[Federal Register Volume 89, Number 13 (Friday, January 19, 2024)]
[Rules and Regulations]
[Pages 3542-3549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00559]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 107 and 121
RIN 3245-AH90
Small Business Investment Company Investment Diversification and
Growth; Technical Amendments and Clarifications
AGENCY: U. S. Small Business Administration.
ACTION: Direct final rule.
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SUMMARY: This direct final rule clarifies and provides technical
updates to the Small Business Investment Company Investment
Diversification and Growth final rule implemented on August 17, 2023
(SBIC IDG Final Rule), which reduced barriers to program participation
for new SBIC fund managers and funds investing in underserved
communities and
[[Page 3543]]
geographies, capital intensive investments, and technologies critical
to national security and economic development. In the SBIC IDG Final
Rule, SBA introduced a new class of SBICs (``Accrual'' SBICs) to unlock
more patient capital financing for small businesses through the SBIC
program and implement changes to lower financial barriers to program
participation for new fund managers. This direct final rule will help
SBA implement Executive Order 13985, Advancing Racial Equity and
Support for Underserved Communities Through the Federal Government, by
reducing financial and administrative barriers to participate in the
SBIC program and modernizing the program's license offerings to align
with a more diversified set of private funds investing in underserved
small businesses.
DATES: This rule is effective March 4, 2024, without further action,
unless significant comment is received by February 20, 2024. If
significant adverse comment is received, SBA will publish a timely
withdrawal of the rule in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Policy: Bailey G. DeVries, Associate Administrator of the Office of
Investment and Innovation, Small Business Administration,
[email protected], 202-941-6064. This phone number can also be
reached by individuals who are deaf or hard of hearing, or who have
speech disabilities, through the Federal Communications Commission's
TTY-Based Telecommunications Relay Service teletype service at 711.
Regulatory Comments/Federal Register Docket: Nathan Putnam, Office
of Investment and Innovation, Small Business Administration,
[email protected], 202-699-1746. This phone number can also be
reached by individuals who are deaf or hard of hearing, or who have
speech disabilities, through the Federal Communications Commission's
TTY-Based Telecommunications Relay Service teletype service at 711.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Small Business Investment Company Program
The mission of the SBIC program is to enhance small business access
to capital by stimulating and supplementing ``the flow of private
equity capital and long-term loan funds which small-business concerns
need for the sound financing of their business operations and for their
growth, expansion, and modernization, and which are not available in
adequate supply.'' SBA carries out this mission by licensing and
monitoring privately owned and managed investment funds that raise
capital from private investors and issue SBA-guaranteed Debentures to
make private long-term equity and debt investments into qualifying
Small Businesses.
B. Notice of Rulemaking
The following is an overview of changes made to 13 CFR part 107 as
part of this Direct Final Rule to clarify and provide technical updates
to the Small Business Investment Company Investment Diversification and
Growth final rule (SBIC IDG Final Rule) implemented on August 17, 2023.
(a) Sec. 107.50 Definition of terms clarification. Clarifying the
definition of Annual Charge, for certain investors clarifying the
definition of Institutional Investor to eliminate the need for a ``dual
commitment'' relative to the capital commitment of such investors and
clarifying that the definition of Leverage is consistent across SBIC
Debenture types.
(b) Sec. 107.150 Management ownership diversity requirements
clarification.
Clarifying the exemption for non-profit entities to own more than
70 percent of the Licensee's Regulatory Capital to facilitate capital
raising efforts, particularly for funds targeting investments in
underserved geographies and critical technologies.
(c) Sec. 107.230 Permitted sources of Private Capital for
Licensees clarification. Clarifying that while SBICs are not restricted
in the amount of investment capital that can be contributed to SBICs
directly or indirectly from local, State or Federal Government
entities, the extent to which such investment capital from local, State
or Federal Government entities is eligible to qualify as Leverageable
Capital is limited by the Small Business Investment Act of 1958, as
amended (``the Act''). The capital contributed by such entities can be
included in an SBIC applicant's proposed formula to calculate
management fees.
(d) Sec. 107.305 Evaluation of license applicants clarification.
Clarifying that SBA does not require a ``certified'' track record as a
part of the SBIC application process and would expect to see that a
meaningful proportion of a prior SBIC fund's institutional investor
base would return to support an anticipated subsequent SBIC fund.
(e) Sec. 107.503 Licensee's adoption of an approved valuation
policy technical correction. Aligning the existing regulation with the
statutory requirements.
(f) Sec. 107.585 Distributions and reductions in Regulatory
Capital technical correction. Correcting the timeframe for payment of
amounts due SBA by Accrual and Reinvestor Licensees making
distributions other than those made solely for tax purposes.
(g) Sec. 107.630 Requirement for Licensees to file financial
statements with SBA (Form 468) clarification.
