[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Proposed Rules]
[Pages 2029-2035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-486]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 76, No. 8 / Wednesday, January 12, 2011 / 
Proposed Rules

[[Page 2029]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AF86


Small Business Investment Companies--Energy Saving Qualified 
Investments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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

SUMMARY: In this proposed rule, the U.S. Small Business Administration 
(SBA) is setting forth the new defined terms, ``Energy Saving Qualified 
Investment'' and ``Energy Saving Activities'', for the Small Business 
Investment Company (SBIC) Program. The new definitions are being 
established to facilitate implementation of a provision of the Energy 
Independence and Security Act of 2007 (Energy Act), which allows an 
SBIC making an ``energy saving qualified investment'' to obtain SBA 
leverage by issuing a deferred interest ``energy saving debenture''. 
This rule would also implement a provision of the Energy Act that 
provides access to additional SBA leverage for SBICs that have made 
Energy Saving Qualified Investments in Smaller Enterprises, as defined 
in SBA regulations.

DATES: Comments must be received on or before February 11, 2011.

ADDRESSES: You may submit comments, identified by RIN 3245-AF 86, by 
any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Mail, Hand Delivery/Courier: Sean Greene, Associate 
Administrator for Investment, 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 Carol Fendler, Investment Division, 409 Third Street, 
SW., Washington, DC 20416. Highlight the information that you consider 
to be CBI and explain why you believe this information should be held 
confidential. SBA will review the information and make the final 
determination of whether it will publish the information or not.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Investment Division, 
Office of Capital Access, (202) 205-7559 or <a href="/cdn-cgi/l/email-protection#5d2e3f343e1d2e3f3c733a322b"><span class="__cf_email__" data-cfemail="6211000b01221100034c050d14">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The Energy Independence and Security Act of 2007, Public Law 110-
140, Title XII, section 1205(a), amended section 303 of the Small 
Business Investment Act of 1958 (SBI Act) by authorizing SBICs licensed 
after September 30, 2008, to issue energy saving debentures. Section 
1205(b) of the Energy Act amended section 103 of the SBI Act by adding 
the new defined terms ``energy saving debenture'' and ``energy saving 
qualified investment.'' Section 1206 of the Energy Act amended section 
303(b)(2) of the SBI Act to make SBICs licensed after September 30, 
2008, eligible for additional leverage if they have made energy saving 
qualified investments. An SBIC making maximum use of this provision 
could have approximately 11% more leverage outstanding than would be 
permitted under the standard leverage eligibility formula.

II. Section by Section Analysis

    Section 107.50--Definitions. The Energy Act provides that energy 
saving debentures are to be issued at a discount, have a 5-year or 10-
year maturity, and require no interest payment or annual charge for the 
first five years. Although an SBIC can use other funds to make an 
energy saving qualified investment, an SBIC that issues an Energy 
Saving Debenture must use the proceeds only to make an energy saving 
qualified investment. To implement these new statutory provisions, SBA 
proposes to add ``Energy Saving Qualified Investment'' and ``Energy 
Saving Activities'' as defined terms in Sec.  107.50.

``Energy Saving Qualified Investment''

    The proposed regulatory definition of Energy Saving Qualified 
Investment has several key points. First, as specified in the statute, 
an Energy Saving Qualified Investment can only be made by an SBIC 
licensed after September 30, 2008. Second, the investment must be made 
in a Small Business, as defined in 13 CFR part 107. Third, the 
investment must be in the form of a Loan, a Debt Security (a debt 
instrument that includes an equity feature, such as warrants or rights 
to convert to equity), or an Equity Security. Fourth, the Small 
Business must be ``primarily engaged'' in business activities that 
reduce the use or consumption of non-renewable energy sources (``Energy 
Saving Activities'').

