' in Energy Saving Activities based on an evaluation of various 
factors, including ``the distribution of revenues, employees and 
expenditures, intellectual property rights held, and business plans 
presented to investors as part of a formal solicitation''.
3. Potential Benefits and Costs
    As stated in the proposed rule, SBA initially estimated demand for 
Energy Saving Debentures at approximately 5 percent of the overall SBIC 
debenture program. This estimate was based on SBA's analysis of SBICs' 
usage of the ``low and moderate income'' (LMI) debenture, which has the 
same structure as the Energy Saving Debenture, and on venture capital 
industry data for ``Cleantech'' investments, which SBA believes are 
fairly representative of energy saving investments. SBA estimated that 
level of demand would result in an increase to the annual fee of 14.3 
basis points versus a formulation with no Energy Saving Debentures. 
When calculating the SBA Fiscal Year 2012 budget, SBA found that the 
same level of demand would increase the annual fee for SBIC licensees 
by 15.5 basis points versus a formulation with no Energy Saving 
Debentures. This increase reflects an overall increase in the size of 
the SBIC program while taking into account the additional risk 
associated with SBIC equity investments contemplated in the usage of 
the Energy Saving Debenture.
    SBA received two comments stating that Energy Saving Debentures 
should not be combined with standard debentures when calculating the 
annual fee charged to all debenture users. The commenters expressed 
concern that all SBIC debenture issuers would be required to subsidize 
the higher-risk Energy Saving Debenture, including those SBICs whose 
access to the Energy Saving Debenture is prohibited because they were 
licensed before October 1, 2008.
    SBA understands the commenters' concern about spreading the costs 
of the Energy Saving Debenture across the entire debenture program. In 
order to limit the impact of fee increases, SBA has decided to cap the 
amount of Energy Saving Debentures available in a given fiscal year at 
5 percent of the overall SBIC program debenture program level for the 
year, even if demand proves to be higher. However, SBA does not believe 
it is feasible to accommodate the commenters' request to separate the 
Energy Saving Debenture from the standard debenture. On a stand-alone 
basis, the annual fee for the Energy Saving Debenture would exceed the 
statutory maximum of 1.38%, meaning that SBA would be unable to 
implement the statutory provisions of the Energy Act. SBA will review 
the demand for and performance of the Energy Saving Debenture on an 
annual basis to determine whether the modeling assumptions underlying 
this Regulatory Impact Analysis should be changed.

Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or presumptive effect.

Executive Order 13132

    For the purposes of Executive Order 13132, SBA has determined that 
this final rule will not have substantial, direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, for the purposes of Executive 
Order 13132, Federalism, SBA has determined that this final rule has no 
federalism implications warranting the preparation of a federalism 
assessment.

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

    SBA has determined that this rule imposes additional reporting and 
recordkeeping requirements under the Paperwork Reduction Act, 44 
U.S.C., chapter 35. This collection of information includes three 
different reporting requirements: (1) Information needed for SBA to 
determine whether a Small Business is ``primarily engaged'' in Energy 
Saving Activities, (2) information needed for SBA to determine whether 
a particular activity is an ``Energy Saving Activity'', and (3) 
identification of a completed financing as an Energy Saving Qualified 
Investment on the Portfolio Financing Report (an existing information 
collection approved under OMB Control Number 3245-0078). The 
descriptions of respondents and the titles and purpose of the 
information collections are discussed below with an estimate of the 
annual reporting burden. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing each 
collection of information.

A. ``Primarily Engaged'' and ``Energy Saving Activity'' Determinations

    Title: Financing Eligibility Statement for Usage of Energy Saving 
Debentures, SBA Form 2428.
    Summary: The Financing Eligibility Statement for Usage of Energy 
Saving Debentures will be used by SBICs requesting either or both of 
the SBA determinations that may be requested under Sec.  107.610(f)(2) 
and/or (f)(3) of the rule: (1) Whether a particular activity in which a 
Small Business is engaged is an Energy Saving Activity, and (2) whether 
a Small Business is ``primarily engaged'' in Energy Saving Activities. 
The Small Business must provide supporting evidence of the Small 
Business's eligibility based on the factors listed in the proposed 
rule. SBA received no comments specifically related to the proposed 
information collection. However, as a result of two comments received 
on the proposed certification requirement in Sec.  107.610(f), SBA has 
eliminated that requirement as it would have related to the SBIC. Only 
the Small Business providing the information must certify that the 
information is true and correct.
    Need and Purpose: Section 1205 of the Energy Independence and 
Security Act of 2007 makes SBA leverage in the form of a deferred 
interest ``energy saving debenture'' available to SBICs licensed after 
September 30, 2008 for the purpose of making Energy Saving Qualified 
Investments. This final rule identifies various criteria under which a 
financing can qualify as an Energy Saving Qualified Investment; 
however, SBA recognizes that some proposed investments will need to be 
individually reviewed by SBA to determine whether they fulfill the 
energy saving objectives of the statute. SBA will use the submitted 
information to make those determinations.
    Description of Respondents: SBICs will submit this form to obtain a

