25042 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

01.0608, Floriculture/Floristry Operations 

and Management 

01.0699, Applied Horticulture/Horticultural 

Business Services, Other 

01.0701, International Agriculture 

01.0801, Agricultural and Extension 

Education Services 

01.0802, Agricultural Communication/ 

Journalism 

01.0899, Agricultural Public Services, Other 

01.0901, Animal Sciences, General 

01.0902, Agricultural Animal Breeding 

01.0903, Animal Health 

01.0904, Animal Nutrition 

01.0905, Dairy Science 

01.0906, Livestock Management 

01.0907, Poultry Science 

01.0999, Animal Sciences, Other 

01.1001, Food Science 

01.1002, Food Technology and Processing 

01.1099, Food Science and Technology, 

Other 

01.1101, Plant Sciences, General 

01.1102, Agronomy and Crop Science 

01.1103, Horticultural Science 

01.1104, Agricultural and Horticultural Plant 

Breeding 

01.1105, Plant Protection and Integrated Pest 

Management 

01.1106, Range Science and Management 

01.1199, Plant Sciences, Other 

01.1201, Soil Science and Agronomy, 

General 

01.1202, Soil Chemistry and Physics 

01.1203, Soil Microbiology 

01.1299, Soil Sciences, Other 

01.9999, Agriculture, Agriculture Operations, 

and Related Sciences, Other 

03.0101, Natural Resources/Conservation, 

General 

03.0103, Environmental Studies 

03.0104, Environmental Science 

03.0199, Natural Resources Conservation and 

Research, Other 

03.0201, Natural Resources Management and 

Policy 

03.0204, Natural Resources Economics 

03.0205, Water, Wetlands, and Marine 

Resources Management 

03.0206, Land Use Planning and 

Management/Development 

03.0207, Natural Resources Recreation and 

Tourism 

03.0208, Natural Resources Law Enforcement 

and Protective Services 

03.0299, Natural Resources Management and 

Policy, Other 

03.0301, Fishing and Fisheries Sciences and 

Management 

03.0501, Forestry, General 

03.0502, Forest Sciences and Biology 

03.0506, Forest Management/Forest 

Resources Management 

03.0508, Urban Forestry 

03.0509, Wood Science and Wood Products/ 

Pulp and Paper Technology 

03.0510, Forest Resources Production and 

Management 

03.0511, Forest Technology/Technician 

03.0599, Forestry, Other 

03.0601, Wildlife and Wildlands Science and 

Management 

03.9999, Natural Resources and 

Conservation, Other 

13.1301, Agricultural Teacher Education 

14.0301, Agricultural/Biological Engineering 

and Bioengineering 

19.0501, Foods, Nutrition, and Wellness 

Studies, General 

19.0504, Human Nutrition 

19.0505, Foodservice Systems 

Administration/Management 

19.0599, Foods, Nutrition, and Related 

Services, Other 

30.1901, Nutrition Sciences 

30.3301, Sustainability Studies 

51.0808, Veterinary/Animal Health 

Technology/Technician and Veterinary 

Assistant 

Appendix B to Part 3434—List of 

HSACU Institutions, 2011–2012 

The institutions listed in this appendix are 

granted HSACU certification by the Secretary 

and are eligible for HSACU programs for the 

period starting October 1, 2011 and ending 

September 30, 2012. Institutions are listed 

alphabetically under the state of the school’s 

location, with the campus indicated where 

applicable. 

Arizona (3) 

Arizona Western College 

Phoenix College 

Pima Community College 

California (22) 

Allan Hancock College 

Bakersfield College 

California State Polytechnic UniversityPomona 

California State University-Bakersfield 

California State University-Fullerton 

California State University-Monterey Bay 

California State University-San Bernardino 

College of the Desert 

El Camino Community College District 

Fullerton College 

Hartnell College 

Merced College 

Mt. San Antonio College 

Porterville College 

Reedley College 

San Diego Mesa College 

San Joaquin Delta College 

Santa Ana College 

Southwestern College 

University of California-Merced 

West Hills College Coalinga 

Whittier College 

Florida (3) 

Florida International University 

Miami Dade College 

Saint Thomas University 

Illinois (2) 

City Colleges of Chicago-Harold Washington 

College 

Triton College 

Kansas (1) 

Seward County Community College 

New Mexico (7) 

Central New Mexico Community College 

Eastern New Mexico University-Main 

Campus 

New Mexico Highlands University 

New Mexico Institute of Mining and 

Technology 

Northern New Mexico College 

University of New Mexico-Main Campus 

Western New Mexico University 

New York (3) 

CUNY City College 

CUNY LaGuardia Community College 

Mercy College 

Puerto Rico (14) 

Bayamon Central University 

Institute Tecnologico de Puerto Rico-Manati 

Inter American University of Puerto RicoAguadilla 

Inter American University of Puerto RicoBayamon 

Inter American University of Puerto RicoMetro 

Inter American University of Puerto RicoPonce 

Inter American University of Puerto Rico-San 

German 

Pontifical Catholic University of Puerto RicoPonce 

Universidad Del Turabo 

Universidad Metropolitana 

University of Puerto Rico-Arecibo 

University of Puerto Rico-Medical Sciences 

Campus 

University of Puerto Rico-Rio Piedras 

Campus 

University of Puerto Rico-Utuado 

Texas (15) 

Clarendon College 

Lee College 

Midland College 

Palo Alto College 

Sul Ross State University 

Texas A&M International University 

Texas A&M University-Corpus Christi 

Texas A&M University-Kingsville 

Texas State Technical College-Harlingen 

University of Houston-Clear Lake 

University of Texas at Brownsville 

University of Texas at El Paso 

University of Texas at San Antonio 

University of Texas of the Permian Basin 

University of the Incarnate Word 

Washington (1) 

Heritage University 

Done in Washington, DC, this 15th day of 

March 2012. 