``Energy Saving Activities''

    The proposed rule defines Energy Saving Activities primarily by 
reference to various criteria established by the Department of Energy 
and other Federal agencies to identify energy efficient products and 
services and to encourage the provision of renewable energy sources. As 
one example, the manufacturing of products that satisfy the criteria 
for use of the Energy Star trademark label would qualify as an Energy 
Saving Activity. For each type of Energy Saving Activity, the proposed 
rule provides a reference to the appropriate Federal program or 
Internal Revenue Code section, or a detailed definition that would 
allow users to determine whether the manufacture or development of a 
specific product, or the provision of a specific service, qualifies 
under the definition. SBA believes that reference wherever possible to 
existing standards for energy efficient products and services will 
ensure that Energy Saving Qualified Investments satisfy the objectives 
of the Energy Act. This approach will also allow the definition of 
Energy Saving Activities to be more easily updated as energy efficiency 
standards expand to include new products and services.
    In addition, paragraph (4) of the definition would allow SBA to 
determine whether activities not specifically addressed in the proposed 
rule are Energy Saving Activities. This approach will provide 
flexibility to accommodate activities based on technologies or 
practices that may emerge in the future. Paragraph (4) encompasses the 
manufacturing of products, provision of services, and conduct of 
research and development activities that reduce (or are anticipated to 
reduce) the consumption of non-

[[Page 2030]]

renewable energy, either through the more efficient use of such energy 
or by providing energy from renewable sources. An SBIC requesting a 
determination by SBA under paragraph (4) will be asked to submit 
written information and certifications (see also the discussion of 
proposed Sec.  107.610 in this preamble). The proposed definition 
identifies the information required to be submitted and the factors 
that SBA will take into account in determining whether activities are 
Energy Saving Activities, although an SBIC would be free to provide 
other information to support its request. Ideally, the claimed energy 
savings will have been tested by an independent engineer or other 
recognized professional with expertise in the subject technology. The 
results of in-house or other non-independent testing may also be 
considered if the SBIC can document that tests were designed, performed 
and evaluated by qualified personnel following appropriate professional 
standards. SBA will also consider such factors as patents held by the 
Small Business, grants awarded by Federal or State government agencies, 
foundations, etc. to promote energy efficiency or energy savings, and 
licenses purchased by the Small Business to make use of energy-saving 
technologies developed by others. For research and development-stage 
companies that have not yet brought a product or service to market, SBA 
will consider projected energy savings, but the SBIC must also provide 
evidence supporting the feasibility and commercial potential of the 
products or services under development. Finally, SBA will consider 
whether an activity that would have been eligible for an energy-related 
Federal tax credit in past years should be considered an Energy Saving 
Activity, even though the subject credit is not currently available.
    SBA welcomes comments regarding additional activities that may be 
candidates for inclusion in the Energy Saving Activities definition. 
For example, SBA is open to suggestions regarding activities that could 
reduce the consumption of non-renewable fuels by reducing the 
dependency on automobiles for transportation, such as provision of 
telework facilities, carpooling services, or improved transit options.

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

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

Determining Whether a Concern is ``Primarily Engaged'' in Energy Saving 
Activities

    The proposed rule presumes that a company is ``primarily engaged'' 
in Energy Saving Activities if it derived at least 50% of its total 
revenues for its most recently completed fiscal year directly from 
Energy Saving Activities. However, SBA recognizes that one of the 
objectives of creating the Energy Saving debenture, which does not 
require the payment of interest during the first five years following 
issuance, may be to allow SBICs to invest in earlier stage enterprises 
that do not meet this revenue test for Energy Saving Activities. In 
some cases, small businesses may be engaged in research and development 
activities with little or no revenues. In other instances, a company 
may already have revenue from activities not related to Energy Saving 
Activities, but may be heavily engaged in activities that are expected 
to produce revenue from Energy Saving Activities in the future. 
Therefore, the proposed rule would allow SBA to determine that a small 
business is primarily engaged in Energy Saving Activities based on the 
totality of the circumstances, as evidenced by such factors as the 
distribution of the company's revenues; the percentage of total 
employees engaged in Energy Saving Activities; the expenditures (which 
may include both amounts expensed and amounts capitalized) allocated to 
Energy Saving Activities; activities related to the development and use 
of intellectual property held by the company related to Energy Saving 
Activities; and Energy Saving Activities contemplated by a business 
plan presented to outside investors as part of a formal fund-raising 
effort.