[[Page 23378]]

determination from SBA as to whether a proposed financing is an Energy 
Saving Qualified Investment. There are approximately 294 active SBICs; 
only about 17% of these are debenture SBICs that were licensed after 
September 30, 2008, and are eligible to issue Energy Saving Debentures 
to make Energy Saving Qualified Investments. Based on anticipated new 
licensing activity, SBA is estimating the number of eligible SBICs at 
60. Assuming each of these SBICs will invest in five companies per 
year, that 5% of all investments will be in energy-saving companies, 
and that one-third of those will require SBA to make a pre-financing 
determination of eligibility, SBA estimates five responses per year.
    SBA estimates the burden of this collection of information as 
follows: An applicant will complete this collection once for each 
prospective Energy Saving Qualified Investment that requires SBA to 
make a pre-financing determination of eligibility. SBA estimates that 
the time needed to complete this collection will average 10 hours. SBA 
estimates that the cost to complete this collection will be 
approximately $150 per hour. Total estimated burden is 50 hours per 
annum costing a total of $7,500 for the year.

B. Portfolio Financing Report

    Title: Portfolio Financing Report, SBA Form 1031 (OMB Control 
Number 3245-0078).
    Summary: SBA Form 1031 is a currently approved information 
collection. SBA regulations (Sec.  107.640) require SBICs to submit a 
Portfolio Financing Report on SBA Form 1031 for each financing that an 
SBIC provides to a small business concern. The form is SBA's primary 
source of information for compiling statistics on the SBIC program as a 
provider of capital to small businesses. SBA also uses the information 
provided on Form 1031 to evaluate SBIC compliance with regulatory 
requirements. SBA has revised the form by adding one new question, 
which would ask the SBIC to use a pull-down menu to identify whether a 
completed financing was an Energy Saving Qualified Investment. SBA's 
financial reporting software would automatically transfer this 
designation to the SBA Form 468 (SBIC Financial Statements), the source 
of data needed to determine eligibility for additional leverage based 
on Energy Saving Qualified Investments under Sec.  107.1150(d)(2)(i). 
This revised form was approved by OMB on March 16, 2011.
    Need and Purpose: Section 1206 of the Energy Independence and 
Security Act of 2007 increases the maximum amount of leverage 
potentially available to an SBIC licensed on or after October 1, 2008, 
that makes Energy Saving Qualified Investments. In this rule, Sec.  
107.1150(d) adjusts the basic leverage eligibility formula in Sec.  
107.1150(a) by subtracting from an SBIC's outstanding leverage the cost 
basis of Energy Saving Qualified Investments that the SBIC has made in 
Smaller Enterprises. The amount that can be subtracted is limited to 
33% of the SBIC's Leverageable Capital. SBA will use the information 
submitted on Form 1031 to track Energy Saving Qualified Investments 
that an SBIC may use in its leverage eligibility calculation, as well 
as for overall program evaluation purposes.
    Description of Respondents: All SBICs are required to submit SBA 
Form 1031 within 30 days after closing an investment. The current 
estimate of 2,800 responses per year is not affected by this rule. SBA 
has added one field to the form to identify whether the investment is 
an Energy Saving Qualified Investment.
    SBA estimates the burden of this collection of information as 
follows: An SBIC making an Energy Saving Qualified Investment will 
select that descriptor from a pull-down menu on SBA Form 1031. There is 
no incremental burden attributable to completion of this additional 
field. An SBIC will complete SBA Form 1031 for each of its completed 
financing transactions. The currently approved hour burden for this 
collection is 12 minutes per response (0.2 hours), at a cost of $7.00 
per response (based on $35.00 per hour). The total estimated burden is 
560 hours per annum at an aggregate cost of $19,600.
    The recordkeeping requirements under the final rule relate to the 
information that an SBIC must maintain in its files to support the 
required certifications for Energy Saving Qualified Investments under 
Sec.  107.610(f)(1). SBA expects that SBICs will be able to obtain the 
necessary documentation with minimal effort. The SBIC would first 
document that the contemplated investment is in a company that provides 
products or services included in the definition of Energy Saving 
Activities, generally by referring to one of the government Web sites 
discussed in this preamble. Second, the SBIC would document that the 
company derives at least 50% of its revenues from the sales of these 
products or services, or, that the company will utilize 100% of the 
proceeds from the financing for Energy Saving Activities; the company 
would have this information available in the ordinary course of 
business.