Clarifying that Reinvestor SBIC Licensees must file Annual and
Interim (Quarterly) Form 468s within 120 calendar days of the close of
the calendar quarter.
(h) Sec. 107.650 Requirement to report portfolio valuations to SBA
clarification.
Clarifying that Reinvestor SBIC Licensees must report valuations to
SBA within 120 calendar days of the close of the calendar quarter.
(i) Sec. 107.650 Requirement to report portfolio valuations to SBA
technical correction. Aligning the existing regulation with the
statutory requirements.
(j) Sec. 107.720 Small Businesses that may be ineligible for
financing clarification. Clarifying that Reinvestor SBIC Licensees may
provide Equity Capital Investments to Disadvantaged Businesses that are
relenders or reinvestors, including Community Development Financial
Institutions (CDFIs) and Minority Deposit Institutions (MDIs). In
addition to Equity Capital Investments, Reinvestor SBIC Licensees may
provide long-term debt or loan financing to CDFIs and MDIs.
(k) Sec. 107.720 Small Businesses that may be ineligible for
financing technical correction. SBA is expanding the exception that
permits holding companies to be established by Licensees to mitigate
implementation challenges for Accrual SBIC Licensees. Also, SBA is
updating the regulation by including a provision that appeared in a
prior rulemaking permitting SBIC Business Development Companies (BDCs)
to form a blocker entity to avoid adverse tax consequences to an
investor that has elected to be taxed as a registered investment
company (RIC) under the Internal Revenue Code (26 U.S.C. 851(b)(2)).
(l) Sec. 107.740 Portfolio diversification (``overline''
limitation) technical correction. Aligning the existing regulation with
the statutory requirements.
(m) Sec. 107.855 Interest rate ceiling and limitations on fees
charged to Small Businesses (``Cost of Money'') technical correction.
Correcting regulations that misstate in 13 CFR 107.855(h)(2) the ``Cost
of Money ceiling'' reference within Sec. 107.855.
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(n) Sec. 107.1120 General eligibility requirements for Leverage
technical correction. Correcting regulations that erroneously state in
13 CFR 107.1120(d) that SBIC Licensees are limited to $150 million in
outstanding Leverage.
(o) Sec. 107.1130 Leverage fees and Annual Charges clarification.
Clarifying that Annual Charges on Debentures are based on the principal
amount of Debentures.
(p) Sec. 107.1150 Maximum amount of Leverage clarification.
Clarifying a statement from the preamble of the SBIC IDG Final Rule
regarding the how SBA determines the Leverage available to Accrual
SBICs and Reinvestor SBICs and how the Agency safely manages the risk
of an outsized interest balance accruing.
(q) Sec. 107.1850 Watchlist technical correction. Correcting
regulations that misstate the formula used to calculate the Leverage
Coverage Ratio.
(r) Sec. 121.103(b) How does SBA determine affiliation?
clarification. Clarifying that SBA does not consider the underlying
fund of a Reinvestor SBIC to be the affiliate of a small business in
which such underlying fund has made an equity investment.
II. Section by Section Analysis
A. Section 107.50 Definition of Terms
SBA seeks to clarify the definition of Institutional Investor to be
consistent with rules implemented in the SBIC IDG Final Rule to provide
regulatory flexibility for fund-of-fund investors that are required to
be managed by SEC regulated Registered Investment Advisors. SBA
considers the commitments of such fund-of-fund investors to not be of
questionable collectability if the conditions set forth in the revised
paragraph (1)(x) of the Institutional Investor definition are met,
generally eliminating the requirement that a ``dual commitment'' be
obtained relative to such investor's capital commitment.
SBA seeks to correct the definition of Annual Charge and correct
text added to the definition of Leverage that could inadvertently lead
to Annual Charges being charged on Accrual Debenture principal and
accrued interest. Consistent with existing practices for Standard
Debentures, the Annual Charge on Accrual Debentures is charged on
Accrual Debenture principal only.
B. Section 107.150 Management Ownership Diversity Requirements
This regulation identifies the SBIC ownership diversity
requirements under section 302(c) of the Act. That section requires
SBIC ownership be ``sufficiently diversified from and unaffiliated with
the ownership of the licensee in a manner that ensures independence and
objectivity in the financial management and oversight of the
investments and operations of the licensee.'' As an exception to the
diversity ownership requirement under Sec. 107.150(b)(1), SBA allows
an investor that is a traditional investment company to own and control
more than 70 percent of the Licensee's Regulatory Capital. Such SBICs
are essentially drop-down funds for that traditional investment company
and are structured exclusively to pool capital from more than one
source for the purpose of investing and generating profits. In the SBIC
Investment Diversification and Growth rulemaking, SBA proposed also
including non-profit entities to own more than 70 percent of the
Licensee's Regulatory Capital to facilitate capital raising efforts,
particularly for funds targeting investments in underserved geographies
and critical technologies. In the final rulemaking, SBA clarified such
non-profit entities could own and control a Licensee; however, did
include the proposed reforms, which were supported in public comments,
for such non-profit entities to own more than 70 percent of the
Licensee's Regulatory Capital. SBA is clarifying in this rulemaking
that such non-profit entities can own more than 70 percent of the
Licensee's Regulatory Capital as originally stated in the proposed
rulemaking.
