[Federal Register Volume 81, Number 22 (Wednesday, February 3, 2016)]
[Proposed Rules]
[Pages 5666-5676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01986]


=======================================================================
-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AG66


Small Business Investment Company Program--Impact SBICs

AGENCY: U.S. Small Business Administration.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: In this proposed rule, the U.S. Small Business Administration 
(SBA) is defining a new class of small business investment companies 
(SBICs) that will seek to generate positive and measurable social 
impact in addition to financial return. With the creation of this class 
of ``Impact SBICs,'' SBA is seeking to expand the pool of investment 
capital available primarily to underserved communities and innovative 
sectors as well as support the development of America's growing impact 
investing industry. This proposed rule sets forth regulations 
applicable to Impact SBICs with respect to licensing, leverage 
eligibility, fees, reporting and compliance requirements.

DATES: Comments on the proposed rule must be received on or before 
March 4, 2016.

ADDRESSES: You may submit comments, identified by RIN 3245-AG66, by any 
of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Mail, Hand Delivery/Courier: Mark Walsh, Associate Administrator 
for the Office of Investment and Innovation, U.S. Small Business 
Administration, 409 Third Street SW., Washington, DC 20416.
    SBA will post comments on http://www.regulations.gov. If you wish 
to submit confidential business information (CBI) as defined in the 
User Notice at http://www.regulations.gov, please submit the 
information to Nate T. Yohannes, Office of Investment and Innovation, 
409 Third Street SW., Washington, DC 20416. Highlight the information 
that you consider to be CBI

[[Page 5667]]

and explain why you believe this information should be held 
confidential. SBA will review the information and make the final 
determination of whether or not it will publish the information.

FOR FURTHER INFORMATION CONTACT: Nate T. Yohannes, Office of Investment 
and Innovation, (202) 205-6714.

SUPPLEMENTARY INFORMATION:

I. Background Information

    ``Impact investing'' is a term used to describe an investment 
approach that combines the pursuit of financial return with the goal of 
generating measurable social, environmental or economic impact. The 
term ``social impact investing'' is often used synonymously with the 
term impact investing, and refers, collectively, to all types of impact 
investing, including social, environmental and economic. Impact 
investors are active throughout the capital markets, and though their 
strategies may vary, according to the Global Impact Investing Network, 
a non-profit organization dedicated to increasing the scale and 
effectiveness of impact investing, impact investors share three 
defining traits. First, impact investors invest with the explicit 
intention of generating a positive social impact. This is in contrast 
to other types of investors who attempt to avoid generating negative 
social impacts or who are entirely indifferent to the social outcomes 
resulting from their investments. Second, though their return 
requirements vary, impact investors are not grant providers and always 
expect a return on their invested capital. Finally, impact investors 
share a commitment to measure the effect of their investments on the 
employees, customers and communities of the companies in which they 
invest. See, The Global Impact Investing Network, About Impact 
Investing, http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html.
    Impact investing currently constitutes a small segment of global 
investment activity. Each year, J.P. Morgan and the Global Impact 
Investing Network (``GIIN'') publish an annual survey of leading impact 
investors. In their May 2015 findings, available at http://www.thegiin.org/cgi-bin/iowa/resources/research/662.html, 146 survey 
respondents reported managing a collective total of $60 billion in 
impact investments. Compared with the $64 trillion in global assets 
under management, a figure drawn from PricewaterhouseCoopers' (``PwC'') 
2014 report Asset Management 2020: A Brave New World, available at 
http://www.pwc.com/gx/en/asset-management/publications/asset-management-2020-a-brave-new-world.jhtml, impact investments comprise a 
small fraction of invested capital worldwide.
    However, the size of the impact industry belies both its growth 
potential and that of the broader sustainable finance sector. This is a 
sector focused on ``creating economic and social value through 
financial models, products and markets that are sustainable over 
time.'' See, Center for Responsible Business, Haas School of Business, 
University of California Berkeley, Sustainable Finance, http://responsiblebusiness.haas.berkeley.edu/programs/sustainablefinance.html. 
The Forum for Sustainable and Responsible Investment estimates that 
U.S.-domiciled assets managed using sustainable, responsible or impact 
investing strategies increased by a compound annual rate of 33% between 
2012 and 2014. If that trend continues, sustainable finance will 
continue to outpace overall market growth. According to the 2014 PwC 
report, global AUM will grow at a compound annual growth rate of just 
nearly 6 percent in coming years.
    SBA's formal efforts in the impact investing space began on April 
7, 2011, when it announced the launch of the SBIC program's Impact 
Investing Initiative (the ``Initiative''), building upon SBA's belief 
that targeting capital investments into segments of the U.S. economy 
where capital formation gaps exist, such as small businesses located in 
low-to-moderate income (``LMI'') and other underserved areas, has the 
potential to effect meaningful and sustained economic development 
impact in those areas. The Initiative made available $1 billion in 
debenture leverage, over the course of 5 years, to SBICs that committed 
to deploy at least 50 percent of their total invested capital in 
``impact investments.'' Under the Initiative, investments in small 
businesses located in LMI areas, economically-distressed areas and 
rural areas generally qualified as impact investments, as did 
investments in small businesses active in the education and clean 
energy sectors.
    Since 2011, SBA has made several changes to the Initiative in an 
effort to enhance its effectiveness. Most recently, in September 2014, 
SBA expanded the scope of the Initiative and renamed it the ``Impact 
Investment Fund'' to reflect SBA's commitment to extend its impact 
investing efforts beyond the Initiative's initial 5-year term.
    This rule follows from that commitment and seeks to recognize, 
within the SBIC program's regulations, the important role impact 
investors can play in helping the SBIC program achieve its goal of 
providing capital and long-term loan funds for the growth, expansion 
and modernization of small businesses.

II. Section by Section Analysis

    Sec.  107.50--Definitions. SBA proposes to add the defined terms 
``Fund-Identified Impact Investment,'' ``Impact Investment,'' ``Impact 
SBIC'' and ``SBA-Identified Impact Investment.''

``Fund-Identified Impact Investment,'' ``Impact Investment,'' and 
``SBA-Identified Impact Investment''

    The definition of ``Impact Investment'' included in this proposed 
rule consists of two categories, each of which is also a defined term 
in the proposed rule: (1) SBA-Identified Impact Investments, which are 
investments in geographic areas and sectors of national priority that 
SBA designates in notices published from time to time on SBA's SBIC 
program Web site (www.sba.gov/inv); and (2) Fund-Identified Impact 
Investments, which are investments that meet an SBIC's own definition 
of an ``Impact Investment'' and which an SBIC applicant must propose 
and SBA must approve during the licensing process, as described in 
proposed Sec.  107.331--Evaluation and selection of Impact SBICs.