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

    When an agency promulgates a rule, the Regulatory Flexibility Act 
(RFA) (5 U.S.C. 601-612) requires the agency to prepare an initial 
regulatory flexibility analysis (IRFA) which describes the potential 
economic impact of the rule on small entities and alternatives that may 
minimize that impact. Section 605 of the RFA allows an agency to 
certify a rule, in lieu of preparing an IRFA, if the rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities. This final rule affects all SBICs issuing 
debentures, of which there are approximately 160, most of which are 
small entities. Therefore, SBA has determined that this rule will have 
an impact on a substantial number of small entities. However, SBA has 
determined that the impact on entities affected by the rule will not be 
significant. The Energy Saving Qualified Investment definition 
identifies the type of investment for which an SBIC will be permitted 
to seek SBA funding in the form of an Energy Saving Debenture; this 
instrument, because of its deferred interest feature, is expected to 
provide SBICs with greater flexibility in structuring qualified 
investments. The Energy Saving Debenture is expected to increase the 
annual fee charged on all new debenture commitments by approximately 
15.5 basis points during fiscal year 2012; however, the fee would 
continue to remain well below the statutorily set maximum fee. 
Accordingly, the Administrator of the SBA hereby certifies that this 
rule will not have a significant impact on a substantial number of 
small entities.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

    For the reasons stated in the preamble, SBA amends part 107 of 
title 13 of the Code of Federal Regulations as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

0
1. The authority citation for part 107 continues to read as follows:

    Authority:  15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 
687g, 687m and Pub. L. 106-554, 114 Stat. 2763; and Pub. L. 111-5, 
123 Stat. 115.


0
2. Amend Sec.  107.50 by adding in alphabetical order definitions of

[[Page 23379]]

``Energy Saving Activities'' and ``Energy Saving Qualified 
Investment'', to read as follows:


Sec.  107.50  Definitions of terms.