Energy Saving Debenture

    As provided in section 1205(b) of the Energy Act, the energy saving 
debenture would be a five- or ten-year debenture issued at a discount 
so as to be, in effect, a ``zero coupon'' debenture for the first five 
years. SBA leverage fees would be paid as required under current Sec.  
107.1130, except for the annual charge in Sec.  107.1130(d) which would 
be deferred for the first five years and thereafter be payable semi-
annually along with the debenture interest. For example, an SBIC 
issuing a $1,000,000 ten-year debenture with a combined interest rate 
and annual charge of 6% would receive roughly $750,000 upon issuance 
and would make no payments of interest or annual charge for the first 
five years. Starting with the sixth year, the SBIC would make semi-
annual payments of interest and charges on the debenture's face amount 
of $1,000,000. At maturity the SBIC would pay the $1,000,000 face 
amount of the debenture.
    Each SBIC that was licensed after September 30, 2008, and is 
eligible to issue debentures under current regulations would be 
eligible to issue an energy saving debenture for the purpose of making 
an Energy Saving Qualified Investment. No regulatory changes are 
necessary to implement this new type of debenture.
    Section 107.610--Required Certifications for Loans and Investments. 
An SBIC that intends to issue energy saving debentures based on its 
Energy Saving Qualified Investments or that intends to seek additional 
leverage based on its Energy Saving Qualified Investments in Smaller 
Enterprises must have an appropriate certification for each such 
investment. Proposed Sec.  107.610(f) makes a distinction between 
investments for which SBA needs to make a pre-financing determination 
of eligibility and those for which it does not. If the small business 
concern is engaged in activities that are specifically included in the 
Energy Saving Activities definition, and it is presumed to be 
``primarily engaged'' in those activities based on the source of its 
revenues, the SBIC only needs to certify the basis for the concern's 
eligibility and retain the certification and supporting documentation 
in its files. If SBA must make a pre-financing determination as to 
whether the concern is engaged in Energy Saving Activities and/or 
whether it is ``primarily engaged'' in such

[[Page 2031]]

activities, the proposed rule would require the SBIC to provide SBA 
with all available information from the concern that is relevant to 
those determinations, along with certifications by the SBIC and the 
concern that the submitted information is true and correct. SBA 
recognizes the burden that may be inherent in this type of ``total 
facts and circumstances'' determination, but believes it is preferable 
to offer this option to SBICs rather than to define Energy Saving 
Qualified Investments more narrowly.
    Section 107.1150--Maximum Amount of Leverage for a Section 301(c) 
Licensee. New paragraph (d) implements a provision of the Energy Act 
that may provide additional leverage eligibility to SBICs licensed on 
or after October 1, 2008, that make Energy Saving Qualified Investments 
in Smaller Enterprises. This paragraph adjusts the leverage eligibility 
formula in Sec.  107.1150(a) by subtracting from an SBIC's outstanding 
leverage the cost basis of Energy Saving Qualified Investments that the 
SBIC has made in Smaller Enterprises. The amount that can be subtracted 
is limited to 33% of the SBIC's Leverageable Capital. Furthermore, as 
required by the Energy Act, only the cost basis of Energy Saving 
Qualified Investments that individually do not exceed 20% of the SBIC's 
Regulatory Capital may be subtracted, even though SBICs in general can 
invest up to 30% of their Regulatory Capital in a single company.