Chavonda Jacobs-Young, 

Acting Director, National Institute of Food 

and Agriculture. 

[FR Doc. 2012–10145 Filed 4–26–12; 8:45 am] 

BILLING CODE 3410–22–P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 107 

RIN 3245–AG32 

Small Business Investment 

Companies—Early Stage SBICs 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Final rule. 

SUMMARY: In this final rule, the U.S. 

Small Business Administration (SBA) is 

defining a new sub-category of small 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25043 

business investment companies (SBICs) 

which will focus on making equity 

investments in early stage small 

businesses. By licensing and providing 

SBA leverage to these ‘‘Early Stage 

SBICs,’’ SBA seeks to expand 

entrepreneurs’ access to capital and 

encourage innovation as part of 

President Obama’s Start-Up America 

Initiative launched on January 31, 2011. 

This final rule also sets forth regulations 

applicable to Early Stage SBICs with 

respect to licensing, capital 

requirements, non-SBA borrowing, 

examination fees, leverage eligibility, 

distributions, and capital impairment. 

In addition, the final rule makes certain 

technical changes to the SBIC 

regulations. 

DATES: This rule is effective April 27, 

2012. 

FOR FURTHER INFORMATION CONTACT: 

Carol Fendler, Office of Investment, 

(202) 205–7559 or sbic@sba.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background Information 

On January 31, 2011, President 

Obama announced the ‘‘Start-Up 

America Initiative’’ to encourage 

American innovation and job creation 

by promoting high-growth 

entrepreneurship across the country 

with new initiatives to help encourage 

private sector investment in job-creating 

startups and small firms, accelerate 

research, and address barriers to success 

for entrepreneurs and small businesses. 

The SBIC program will play a key role 

in accomplishing these goals by 

expanding access to capital for early 

stage businesses. 

Early stage businesses face difficult 

challenges accessing capital, 

particularly those without the necessary 

assets or cash flow for traditional bank 

funding. Although the venture capital 

industry provided over $22 billion in 

financings to U.S. businesses in 

calendar year 2010, this represented 

over a 23% decline from 2007. Less than 

a third of these financing dollars went 

to early stage or start-up businesses. Of 

the financings that went to early stage 

and start-up, over two-thirds went to 

businesses located in three states: 

California, Massachusetts, and New 

York. (Source: ThomsonOne 

VentureXpert) As a result, less than 

10% of U.S. venture financing dollars 

went to early stage and start-up 

businesses not in those three states. SBA 

will seek to expand access to capital for 

early stage small businesses throughout 

the United States by allocating from its 

current debenture authorization up to 

$200 million per year (up to $1 billion 

total over five years) beginning in FY 

2012 to Early Stage SBICs. 

SBA has not typically provided 

leverage in the form of SBA-guaranteed 

debentures to SBICs that plan to provide 

early stage venture capital financing to 

small businesses. The standard 

debenture is generally appropriate for 

investments in small businesses that 

generate sufficient cash flow to pay 

interest and/or dividends, so that SBICs 

in turn can make semi-annual interest 

payments on their debentures. 

Investments in early stage companies, 

which typically cannot make current 

interest or dividend payments, do not fit 

naturally with the structure of 

debenture leverage. 

Furthermore, early stage companies 

have inherently higher risk; although 

they can offer potentially higher returns 

than later stage equity or mezzanine 

debt investments, the returns are much 

more volatile. Because the debenture 

program is required by law to operate at 

zero cost, the Early Stage SBIC initiative 

contemplates a number of strategies to 

mitigate risk and limit the initiative’s 

impact on leverage fees, although fee 

increases will still be necessary. 

On December 9, 2011, SBA published 

a proposed rule to define an Early Stage 

SBIC and to establish the features of the 

Early Stage SBIC initiative. The 

proposed rule also included several new 

regulatory provisions intended to 

reduce the risk that an Early Stage SBIC 

would default on its leverage and to 

improve SBA’s recovery prospects 

should a default occur. The preamble to 

the proposed rule also discussed key 

aspects of the Early Stage initiative that 

are not addressed in the regulations, 

including the limits on the aggregate 

amount of debenture leverage that will 

be made available to Early Stage SBICs, 

and SBA’s intention to make leverage 

available to Early Stage SBICs in two 

forms: (1) A debenture that requires 

quarterly interest payments throughout 

its term; and (2) a debenture that is 

issued at a discount and does not 

require interest payments during the 

first five years of its term. 

SBA received ten sets of comments on 

the proposed rule. Some were general 

comments on the Early Stage initiative 

and others were specific to individual 

sections of the proposed regulations. 

SBA discusses the comments in the 

following sections. 