C. Section 107.230 Permitted Sources of Private Capital for Licensees
SBA seeks to clarify that while SBICs are not restricted in the
amount of investment capital that can be contributed to SBICs directly
or indirectly from local, State or Federal Government entities, the
extent to which such investment capital from local, State or Federal
Government entities is eligible to qualify as Leverageable Capital is
limited by the Small Business Investment Act of 1958, as amended (``the
Act''). The capital contributed by such entities can be included in an
SBIC applicant's proposed formula to calculate management fees.
D. Section 107.305 Evaluation of License Applicants
SBA seeks to clarify that a management team must have demonstrated
investment acumen to apply for an SBIC license, as defined in Sec.
107.305(b). SBA looks at a mosaic of factors when determining
eligibility for an SBIC license and can rely upon third-party data
sources and reference checks in conjunction with the initial license
application to verify management team eligibility. For clarity, SBA is
adding that while a track record is required to apply for an SBIC
license, a certified track record is not required and is clarifying
that SBA would expect to see that a meaningful proportion, in terms of
the number of institutional investors, of a prior SBIC fund's investor
base would return to support an anticipated subsequent SBIC fund.
E. Section 107.503 Licensee's Adoption of an Approved Valuation Policy
SBA is correcting current regulations, which erroneously state in
13 CFR 107.503(d)(4) that SBIC Licensees must report material adverse
changes within 45 days following the close of the quarter. The
statutory requirement is within 30 days following the close of the
quarter.
F. Section 107.585 Distributions and Reductions in Regulatory Capital
SBA is correcting the timeframe set forth in Sec. 107.585(c), for
both the mandatory payment of Annual Charges and accrued interest and
the mandatory payment of the ``SBA share'' by Accrual and Reinvestor
Licensees making distributions other than those made solely for tax
purposes. Under the SBIC IDG Final Rule such Licensees are required to
make mandatory payments on annual charges and accrued interest and the
calculated SBA share of Leverage in connection with each distribution
to private investors, other than a distribution approved in writing and
in advance by SBA as solely for tax purposes. The SBIC IDG Final Rule
provided inconsistent guidance as to the timing of such payments due to
SBA. In order to reduce its risk, SBA corrects the regulation to
require that each such payment to SBA be made on or before the date of
the corresponding non-tax distribution to private investors.
Also, in view of the alignment of the ``overline'' formula of Sec.
107.740 with the formula set forth in section 306 of the Act, SBA seeks
to eliminate from Sec. 107.585 two references to the former regulatory
formula. Those references concern an ``add back'' of approved
reductions of Regulatory Capital to the regulatory formula previously
contained within Sec. 107.740. Given that Sec. 107.740 has now been
aligned with the statutory overline formula, as to which such ``add
backs'' are not applicable, the references within Sec. 107.585 to such
``add backs'' are no longer relevant.
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G. Section 107.630 Requirement for Licensees To File Financial
Statements With SBA (Form 468)
SBA seeks to clarify that Reinvestor SBICs are required to file
Annual Form 468 within 120 calendar days of the end of your fiscal year
and Interim Form 468 within 120 calendar days of the respective
quarter.
H. Section 107.650 Requirement To Report Portfolio Valuations to SBA
Consistent with the clarification in 13 CFR 107.630, SBA similarly
clarifies that Reinvestor SBICs must report valuations to SBA within
120 days of the end of the fiscal year and within 120 days following
the close of other reporting periods.
In addition, SBA aligns the regulatory requirement for Licensees to
report material adverse changes in valuations with the statutory
requirement.
I. Section 107.720 Small Businesses That May Be Ineligible for
Financing
This regulation identifies small businesses that may be ineligible
for financing by SBICs. Current 13 CFR 107.720(a)(2)(i) provides an
exception to the limitation on investments in relenders or reinvestors
in order to permit Reinvestor SBICs to provide Equity Capital
Investments to underserved Small Business reinvestors (except banks,
savings and loans not insured by agencies of the Federal Government,
and agricultural credit companies). As part of this rulemaking, SBA is
seeking to clarify its intent relative to Sec. 107.720(a)(2)(i) by
noting that Reinvestor SBIC Licensees may provide Equity Capital
Investments to Disadvantaged Businesses that are relenders or
reinvestors, including Community Development Financial Institutions
(CDFIs) and Minority Deposit Institutions (MDIs). In addition to Equity
Capital Investments, Reinvestor SBIC Licensees may provide long-term
debt or loan financing to CDFIs and MDIs. SBA notes that such CDFIs and
MDIs are excepted from the requirement to solely make investments or
loans to eligible businesses pursuant to the requirements set forth in
Sec. 107.720(a)(2)(i).