``Impact SBIC''

    The regulatory definition of an Impact SBIC has several key points. 
First, an Impact SBIC must be organized as a limited partnership. 
Although the current regulations permit other forms of organization, 
the vast majority of existing SBICs are limited partnerships. SBA 
believes that having a degree of uniformity in organizational structure 
will facilitate a more timely and efficient licensing process for 
Impact SBICs.
    Second, the ``Impact SBIC'' designation would apply only to SBICs 
licensed under this rule as well as those licensees designated as 
Impact SBICs after the launch of the Initiative in 2011 and before the 
effective date of this rule.
    Third, an Impact SBIC must invest at least 50 percent of its 
financing dollars in small business concerns that meet the criteria set 
forth in the definition of Impact Investment in this rule (referred to 
hereafter as the ``50 percent requirement''). SBA believes the 50 
percent threshold indicates a significant focus, while still giving 
Impact SBICs flexibility in developing their portfolios. Per the 
proposed rule, follow-on investments in a portfolio company that 
qualified as an ``Impact Investment'' at the time of the SBIC's initial 
financing

[[Page 5668]]

would count towards the 50 percent requirement.
    An Impact SBIC may satisfy the 50 percent requirement exclusively 
through SBA-Identified Impact Investments or Fund-Identified Impact 
Investments, but may also satisfy the 50 percent requirement through a 
combination of these investments. Per proposed Sec.  107.331, SBA must 
approve all Fund-Identified Impact Investment definitions and 
strategies during the licensing process, regardless of whether such 
investments will be used to meet all or only a portion of the 50 
percent requirement.
    Sec.  107.301--Impact SBIC licensing fee discount. This section 
proposes a 60% reduction in the licensing fees Impact SBIC applicants 
must pay under Sec.  107.300. The discount is intended to incentivize 
the formation of Impact SBICs. Despite the fee reduction, SBA will 
devote neither less time nor fewer resources to the assessment of 
Impact SBIC applications than it devotes to the assessment of standard 
SBIC applications.
    However, Sec.  107.301 would provide that in the event an Impact 
SBIC applicant were to ultimately be approved for an SBIC license as 
anything other than an Impact SBIC, SBA would be entitled to recover 
the value of any discounts the applicant received prior to licensing. 
This provision was added to cover cases in which an applicant decides 
mid-process, with SBA permission, to seek a standard SBIC license 
instead of an Impact SBIC license. These types of changes sometimes 
occur during the fundraising process as fund managers adjust to the 
expectations of private capital providers. Although licensees 
designated as Impact SBICs under the Initiative would be eligible for 
fee discounts as of the effective date of this rule, SBA will not 
return any fees these licensees paid prior to that date.
    Finally, any Impact SBIC, whether licensed under the Initiative or 
under this rule, may submit a written request to SBA seeking to convert 
to a standard SBIC license. SBA would generally expect to grant such a 
request, provided that SBA recovers the value of any discounts the 
licensee received.
    Sec.  107.310--When and how to apply for licensing as an Early 
Stage SBIC. America's impact investment industry includes fund managers 
focused on making equity investments in early stage companies. In order 
to accommodate these fund managers, proposed Sec.  107.310 permits 
applicants to apply simultaneously for an Impact SBIC and Early Stage 
SBIC license. Further, such dual applicants will be permitted to submit 
their application at any time and will not be subject to the submission 
deadlines specified in Early Stage Notices SBA may publish in the 
Federal Register. However, those applicants licensed as both Early 
Stage and Impact SBICs will be subject to every regulation pertaining 
to either type of licensee.
    Sec.  107.330--Evaluation and selection of Impact SBIC license 
applicants making SBA-Identified Impact Investments. Impact SBIC 
license applicants proposing to meet their impact investment 
requirements exclusively through SBA-Identified Impact Investments will 
be evaluated and selected based on the standards outlined in Sec.  
107.305, which are used to assess all SBIC applicants. In addition, SBA 
will evaluate the managers' skills and experience in building and 
managing a portfolio of impact investments. However, an applicant's 
potential to generate social, environmental or economic impact will be 
considered relevant only to its eligibility to participate in the SBIC 
program as an Impact SBIC and will not serve as a substitute for any of 
the factors cited in Sec.  107.305.
    Sec.  107.331--Evaluation and selection of Impact SBIC license 
applicants making Fund-Identified Impact Investments.
    Under proposed Sec.  107.331, Impact SBIC license applicants 
seeking approval to make Fund-Identified Impact Investments will be 
subject first and foremost to the evaluation process and qualification 
standards outlined in Sec.  107.305, which are used to assess all SBIC 
applicants. An applicant's potential to generate social, environmental 
or economic impact will be considered relevant only to its eligibility 
to participate in the SBIC program as an Impact SBIC and will not serve 
as a substitute for any of the factors cited in Sec.  107.305.
    Using SBA Form 2181 (Applicant Narrative), applicants will be 
expected to provide definition(s) of the Fund-Identified Impact 
Investments they intend to make for the purposes of complying with the 
requirement that 50 percent of the total dollar amount of their 
financings be deployed in Impact Investments. Applicants will also be 
required to describe, using qualitative and quantitative analysis, the 
expected social, environmental or economic impact of their proposed 
Fund-Identified Impact Investments.
    SBA will review any Fund-Identified Impact Investment 
definition(s), along with an applicant's overall investment strategy, 
in order to determine whether the proposed definitions and strategy are 
consistent with SBA's mission, as well as the letter and spirit of the 
SBIC program's regulations. For instance, a Fund-Identified Impact 
Investment definition that targets financial intermediaries would not 
be approved if SBA determines it risks running afoul of the regulatory 
prohibition on financing ``relenders'' or ``reinvestors.''
    SBA will next determine whether the applicant's proposed Fund-
Identified Impact Investments are likely to yield a positive impact 
when all the potential social, environmental and economic effects of 
the investments are considered. SBA's evaluation may consider factors 
such as whether the strategy will include investments in Portfolio 
Concerns that increase services to low income communities, engage in 
environmentally sustainable business practices or manufacture 
environmentally sustainable products, or that operate in industries of 
national priority other than in the sectors identified by SBA as an 
SBA-Identified Impact Investment. The Agency acknowledges that reaching 
a definitive and objective conclusion regarding a strategy's overall 
impact may be challenging. Impact is often described in qualitative, 
rather than quantitative terms. In anticipation of that challenge, the 
proposed rule has been drafted to mitigate the risk that SBA would be 
put in the position of having to accept or reject a proposed definition 
based solely on a value judgment.
    Applicants will be expected to make reasonable arguments, supported 
by convincing evidence, that their proposed definitions can meet the 
impact requirements of this rule. In this regard, the process SBA will 
use to evaluate proposed Fund-Identified Impact Investment definitions 
differs little from the process used to assess fund manager 
qualifications. SBA will use its standard due diligence tools, 
including principal interviews and reference calls, to test the 
strength of an applicant's proposal and the validity of the evidence 
presented therein. Just as a standard SBIC applicant might be rejected 
for making unsubstantiated track record claims, so too could a Fund-
Identified Impact Investment definition be turned down if diligence 
suggests it lacks credibility.
    SBA takes a nuanced approach to its licensing decisions and does 
not rely solely on easy-to-measure financial metrics. An applicant's 
past financial performance is always carefully weighed against less 
tangible factors such as the level of cohesion among the proposed 
management team members; the alignment of incentives between the fund 
manager and private investors; and

[[Page 5669]]

the quality of the proposed investment strategy, among other variables.
    SBA expects to receive few, if any, Fund-Identified Impact 
Investment definition proposals that are intended solely to obtain the 
fee reduction benefits of an Impact SBIC license. The fee reductions in 
the proposed rule are not material compared to the amount of capital 
raised by an SBIC applicant, and Impact SBIC licensees are subject to 
enhanced regulatory reporting requirements. Moreover, fund managers 
that have expressed interest in SBA's impact investing efforts have, 
to-date, all proposed strategies with clear benefits and no obvious 
risk of yielding negative effects. The following are examples of the 
types of impact investments being made in the market today and which 
SBA anticipates Impact SBICs applying under this section may target:

 Healthcare companies that offer affordable, high-quality 
services to low-income consumers
 Education companies that provide evidence-based, supplemental 
learning services designed to enhance student achievement
 Energy efficiency and sustainability consulting firms
 Agricultural businesses that employ humane and environmentally 
sustainable farming practices
 Businesses that collect and reprocess industrial waste for 
alternative use
 Alternative credit scoring firms that enhance access to 
financial services for low-income consumers

    In addition to approving an applicant's proposed definition of a 
Fund-Identified Impact Investment, SBA must be satisfied with the 
applicant's impact measurement and assessment plan, which an applicant 
must submit in accordance with proposed Sec.  107.331(b). Under this 
section, the applicant must outline its plan to comply with proposed 
Sec.  107.665, which requires Impact SBICs making Fund-Identified 
Impact Investments to obtain an assessment of their impact (1) from an 
independent, third-party assessment provider, (2) using an SBA-approved 
impact measurement standard, a list of which SBA will publish on its 
Web site from time to time, and (3) using an assessment process that is 
both transparent and comprehensive.
    Impact measurement is a defining characteristic of impact 
investors. Without it, impact fund managers and their capital providers 
face a much bigger challenge in determining whether their goal of 
generating positive social impact has been met. Unfortunately, 
determining whether a fund has reached its impact target is far more 
complicated than evaluating its financial performance. The process 
requires establishing a standard by which the targeted outcomes will be 
measured, then crafting an evaluation framework capable of weighing the 
resulting measurements to yield an overall assessment of impact.
    With regard to measurement, the proposed rule would require Impact 
SBICs licensed under this section to measure their impact using one of 
several pre-approved measurement standards. At the outset, SBA intends 
to approve the use of the three sets of standards listed below, 
although SBA may approve additional standards as they become more 
widely adopted by the impact investing industry:

--The Impact Reporting and Investment Standards (``IRIS''), an impact 
evaluation framework created by GIIN;
--The G4 Sustainability Reporting Standards, produced by the Global 
Reporting Initiative (``GRI''); and
--The standards produced and maintained by the Sustainability 
Accounting Standards Board (``SASB'').

    The purpose of these standards is to establish a common language 
companies and investors can use to report the positive and negative 
impacts that result from their activities. These standards are part of 
a broader industry effort to bring to impact measurement what the 
Generally Accepted Accounting Standards (``GAAP'') provide for 
financial reporting. When comparing the GAAP-compliant financial 
statements of two different companies, an investor can be confident the 
same set of rules was used to report items such as revenue, inventory 
and operating cash flow in both statements. GAAP does not provide 
guidance on how to interpret the data, but it does ensure consistency 
in reporting.
    Impact measurement standards were developed to offer the same 
proposition. Consider the simple example of two Impact SBICs, both of 
which are pursuing similar strategies to create high-wage jobs in a 
particular region. In the absence of a measurement standard, the tasks 
of defining a ``job'' and calculating a ``wage'' are left to the funds 
themselves, which leaves room for methodological discrepancies. One 
fund may include the value of benefits in its calculation of wages, 
while the other restricts its definition to direct cash payments. An 
investor trying to determine which fund has been more effective in 
reaching its impact goal would have difficulty in this scenario. 
Measurement standards help reduce these definitional challenges. Were 
the two funds to use IRIS metrics, for instance, they could both rely 
on the IRIS definition of a ``full-time'' or ``permanent'' employee and 
use the method IRIS has established for calculating the wages of those 
employees.
    The impact investing industry has yet to coalesce around a single 
set of measurement standards and may never do so. However, the three 
standards SBA intends to approve were selected, in part, because of 
their prominence in the industry and the flexibility they provide for 
different types of impact strategies. Of the three, IRIS is likely the 
best-known and most widely used set of standards. GRI has a focus on 
sustainability, which may provide environmentally focused Impact SBICs 
additional flexibility. Finally, SASB's standards are designed 
primarily for public corporations and may facilitate reporting for 
Impact SBICs with portfolio companies that are already public or intend 
to go public.
    With clear options available for the measurement of impact, Impact 
SBICs can turn to the second component of SBA's proposed evaluation 
system, which deals with the assessment of impact. As noted above, 
impact measurement standards only provide guidance on how to report 
impact data. They are silent on how to interpret that data. Returning 
to the example above, the two fund managers may report IRIS-compliant 
employee and wage data to their investors, but an assessment framework 
is needed to determine what constitutes a ``strong'' level of 
employment growth, what threshold determines a wage is ``high'', or how 
to weigh the growth in wages against the growth in employment when 
evaluating the funds' overall impact.
    As with financial performance, each individual investor is 
empowered to reach his or her own conclusions about what constitutes 
``success'' with regard to impact. While numbers, such as an internal 
rate of return, cannot be easily manipulated by a fund manager, 
investors could receive biased reports on impact returns if a fund 
manager were to selectively choose metrics and the weighting associated 
with those metrics. The use of independent and transparent assessment 
systems not only helps reduce the risk of selective reporting, but it 
also promotes the use of best practices across the industry.
    For these reasons, SBA considers the assessment component of its 
proposed impact evaluation system critical to the credibility of the 
program. Impact SBIC

[[Page 5670]]