II. General Comments 

Need for Initiative. SBA received six 

comments that included general 

statements of support for the goals of the 

Early Stage initiative. These 

commenters agreed with SBA’s 

assessment that there is a gap in the 

availability of capital for early stage 

equity investing and that the Early Stage 

initiative could help to provide early 

stage small businesses with access to 

much-needed capital. However, two 

commenters suggested that SBA address 

the needs of early stage companies 

through a new program, separate from 

the existing SBIC debenture program, to 

avoid the possibility that failures among 

higher risk Early Stage SBICs could 

jeopardize the ability of the current 

debenture program to operate on a 

break-even basis. As discussed in the 

proposed rule, SBA considered seeking 

legislation to authorize a new program 

specifically focused on early stage 

investing, but ultimately chose to 

pursue an initiative through the existing 

debenture program because of the 

compelling need to begin assisting early 

stage small businesses as quickly as 

possible. 

SBA agrees that the stability of the 

existing debenture program must be 

maintained, and has designed the Early 

Stage initiative with multiple 

protections to achieve that goal. These 

protections include: (1) Limiting the 

total leverage committed to Early Stage 

SBICs to a maximum of $200 million 

per year over a five year period; (2) 

limiting the maximum leverage 

available to an individual Early Stage 

SBIC to the lesser of $50 million or 100 

percent of its Regulatory Capital (as 

opposed to the lesser of $150 million or 

300 percent of Regulatory Capital for 

standard debenture SBICs); and (3) 

establishing special distribution rules to 

require pro rata repayment of SBA 

leverage when an Early Stage SBIC 

makes distributions to its investors. The 

higher risks of early stage investing have 

been accounted for in the program 

formulation model which determines 

the annual fee needed to keep the 

debenture program’s original subsidy 

cost at zero, as required by law. 

Cost of the Initiative. SBA received 

four comments expressing concern 

about the increased leverage fees 

attributable to the Early Stage initiative. 

For SBA leverage commitments issued 

in fiscal year 2012, the initiative adds 

13.7 basis points to the annual fee. For 

fiscal year 2013, the impact of the 

initiative on the annual fee will be 

slightly lower, 11.5 basis points, based 

on updated assumptions. The 

commenters felt it was unfair or 

inappropriate to impose the additional 

costs of the Early Stage initiative on 

other users of debenture leverage. They 

indicated that the initiative should not 

be pursued unless it could break even 

on a stand-alone basis. Some 

commenters expressed concern not only 

about the added cost for fiscal year 

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25044 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

2012, but also about the extent to which 

the annual fee might increase in future 

years. These commenters noted the large 

losses that SBA incurred on 

participating securities, a type of SBA 

leverage that was offered in the past to 

SBICs focused on equity investing, 

much of which was early stage; they 

also speculated that fees could rise 

based on the impact of the statutorily 

mandated ‘‘energy saving debentures’’ 

that will be available to SBICs making 

certain types of energy-related 

investments. 

SBA understands that managers of a 

debenture SBIC may feel that they are 

being unfairly required to ‘‘subsidize’’ 

the higher-risk investment strategy of an 

Early Stage SBIC. However, debenture 

SBICs already pursue a range of 

investment strategies that present 

varying degrees of risk to SBA, yet SBA 

does not formulate separate fees based 

on these differences; rather, the leverage 

fees are calculated based on analysis of 

the overall SBIC program portfolio. 

Although the Early Stage initiative does 

result in a small increase in the annual 

fee for all new debenture leverage 

commitments, the resulting fee of 

roughly 80 basis points for fiscal year 

2012 is well below the statutory 

maximum of 1.38 percent and is also 

below the actual fees charged in many 

previous years. 

SBA notes that the fiscal year 2012 

annual fee reflects the impact of both 

the Early Stage initiative and the energy 

saving debentures. In addition, in 

developing the Early Stage initiative, 

SBA gave extensive consideration to the 

lessons learned from the participating 

securities program. 

Leverage availability. The proposed 

rule stated that SBA would allocate up 

to $200 million of debenture leverage 

per year to Early Stage SBICs, to a total 

of up to $1 billion over a five-year 

period. Two commenters noted that an 

Early Stage SBIC may need leverage 

after its fifth year of operations, because 

either a portion of its leverage 

commitment expired or it did not obtain 

commitments for the full amount of 

leverage it was eligible for. The 

commenters stated that SBA should 

ensure that adequate leverage will be 

available for Early Stage SBICs 

throughout their partnership terms. 

SBA currently intends to issue 

commitments for Early Stage debenture 

leverage only until the end of fiscal year 

2016. However, SBA recognizes that it 

is important for Early Stage SBICs to be 

able to obtain the leverage for which 

they are eligible, and will explore 

various options to ensure availability. 

These options may include allowing an 

Early Stage SBIC to apply for a new 

leverage commitment to replace an 

expired commitment, provided that 

SBA has the budget authority to do so, 

or permitting an Early Stage SBIC to 

draw the remaining balance of a 

leverage commitment prior to its 

expiration, even if does not have a 

current need for the funds. Because SBA 

cannot ensure that any of these options 

will be available in the future, Early 

Stage SBICs will need to be prepared to 

manage their portfolios within the 

existing limitations. 

Capital Impairment. SBA did not 

propose any exceptions to the existing 

Capital Impairment regulations for Early 

Stage SBICs. However, SBA received 

two comments stating that Early Stage 

SBICs should receive additional 

forbearance because of the kind of 

investments they will be making. The 

commenters felt that Early Stage SBICs 

should benefit from the same types of 

exceptions that the regulations provided 

for participating securities SBICs, such 

as a maximum allowable Capital 

Impairment Percentage (CIP) of 85 

percent for the five years after a fund’s 

first issuance of leverage. 