Current regulations provide for two exceptions that allow an SBIC
to structure an investment utilizing a passive small business as a
pass-through. The first exception, identified in Sec. 107.720(b)(2),
permits an investment utilizing up to two passive entities, as long as
substantially all of the financing proceeds are passed through to one
or more active ``subsidiary companies,'' each of which is an eligible
small business. The second exception, identified in Sec.
107.720(b)(3), allows a partnership SBIC to form and finance a passive,
blocker entity that in turn provides financing to an active,
unincorporated small business. Currently, this structure is permitted
only if a direct financing of the unincorporated small business would
cause at least one of the SBIC's investors to incur Unrelated Business
Taxable Income (UBTI) under section 511 of the Internal Revenue Code,
which may arise from an activity engaged in by a tax-exempt
organization that is not related to the tax-exempt purpose of that
organization.
SBA is clarifying that the exception set forth in 13 CFR
107.720(b)(2) permits an SBIC to structure an investment utilizing
additional passive small businesses as a pass through, provided that
(i) all financing proceeds are passed through to one or more active
``subsidiary companies,'' each of which is an eligible small business,
(ii) SBA has adequate information to review information appropriate to
each passive small business pursuant to 13 CFR 107.720(b)(4), and (iii)
SBA is able to maintain enforcement rights against each of the small
businesses financed pursuant to 13 CFR 107.720(b)(2), including the
active Small Business. Further, SBA is clarifying that 13 CFR
107.720(b)(3) allows the formation of a blocker entity, in the case of
an SBIC that either is a BDC licensed under the Investment Company Act
of 1940 or is owned by a parent BDC, to avoid adverse tax consequences
to an investor that has elected to be taxed as a registered investment
company under the Internal Revenue Code (26 U.S.C. 851(b)(2)). SBA
believes that these changes will provide SBICs with additional
flexibility investments to eligible Small Businesses and increase the
flow of private capital within the SBIC program.
J. Section 107.740 Portfolio Diversification (``Overline'' Limit)
SBA seeks to align the ``overline'' formula contained within Sec.
107.740 with overline formula that is set forth in section 306 of the
Act. Section 306 contains an aggregate limitation on the concentration
of a Licensee's combined capital (Private Capital + guaranteed
Leverage), precluding a Licensee from investing combined capital in
excess of a threshold determined under the statutory formula.
Previously, SBA regulations contained an overline limitation that was
similar to the statutory requirement though different in important
respects, thus subjecting Licensees to an additional overline
requirement and potentially resulting in confusion in various
circumstances. By aligning the regulation with the statute, SBA now
effectively simplifies overline management and the burden of tracking
the overline requirement under two separate formulae.
K. Section 107.855 Interest Rate Ceiling and Limitations on Fees
Charged to Small Businesses (``Cost of Money'')
SBA seeks to correct a misstated reference by correcting
107.855(h)(2) to read as follows: ``Discount the cash flows back to the
first disbursement date using the Cost of Money ceiling from paragraph
(c) of this section as the discount rate.''
L. Section 107.1120 General Eligibility Requirements for Leverage
SBA seeks to correct current regulations, which erroneously state
in 13 CFR 107.1120(d) that SBIC Licensees are limited to $150 million
in outstanding Leverage. This provision does not reflect a change in
the statutory outstanding Leverage maximum which is $175 million for an
individual Licensee and $350 million in aggregate for SBIC Licensees
that are under Common Control. Also, SBA has inserted language
referring to the maximum Leverage allowed under the Act to ensure that
any statutory changes are reflected in the regulations.
M. Section 107.1130 Leverage Fees and Annual Charge
SBA seeks to clarify the current regulations which are ambiguous as
to the basis for which Annual Charges are calculated on outstanding
Debentures. SBA clarifies the regulation by adding the word
``principal'' in front of ``amount'' in 13 CFR 107.1130(d)(1).
N. Section 107.1150 Maximum Amount of Leverage
SBA seeks to further clarify a statement from the preamble of the
SBIC IDG Final Rule regarding how SBA determines the Leverage available
to Accrual SBICs and Reinvestor SBICs. In the rule, SBA stated that
``In order to determine the maximum amount of leverage that Accrual
SBICs and Reinvestor SBICs may have outstanding, SBA will aggregate the
total principal leverage plus ten years of accrued interest on such
principal to determine the total Accrual Debentures that the Accrual
SBIC may issue based on the statutory limitation.'' SBA seeks to
clarify that this aggregation is based on an estimate of potential
interest which could accrue based on prevailing interest rates at the
time of licensing. Furthermore, SBA seeks to clarify how
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the Agency safely manages the risk of an outsized interest balance
accruing by requiring Accrual Debentures to include a provision which
requires the prompt payment of any interest that has accrued in excess
of the limitation of SBA Leverage available at the end of each quarter.