applicants seeking a license under this section of the proposed rule 
must identify the assessment providers they expect to use to fulfill 
their reporting requirements and describe the systems those providers 
employ. Further, the applicant must provide evidence that each 
assessment provider is independent, that the criteria and weightings 
the providers use are publicly available and that each provider is 
capable of conducting a comprehensive assessment of the Impact SBIC's 
impact. A comprehensive assessment is one capable of evaluating the 
social, environmental and economic impacts of the applicant's proposed 
strategy.
    One assessment system SBA has already approved for use under its 
current Impact Investment Fund policy is the Global Impact Investment 
Ratings System (``GIIRS''), a product of the non-profit organization B 
Lab, which uses a standard set of IRIS impact metrics. GIIRS was 
created to bring to the impact investment industry the kind of 
consistent and comparable rating reports traditional finance has had 
for decades in the form of mutual fund ratings or credit ratings. With 
each investment fund they rate, B Lab staff collects a standard set of 
IRIS impact metrics from each company in the portfolio. That data is 
then run through the GIIRS assessment criteria, each of which is 
assigned a specific weight. The end result is a ratings report with an 
overall impact score and scores for each individual sub-component of 
the overall assessment. Since each rating uses the same set of core 
metrics, assessment criteria and weightings, one investment fund's 
score can be compared to that of another.
    With each new Impact SBIC licensed under this section, SBA will 
build a portfolio of investment strategies and impact reports that it 
hopes will help guide future applicants to the program. Both to 
facilitate that learning process and to ensure program transparency, 
Section 107.331(d) allows the Agency to publish information about the 
investment strategies and assessment systems the Impact SBICs licensed 
under this section have employed.
    However, the provisions of paragraph (d) will not release SBA from 
its responsibility to protect the confidential business information of 
its licensees. SBA intends only to publish general descriptions of the 
investment strategies it has approved and will not reveal any details 
that might compromise an applicant or licensee's confidential business 
information. Similarly, the Agency will make public the names of 
assessment providers it has approved and descriptions of the assessment 
systems those providers use, but will not reveal the results of any 
individual impact assessment.
    Sec.  107.502--Representations to the public. SBA is proposing to 
add new paragraphs (b) and (c) to this section, which would require 
Impact SBIC license applicants and Impact SBICs to identify themselves 
as impact investment funds when marketing their funds to prospective 
investors. This requirement is meant to ensure that investors are made 
aware that the Impact SBIC applicant intends to participate, or that a 
licensed Impact SBIC is participating, in the SBIC program as an Impact 
SBIC. Requiring Impact SBICs to identify themselves as such will also 
help deter applicants whose sole interest in obtaining an Impact SBIC 
license is to benefit from the associated fee discounts.
    Sec.  107.610--Required certifications for Loans and Investments. 
Proposed new paragraph (g) would provide for new certifications by 
Impact SBICs and the small businesses in which they make Impact 
Investments, certifying the basis for which each investment qualifies 
as an Impact Investment. As with most of the existing certifications in 
this section, the Impact certifications would be retained in the SBIC's 
files and be available for SBA's review.
    The paragraph would require different levels of certification 
depending on the type of Impact Investment. SBA-Identified Impact 
Investments will be based on certifications from both the Impact SBIC 
and its portfolio concerns; Fund-Identified Impact Investments will 
only require the certification of the Impact SBIC. Since SBA-Identified 
Impact Investments will be based on definitions in federal regulation 
and will generally depend on specific statistics collected at the 
company level, it is reasonable to expect the leaders of those 
businesses to certify the accuracy of their information. By contrast, 
Fund-Identified Impact Investments may be based on sector data or other 
information outside the control of the small business being financed. 
Therefore, for Impact SBICs making Fund-Identified Impact Investments, 
the regulation places the full certification burden on the Impact SBIC.
    As noted above, per the proposed rule, follow-on financings in 
Impact Investments would count towards the 50 percent requirement, and 
therefore, SBA will not require Impact SBICs to re-certify the 
investment as part of a follow-on financing. SBA believes that 
requiring Impact SBICs to re-certify their follow-on financings as 
Impact Investments might deter them from making long-term capital 
commitments out of concern that future financings might not count 
towards the ``50 percent requirement.'' Nonetheless, SBA is soliciting 
comments from the public on whether such follow-on investments should 
count towards the 50 percent requirement only if the Impact SBIC re-
certifies the investment as an Impact Investment at the time a follow-
on investment is made.
    Sec.  107.665--Measurement and reporting requirements for Impact 
SBICs making Fund-Identified Impact Investments. This proposed section 
would require Impact SBICs making Fund-Identified Impact Investments to 
obtain independent assessments of the social, environmental and 
economic impact of their investment strategy. Unless the licensee 
obtains SBA approval to do otherwise, these assessments must be 
prepared in manner consistent with the plan approved during the 
licensing process.
    Impact SBICs subject to this section will face penalties if they 
fail to obtain impact assessments, but SBA will neither penalize nor 
reward an Impact SBIC based solely on the results of those impact 
assessments. One purpose of permitting Impact SBICs to make Fund-
Identified Impact Investments is to encourage innovative approaches to 
social, environment and economic challenges. Penalizing licensees that 
fail to meet their impact goals, despite their best efforts, would be 
counterproductive. Instead, the Agency trusts that successful fund 
managers will earn their rewards in the market place, using the 
strength of their financial and social returns to attract private 
capital. SBA will also look favorably on subsequent Impact SBIC 
applicants with a record of strong social and financial performance. By 
contrast, Impact SBICs with poor impact assessments are more likely to 
face difficulty raising private capital and obtaining a subsequent 
Impact SBIC license.
    Sec.  107.693--Impact SBIC examination fee discount. This new 
proposed section would allow a 10% reduction in the examination ``base 
fee'' that would otherwise be applicable to Impact SBICs under existing 
Sec.  107.692. SBA will devote neither less time nor fewer resources to 
the examination of Impact SBIC licensees as a result of this discount. 
Under the proposed rule, licensees designated as Impact SBICs prior to 
the effective date of this rule will be eligible for fee discounts on a 
going-forward basis, but SBA will not return fees already paid.
    Sec.  107.1120--General eligibility requirements for Leverage. 
Proposed

[[Page 5671]]

new paragraph (l) would provide for a new certification by Impact SBICs 
seeking an SBA leverage commitment or draw. The Impact SBIC would be 
required to certify that it will invest at least 50 percent of the 
aggregate dollar amount of its financings in Impact Investments, in 
compliance with the Impact Investment and Impact SBIC definitions in 
Sec.  107.50. This prospective certification is consistent with the 
other certifications required by Sec.  107.1120. SBA intends to monitor 
Impact SBICs' performance in making Impact Investments to ensure that 
they are making investments that meet this requirement.
    Sec.  107.1810--Events of default and SBA's remedies for Licensee's 
noncompliance with terms of Debentures. SBA is proposing two changes in 
this section that would apply only to Impact SBICs. First, under 
proposed Sec.  107.1810(f)(13), it would be an event of default if an 
Impact SBIC fails to meet the requirement to invest at least 50 percent 
of its financing dollars in Impact Investments, as defined in proposed 
Sec.  107.50. If the Impact SBIC fails to cure to SBA's satisfaction, 
SBA could invoke the remedies in existing Sec.  107.1810(g), which 
includes the right to declare outstanding debenture leverage 
immediately due and payable. SBA would generally not expect to invoke 
such remedies if an Impact SBIC's failure to meet the 50 percent 
requirement appears to be temporary.
    Second, under proposed Sec.  107.1810(f)(14), it would be an event 
of default if an Impact SBIC licensed under an SBA-approved plan to 
make Fund-Identified Impact Investments fails to obtain an acceptable 
independent, third-party assessment to measure the social, 
environmental or economic impact of the fund's Impact Investment 
strategy within the time frames required by proposed Sec.  107.665. If 
the Impact SBIC fails to cure to SBA's satisfaction, SBA could invoke 
the remedies in existing Sec.  107.1810(g), which include the right to 
declare outstanding debenture leverage immediately due and payable.
    Sec.  107.1940--Impact SBIC licensee noncompliance with 
regulations. SBA proposes creating in this new section a series of 
actions the Agency may take with respect to Impact SBICs that fail to 
meet the 50 percent requirement and Fund-Identified Impact SBICs that 
fail to meet assessment requirements. Regardless of whether an Impact 
SBIC has outstanding leverage, if an event of default would have been 
triggered under proposed Sec.  107.1810(f)(13) or (14), SBA will have 
the authority, upon written notice, to take any or all of the following 
actions: (1) Convert the licensee's Impact SBIC license to a standard 
SBIC license (including, in SBA's discretion, requiring the licensee to 
notify its private investors of the conversion); and (2) require the 
licensee to return to SBA up to the full dollar amount of any licensing 
or examinations fee discounts it has received prior to the date of the 
written notice. However, SBA will be authorized to take these actions 
only after giving the licensee at least 15 days to resolve its non-
compliance and only after the licensee fails to resolve its non-
compliance within the time period given.
    SBA included these additional remedies to address two areas of 
concern. First, the events of default proposed under Sec.  107.1810(f) 
would only apply to Impact SBICs with outstanding leverage. As a 
result, Impact SBICs that are licensed as non-leveraged funds or those 
that pre-pay their leverage in full would not be subject to any 
remedies if they were to fall out of compliance with the 50 percent 
requirement or, as applicable, the assessment requirement. Second, the 
fee discounts proposed under this rule generally reward Impact SBIC 
applicants and licensees for future, rather than past behavior. For 
instance, an Impact SBIC will be eligible for a 60 percent discount on 
its licensing fee based on its proposal to deploy at least 50 percent 
of its capital in Impact Investments. Without the provisions proposed 
under this section, SBA would have limited authority to recover those 
benefits or otherwise take action against the fund if it fails to 
follow through on that commitment.