SBA believes that adopting this 

suggestion would result in an 

unacceptable increase in risk. SBA 

incurred losses on a large majority of 

participating securities SBICs that 

reached an 85 percent CIP, and 

especially on those that reached 85 

percent sooner rather than later. 

However, SBA recognizes that an Early 

Stage SBIC is more likely than a regular 

debenture SBIC to have some early 

losses that, combined with a lack of 

current income, may put upward 

pressure on the CIP even though the 

fund’s overall portfolio ultimately 

proves to be sound. SBA has considered 

whether there is a low-risk way to offer 

Early Stage SBICs more flexibility in 

their CIP calculation, and believes that 

a change can safely be made in the 

treatment of ‘‘Class 2’’ unrealized 

appreciation. Class 2 appreciation arises 

when an SBIC holds an investment in a 

company that subsequently receives a 

new round of financing at a higher 

price, provided the new round includes 

a substantial investment by a 

sophisticated, new, non-strategic 

investor in an arm’s length transaction. 

SBA regulations allow Class 2 

appreciation (discounted by 50 percent) 

to offset realized losses in the CIP 

computation, but in most cases only for 

24 months after the new round of 

financing takes place. 

For Early Stage SBICs, SBA believes 

the 24-month limit can be made more 

flexible without increasing program 

risk. In general, at the end of the initial 

24 months, an Early Stage SBIC with 

‘‘expiring’’ Class 2 appreciation will be 

able to request an extension based on an 

independent third-party valuation of the 

investment and any other relevant 

information, as determined by SBA. In 

addition, in certain instances, based on 

the valuation of the investment and 

other relevant information, SBA will 

permit the Early Stage SBIC to use the 

Class 2 appreciation in its CIP 

computation without the 50 percent 

discount. Full details of these changes 

are discussed in the section-by-section 

analysis under new § 107.1845. 

SBA believes these capital 

impairment changes are also responsive 

in part to a concern that may be implicit 

in two comments received on proposed 

§ 107.1182, under which SBA has the 

right to require valuations of an Early 

Stage SBIC’s investments. In asking how 

SBA plans to use these valuations and 

whether SBA will be bound by them, 

the comments may reflect a concern that 

SBA is more likely to mandate the 

write-down of an investment based on 

a valuation than it is to allow a writeup. While SBA is not adopting a general 

policy of allowing Early Stage SBICs to 

write up investments based on 

independent valuations, this final rule 

does provide Early Stage SBICs with a 

degree of assurance that they will 

continue to receive credit for their Class 

2 Appreciation when it is supported by 

an acceptable third party valuation. 

III. Section by Section Analysis 

A. Early Stage Initiative Provisions 

Section 107.50—Definitions. To 

implement the Early Stage initiative, 

SBA proposed to add the defined term 

‘‘Early Stage SBIC’’ and revise the 

existing defined term ‘‘Payment Date’’. 

Early Stage SBIC 

SBA received three sets of comments 

suggesting various changes to the 

proposed definition. SBA particularly 

sought input from the public on 

whether 50 percent was appropriate as 

the required minimum level of early 

stage investments, and all comments 

received on the definition focused on 

this issue. One commenter suggested 

that an Early Stage SBIC should be 

required to invest at least 75 percent of 

its total financing dollars in small 

businesses classified as ‘‘early stage’’ at 

the time of the SBIC’s initial investment. 

The commenter felt that later stage 

investments would not support the 

intent of the initiative and could distract 

SBIC managers from focusing on their 

early stage investments. The commenter 

also viewed early stage investing as a 

specialized skill. In contrast, two other 

commenters suggested a change in the 

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definition to require at least 25 percent 

of all financing dollars to be invested in 

later stage investments structured to 

produce current income. They thought 

this change would reduce risk and 

might eliminate the need for the interest 

reserve required under § 107.1181, 

which would increase an Early Stage 

SBIC’s total funds available for 

investment. 

SBA has not adopted either of these 

comments because it believes the 

commenters’ contrasting points of view 

illustrate the benefits of maintaining the 

flexibility that the proposed definition 

provided. SBA expects that some 

management teams will focus 

exclusively on early stage companies, 

while others will opt for a mixed 

portfolio. Applicants may propose to 

manage risk in a number of different 

ways, including making some later-stage 

investments, taking less than one tier of 

leverage, or using leverage primarily for 

follow-on investments in portfolio 

companies that are performing well. 

SBA believes that fund managers are in 

the best position to develop an 

investment strategy based on their own 

skills, experience and analysis of market 

opportunities. 

The only other comment received on 

the Early Stage definition was a 

suggested clarification. Two 

commenters thought it would be helpful 

for the definition to refer specifically to 

§ 107.1810(f)(11), which specifies the 

time frame within which an Early Stage 

SBIC must satisfy the early stage 

investment requirement. SBA agrees 

and has added a cross-reference to the 

cited section. 

The other key points of the definition 

were that: (1) An Early Stage SBIC must 

be organized as a limited partnership; 

and (2) a small business would be 

considered ‘‘early stage’’ if it has not yet 

achieved positive cash flow from 

operations in any full fiscal year. SBA 

received no comments on these aspects 

of the definition and is finalizing them 

without change. 