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

Executive Order 12866

    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. Necessity of Regulation
    This proposed regulatory action would implement sections 1205 and 
1206 of the Energy Independence and Security Act of 2007, Public Law 
110-140. The statutory revisions provide an SBIC seeking to make an 
``energy saving qualified investment'' with a new SBA leverage option 
in the form of an ``energy saving debenture.''
2. Alternative Approaches to Regulation
    Because the regulatory definition of Energy Saving Qualified 
Investment must be consistent with the statutory definition, SBA had a 
limited ability to consider alternatives. The statute defines ``energy 
saving qualified investment'' as an ``investment in a small business 
concern that is primarily engaged in researching, manufacturing, 
developing, or providing products, goods, or services that reduce the 
use or consumption of non-renewable energy resources.'' The SBA 
considered adopting this statutory definition without modification. 
However, SBA did not select this approach due to concerns that without 
some interpretation of the broad statutory language, it would be 
difficult to evaluate (a) whether qualifying investments would actually 
contribute to the energy-saving objectives of the statute and (b) what 
constitutes ``primarily engaged''.
    In considering alternatives for determining whether a qualifying 
investment would likely contribute to the energy-saving objectives of 
the statute, the SBA conferred with the Department of Energy (DOE) to 
consider two options besides using the broad statutory definition: (1) 
Defining a list of specific industries and (2) referencing existing 
standards developed for Federal programs that promote energy 
efficiency. SBA did not adopt the first option to identify a list of 
specific industries because (1) ``energy saving'' efforts take place 
across a broad spectrum of industries; (2) the North American 
Industrial Classification System (NAICS) codes, typically used to 
identify industries, are inadequate for capturing whether a business is 
involved in ``energy saving'' across this spectrum; and (3) developing 
a static list does not adequately allow for either a full range of 
products and services or the rapid growth in this area that might 
further the statutory goals. Given the number of Federal programs 
already directed towards ``energy saving'' activities, SBA chose to 
adopt the second option in order to improve standardization across 
agencies, allow growth as DOE and other agencies update program 
standards to reflect new ``energy saving'' initiatives, and to address 
the broadest spectrum of products and services. Towards those goals, 
SBA recognizes that SBICs may wish to invest in Small Businesses that 
are manufacturing or researching products or performing services that 
have not been identified by existing Federal standards. Therefore, SBA 
will also consider other investments on a case by case basis, based on 
the SBIC's ability to demonstrate energy savings associated with the 
Small Business's activities.
    To determine whether a concern is ``primarily engaged'' in Energy 
Saving Activities, SBA considered using either a specific quantitative 
standard or an evaluation based on total facts and circumstances. For 
simplicity, the proposed rule presumes that a business is ``primarily 
engaged'' if it derived at least 50% of revenues during its most 
recently completed fiscal year from Energy Saving Activities. SBA also 
considered a higher percentage requirement, but chose 50% to encourage 
energy-saving investments as much as possible while meeting statutory 
requirements. Alternatively, an SBIC may ask SBA to determine whether a 
concern is ``primarily engaged'' in Energy Saving Activities based on 
an evaluation of various factors. As stated in the proposed definition 
of Energy Saving Qualified Investments, these factors include ``the 
distribution of revenues, employees and expenditures, intellectual 
property rights held, and business plans presented to investors as part 
of a formal solicitation''. SBA believes the combination of these two 
approaches provides a reasonable balance between simplicity and 
inclusiveness.
3. Potential Benefits and Costs
    SBA anticipates that this rule will provide marginal benefit to 
small businesses seeking investments by SBICs under those circumstances 
in which the investment structure does not lend itself well to SBA's 
standard debenture. Standard debentures require the SBIC to make semi-
annual interest payments, while the energy saving debenture 
contemplated by the statute would be issued at a discount, have a 5-
year or 10-year maturity, and require no interest payment or annual 
charge for the first five years. This structure is the same as the SBIC 
program's currently available low and moderate income (LMI) debenture.
    Since the structure of the energy saving debenture mirrors that of 
the LMI debenture, in determining this rule's benefit to both SBICs and 
small businesses, SBA analyzed the impact of the LMI debenture. The LMI 
debenture was first issued in FY 2001. Between FY 2001 and March 31, 
2010, SBICs have issued approximately $4.2 billion in debentures, with 
less than $45 million in LMI debentures (approximately 1% of all 
debenture leverage issued since FY 2001). The proceeds of LMI 
debentures can only be used to make LMI financings; however, SBA 
estimates that only 2% of LMI financings by SBICs issuing debentures 
were funded using the LMI debenture. SBICs placed 21.5% of their 
investment dollars in portfolio companies in LMI zones between FY 2001 
and July 31, 2010, compared with 21.6% in fiscal years

[[Page 2032]]