Compliance With Executive Orders 12866, 12988, 13132, 13563, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866

    The Office of Management and Budget has determined that this rule 
is a ``significant'' regulatory action under Executive Order 12866. The 
Regulatory Impact Analysis is set forth below.
1. Need for Regulation
    The Small Business Investment Act of 1958, as amended, established 
the SBIC program to ``stimulate and supplement the flow of private 
equity capital and long-term loan funds'' to U.S.-based small 
businesses. 15 U.S.C. 661. As part of that effort, the Act contains 
several provisions aimed at promoting the flow of capital to several 
special categories of small business, including those located in low 
income geographic areas, those engaged in energy-saving activities and 
``smaller'' businesses.15 U.S.C. 683(b)(2)(C), 683(b)(2)(D), 683(d).
    Over the past several years, SBA's focus on achieving these 
economic development goals has yielded results, but progress has come 
at a slower pace than anticipated. Despite the recent growth in the 
number of SBIC-financed businesses located in LMI areas, which rose 
from 216 in fiscal year (``FY'') 2012 to 229 in FY 2014, the program 
has yet to return to the high level achieved in FY 2011, during which 
SBICs financed 351 businesses located in LMI areas. The LMI Debenture, 
a leverage instrument meant to help facilitate these types of 
investments, is rarely used. Similarly, there has yet to be a single 
draw of SBA's Energy Savings Debenture, which has been available since 
2012 to help finance small businesses involved in reducing the use of 
non-renewable energy sources.
    The proposed rule was crafted to enhance the SBIC program's 
effectiveness in channeling much-needed capital to these and other 
underserved segments of the U.S. economy. From an overall economic 
development perspective, SBA believes that capital investments made 
into small businesses located in LMI and other underserved areas have 
the potential to have the most meaningful and sustained impact due to 
the capital formation gaps in those areas.
2. Alternative Approaches to Regulation
    SBA considered several alternatives to the proposed regulation, 
each of which will be discussed below. First, SBA considered pursuing 
its impact investment objectives solely through existing policy 
initiatives. Based on extensive feedback received from SBIC fund 
managers, lower-middle market industry representatives, impact 
investment fund managers, impact policy thought leaders and others, SBA 
rejected this alternative. SBA's existing impact investing policies 
impose additional burdens without providing sufficient incentives to 
attract Impact SBIC fund managers to the program. Further, given that 
SBIC licensees have operational lives of ten years or more, the market 
will be reluctant to embrace SBA's impact investing efforts unless the 
Agency demonstrates a lasting commitment to the space by promulgating 
regulations.
    SBA faced a challenge in developing a definition of an ``Impact 
Investment'' that dealt appropriately with the subjectivity inherent in 
any non-financial measure of performance. Initially, SBA considered 
restricting the

[[Page 5672]]

definition of an Impact Investment to financings that meet requirements 
already outlined in federal regulations, such as Energy-Savings 
Investments, LMI Investments or investments in rural areas. These 
investments are aligned with federal policy priorities and are easy to 
define and monitor. The original Impact Investment Initiative policy 
launched in 2011 was structured in this manner and was slow to attract 
applicants. Given the nascence of the impact investing industry, which 
supports a diverse range of investment strategies, SBA determined a 
more accommodative approach would be more effective.
    The proposed rule has been drafted to allow Impact SBIC applicants 
to make SBA-Identified Impact Investments, which target federal 
priority areas, or make Fund-Identified Impact Investments that align 
with their own definitions of impact. This approach expands the reach 
of SBA's impact investing efforts beyond the limited sub-set of 
investments that meet existing regulatory criteria. The Agency also 
recognizes the complexities Fund-Identified Impact Investments may 
introduce to the SBIC licensing and monitoring process.
    SBA had to carefully consider the bases on which it would approve 
an Impact SBIC's proposed Fund-Identified Impact Investment definition. 
One option the Agency considered was to outline, as part of this 
regulation, a series of sector-specific eligibility requirements that 
Fund-Identified Impact Investments would have to satisfy. Working with 
colleagues at the U.S. Department of Education, SBA staff made an 
initial attempt at preparing guidelines for investments in the 
education sector but quickly discovered the impracticality of the 
approach. Even within a single sector, there exists such a tremendous 
diversity of economic activity that establishing requirements specific-
enough to be useful would require an inordinate commitment of time and 
resources.
    An alternative approach would be to remove SBA from the approval 
process altogether and give Impact SBIC applicants complete latitude to 
pursue Fund-Identified Impact Investments of their choice. Under this 
approach, SBA would evaluate Impact SBICs using its existing licensing 
process without any additional consideration of the impact-related 
aspects of the applicant's proposal. A key advantage of this approach 
is that it would allow SBA to fully cede the definitional challenge of 
impact to fund managers and their private investors. It would also 
ensure the program remains open to innovative impact strategies.
    SBA will always encourage applicants to propose innovative 
investment strategies, but the Agency must retain the ability to review 
and approve proposed Fund-Identified Impact Investment definitions. Not 
only must the Agency ensure that SBICs are making investments that are 
consistent with the letter and spirit of program regulations, but it 
must also consider the reputation of the SBIC program within the 
private investor community. The statute underlying the SBIC program, 
known as the Small Business Investment Act, makes clear that the 
program should be implemented in a manner that ``insure[s] the maximum 
participation of private financing sources.'' 15 U.S.C. 661. Were SBA 
to ignore an applicant's proposed Fund-Identified Impact Investment 
definitions, private impact investors might take the Agency's approach 
as a signal of indifference to market development.
    In fact, the approach SBA has taken reflects the Agency's interest 
in not only enhancing the impact of the SBIC program, but also 
promoting industry best practices. SBA is as concerned with the process 
used to make Fund-Identified Impact Investments as it is with the 
outcomes of those investments. Each Impact SBIC applicant will have the 
burden of demonstrating, with qualitative or quantitative analysis, 
that its investment strategy will, in aggregate, generate a measurable 
positive impact. SBA staff will supplement their evaluation of the 
applicant's analysis and its other application materials with the 
results obtained using the standard tools of due diligence, such as 
interviews with the management team, reference calls, consultations 
with industry experts, public record searches and other research.
    As long as a fund manager is qualified and its definition does not 
run afoul of the Agency's mission, statutes, regulations or policies, 
SBA intends to give applicants substantial leeway in defining their 
Fund-Identified Impact Investments. The measurement and assessment 
requirements of the proposed rule ensure that even those Impact SBICs 
that fail to meet their targeted social returns will contribute to 
market development. Measuring results, good and bad, contributes to the 
industry's understanding of the relationship between financial and 
social returns and helps investors identify the most talented managers.
    SBA confronted two key questions as it considered how to create a 
robust measurement and assessment process. First, what means should SBA 
use to assess the impact of Fund-Identified Impact Investments? Second, 
what consequences, if any, should Impact SBICs face based on the result 
of their impact assessments?
    With regard to the first question, SBA could have assumed the full 
burden of evaluating each Fund-Identified Impact Investment to 
determine its impact. This alternative was rejected because SBA staff 
lack sufficient time, resources and expertise to properly evaluate the 
full range of potential Fund-Identified Impact Investments. A second 
alternative was to leverage the expertise of Impact SBIC fund managers 
themselves and allow them to prepare their own assessments. While it 
may be appropriate to have Impact SBIC applicants argue the merits of 
their Fund-Identified Impact Investment definitions during the 
licensing process, SBA considered it imprudent to allow Impact SBICs to 
evaluate their own success.
    The proposed rule instead requires Impact SBICs to obtain 
independent, third-party impact evaluations based on industry-adopted 
standards. The use of independent third parties helps reduce the bias 
inherent in a fund's own impact evaluation and relieves SBA of the 
potentially significant burden of assessing a wide range of impact 
investment strategies.
    With regard to the second question, SBA has chosen not to penalize 
licensees based on the results of their impact assessments. As noted 
above, assessments provide private capital with greater transparency 
regarding an applicant's track record of generating impact. Given that 
most fund managers seek to follow their first investment vehicle with a 
second, the assessment process itself creates sufficient risk that 
investors will decline to invest in a second fund. Accordingly, SBA 
does not believe that an Impact SBIC should incur regulatory penalties 
based on the results of an impact assessment.
3. Potential Benefits and Costs
    The proposed rule offers two primary benefits to SBA and its 
stakeholders. First, it offers the potential to enhance the overall 
social, environmental and economic impact of the SBIC program. Existing 
SBICs already have tremendous impact on America's small business 
economy. In FY 2014, SBICs together invested nearly $5.5 billion in 
more than 1,000 small business concerns, helping them to grow and 
modernize their operations. The introduction of Impact SBICs will 
increase the portion of those annual financings that are