Payment Date 

SBA proposed special distribution 

rules in § 107.1180 which would require 

Early Stage SBICs to make mandatory 

prepayments of outstanding debentures 

at the same time they make distributions 

to their private limited partners. The 

proposed revision of the ‘‘Payment 

Date’’ definition in § 107.50 designated 

March 1, June 1, September 1, and 

December 1 of each year as the dates on 

which debenture prepayments could be 

made and required interest payments 

would be due. 

SBA received two comments 

suggesting a requirement for semiannual interest payments (the same as 

for standard debentures), while 

preserving the option for an Early Stage 

SBIC to prepay debentures and make 

interest payments on a quarterly basis. 

The commenters reasoned that this 

added flexibility would be a better fit 

with the type of investing that Early 

Stage SBICs will do. 

SBA proposed the quarterly Payment 

Date structure expressly to provide 

Early Stage SBICs with more frequent 

distribution opportunities than standard 

debentures afford. SBA believes that a 

hybrid structure with both required and 

optional interest payments would result 

in excessive administrative burden for 

SBICs, SBA, and debenture purchasers. 

Accordingly, SBA is finalizing the 

Payment Date definition as proposed. 

Section 107.210—Minimum capital 

requirements for Licensees. Proposed 

§ 107.210(a)(3) required an Early Stage 

SBIC to have at least $20 million of 

Regulatory Capital (consisting of paid-in 

capital contributions from private 

investors plus binding capital 

commitments from Institutional 

Investors, as defined in existing 

§ 107.50). In comparison, the minimum 

Regulatory Capital is $5 million for 

other debenture SBICs and $10 million 

for participating securities SBICs. 

Two commenters noted that SBA will 

consider geographic diversity as one 

factor in evaluating applicants for an 

Early Stage SBIC license. Based on the 

presumption that a fund investing in 

underserved areas might be able to 

operate effectively with less than $20 

million of capital, they suggested 

language that would allow SBA to 

license an Early Stage SBIC with 

Regulatory Capital as low as $10 

million, provided SBA is satisfied that 

the fund would be economically viable. 

In the proposed rule, SBA specifically 

requested public input on the $20 

million private capital minimum. The 

very limited response to this request 

suggests that the proposed minimum 

capital requirement was acceptable to 

most readers. Although SBA recognizes 

that operating costs differ across 

geographic locations, SBA’s experience 

in the regular debenture program has 

not shown a strong connection between 

the geographic areas in which an SBIC 

plans to invest and the amount of 

capital it raises. In light of historical 

data showing that SBA has experienced 

higher loss rates on smaller SBICs, with 

performance statistics improving as 

private capital approaches $20 million, 

SBA does not see a compelling reason 

to reduce the minimum capital 

requirement and is finalizing § 107.210 

as proposed. 

Section 107.300—License application 

form and fee. Three commenters 

addressed this section. One commenter 

expressed concern that small businesses 

seeking financing from an Early Stage 

SBIC might be required to pay a $25,000 

fee. That is not the case; the $25,000 fee 

would be paid by applicants for an Early 

Stage SBIC license. The other two 

commenters each submitted two 

identical comments. First, they 

requested clarification that SBA would 

refund the licensing fee if it did not 

accept an application for processing. 

The proposed rule characterized the 

licensing fee as ‘‘non-refundable’’; 

however, if SBA received an application 

that could not be accepted for 

processing, and the applicant did not 

correct the deficiencies, SBA would 

return the licensing fee along with the 

application itself. In SBA’s experience, 

this situation has rarely if ever occurred 

and does not need to be specifically 

addressed in the regulation. Consistent 

with current practice, SBA will not 

refund the fee for an application that is 

denied, withdrawn, or otherwise 

dismissed after being accepted for 

processing. 

The commenters also urged SBA to 

cease adding $10,000 to the application 

fee because an applicant is organized as 

a partnership. The intent of this 

comment is unclear. For many years, 

§ 107.300 has included an additional 

$5,000 charge for partnerships, and the 

proposed rule did not change that 

provision. SBA imposed this additional 

cost because of the more extensive 

document review that a partnership 

application requires. It is possible that 

the commenters intended to address the 

$10,000 difference in the licensing fee 

for an Early Stage SBIC applicant versus 

a regular debenture applicant ($25,000 

versus $15,000, assuming both are 

organized as partnerships). SBA 

believes the difference is justified by 

processing differences between the two 

types of applications, including 

compressed processing times for Early 

Stage applications which will require 

SBA to supplement its licensing staff 

with outside consultants. Therefore, the 

proposed section has been finalized 

without change. 

Section 107.305—Evaluation of 

license applicants. In the proposed rule, 

SBA specifically requested input from 

the public on the factors used by SBA 

to evaluate applicants to the SBIC 

program, including applicants for an 

Early Stage SBIC license. These factors 

were grouped in four broad categories: 

Management qualifications, 

performance of managers’ prior 

investments, the applicant’s proposed 

investment strategy, and the applicant’s 

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proposed organizational structure and 

fund economics. Only two commenters 

addressed this section, submitting 

nearly identical comments. SBA is 

finalizing the proposed section without 

change, for the reasons discussed in the 

following paragraphs. 

Proposed § 107.305(a) included 

experience in ‘‘implementing best 

practices for investment firms’’ as one 

aspect of management qualifications 

that SBA would evaluate. The two 

commenters described this criterion as 

an amorphous standard on which there 

is no consensus, and suggested deleting 

it. SBA disagrees. SBA believes that 

many best practices are widely 

acknowledged and disseminated by 

organizations such as the Institutional 

Limited Partners Association, the 

National Venture Capital Association, 

and the Private Equity Industry 

Guidelines Group. 

