[Federal Register Volume 83, Number 112 (Monday, June 11, 2018)]
[Proposed Rules]
[Pages 26874-26875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12031]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AG66


Small Business Investment Company Program--Impact SBICs

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule; withdrawal.

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SUMMARY: The Small Business Administration (SBA) is withdrawing its 
proposed rule published on February 3, 2016. In the proposed rule, SBA 
would have defined a new class of small business investment companies 
(SBICs) that would seek to generate positive and measurable social 
impact in addition to financial return. With the creation of this class 
of ``Impact SBICs,'' SBA sought 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. SBA is withdrawing the proposed rule because SBA 
has determined that the cost is not commensurate with the benefits.

DATES: SBA is withdrawing the proposed rule published on February 3, 
2016 (81 FR 5666) as of June 11, 2018.

FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment 
and Innovation, (202) 205-7563, [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background Information

    SBA's efforts in the impact investing space began on April 7, 2011 
through a policy letter (``Impact Policy''), which was subsequently 
updated on September 26, 2012 and September 25, 2014. The purpose of 
the Impact Policy was to license small business investment companies 
(``SBICs'') focused on generating both a positive and measurable social 
impact in addition to a financial return as ``Impact SBICs.'' Licensed 
Impact SBICs were expected to provide at least 50% of their financings 
in ``impact investments'' as defined by the Impact Policy.
    SBA published a Proposed Rule on February 3, 2016 (81 FR 5666) (the 
``Proposed Rule'') to permanently define Impact SBICS and set forth 
regulations applicable to Impact SBICs with respect to licensing, 
leverage eligibility, fees, reporting and compliance requirements. The 
intent of the rule was to encourage qualified private equity fund 
managers with a focus on social impact to apply to the SBIC program. As 
part of the Proposed Rule, SBA would have provided the following three 
key benefits: (1) Impact SBIC applicants would have received a 60% 
discount on the licensing fee; (2) Impact SBICs would have received a 
10% discount on the examination base fee; and (3) Impact SBICs could 
have simultaneously applied as an Early Stage SBIC not subject to the 
call and timing provisions identified under 13 CFR 107.300. Given these 
benefits, the proposed rule also imposed certain penalties if an Impact 
SBIC did not adhere to its impact strategy or the Impact SBIC rules.

II. Reason for Withdrawal

    In determining whether to publish a final rule, SBA evaluated the 
results of the Impact Policy and the comments received in response to 
the Proposed Rule. In six years under the Impact Policy, few qualified 
funds applied to be licensed as Impact SBICs, and SBA licensed only 
nine Impact SBICs. SBA believes that many of these SBICs would have 
applied to the SBIC program

[[Page 26875]]

regardless of the existence of the Impact Policy. SBA determined that 
the cost of the Impact Policy was not commensurate with the benefits. 
On September 28, 2017, SBA provided notice to program stakeholders that 
SBA was cancelling the Impact Policy and would no longer accept 
applications to be licensed as an Impact SBIC on or after November 1, 
2017.
    Although SBA proposed licensing and examination fee discounts to 
provide further incentives for Impact SBICs as part of the Proposed 
Rule, SBA received one comment that all SBICs should be treated 
similarly in fee structure and no discounts should be offered. Three 
comments stated that the discounts are too small to provide an 
incentive sufficient to result in the formation of Impact SBICs, 
although two of these commenters stated that they nonetheless 
appreciated the discount.
    Because Impact SBICs would have received certain benefits under the 
Proposed Rule, the Proposed Rule also identified penalties if an Impact 
SBIC failed to meet the requirements set forth in the rule, including 
failing to invest at least 50% of its financing dollars in impact 
investments and, for Impact SBICs using a Fund-Identified Impact 
Investment Strategy, failing to comply with certain specific 
measurement and reporting obligations. SBA received four comments 
stating that the Proposed Rule should not apply to Impact SBICs 
licensed prior to the effective date of any final rule, two comments 
stating that SBA should adjust the rules to reflect the policies under 
which the Impact SBICs were licensed, and one comment that suggested 
that existing Impact SBICs should be allowed the option to either 
complete their license under the relevant Impact Policy under which 
they were licensed or opt in to these new regulations. In reviewing 
these comments, SBA determined that finalizing the rule would not 
likely result in an increase in the number of Impact SBICs in the 
program and would likely result in fewer Impact SBIC applications than 
SBA received under the Impact Policy. Although SBA licensed two Impact 
SBICs in each of FY 2015 and FY 2016, after publication of the proposed 
rule, SBA did not license any Impact SBICs in FY 2017.
    SBA also considered costs in determining whether to withdraw the 
Proposed Rule. As noted in the Proposed Rule, due to the risk 
associated with this class of SBICs, and based on the amount of 
leverage SBA expected to allocate to the Impact SBIC program, the 
Proposed Rule was expected to increase the cost to all SBICs issuing 
SBA-guaranteed debentures by increasing the annual fee payable by all 
such SBICs by approximately 6.1 basis points. For an SBIC issuing $100 
million in SBA-guaranteed debentures, this would equate to $61,000 per 
year. SBICs typically issue Debentures over a 4 to 6-year period (using 
multiple commitments) and begin paying back leverage as the fund 
harvests its investments. As a result, based on Debenture pools since 
1992 that have been fully repaid, the average hold period is 
approximately 6 years, this would equate to $366,000 in total 
additional fees for the SBIC. If the SBIC held the leverage outstanding 
for its full ten-year term, this would equate to $610,000 for a single 
SBIC. Between FYs 2012 and 2017, SBA approved, on average, $2.28 
billion aggregate debenture commitments per year. If an additional 6.1 
basis point charge were in effect, SBICs would incur over $1.4 million 
per year in additional fees, or approximately $8.3 million over the 
average 6-year average holding period for SBIC debentures. This is 
capital that SBICs could otherwise deploy to small businesses.
    The withdrawal of the Proposed Rule has no effect on currently 
licensed Impact SBICs. Currently licensed Impact SBICs must continue to 
operate under the Impact Policy under which they were licensed (i.e., 
the Impact Policy issued in 2011, 2012 or 2014, as applicable). SBA 
will continue to follow SBA regulations and credit policies applicable 
to all SBICs with respect to approving leverage commitments and draws 
for Impact SBICs licensed with the intent of issuing SBA-guaranteed 
debentures. It should be noted that SBA allocated debentures for Impact 
SBICs in both FY 2018 and FY 2019 to accommodate existing Impact SBICs. 
SBA will determine the allocations of leverage for Impact SBICs for 
subsequent Fiscal Years after taking into account projected need by 
Impact SBICs in existence at that time.

Executive Order 13771

    The withdrawal of the NPRM qualifies as a deregulatory action under 
Executive Order 13771. See OMB's Memorandum titled ``Guidance 
Implementing Executive Order 13771, Titled `Reducing Regulation and 
Controlling Regulatory Costs' '' (April 5, 2017).
    Accordingly, for the reasons stated in the preamble, the Proposed 
Rule published at 81 FR 5666 on February 3, 2016, is withdrawn.

    Authority:  15 U.S.C. 634(b)(6).

    Dated: May 12, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-12031 Filed 6-8-18; 8:45 am]
 BILLING CODE 8025-01-P