[[Page 5673]]

intentionally directed towards economically-distressed communities and 
companies taking innovative approaches to social problems.
    SBA also hopes the proposed rule will support the development of 
the impact investing industry more broadly. The rule has been drafted 
to incorporate impact investing best practices, especially with regard 
to the measurement and assessment of impact. As more and more SBA- and 
Fund-Identified Impact Investments are made, the SBIC program will have 
more data to contribute to the industry on the balance between 
financial and social performance.
    In terms of costs, Impact SBICs are anticipated to have an 
additional 3% higher loss rate than regular SBICs, due to the risks 
that may be associated with Impact Investments contemplated under the 
proposed rule. Although SBA is targeting $200 million in commitments 
per year in terms of licensing, the number of Impact SBICs that SBA may 
license or the amount of debenture leverage commitments that may be 
approved for Impact SBICs in any year is subject to the limitations set 
forth in annual appropriations acts or in other statutes or 
regulations. In addition, both newly licensed Impact SBICs and 
previously licensed Impact SBICs have the opportunity to receive new 
leverage commitments in any year. The SBIC program subsidy model for FY 
2017 has been formulated to reflect the provision proposed in this rule 
that Impact SBICs are allowed to be licensed as Early Stage SBICs. 
Early Stage SBICs are expected to have approximately a 10% higher loss 
rate than regular SBICs. The resulting fee of 34.7 basis points for FY 
2017 remains well within historical ranges for the SBIC Debenture 
annual fee.

Executive Order 12988

    This action meets applicable standards set forth in section 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

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

Executive Order 13563

    In drafting this proposed rule, SBA considered the input of impact 
investment industry experts on ways to facilitate the growth of 
private-sector led impact investing as a strategy to create jobs and 
strengthen communities. With the assistance of the White House Office 
of Social Innovation and Civic Participation, which included a White 
House hosted event in June 2014 (see, https://www.whitehouse.gov/blog/2014/06/25/executive-actions-accelerate-impact-investing-create-jobs-and-strengthen-communities), SBA held roundtable discussions with 
representatives from endowments, foundations, institutional asset 
managers, high net worth individuals, investment funds, standard SBICs, 
existing Impact SBICs, not-for-profit entities, banks, and other 
federal government agencies. The roundtables covered topics such as: 
(1) Increasing the flow of private capital toward sustainable business 
models; (2) supporting private sector investment in high-impact sectors 
and underserved communities; (3) making innovative impact enterprises 
investment-ready; (4) removing regulatory barriers that keep capital on 
the sidelines; and (5) growing the impact economy through policy 
interventions.

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

    SBA has determined that this rulemaking proposes additional 
reporting requirements as defined by the Paperwork Reduction Act. 
Specifically, as discussed above, all Impact SBICs utilizing a Fund-
Identified Impact strategy would be required to submit to SBA 
independent, third-party evaluations of the impacts of such 
investments. This proposed rule would also codify two other reporting 
requirements that are already imposed on Impact SBICs based on the 
terms and conditions of the Impact Investment Fund established by SBA 
on April 11, 2011, as amended on September 25, 2014, available at 
https://www.sba.gov/content/impact-investment-fund-overview. First, at 
the time of application, Impact SBIC applicants are currently required 
to outline in their proposed investment strategy whether a particular 
strategy is an ``Impact Investment.'' This requirement is not being 
changed by this rule; it is merely being codified in the regulations. 
Furthermore, this requirement is already approved as part of SBA Form 
2181, Appendix 2 (OMB Control Number 3245-0062). Second, as part of 
reporting on their portfolio financings, Impact SBICs are also 
currently required to identify whether a completed financing is an 
Impact Investment. Therefore, this requirement is also not being 
imposed for the first time by this rule but rather merely being 
codified in the regulations. To make it easier for SBICs to meet this 
requirement, SBA recently proposed adding two questions to the 
Portfolio Financing Report (an existing information collection approved 
under OMB Control Number 3245-0078), to enable Impact SBICS to 
specifically identify whether a particular investment qualifies as an 
SBA-Identified or Fund Identified investment. This particular change 
will be made in conjunction with other revisions to Form 1031 as a 
result of other amendments to the SBIC program in the proposed rule, 
Small Business Investment Companies; Passive Business Expansion & 
Technical Clarifications. (RIN: 3245-AG67) (80 FR 60077, October 5, 
2015). The description, number of respondents, and the purpose of the 
information collection that would be imposed by this rule is 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 the requirements for the collection of information.
A. Impact Evaluations
    Title: Independent, Third-Party Impact Evaluations.
    Summary: The proposed rule requires Impact SBICs licensed to make 
Fund-Identified Impact Investments to submit two impact evaluations to 
SBA. Each assessment must be completed by an independent third-party 
based on industry standards. One assessment is due within two years of 
licensing, while the second must be submitted between the 5th and 7th 
year after licensing. These independent evaluations are required only 
of Impact SBICs that make Fund-Identified Impact Investments. Impact 
SBICs that restrict themselves to SBA-Identified Impact Investments 
bear no additional reporting burden beyond what is required of all 
SBICs.
    Description and Number of Respondents: Only those Impact SBICs 
licensed to make Fund-Identified Impact Investments will be required to 
complete this requirement.
    Annual Estimated Number of Responses: SBA estimates that it may 
receive approximately 2 responses each year based on an annual average 
of 6 Impact SBICs requiring assessments during years 1-2 and again in 
years 5-7 of their lifecycle.