Proposed § 107.305(b) included ‘‘the 

contribution of prior investments to the 

growth of portfolio company revenues 

and number of employees’’ as one of the 

factors SBA would consider in 

evaluating the performance of fund 

managers’ prior investments. The two 

commenters suggested eliminating 

employment growth as a criterion 

because investment funds do not 

usually track this information. SBA 

understands that not all fund managers 

will have employment data for the 

companies in which they previously 

invested, and will not disqualify an 

applicant that does not have these data. 

However, job growth is a critical part of 

the SBIC program’s mission and SBA 

believes it should be considered. In fact, 

the current SBIC license application 

(which Early Stage SBIC will also use) 

already requests information on the 

growth of portfolio company employees 

and revenues, and most applicants have 

been able to provide it. 

Proposed § 107.305(c) included 

compliance with SBA regulations as a 

factor in SBA’s evaluation of an 

applicant’s investment strategy; 

proposed § 107.305(d) similarly 

included regulatory compliance with 

respect to an applicant’s organizational 

structure and fund economics. The two 

commenters felt that compliance was 

relevant only to applicants that have 

previously managed an SBIC. However, 

the provisions relate not to an 

applicant’s prior funds, but to the 

likelihood of compliance of the strategy 

and structure of the proposed new SBIC. 

Therefore, these provisions pertain to all 

applicants. 

Section 107.310—When and how to 

apply for licensing as an Early Stage 

SBIC. Under proposed § 107.310, SBA 

would not license two Early Stage SBICs 

under common control if both would 

have SBA leverage or leverage 

commitments outstanding at the same 

time. SBA received one comment stating 

that Early Stage SBIC managers should 

be able to access leverage across 

multiple funds at the same time, as this 

modification would strengthen the 

community of investment firms and 

individuals that finance early stage 

companies. SBA has not adopted this 

comment because portfolio 

diversification is particularly important 

with only a five year licensing period 

for the Early Stage initiative and a 

limited total leverage allocation. 

The proposed section also provided 

that SBA would accept Early Stage SBIC 

applications only during specified 

periods, which would be announced by 

Federal Register notice. One commenter 

thought, depending on the number of 

applications received, that SBA might 

turn down applicants even though they 

meet the qualification standards for 

licensing. The commenter suggested 

that any qualified applicant that is not 

given a green light to apply for an Early 

Stage SBIC license should receive a 

green light to apply for a regular 

debenture SBIC license. An Early Stage 

SBIC applicant that does not meet the 

licensing qualification standards is not 

prohibited from separately pursuing a 

regular debenture SBIC license. 

Section 107.320—Evaluation of Early 

Stage SBICs. Proposed § 107.320 stated 

that SBA would evaluate Early State 

SBIC applicants using the same set of 

factors applicable to SBIC applicants in 

general, as set forth in proposed 

§ 107.305. In addition, proposed 

§ 107.320(a) and (b) added two selection 

criteria specific to Early Stage SBICs, 

giving SBA the right to consider: (1) 

Diversification of Early Stage SBICs 

with respect to ‘‘vintage year’’ (the year 

in which an investment fund draws its 

initial capital from investors), and (2) 

diversification of Early Stage SBICs with 

respect to geographic location. SBA 

received no comments specific to this 

section and is finalizing it without 

change. 

Section 107.565—Restrictions on 

third-party debt of Early Stage SBICs. 

Proposed § 107.565 required an Early 

Stage SBIC to obtain SBA approval to 

have, incur or refinance any third-party 

debt, whether secured or unsecured. 

The proposed rule made an exception 

for ‘‘accounts payable from routine 

business operations’’. Two commenters 

were concerned that ‘‘routine business 

operations’’ could be interpreted too 

narrowly; one asked whether it would 

include certain legal expenses or 

specialized audit work performed as 

part of an Early Stage SBIC’s due 

diligence on a potential investment. 

SBA considers the ordinary expenses of 

operating an SBIC to come within this 

exception and other extraordinary 

expenses would require SBA’s prior 

approval. SBA is finalizing § 107.565 as 

proposed. 

Section 107.585—Voluntary decrease 

in Licensee’s Regulatory Capital. The 

proposed rule required any reduction of 

Regulatory Capital under § 107.585 by 

an Early Stage SBIC to be approved by 

SBA in writing. SBA received two 

comments suggesting that an Early Stage 

SBIC that has repaid all of its leverage 

should be exempt from this prior 

approval requirement. The requested 

exemption is available under existing 

§ 107.1000(b), which applies to all 

SBICs (including Early Stage SBICs) 

with no outstanding leverage. 

Section 107.692—Examination fees. 

SBA received two comments addressing 

this section. Both suggested that 

partnership SBICs should not be 

charged an additional $10,000 

examination fee; however, neither the 

existing regulations nor the proposed 

rule included such a fee. The proposed 

amendments to § 107.692, which SBA is 

finalizing without change, require an 

Early Stage SBIC to pay an examination 

fee that is 10 percent higher than the 

base fee until all debenture leverage has 

been repaid and no further leverage will 

be issued. The existing regulation also 

includes a 5 percent addition to the base 

fee for partnerships. The maximum base 

fee is $14,000, so the 5 percent and 10 

percent premiums combined cannot 

exceed $2,100. SBA charges more for 

partnerships based on the 

documentation that must be reviewed; 

for Early Stage SBICs, SBA expects that 

the value of unrealized investments will 

require more review than is needed for 

other debenture SBICs. 