* * * * *
    Energy Saving Activities means any of the following:
    (1) Manufacturing or research and development of products, integral 
product components, integral material, or related software that meet 
one or more of the following:
    (i) Improves residential energy efficiency as demonstrated by 
meeting Department of Energy or Environmental Protection Agency 
criteria for use of the Energy Star trademark label;
    (ii) Improves commercial energy efficiency as demonstrated by being 
in the upper 25% of efficiency for all similar products as designated 
by the Department of Energy's Federal Energy Management Program;
    (iii) Improves automobile efficiency or reduces consumption of non-
renewable fuels through the use of advanced batteries, power 
electronics, or electric motors; advanced combustion engine technology; 
alternative fuels; or advanced materials technologies, such as 
lightweighting;
    (iv) Improves industrial energy efficiency through combined heat 
and power (CHP) prime mover or power generation technologies, heat 
recovery units, absorption chillers, desiccant dehumidifiers, packaged 
CHP systems, more efficient process heating equipment, more efficient 
steam generation equipment, heat recovery steam generators, or more 
efficient use of water recapture, purification and reuse for industrial 
application;
    (v) Advances commercialization of technologies developed by 
recipients of awards from the Department of Energy under the Advanced 
Research Projects Agency--Energy, Small Business Innovation Research, 
or Small Business Technology Transfer programs;
    (vi) Reduces the consumption of non-renewable energy by providing 
renewable energy sources, as demonstrated by meeting the standards, 
applicable to the year in which the investment is made, for receiving a 
Renewable Electricity Production Tax Credit as defined in Internal 
Revenue Code Section 45 or an Energy Credit as defined in Internal 
Revenue Code Section 48;
    (vii) Reduces the consumption of non-renewable energy for electric 
power generation as described in Internal Revenue Code Section 
48(c)(1)(A) by providing highly efficient energy conversion systems 
that can use renewable or non-renewable fuel through fuel cells; or
    (viii) Improves electricity delivery efficiency by supporting one 
or more of the smart grid functions as identified in 42 U.S.C. 
17386(d), by means of a product, service, or functionality that serves 
one or more of the following smart grid operational domains: Equipment 
manufacturing, customer systems, advanced metering infrastructure, 
electric distribution systems, electric transmission systems, storage 
systems, and cyber security.
    (2) Installation and/or inspection services associated with the 
deployment of energy saving products as identified by meeting one or 
more of the following standards:
    (i) Deploys products that qualify, in the year in which the 
investment is made, for installation-related Federal Tax Credits for 
Residential Consumer Energy Efficiency;
    (ii) Deploys products related to commercial energy efficiency as 
demonstrated by deploying commercial equipment that is in the upper 25% 
of efficiency for all similar products as designated by the Department 
of Energy's Federal Energy Management Program;
    (iii) Deploys combined heat and power products, goods, or services;
    (iv) Deploys products that qualify, in the year in which the 
investment is made, for receiving a Renewable Electricity Production 
Tax Credit as defined in Internal Revenue Code Section 45 or an Energy 
Credit as defined in Internal Revenue Code Section 48; or
    (v) Deploys a product, service, or functionality that improves 
electricity delivery efficiency by supporting one or more of the smart 
grid functions as identified in 42 U.S.C. 17386(d), and that serves one 
or more of the following smart grid operational domains: Equipment 
manufacturing, customer systems, advanced metering infrastructure, 
electric distribution systems, electric transmission systems, or grid 
cyber security.
    (3) Auditing or consulting services performed with the objective of 
identifying potential improvements of the type described in paragraph 
(1) or (2) of this definition.
    (4) Other manufacturing, service, or research and development 
activities that use less energy to provide the same level of energy 
service or reduce the consumption of non-renewable energy by providing 
renewable energy sources, as determined by SBA. A Licensee must obtain 
such determination in writing prior to providing Financing to a Small 
Business. SBA will consider factors including but not limited to:
    (i) Results of energy efficiency testing performed in accordance 
with recognized professional standards, preferably by a qualified 
third-party professional, such as a certified energy assessor, energy 
auditor, or energy engineer;
    (ii) Patents or grants awarded to or licenses held by the Small 
Business related to Energy Saving Activities listed in subsection (1) 
or (2) above;
    (iii) For research and development of products or services that are 
anticipated to reduce the consumption of non-renewable energy, written 
evidence from an independent, certified third-party professional of the 
feasibility, commercial potential, and projected energy savings of such 
products or services; and
    (iv) Eligibility of the product or service for a Federal tax credit 
cited in this definition that is not available in the year in which the 
investment is made, but was available in a previous year.
    Energy Saving Qualified Investment means a Financing which:
    (1) Is made by a Licensee licensed after September 30, 2008;
    (2) Is in the form of a Loan, Debt Security, or Equity Security, 
each as defined in this section;
    (3) Is made to a Small Business that is primarily engaged in Energy 
Saving Activities. A Licensee must obtain a determination from SBA 
prior to the provision of Financing as to whether a Small Business is 
primarily engaged in Energy Saving Activities. SBA will consider the 
distribution of revenues, employees and expenditures, intellectual 
property rights held, and Energy Saving Activities described in a 
business plan presented to investors as part of a formal solicitation 
in making its determination. However, a Small Business is presumed to 
be primarily engaged in Energy Saving Activities, and no pre-Financing 
determination by SBA is required, if:
    (i) The Small Business derived at least 50% of its revenues during 
its most recently completed fiscal year from Energy Saving Activities; 
or
    (ii) The Small Business will utilize 100% of the Financing proceeds 
received from a Licensee to engage in Energy Saving Activities.
* * * * *

0
3. Amend Sec.  107.610 by revising the last sentence of the 
introductory text and adding paragraph (f) to read as follows:

[[Page 23380]]

Sec.  107.610  Required certifications for Loans and Investments.