[[Page 5674]]

    Estimated Annual Hour and Cost Burden: Impact SBICs licensed to 
make Fund-Identified Impact Investments will be required to obtain an 
impact evaluation and may incur costs. SBA estimates that it may have 
approximately 6 Impact SBICs making Fund-Identified Impact Investments 
in any given year. One independent provider charges between $3,500 and 
$7,500 for a full portfolio rating, depending on the size of the fund 
and the number of portfolio companies. Two ratings completed at the 
maximum price of $7,500 would require an Impact SBIC to spend a total 
of $15,000 over the course of its 10 year fund life. On an annualized 
basis, the cost would be $1,500 per year. The total annual cost burden 
for the estimated 6 Impact SBICs making Fund-Identified Impact 
Investments is $9,000.
    The hourly burden for these respondents would be negligible, as the 
assessment work would be completed by an independent third-party. The 
total time required to contact the provider and initiate an assessment 
is estimated at a total of 24 hours per assessment. Impact SBICs 
subject to the third-party assessment requirement must submit a total 
of two assessments over the course of their 10 year fund life. On an 
annualized basis, these applicants each will spend 4.8 hours per year. 
With an estimated 6 Impact SBICs making Fund-Identified Impact 
Investments in the portfolio at any given time, the total annual hourly 
burden is estimated at 28.8 hours.

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

    When an agency promulgates a rule, the Regulatory Flexibility Act 
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 proposed rule would affect all SBICs issuing debentures, of 
which there are currently 193, most of which are small entities. 
Therefore, SBA has determined that this proposed rule would 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. SBA keeps the SBIC program at a zero subsidy cost to 
taxpayers by charging up front and annual fees on its leverage. SBA 
calculates the annual fee each year using historical data to assess the 
appropriate fee to keep the program at zero subsidy cost. Because SBA 
expects Impact SBICs to be riskier than standard SBICs, SBA adjusted 
the SBIC debenture program budget formulation model which determines 
the annual fee needed to keep the debenture program at a zero subsidy 
cost.
    The projected leverage allocation to Impact SBICs would increase 
the annual fee charged to all SBICs seeking new debenture commitments 
by approximately 6.1 basis points. The annual fee would remain in line 
with historical levels. Since 2000, the annual fee has ranged from a 
high of 100 basis points (1 percent) to a low of 29 basis points, with 
a 15-year median of 83 basis points. The annual fee for FY 2015 is 
approximately 74.2 basis points. Although the cost will vary in the 
future based on economic factors and assumptions used to develop the 
annual fee, SBA expects the fee to remain under 1 percent, comparable 
to historical annual fees and below the statutory maximum of 1.38 
percent. Accordingly, the Administrator of the SBA hereby certifies 
that this rule will not have a significant impact on a substantial 
number of small entities. SBA welcomes comment from members of the 
public who believe there will be a significant impact either on SBICs, 
or on companies that receive funding from SBICs.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs--business, Licensing fees, 
Examination fees, Small businesses.

    For the reasons stated in the preamble, SBA proposes to amend 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 is revised to read as follows:

    Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g, 
687m.

0
2. Amend Sec.  107.50 by adding in alphabetical order definitions of 
``Fund-Identified Impact Investment,'' ``Impact Investment,'' ``Impact 
SBIC'' and ``SBA-Identified Impact Investment'' to read as follows:


Sec.  107.50  Definition of terms.

* * * * *
    Fund-Identified Impact Investment means a Financing by an Impact 
SBIC that meets the definition of an Impact Investment proposed by the 
SBIC and approved by SBA in writing at the time of licensing, as 
described in Sec.  107.331.
* * * * *
    Impact Investment means an SBA-Identified Impact Investment or 
Fund-Identified Impact Investment.
    Impact SBIC means any Section 301(c) Partnership Licensee that must 
make at least 50 percent of all of its Loans and Investments (in 
dollars) in Impact Investments and is designated by SBA as an ``Impact 
SBIC.''
* * * * *
    SBA-Identified Impact Investment means a Financing that meets SBA's 
definition of an Impact Investment, which SBA will publish from time to 
time on its Web site and which will include geographies and sectors of 
national priority.
* * * * *
0
3. Add Sec.  107.301 to read as follows:


Sec.  107.301  Impact SBIC licensing fee discount.

    (a) All applicants seeking to be licensed as an Impact SBIC will 
receive a 60 percent discount, rounded to the nearest one-hundred 
dollars, on any fees to which they are subject under Sec.  107.300.
    (b) In the event an applicant seeking to be licensed as an Impact 
SBIC is licensed as anything other than an Impact SBIC, SBA reserves 
the right to recover, prior to licensing, the full dollar amount of any 
licensing fee discounts the applicant has received.
0
4. In Sec.  107.310, designate the existing text as paragraph (a) and 
add paragraph (b) to read as follows:


Sec.  107.310  When and how to apply for licensing as an Early Stage 
SBIC.

* * * * *
    (b) Impact SBIC applicants. An applicant may elect to apply 
simultaneously for licensing as both an Early Stage SBIC and an Impact 
SBIC. Such applicants may apply as described in Sec.  107.300 at any 
time and are not subject to the submission deadlines set forth in 
paragraph (a) of this section. Applicants seeking a dual license must 
comply with the regulations in this part pertaining to Early Stage 
SBICs and Impact SBICs, and to any requirements, other than submission 
deadlines, specified in the most recently published Early Stage Notice 
in the Federal Register.
0
5. Add Sec. Sec.  107.330 and 107.331 to read as follows:


Sec.  107.330  Evaluation of Impact SBIC license applicants.

    SBA will evaluate each applicant seeking to be licensed as an 
Impact SBIC based on the same factors applicable to

[[Page 5675]]

other license applicants, as set forth in Sec.  107.305, with 
particular emphasis on the managers' skill and experience in 
originating, evaluating, executing and monitoring Impact Investments 
consistent with the applicant's investment strategy.


Sec.  107.331  Evaluation of Fund-Identified Impact Investments and 
measurement plans.