1998-2000 when the LMI debenture was not available. The structural 
similarities between the LMI debenture and the energy saving debenture 
suggest that this rule will have a similarly marginal impact.
    In estimating the impact, the SBA also considered available 
industry data. The PricewaterhouseCoopers/National Venture Capital 
Association MoneyTree <SUP>TM</SUP> Report indicates that $1.9 billion 
in Cleantech investments were made in calendar year 2009, representing 
approximately 11% of all venture financings. SBA believes that 
Cleantech investments are fairly representative of energy saving 
investments. SBA estimates that the percentage of the SBIC portfolio 
directed towards Energy Saving Qualified Investments will be similar to 
the percentage of Cleantech investments in the venture industry. 
However, only SBICs licensed after September 30, 2008, will be eligible 
to issue energy saving debentures and many such SBICs will choose to 
use the standard debenture to make these types of financings. 
Therefore, the SBA estimates that approximately half of the anticipated 
SBIC energy saving investments will be performed using the new energy 
saving debenture or 5% of all financings by SBICs issuing debentures. 
In FY 2009, SBICs issuing debentures provided $1.2 billion in financing 
to small businesses.
    With respect to potential costs of the regulation to SBICs, the 
cost has been incorporated into the program formulation model which 
determines the annual fee to keep the debenture program to zero subsidy 
cost as required by law. Because the structure of the LMI debenture is 
the same as the energy saving debenture, SBA used its performance as a 
proxy for the energy saving debenture. SBA's estimate that energy 
saving debentures would constitute 5% of total demand for debenture 
leverage resulted in an increase to the annual fee of 14.3 basis points 
versus formulations with no energy saving debentures. This increase 
reflects the additional risk associated with underlying SBIC equity 
investments contemplated in the usage of this debenture. Despite this 
increase, the annual fee is estimated to remain substantially lower 
than the ten year average and far below the statutory maximum of 1.38%. 
It should be noted that if the energy saving debenture was formulated 
as a stand-alone program (apart from the standard debenture) it is 
likely that its annual fee would exceed the statutory maximum. SBA will 
review the demand for and performance of the energy saving debenture on 
an annual basis to determine if these assumptions should be changed. 
Should the actual or anticipated demand for the energy saving debenture 
exceed 5% of all debenture leverage issued in any given year, SBA will 
consider separately formulating the energy saving debenture as a 
separate program so that its higher cost would be borne directly by 
users rather than spread among all SBICs.

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 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.

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

    SBA has determined that this proposed rule imposes additional 
reporting and recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C., chapter 35. This collection of information includes 
three different reporting requirements: (1) Information needed for SBA 
to determine whether a Small Business is ``primarily engaged'' in 
Energy Saving Activities, (2) information needed for SBA to determine 
whether a particular activity is an ``Energy Saving Activity'', and (3) 
identification of a completed financing as an Energy Saving Qualified 
Investment on the Portfolio Financing Report. As a result of proposed 
changes in this rule, SBA will also amend an existing approved 
information collection, Portfolio Financing Report, SBA Form 1031 (OMB 
Control Number 3245-0078). The titles, descriptions and respondent 
descriptions of the information collections provisions are discussed 
below with an estimate of the annual reporting burden. Included in the 
estimate is the time for reviewing instructions, searching existing 
data sources, gathering and maintaining the data needed, and completing 
and reviewing each collection of information.
    SBA invites comments on: (1) Whether the proposed collection of 
information is necessary for the proper performance of SBA's functions, 
including whether the information will have a practical utility; (2) 
the accuracy of SBA's estimate of the burden of the proposed 
collections of information, including the validity of the methodology 
and assumptions used; (3) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (4) ways to minimize 
the burden of the collection of information on respondents, including 
through the use of automated collection techniques, when appropriate, 
and other forms of information technology.
    Please send comments by the closing date for comment for this 
proposed rule to Wendy Liberante, Office of Management and Budget, 
Office of Information and Regulatory Affairs, 725 17th Street, NW., 
Washington, DC 20503 and to Harry Haskins, Deputy Associate 
Administrator for Investment, Office of Investment, Small Business 
Administration, 409 Third Street, SW., Washington, DC 20416.
A. ``Primarily Engaged'' and ``Energy Saving Activity'' Determinations
    Title: Financing Eligibility Statement for Usage of Energy Saving 
Debentures [no SBA form number].
    Summary: The Financing Eligibility Statement for Usage of Energy 
Saving Debentures will be used by SBICs requesting either or both of 
the SBA determinations that may be requested under the proposed rule: 
(1) Whether a Small Business is ``primarily engaged'' in Energy Saving 
Activities, as described in the proposed definition of ``Energy Saving 
Qualified Investment'' in Sec.  107.50 and as used in Sec.  
107.610(f)(2)(i), and/or (2) whether a particular activity in which a 
Small Business is engaged is an ``Energy Saving Activity'', as 
described in the proposed definition of that term and as used in Sec.  
107.610(f)(2)(ii). The SBIC must provide supporting evidence of the 
Small Business's eligibility based on the factors listed in the 
proposed rule.
    Need and Purpose: Section 1205 of the Energy Independence and 
Security Act of 2007 makes SBA leverage in the form of a deferred 
interest ``energy saving debenture'' available to SBICs licensed after 
September 30, 2008 for the purpose of making Energy Saving Qualified 
Investments. The proposed rule identifies various criteria under which 
a financing can qualify as an Energy Saving Qualified Investment; 
however, SBA recognizes that some proposed investments will need to be 
individually reviewed by SBA to determine whether they fulfill the 
energy saving objectives of the statute.