    * * * Except for information and documentation prepared under 
paragraphs (f)(2) and (3) of this section, you must keep these 
documents in your files and make them available to SBA upon request.
* * * * *
    (f) For each Energy Saving Qualified Investment:
    (1) If a pre-Financing determination of eligibility by SBA is not 
required under the definition of Energy Saving Activities or Energy 
Saving Qualified Investment:
    (i) A certification by you, dated as of the closing date of the 
Financing, as to the basis for the qualification of the Financing as an 
Energy Saving Qualified Investment;
    (ii) Supporting documentation of the Energy Saving Activities 
engaged in by the concern;
    (iii) Supporting documentation of either the percentage of its 
revenues derived from Energy Saving Activities during the concern's 
most recently completed fiscal year, which must be at least 50 percent, 
or the concern's intended use of the Financing proceeds, all of which 
must be used for Energy Saving Activities; and
    (iv) A certification by the concern, dated as of the closing date 
of the Financing, that any information it provided to you in connection 
with this paragraph (f)(1) is true and correct to the best of its 
knowledge.
    (2) If, prior to providing Financing, you must obtain a 
determination from SBA that the activities in which a concern is 
engaged are Energy Saving Activities, submit to SBA in writing a 
description of the product or service being provided or developed, 
including all available documentation of the energy savings produced or 
anticipated, addressing the factors considered under paragraph (4) of 
the definition of ``Energy Saving Activities'' in Sec.  107.50 and 
certified by the concern to be true and correct to the best of its 
knowledge.
    (3) If, prior to providing Financing, you must obtain a 
determination from SBA that the concern is ``primarily engaged'' in 
Energy Saving Activities, submit to SBA in writing all available 
information concerning the factors considered under paragraph (3) of 
the definition of ``Energy Saving Qualified Investment'' in Sec.  
107.50, certified by the concern to be true and correct to the best of 
its knowledge.
    (4) For each Financing closed after you obtain a determination from 
SBA under paragraph (f)(2) or (3) of this section, a certification by 
you, dated as of the closing date of the Financing, that to the best of 
your knowledge, you have no reason to believe that the materials 
submitted are incorrect.
    (5) For each Financing closed based on supporting documentation of 
the concern's intended use of proceeds for Energy Saving Activities 
under paragraph (f)(1)(iii) of this section:
    (i) Documentation by the concern, dated no later than six months 
after the closing of the Financing, of the proceeds used to date for 
Energy Saving Activities, with further updates provided at six month 
intervals until 100 percent of the Financing proceeds have been 
accounted for; and
    (ii) Documentation that you have reviewed the information submitted 
by the concern under paragraph (f)(5)(i) of this section and have 
reasonably determined that 100 percent of the Financing proceeds were 
used for Energy Saving Activities.

0
4. Amend Sec.  107.1150 by adding a sentence at the end of paragraph 
(c) introductory text and adding paragraph (d) to read as follows:


Sec.  107.1150  Maximum amount of Leverage for a Section 301(c) 
Licensee.

* * * * *
    (c) * * * Any investment that you use as a basis to seek additional 
leverage under this paragraph (c) cannot also be used to seek 
additional leverage under paragraph (d) of this section.
* * * * *
    (d) Additional Leverage based on Energy Saving Qualified 
Investments in Smaller Enterprises. (1) Subject to SBA's credit 
policies, if you were licensed on or after October 1, 2008, you may 
have outstanding Leverage in excess of the amounts permitted by 
paragraphs (a) and (b) of this section in accordance with this 
paragraph (d). Any investment that you use as a basis to seek 
additional Leverage under this paragraph (d) cannot also be used to 
seek additional Leverage under paragraph (c) of this section.
    (2) To determine whether you may request a draw that would cause 
you to have outstanding Leverage in excess of the amount determined 
under paragraph (a) of this section:
    (i) Determine the cost basis, as reported on your most recent 
filing of SBA Form 468, of any Energy Saving Qualified Investments in a 
Smaller Enterprise that individually do not exceed 20% of your 
Regulatory Capital.
    (ii) Calculate the amount that equals 33% of your Leverageable 
Capital.
    (iii) Subtract from your outstanding Leverage the lesser of 
(d)(2)(i) or (ii).
    (iv) If the amount calculated in paragraph (d)(2)(iii) is less than 
the maximum Leverage determined under paragraph (a) of this section, 
the difference between the two amounts equals your additional Leverage 
availability.

    Dated: February 9, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-9454 Filed 4-18-12; 8:45 am]
BILLING CODE 8025-01-P