Section 107.1120—General eligibility 

requirements for Leverage. Proposed 

paragraph (k) of this section provided 

for a new certification by Early Stage 

SBICs seeking an SBA leverage 

commitment or draw. The Early Stage 

SBIC would be required to certify that 

it will provide at least 50 percent of the 

aggregate dollar amount of its financings 

to ‘‘early stage’’ companies, in 

accordance with the Early Stage SBIC 

definition in § 107.50. The proposed 

certification was not specific as to when 

the early stage investment requirement 

would be met, and two commenters 

suggested that the clarity of the 

provision would be improved by adding 

a cross-reference to the timing 

requirements in § 107.1810(f)(11). SBA 

agrees and has revised the final rule 

accordingly. 

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Section 107.1150—Maximum amount 

of leverage for a section 301(c) licensee. 

In this section, SBA proposed special 

limits on the maximum amount of 

leverage that will be available to an 

Early Stage SBIC. Among other 

limitations, the maximum leverage that 

an Early Stage SBIC could have 

outstanding at any time would be 

limited to 100 percent of its paid-in 

private capital (‘‘Leverageable Capital’’) 

or $50 million, whichever is less. SBA 

received two comments suggesting that 

Early Stage SBICs should be able to 

obtain additional leverage if they invest 

in low income geographic areas. This 

benefit is available to other SBICs under 

existing § 107.1150(c). SBA has not 

adopted this comment based on its 

concern that increasing the leverage for 

which an Early Stage SBIC is eligible 

would result in increased risk and could 

ultimately increase the leverage fees that 

all debenture SBICs must pay. 

Section 107.1180—Required 

distributions to SBA by Early Stage 

SBICs. In this section, SBA proposed to 

add distribution requirements that 

would apply only to Early Stage SBICs. 

To reduce the risk of the Early Stage 

initiative, the proposed rule required an 

Early Stage SBIC to make a distribution 

to SBA whenever it made a distribution 

to its investors. Distributions could be 

made on any quarterly Payment Date 

(March 1, June 1, September 1, or 

December 1). SBA would apply any 

such distribution to the repayment of 

the SBIC’s outstanding debentures. The 

Early Stage SBIC would have to be 

current on its debenture interest and 

fees before making a distribution. SBA 

received two comments pointing out a 

possible conflict in the proposed 

regulatory language. They noted that 

proposed § 107.1180 used the existing 

defined term ‘‘Distribution’’, which 

includes ‘‘any transfer of cash or noncash assets to SBA, its agent or Trustee’’. 

Thus, the definition could be presumed 

to include payments of interest and fees 

to SBA, which therefore would be 

subject to the various restrictions on 

Distributions in the proposed rule. To 

avoid any confusion, SBA has revised 

§ 107.1180(a) to clarify that Early Stage 

SBIC with outstanding leverage may pay 

interest, annual fees, and maturing 

debenture principal pursuant to the 

terms of its debentures, and that these 

payments are not subject to the 

‘‘Distribution’’ requirements in 

§ 107.1180. 

SBA also received two comments on 

the provision in proposed § 107.1180(b) 

that allowed debentures issued by Early 

Stage SBICs to be prepaid in whole but 

not in part. The commenters asked how 

SBA would handle a distribution if the 

amount received was not sufficient to 

pay off a debenture in full. SBA has 

experience with this issue through the 

participating securities program, which 

includes many SBICs that have also 

issued debentures. These SBICs have 

pre-planned their distributions so that 

the amount payable to SBA will be the 

amount needed to pay off one or more 

debentures in full. SBICs have the 

flexibility to issue debentures in fairly 

small increments, and most do so; as a 

result, it should not be difficult to 

arrange a distribution so that debenture 

prepayments work out properly. 

Proposed § 107.1180(d) stated that 

SBA’s share of a distribution would 

depend on the Early Stage SBIC’s 

‘‘highest ratio’’ of outstanding leverage 

to Leverageable Capital, and its Capital 

Impairment Percentage (CIP), as 

determined under existing § 107.1840. 

At a CIP of less than 50 percent, 

distributions would be allocated pro 

rata (based on the ‘‘highest ratio’’) 

between SBA (up to the amount of the 

outstanding debenture leverage) and the 

Early Stage SBIC’s investors. However, 

if the CIP reached 50 percent or more, 

SBA would receive 100 percent of any 

distribution until all outstanding 

debentures have been repaid. If the 

Early Stage SBIC reduced its CIP below 

50 percent, it could resume 

distributions to its investors. 

SBA received one comment on these 

distribution priority provisions. The 

commenter stated that for Early Stage 

SBICs that maintain a low ratio of 

leverage to Leverageable Capital (for 

example, funds that raise $2 or $3 of 

private capital for every $1 of leverage), 

SBA should not take all distributions 

when the CIP reaches 50 percent 

because the SBA leverage would still be 

fully protected. The commenter 

proposed a variable formula to 

determine the CIP at which SBA would 

be entitled to priority in distributions, 

suggesting that this change would make 

the Early Stage initiative more attractive 

to potential investors. SBA believes that 

a variable threshold introduces too 

much complexity, but also agrees that 

an Early Stage SBIC that takes 

substantially less than one tier of 

leverage does represent a lower risk to 

SBA and should receive the benefit of 

more favorable distribution rules. 