[[Page 2033]]

SBA will use the submitted information to make those determinations.
    Description of Respondents: Small business investment companies 
will submit this form to obtain a determination from SBA as to whether 
a proposed financing is an Energy Saving Qualified Investment. There 
are approximately 300 active SBICs; only about 10% of these were 
licensed after September 30, 2008, and are eligible to issue energy 
saving debentures to make Energy Saving Qualified Investments. Based on 
anticipated new licensing activity, SBA is estimating the number of 
eligible SBICs at 60. Assuming each of these SBICs will invest in five 
companies per year, that 5% of all investments will be in energy-saving 
companies, and that one-third of those will require SBA to make a pre-
financing determination of eligibility, SBA estimates five responses 
per year.
    SBA estimates the burden of this collection of information as 
follows: An applicant will complete this collection once for each 
prospective Energy Saving Qualified Investment that requires SBA to 
make a pre-financing determination of eligibility. SBA estimates that 
the time needed to complete this collection will average 10 hours. SBA 
estimates that the cost to complete this collection will be 
approximately $150 per hour. Total estimated aggregate burden is 50 
hours per annum costing a total of $7,500 for the year.
B. Portfolio Financing Report
    Title: Portfolio Financing Report, SBA Form 1031 (OMB Control 
Number 3245-0078).
    Summary: SBA Form 1031 is a currently approved information 
collection form. SBA regulations (Sec.  107.640) require SBICs to 
submit a Portfolio Financing Report on SBA Form 1031 for each financing 
that an SBIC provides to a small business concern. The form is SBA's 
primary source of information for compiling statistics on the SBIC 
program as a provider of capital to small businesses. SBA also uses the 
information provided on Form 1031 to evaluate SBIC compliance with 
regulatory requirements. SBA proposes to revise the form by adding one 
new question, which would ask the SBIC to use a pull-down menu to 
identify whether a completed financing was an Energy Saving Qualified 
Investment. SBA's financial reporting software would automatically 
transfer this designation to the SBA Form 468 (SBIC Financial 
Statements), the source of data needed to determine eligibility for 
additional leverage based on Energy Saving Qualified Investments under 
Sec.  107.1150(d)(2)(i).
    Need and Purpose: Section 1206 of the Energy Independence and 
Security Act of 2007 increases the maximum amount of leverage 
potentially available to an SBIC licensed on or after October 1, 2008, 
that makes Energy Saving Qualified Investments. Proposed Sec.  
107.1150(d) adjusts the basic leverage eligibility formula in Sec.  
107.1150(a) by subtracting from an SBIC's outstanding leverage the cost 
basis of Energy Saving Qualified Investments that the SBIC has made in 
Smaller Enterprises. The amount that can be subtracted is limited to 
33% of the SBIC's Leverageable Capital. SBA will use the information 
submitted on Form 1031 to track Energy Saving Qualified Investments 
that an SBIC may use in its leverage eligibility calculation, as well 
as for overall program evaluation purposes.
    Description of Respondents: All SBICs are currently required to 
submit SBA Form 1031 within 30 days after closing an investment. The 
current estimate of 3,700 responses per year is not affected by this 
proposed rule. SBA proposes to add a single additional field to the 
form to identify whether the investment is an Energy Saving Qualified 
Investment.
    SBA estimates the burden of this collection of information as 
follows: An SBIC making an Energy Saving Qualified Investment will 
select that descriptor from a pull-down menu on SBA Form 1031. There is 
no incremental burden attributable to completion of this additional 
field. An SBIC will complete SBA Form 1031 for each of its completed 
financing transactions. The currently approved hour burden for this 
collection is 12 minutes per response (0.2 hours), at a cost of $5.00 
per response (based on $25.00 per hour). The total estimated burden is 
740 hours per annum at an aggregate cost of $18,500.
    The recordkeeping requirements under the proposed rule relate to 
the information that an SBIC must maintain in its files to support the 
required certifications for Energy Saving Qualified Investments under 
Sec.  107.610(f)(1). SBA expects that SBICs will be able to obtain the 
necessary documentation with minimal effort. The SBIC would first 
document that the contemplated investment is in a company that provides 
products or services included in the definition of Energy Saving 
Activities, generally by referring to one of the government web sites 
discussed in this preamble. Second, the SBIC would document that the 
company derives at least 50 percent of its revenues from the sales of 
these products or services; the company would have this information 
available in the ordinary course of business.