    If an applicant intends to qualify for an Impact SBIC license based 
on investments in Fund-Identified Impact Investments, SBA will evaluate 
the applicant's proposed definition(s) of a Fund-Identified Impact 
Investment and its plan to comply with the measurement and reporting 
requirements of Sec.  107.665, and will approve the same in writing at 
the time of licensing based the applicant's satisfaction of the 
following:
    (a) Fund-Identified Impact Investments. Using the submitted 
application materials, any interviews with the applicant's management 
team, the results of public record searches and any other due diligence 
conducted by SBA, SBA will assess the likelihood that the applicant's 
proposed investment strategy and Fund-Identified Impact Investment 
definition(s) will generate, in the aggregate, beneficial social, 
environmental or economic impacts. SBA's evaluation may consider 
factors such as whether the strategy will include investments in 
Portfolio Concerns that increase services to low income communities, 
engage in environmentally sustainable business practices or manufacture 
environmentally sustainable products, or that operate in industries of 
national priority other than in the sectors identified by SBA as an 
SBA-Identified Impact Investment.
    (b) Measurement and reporting plan. During licensing, each 
applicant seeking an Impact SBIC license under Sec.  107.331 must 
identify the assessment provider(s) and assessment system(s) it intends 
to use in order to comply with the requirements of Sec.  107.665. Using 
the submitted application materials, any interviews with the 
applicant's management team, the results of public record searches and 
any other due diligence conducted by SBA, SBA will assess the 
applicant's proposed measurement and reporting plan based on the 
following factors:
    (1) The applicant's proposed assessment system(s) must employ at 
least one approved measurement standard, from a list of approved 
standards published by SBA on its Web site from time to time.
    (2) The applicant's proposed assessment system must comply with the 
following:
    (i) The assessment system's criteria and weightings are publicly 
available; and
    (ii) The assessment system is capable of producing an assessment of 
the social, environmental and/or economic effects of impact 
investments.
    (3) The applicant's proposed assessment provider(s) must each be an 
independent, third-party. An assessment provider will not be considered 
an independent third-party if any of the following conditions exist at 
the time of licensing or assessment:
    (i) The assessment provider is an Associate of the Impact SBIC or 
any of its Portfolio Concerns; or
    (ii) The assessment provider is materially financed by an 
association that represents the interests of the specific industry in 
which the Impact SBIC or its Portfolio Concerns are engaged.
    (c) Publication. SBA may periodically publish on its Web site:
    (i) General descriptions of impact investment strategies pursued by 
Impact SBICs licensed to make Fund-Identified Impact Investments; and
    (ii) Detailed descriptions of the assessment systems SBA has 
approved for use by Impact SBICs licensed to make Fund-Identified 
Impact Investments.
0
6. In Sec.  107.502, designate the existing text as paragraph (a) and 
add paragraphs (b) and (c) to read as follows:


Sec.  107.502  Representations to the public.

* * * * *
    (b) Impact SBIC applicants must declare their intention to apply 
for an Impact SBIC license in any solicitation to investors.
    (c) Impact SBIC licensees must indicate that they have obtained an 
Impact SBIC license from SBA in any solicitation to investors.
0
7. Amend Sec.  107.610 by adding paragraphs (g) and (h) to read as 
follows:


Sec.  107.610  Required certifications for Loans and Investments.

* * * * *
    (g) For each SBA-Identified Impact Investment:
    (i) A certification by the concern, dated as of the date of 
application for SBIC financing, as to the basis for its qualification 
as an Impact Investment; and
    (ii) A certification by the Impact SBIC, made contemporaneously 
with the certification of the concern, that the concern qualifies as an 
Impact Investment as of the date of the concern's certification and the 
basis for such qualification.
    (h) For each Fund-Identified Impact Investment, a certification by 
the Impact SBIC, as of the date of the financing, that the concern 
qualifies as a Fund-Identified Impact Investment under the 
definition(s) approved in writing by SBA and the basis for such 
qualification.
0
8. Add Sec.  107.665 to read as follows:


Sec.  107.665  Measurement and reporting requirements for Impact SBICs 
making Fund-Identified Impact Investments.

    Impact SBICs that SBA approved in writing to make Fund-Identified 
Impact Investments must obtain an assessment of their impact investment 
strategy from an independent, third-party provider within two years 
after licensing and again between five and seven years after licensing. 
Without prior written SBA approval, the Impact SBIC may not use an 
assessment system(s) or assessment provider(s) different from those the 
Impact SBIC identified and SBA approved during the licensing process. 
Each assessment must be submitted to SBA within 30 days of its 
completion.
0
9. Add Sec.  107.693 to read as follows:


Sec.  107.693  Impact SBIC examination fee discount.

    An Impact SBIC will receive a 10% discount on its examination base 
fee, rounded to the nearest one-hundred dollars, subject to the 
following:
    (a) The discount will be calculated based on the examination base 
as determined prior to any adjustments provided for under Sec.  
107.692.
    (b) Impact SBICs also licensed as Early Stage SBICs are entitled to 
any additional discounts, but exempt from any premium, that Early Stage 
SBICs would otherwise be required to pay under Sec.  107.692.
0
10. Amend Sec.  107.1120 by adding paragraph (l) to read as follows:


Sec.  107.1120  General eligibility requirements for Leverage.

* * * * *
    (l) If you are an Impact SBIC, certify in writing that, in 
accordance with Sec.  107.1810(f)(13), at least 50 percent of the 
aggregate dollar amount of your Financings will qualify as Impact 
Investments defined in Sec.  107.50.
0
11. Amend Sec.  107.1810 by adding paragraphs (f)(13) and (14) to read 
as follows:


Sec.  107.1810  Events of default and SBA's remedies for Licensee's 
noncompliance with terms of Debentures.

* * * * *
    (f) * * *
    (13) Failure by an Impact SBIC to meet investment requirements. You 
are

[[Page 5676]]

an Impact SBIC and, beginning on the first fiscal quarter end when your 
cumulative total Financings (in dollars) are at least equal to your 
Regulatory Capital, you have not made at least 50 percent of such 
Financings to Small Businesses that at the time of your initial 
Financing were Impact Investments.
    (14) Failure by an Impact SBIC to meet assessment requirements. You 
are an Impact SBIC making Fund-Identified Impact Investments and you 
fail to obtain an independent, third-party assessment within two years 
of your licensing date and, again, between five and seven years from 
your licensing date, pursuant to the requirements under Sec.  107.665.
* * * * *
0
12. Add Sec.  107.1940 to read as follows:


Sec.  107.1940  Impact SBIC licensee noncompliance with regulations.

    (a) For any occurrence (as determined by SBA) of one or more of the 
events in this paragraph (a), SBA may avail itself of one or more of 
the remedies in paragraph (b) of this section.
    (1) Failure by an Impact SBIC to meet investment requirements. You 
are an Impact SBIC and, beginning on the first fiscal quarter end when 
your cumulative total Financings (in dollars) are at least equal to 
your Regulatory Capital, you have not made at least 50 percent of such 
Financings to Small Businesses that at the time of your initial 
Financing were Impact Investments.
    (2) Failure by an Impact SBIC to meet assessment requirements. You 
are an Impact SBIC making Fund-Identified Impact Investments and you 
fail to obtain an independent, third-party assessment within two years 
of your licensing date and, again, between five and seven years from 
your licensing date, pursuant to the requirements under Sec.  107.665.
    (b) SBA may exercise any or all of the following rights:
    (1) Convert your Impact SBIC license to a standard SBIC license 
(including, in SBA's discretion, requiring you to promptly notify your 
investors of the conversion); and
    (2) Require you to refund to SBA up to the full dollar amount of 
any licensing or examination fee discounts you have received prior to 
the date of your written notice.
    (c) SBA may invoke the remedies in paragraph (b) of this section 
only if:
    (1) It has given you at least 15 days to cure the noncompliance;
    (2) You fail to cure the noncompliance to SBA's satisfaction within 
the allotted time.

    Dated: October 7, 2015.
Maria Contreras-Sweet,
Administrator.

    Editorial Note:  This document was received for publication by 
the Office of the Federal Register on January 29, 2016.

[FR Doc. 2016-01986 Filed 2-2-16; 8:45 am]
 BILLING CODE 8025-01-P