This clarification refers to the fact that SBA is performing a
forecasting exercise in conjunction with other considerations during
the Licensing process to ultimately make a determination on the Total
Intended Leverage Commitment SBA will conditionally approve as part of
the Green Light approval. It should be noted that all Total Intended
Leverage Commitments and Leverage issued are bound by the statutory
maxima applicable to Individual Licensees and Licensees under Common
Control. (SBA may issue a subsequent Leverage Commitment which permits
the Licensee to exceed the sum otherwise available under section
303(b)(2), up to an amount equal to the lesser of (a) 33 percent of the
Licensee's Private Capital, and (b) the Licensee's Energy Saving
Qualified Investment cost basis, subject to the limitations expressed
in section 303 of the SBIC Act and its implementing regulations.)
O. Section 107.1850 Watchlist
SBA seeks to correct current regulations, which erroneously present
in 13 CFR 107.1859 the formula used to calculate a metric that was
among those included in the formal Licensee ``Watchlist'' process
implemented by the SBIC IDG Final Rule to formalize monitoring
practices that have existed in SBIC Program Standard Operating
Procedures for several years. Among the ``Watchlist triggers''
described in paragraph 13 CFR 107.1850(a) was the Leverage Coverage
Ratio (LCR). SBA now corrects clause 13 CFR 107.1850(a)(6) which
presents the formula used to calculate LCR, which was misstated in the
SBIC IDG Final Rule.
P. Section 121.103 How does SBA determine affiliation?
With the SBIC IDG Final Rule, SBA established within Sec.
107.720(a)(2) a new type of SBIC, known as a Reinvestor SBIC, licensed
to issue Accrual Debentures and approved by SBA to provide ``Equity
Capital Investments to underserved Small Business reinvestors (except
banks, savings and loans not insured by agencies of the Federal
Government, and agricultural credit companies) that make direct
financings'' to certain qualifying Small Businesses. With the advent of
Reinvestor SBICs, questions have arisen concerning the applicability of
SBA affiliation rules to the relationship between such underserved
Small Business reinvestors and the qualifying Small Businesses in which
they invest. Although 13 CFR 121.103(b)(1), in current form, provides
clarity as to the lack of regulatory affiliation between licensed SBICs
and the Small Businesses to which they provide Financing, the SBIC IDG
Final Rule failed to answer the related question of whether a Small
Business reinvestor is affiliated with the qualifying Small Business in
which it reinvests. SBA now modifies clause 13 CFR 121.103(b)(1) to
respond to this question and resolve that no affiliation results from
this relationship.
III. Compliance With Executive Orders 12866, 12988, 13132, 13563, and
13175, the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the
Regulatory Flexibility Act (5 U.S.C. 601-612))
A. Executive Order 12866
The Office of Management and Budget has determined that this rule
is not a ``significant regulatory action'' under Executive Order 12866.
B. 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 preemptive effect or retroactive effect.
C. Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132. It 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, as specified in the Executive order. As
such it does not warrant the preparation of a federalism assessment.
D. Executive Order 13175
This rule does not have tribal implications under Executive Order
13175, Consultation and Coordination with Indian Tribal Governments,
because it would not have a substantial direct effect on one or more
Indian tribes, on the relationship between the Federal Government and
Indian tribes, or on the distribution of power and responsibilities
between the Federal Government and Indian tribes.
E. Executive Order 13563
Executive Order 13563, Improving Regulation and Regulatory Review
(January 18, 2011), requires agencies to adopt regulations through a
process that involves public participation, and to the extent feasible,
base regulations on the open exchange of information and perspectives
from affected stakeholders and the public as a whole. SBA has developed
this rule in a manner consistent with these requirements, and the
public will have the opportunity to provide comments prior to the
effective date of this direct final rule.
F. Congressional Review Act, 5 U.S.C. 801-808
The Office of Management and Budget has determined that this is not
a major rule under 5 U.S.C. 804(2).
G. Paperwork Reduction Act, 44 U.S.C., Ch. 35
SBA has determined that this rule would not impose new reporting or
recordkeeping requirements under the Paperwork Reduction Act.
H. Regulatory Flexibility Act, 5 U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires
administrative agencies to consider the effect of their actions on
small businesses, small organizations, and small governmental
jurisdictions. According to the Regulatory Flexibility Act (RFA), 5
U.S.C. 601, when an agency issues a rulemaking, it must prepare a
regulatory flexibility analysis to address the impact of the rule on
small entities. However, section 605 of the RFA allows an agency to
certify a rule, in lieu of preparing an analysis, if the rulemaking is
not expected to have a significant economic impact on a substantial
number of small entities.