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

    When an agency promulgates a rule, the Regulatory Flexibility Act 
(5 U.S.C. 601-612) requires the agency to prepare an initial regulatory 
flexibility analysis (IRFA) which will describe 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 affects all SBICs issuing debentures, of 
which there are approximately 160, most of which are small entities. 
Therefore, SBA has determined that this proposed rule will have an 
impact on a substantial number of small entities. However, SBA has 
determined that the impact on entities affected by the rule will not be 
significant. The energy saving qualified investment definition 
identifies the type of investment for which an SBIC will be permitted 
to seek SBA funding in the form of an ``energy saving debenture''; this 
instrument, because of its deferred interest feature, is expected to 
provide SBICs with greater flexibility in structuring qualified 
investments. The energy saving debenture is expected to increase the 
annual fee charged on all new debenture commitments by approximately 14 
basis points; however, the fee would continue to remain low by 
historical standards. 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, Reporting and 
recordkeeping requirements, 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

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

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

[[Page 2034]]

106-554, 114 Stat. 2763; and Pub. L. 111-5, 123 Stat. 115.

    2. Amend Sec.  107.50 by adding definitions of ``Energy Saving 
Activities'' and ``Energy Saving Qualified Investment'', to read as 
follows:


Sec. 107.50  Definitions of terms.

* * * * *
    Energy Saving Activities means any of the following:
    (1) Manufacturing or research and development of products, integral 
product components, integral material, or related software that meet 
one or more of the following:
    (i) Improves residential energy efficiency as demonstrated by 
meeting Department of Energy and Environmental Protection Agency 
criteria for use of the Energy Star trademark label;
    (ii) Improves commercial energy efficiency as demonstrated by being 
in the upper 25% of efficiency for all similar products as designated 
by the Department of Energy's Federal Energy Management Program;
    (iii) Improves automobile efficiency or reduces petroleum 
consumption through the use of advanced batteries, power electronics, 
or electric motors; advanced combustion engine technology; or advanced 
materials technologies, such as lightweighting;
    (iv) Improves industrial energy efficiency through combined heat 
and power (CHP) prime mover or power generation technologies, heat 
recovery units, absorption chillers, desiccant dehumidifiers, packaged 
CHP systems, more efficient process heating equipment, more efficient 
steam generation equipment, or heat recovery steam generators for 
industrial application;
    (v) Reduces the consumption of non-renewable energy by providing 
renewable energy sources, as demonstrated by meeting the standards, 
applicable to the year in which the investment is made, for receiving a 
Renewable Electricity Production Tax Credit as defined in Internal 
Revenue Code Section 45 or an Energy Credit as defined in Internal 
Revenue Code Section 48; or
    (vi) Improves electricity delivery efficiency by supporting the 
smart grid functions as identified in 42 U.S.C. 17386(d) by delivering 
a product, service, or functionality that serves one or more of the 
following operational domains: equipment manufacturing, customer 
systems, advanced metering infrastructure, electric distribution 
systems, electric transmission systems, or grid cyber security.
    (2) Installation and/or inspection services associated with the 
deployment of energy saving products as identified by meeting one or 
more of the following standards:
    (i) Deploys products that qualify, in the year in which the 
investment is made, for installation-related Federal Tax Credits for 
Consumer Energy Efficiency;
    (ii) Deploys products related to commercial energy efficiency as 
demonstrated by deploying commercial equipment that is in the upper 25% 
of efficiency for all similar products as designated by the Department 
of Energy's Federal Energy Management Program;
    (iii) Deploys combined heat and power products, goods, or services;
    (iv) Deploys products that qualify, in the year in which the 
investment is made, for receiving a Renewable Electricity Production 
Tax Credit as defined in Internal Revenue Code Section 45 or an Energy 
Credit as defined in Internal Revenue Code Section 48; or
    (v) Deploys a product, service, or functionality that improves 
electricity delivery efficiency by supporting the smart grid functions 
as identified in 42 U.S.C. 17386(d) serving one or more of the 
following operational domains: equipment manufacturing, customer 
systems, advanced metering infrastructure, electric distribution 
systems, electric transmission systems, or grid cyber security.
    (3) Auditing and/or consulting services performed with the 
objective of identifying potential improvements of the type described 
in paragraph (1) or (2) of this definition.
    (4) Other manufacturing, service, or research and development 
activities that use less energy to provide the same level of energy 
service or reduce the consumption of non-renewable energy by providing 
renewable energy sources, as determined by SBA. A Licensee must obtain 
such determination in writing prior to providing Financing to a Small 
Business. SBA will consider factors including but not limited to:
    (i) Results of energy efficiency testing performed in accordance 
with recognized professional standards, preferably by a qualified 
third-party professional, such as a certified energy assessor, energy 
auditor, or energy engineer;
    (ii) Patents or grants awarded to or licenses held by the Small 
Business related to Energy Saving Activities listed in subsection (1) 
or (2) in this definition;
    (iii) For research and development of products or services that are 
anticipated to reduce the consumption of non-renewable energy, written 
evidence from an independent certified third-party professional of the 
feasibility, commercial potential, and projected energy savings of such 
products or services;
    (iv) Eligibility of the product or service for a Federal tax credit 
cited in this definition that is not available in the year in which the 
investment is made, but was available in a previous year.
    Energy Saving Qualified Investment means a Financing which:
    (1) Is made by a Licensee licensed after September 30, 2008;
    (2) Is in the form of a Loan, Debt Security, or Equity Security, 
each as defined in this section; and
    (3) Is made to a Small Business that is primarily engaged in Energy 
Saving Activities. A Small Business that derived at least 50% of its 
revenues during its most recently completed fiscal year from Energy 
Saving Activities is presumed to be primarily engaged in such 
activities. Alternatively, a Licensee licensed after September 30, 2008 
may request a determination from SBA prior to the provision of 
Financing as to whether a Small Business is primarily engaged in Energy 
Saving Activities. SBA will consider the distribution of revenues, 
employees and expenditures, intellectual property rights held, and 
Energy Saving Activities described in a business plan presented to 
investors as part of a formal solicitation in making its determination.
* * * * *
    3. Amend Sec.  107.610 by revising the last sentence of the 
introductory text and adding paragraph (f) to read as follows:


Sec.  107.610  Required certifications for Loans and Investments.

    * * * Except for information and documentation prepared under 
paragraph (f)(2) of this section, you must keep these documents in your 
files and make them available to SBA upon request.
* * * * *
    (f) For each Energy Saving Qualified Investment:
    (1) If a pre-Financing determination of eligibility by SBA is not 
required under the definition of Energy Saving Activities or Energy 
Saving Qualified Investment:
    (i) A certification by you, dated as of the closing date of the 
Financing, as to the basis for the qualification of the Financing as an 
Energy Saving Qualified Investment; and
    (ii) Supporting documentation of the Energy Saving Activities 
engaged in by

[[Page 2035]]

the concern and the percentage of its revenues derived from Energy 
Saving Activities during its most recently completed fiscal year.
    (2) If a pre-Financing determination of eligibility by SBA is 
required under the definition of Energy Saving Activities or Energy 
Saving Qualified Investment:
    (i) If the concern did not derive at least 50% of its revenues 
during its most recently completed fiscal year from Energy Saving 
Activities, submit to SBA in writing all available information 
concerning the factors considered under paragraph (3) of the definition 
of ``Energy Saving Qualified Investment'' in Sec.  107.50, certified by 
both you and the concern to be true and correct to the best of your 
knowledge.
    (ii) If you are requesting a determination by SBA that the 
activities in which the concern is primarily engaged are Energy Saving 
Activities, submit to SBA in writing a description of the product or 
service being provided or developed, including all available 
documentation of the energy savings produced or anticipated, addressing 
the factors considered under paragraph (4) of the definition of 
``Energy Saving Activities'' in Sec.  107.50 and certified by both you 
and the concern to be true and correct to the best of your knowledge.
    4. Amend Sec.  107.1150 by adding a sentence at the end of 
paragraph (c) introductory text and adding paragraph (d) to read as 
follows:


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

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

    Dated: January 6, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-486 Filed 1-11-11; 8:45 am]
BILLING CODE 8025-01-P


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