This rule likely will not impact a substantial number of small
entities. This rulemaking is intended to update and clarify comments
received in connection with prior SBA rules, and accordingly will
affect only a limited population of existing and potential SBIC
Licensees. Importantly, this rule does not directly impact small
businesses receiving investments, nor any investors or small banks
participating in the SBIC Licensee. This rulemaking regulates the
relevant SBIC Licensees. The courts have held that the RFA does not
require a regulatory flexibility analysis for entities not directly
regulated by the agency's proposed rulemaking. Thus, SBA is not
required to conduct a regulatory flexibility analysis on potential
downstream benefits or costs to those entities.
Further, this rulemaking also does not have a significant economic
impact on
[[Page 3547]]
those small entities directly regulated under this rulemaking. SBA
expects the changes in this proposed rule to increase program
participation, access to capital, and diversity of investment
strategies. The rule does not impose any significant new compliance
requirements to SBIC program participants.
Based on the foregoing, the Administrator of the SBA hereby
certifies that this rulemaking will not have a significant economic
impact on a substantial number of small entities.
Justification for Direct Final Rule--Administrative Procedure Act
In general, SBA publishes a rule for public comment before issuing
a final rule, in accordance with the Administrative Procedure Act. 5
U.S.C. 553. The Administrative Procedure Act provides an exception to
this standard rulemaking process, however, when an agency finds good
cause to adopt a rule without prior public participation. 5 U.S.C.
553(b)(3)(B). The good cause requirement is satisfied when prior public
participation is impracticable, unnecessary, or contrary to the public
interest.
SBA is publishing this rule as a direct final rule because public
participation is unnecessary. SBA views this as a non-controversial
administrative action because all technical corrections and updates are
consistent with public comments received throughout the SBIC IDG Final
Rule rulemaking process. This rule will be effective on the date shown
in the DATES section unless SBA receives significant adverse comment on
or before the deadline for comments. Significant adverse comments are
comments that provide strong justifications why the rule should not be
adopted or for changing the rule. SBA does not expect to receive any
significant adverse comments because these technical corrections and
updates are consistent with broad stakeholder comments received during
the prior SBIC IDG Final Rule rulemaking process.
If SBA receives significant adverse comment, SBA will publish a
notice in the Federal Register withdrawing this rule before the
effective date. If SBA receives no significant adverse comments, the
rule will be effective 45 days after publication without further
notice.
List of Subjects
13 CFR Part 107
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 121
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
Accordingly, for the reasons stated in the preamble, SBA is
implementing regulations to amend 13 CFR parts 107 and 121 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. 662, 681-687, 687b-h, 687k-m.
0
2. Amend Sec. 107.50 by revising the definitions of Annual Charge,
paragraph (1)(x) of Institutional Investor, and Leverage to read as
follows:
Sec. 107.50 Definition of terms.
* * * * *
Annual Charge means:
Annual Charge means an annual fee on the principal amount of
outstanding Debentures which is payable to SBA by Licensees, subject to
the terms and conditions set forth in Sec. Sec. 107.585 and
107.1130(d).
* * * * *
Institutional Investor means:
(1) * * *
(x) An entity managed by an SEC regulated Registered Investment
Adviser in good standing, provided the Licensee's limited partnership
agreement (or other governing agreement) contains sufficient provisions
to ensure collectability.
* * * * *
Leverage means:
Leverage means financial assistance provided to a Licensee by SBA,
either through the purchase or guaranty of a Licensee's Debentures, and
any other SBA financial assistance evidenced by a security of the
Licensee.
* * * * *
0
3. Amend Sec. 107.150 by revising paragraph (b)(2) to read as follows:
* * * * *
(b) * * *
(2) Exception. An investor that is a traditional investment
company, as determined by SBA, may own and control more than 70 percent
of your Regulatory Capital and your Leverageable Capital. For purposes
of this section, a traditional investment company must be a non-profit
entity, or a professionally managed firm organized exclusively to pool
capital from more than one source for the purpose of investing in
businesses that are expected to generate substantial returns to the
firm's investors. In determining whether a firm is a traditional
investment company for purposes of this section, SBA will also
consider:
* * * * *
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4. Amend Sec. 107.230 by:
0
a. Adding a heading to paragraph (e); and
0
b. Adding paragraph (f).
The revisions read as follows:
Sec. 107.230 Permitted sources of Private Capital for Licensees.
* * * * *
(e) Borrowed funds exclusion. * * *
(f) Public sector contributions. The Act limits the extent to which
funds invested directly or indirectly by local, State or Federal
Government entities are eligible to qualify as Leverageable Capital.
However, SBICs are not restricted from accepting funds invested
directly or indirectly from local, State or Federal Government
entities. The funds contributed by such entities may be included in an
SBIC applicant's proposed formula to calculate management fees.
0
5. Amend Sec. 107.305 by adding a sentence at the end of paragraph (b)
and revising (e)(1)(iii) to read as follows:
Sec. 107.305 Evaluation of license applicants.
* * * * *
(b) * * * While a track record is required to apply for an SBIC
license, a ``certified'' track record is not required.
* * * * *
(e) * * *
(1) * * *
(iii) Consistent limited partnership (LP)-general partnership (GP)
dynamics. No new limited partner will represent >=33 percent of the
Private Capital of the licensee upon reaching final close at target
fund size or hard cap. SBA would expect to see that a meaningful
proportion of a prior SBIC fund's institutional investor base would
return to support an anticipated subsequent SBIC fund. The most recent
limited partnership agreement (LPA) of the active Licensee and all side
letters will have no substantive changes for the applicant fund.
* * * * *
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6. Amend 107.503 by revising paragraph (d)(4) to read as follows:
Sec. 107.503 Permitted sources of Private Capital for Licensees.
* * * * *
(d) * * *
(4) You must report material adverse changes in valuations at least
quarterly,
[[Page 3548]]
within 30 days following the close of the quarter.
* * * * *
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7. Amend Sec. 107.585 by:
0
a. In paragraph (b), removing the fourth sentence;
0
b. Revising the introductory text of paragraph (c), paragraph (c)(1),
paragraph (c)(2) introductory text, and paragraph (c)(2)(i); and
0
c. In paragraph (c)(4) removing the fifth sentence.
The revisions read as follows:
Sec. 107.585 Distributions and reductions in Regulatory Capital.
* * * * *
(c) Accrual SBICs and Reinvestor SBICs. If you are an Accrual SBIC
or Reinvestor SBIC, unless you receive prior written approval from SBA
to make a distribution solely to cover tax liabilities, you may only
distribute as follows:
(1) Payment of Annual Charges and accrued interest. Prior to any
non-tax distribution, you must pay any Annual Charges owed to SBA and
all accrued interest on your outstanding Leverage.
(2) Calculate SBA's share of distribution. Prior to any non-tax
distribution, you must make payments to SBA on a pro rata basis with
any distributions based on your SBA Total Intended Leverage Commitment
relative to your Total Private Capital Commitments, inclusive of
Qualified Non-Private Funds, determined within 12 months of Licensure
calculated as follows: SBA's Share = Total Distributions x [Total
Intended Leverage Commitment/(Total Intended Leverage Commitment +
Total Private Capital Commitments)] where:
(i) Total Distributions means any prior tax distributions plus the
total amount of distributions, whether profit or return of capital, you
intend to make after paying all accrued interest and Annual Charges;
* * * * *
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8. Amend Sec. 107.630 by adding a sentence at the end of paragraphs
(a) introductory text and (b) to read as follows:
Sec. 107.630 Requirement for Licensees to file financial statements
with SBA (Form 468).
(a) * * * Reinvestor SBICs must file Annual Form 468 within 120
calendar days of the end of your fiscal year.
* * * * *
(b) * * * Reinvestor SBICs must file such reports within 120
calendar days of the end of the reporting period.
* * * * *
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9. Revise Sec. 107.650 to read as follows:
Sec. 107.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 107.503. You must report such valuations to SBA
within 90 calendar days of the end of the fiscal year in the case of
annual valuations, and if you are a Leveraged Licensee within 45
calendar days following the close of other reporting periods.
Reinvestor SBICs must report valuations to SBA within 120 calendar days
of the end of the fiscal year in the case of annual valuations, and
within 120 calendar days following the close of other reporting
periods. You must report material adverse changes in valuations at
least quarterly, within 30 days following the close of the quarter.
0
10. Amend Sec. 107.720 by:
0
a. Adding two sentences at the end of paragraph (a)(2)(i);
0
b. Revising the first sentence of paragraph (b)(2) introductory text;
0
c. Revising the fourth sentence of paragraph (b)(3) introductory text;
and
0
d. Revising paragraph (b)(4)(iii).
The additions and revisions read as follows:
Sec. 107.720 Small Businesses that may be ineligible for financing.
(a) * * *
(2) * * *
(i) * * *A Reinvestor SBIC may make Equity Capital Investments to
Disadvantaged Businesses that are relenders or reinvestors, including
Community Development Financial Institutions (CDFIs) and Minority
Deposit Institutions (MDIs), and any such investments in CDFIs or MDIs
pursuant to this section are not subject to the requirement that such
CDFIs or MDIs make direct financings solely to Small Businesses. In
addition to Equity Capital Investments, Reinvestor SBIC Licensees may
provide long-term debt or loan financing to CDFIs and MDIs.
* * * * *
(b) * * *
(2) Exception for pass-through of proceeds to subsidiary. You may
provide Financing directly to passive businesses, including passive
businesses that you have formed, if it is a Small Business and it
passes substantially all the proceeds through to (or uses substantially
all the proceeds to acquire) one or more subsidiary companies, each of
which is an eligible Small Business that is not passive. * * *
(3) * * * You may form such blocker entities only if a direct
Financing to such Small Businesses would cause any of your investors to
incur ``unrelated business taxable income'' under section 511 of the
Internal Revenue Code (26 U.S.C. 511) or to incur ``effectively
connected income'' to foreign investors under sections 871 and 882 of
the Internal Revenue Code (26 U.S.C. 871 and 882) or (for an investor
that has elected to be taxed as a regulated investment company) receive
or be deemed to receive gross income that does not qualify under
section 851(b)(2) of the Internal Revenue Code (26 U.S.C. 851(b)(2)). *
* *
(4) * * *
(iii) For the purposes of this part 107, each passive and non-
passive business included in the Financing is a Portfolio Concern and
subject to the provisions set forth in the Act. The terms of the
financing must also provide SBA with access to Portfolio Concern
information in compliance with this part 107, including without
limitation Sec. Sec. 107.600 and 107.620.
* * * * *
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11. Revise Sec. 107.740 to read as follows:
Sec. 107.740 Portfolio diversification (``Overline'' limitation).
If you are a Leveraged Licensee, the aggregate amount of financings
you may provide and commitments you may issue to a Small Business and
its affiliates may not, without SBA's prior written approval, exceed 10
percent of the sum of:
(a) Your Private Capital; and
(b) The total amount of Leverage principal (excluding any interest
which may become due or accrue at any point following the issuance of
Leverage) projected to be issued in the business plan that was approved
by SBA at the time you were licensed.
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12. Amend Sec. 107.855 by revising paragraph (h)(2) to read as
follows:
Sec. 107.855 Interest rate ceiling and limitations on fees charged to
Small Businesses (``Cost of Money'').
* * * * *
(h) * * *
(2) Discount the cash flows back to the first disbursement date
using the Cost of Money ceiling from paragraph (c) of this section as
the discount rate.
* * * * *
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13. Amend Sec. 107.1120 by revising paragraph (d) to read as follows:
Sec. 107.1120 General eligibility requirements for Leverage.
* * * * *
(d) For any Leverage draw that would cause you and any other
Licensees under Common Control to have aggregate outstanding Leverage
in excess of the amount permitted under Section 303(b)(2)(A)(ii) of the
Act,
[[Page 3549]]
which, as of June 21, 2018, is $175,000,000, certify that none of the
Licensees has a condition of Capital Impairment. See also Sec.
107.1150(b).
* * * * *
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14. Amend Sec. 107.1130 by revising paragraph (d)(1) introductory text
to read as follows:
Sec. 107.1130 Leverage fees and Annual Charge.
* * * * *
(d) * * *
(1) Debentures. You must pay to SBA an Annual Charge, not to exceed
1.38 percent per annum, on the outstanding principal amount of your
Debentures, payable under the same terms and conditions as the interest
on the Debentures. For Leverage issued pursuant to Leverage commitments
approved on or after October 1, 2023, the Annual Charge, established
and published, shall not be less than 0.10 percent per annum, subject
to the following provisions:
* * * * *
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15. Amend Sec. 107.1850 by revising paragraph (a)(6) to read as
follows:
Sec. 107.1850 Watchlist.
* * * * *
(a) * * *
(6) Your leverage coverage ratio (LCR) falls below 1.25, where LCR
is calculated as ((Total Assets-Liabilities excluding SBA Leverage-
Other Assets) + Unfunded Private Commitments)/Outstanding Leverage, or
a Capital Impairment Percentage approaching your threshold set forth in
Sec. 107.1830.
* * * * *
PART 121--SMALL BUSINESS SIZE REGULATIONS
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16. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, and
694a(9); Pub. L. 116-136, Section 1114.
0
17. Amend Sec. 121.103 by revising paragraph (b)(1) to read as
follows:
Sec. 121.103 How does SBA determine affiliation?
* * * * *
(b) * * *
(1) Business concerns owned in whole or substantial part either by
investment companies licensed, or by development companies qualifying,
under the Small Business Investment Act of 1958, as amended, or by
investment companies to which a Reinvestor SBIC (within the meaning of
13 CFR 107.720(a)(2)) has provided a meaningful percentage of Equity
Capital are not considered affiliates of such investment companies or
development companies.
* * * * *
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-00559 Filed 1-18-24; 8:45 am]
BILLING CODE 8026-09-P