Accordingly, SBA is revising 

§ 107.1180(d) so that SBA will be 

entitled to 100 percent of distributions 

only if the CIP is 50 percent or greater 

and the Early Stage SBIC’s highest 

leverage ratio is greater than 0.5. In 

other words, an Early Stage SBIC that 

uses at least $2 of private capital for 

every $1 of leverage will be permitted to 

continue making pro rata distributions 

to SBA and its private investors even if 

its CIP reaches or exceeds 50 percent, as 

long as it does not have a condition of 

capital impairment under § 107.1830. 

Section 107.1181—Interest reserve 

requirements for Early Stage SBICs. Two 

commenters addressed this section, 

which required an Early Stage SBIC to 

maintain funds in reserve to cover 

interest and Charges on each of its 

outstanding debentures over the first 

five years of its term. 

The proposed rule provided an 

exception to the interest reserve 

requirement for leverage in the form of 

a discounted debenture, which will not 

require cash interest payments during 

the first five years of its term. Instead, 

the proceeds received by the Early Stage 

SBIC when the debenture is issued will 

be discounted; over the first five years 

following issuance, the carrying value of 

the debenture will accrete until it 

reaches face value, and semi-annual 

interest payments will be required 

beginning in year six. 

For standard debentures, the 

proposed rule required a reserve 

sufficient to pay interest and Charges for 

the first 21 Payment Dates following 

issuance of a debenture, and both 

commenters thought the correct period 

should be 20 Payment Dates, to 

correspond to a five year period. 

However, SBA notes that the first of the 

21 Payment Dates will come at the end 

of a ‘‘stub period’’ that is less than a full 

quarter. The proposed rule correctly 

provided for the stub period followed by 

20 quarters. 

Both commenters suggested that SBA 

should consider permitting Early Stage 

SBICs to issue discounted debentures as 

an alternative to the reserve 

requirements. SBA clearly stated its 

intention to do so in the preamble to the 

proposed rule. In the proposed and final 

rules, § 107.1181(a) states that the 

reserve requirement applies only to 

debentures that require periodic interest 

payments to SBA during the first five 

years of their term. 

Finally, both commenters 

recommended that the regulation state 

explicitly that the required reserve on a 

debenture will be reduced each time the 

issuing Early Stage SBIC makes an 

interest payment. SBA believes this 

point is implicit in the regulation (it was 

also made explicitly in the preamble to 

the proposed rule), but has added it to 

the final rule for avoidance of doubt. 

Section 107.1182—Valuation 

requirements for Early Stage SBICs 

based on Capital Impairment 

Percentage. This section would require 

an Early Stage SBIC to notify SBA in 

writing if it has a Capital Impairment 

Percentage of at least 50 percent, even 

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if its maximum allowable CIP is higher. 

When SBA receives this notification, or 

makes its own determination that the 

CIP is at least 50 percent, SBA would 

have the right to require the Early Stage 

SBIC to engage a third party valuation 

expert, acceptable to SBA, to perform 

valuations of some or all of the 

licensee’s investments, as determined 

by SBA. Two commenters asked how 

SBA plans to use the valuations, and 

whether Early Stage SBICs will be able 

to contest them. SBA has not adopted 

standard procedures for acting upon 

third-party valuations, in part because 

valuations are often provided in ranges 

and have varying degrees of uncertainty 

associated with them. SBA will use the 

valuations as additional data points to 

assess the Early Stage SBIC’s financial 

condition and the repayment prospects 

of outstanding SBA leverage, as it 

currently does with valuations for other 

debenture SBICs. SBICs always have the 

right to provide additional information 

if they disagree with a valuation. 

Section 107.1810—Events of default 

and SBA’s remedies for Licensee’s 

noncompliance with terms of 

Debentures. SBA proposed four changes 

in this section that would apply only to 

Early Stage SBICs. SBA received no 

specific comments on this section and is 

finalizing it as proposed. The change is 

a revision of § 107.1810(f)(2), which 

provides that an improper distribution 

made by an SBIC is an event of default. 

In the final rule, § 107.1810(f)(2)(iv) 

adds distributions by Early Stage SBICs, 

as permitted under proposed 

§ 107.1180, to the list of specific 

distributions that would not be 

considered improper distributions. 

Second, under § 107.1810(f)(11), it is 

an event of default if an Early Stage 

SBIC fails to meet the requirement to 

invest at least 50 percent of its financing 

dollars in early stage companies, as 

defined under the proposed Early Stage 

SBIC definition in § 107.50. This 

provision would require an Early Stage 

SBIC to meet the 50 percent requirement 

as soon as the total dollars invested to 

date are equal to or greater than 

Regulatory Capital. Third, under 

proposed new § 107.1810(f)(12), it 

would be an event of default if an Early 

Stage SBIC fails to maintain the interest 

reserve required under proposed 

§ 107.1181, as discussed earlier in this 

preamble. 

The conditions in proposed 

§ 107.1810(f)(11) and (f)(12) would both 

be in the category of events of default 

with opportunity to cure. If the Early 

Stage SBIC fails to cure to SBA’s 

satisfaction, SBA could invoke the 

remedies in existing § 107.1810(g), 

which include the right to declare 

outstanding debenture leverage 

immediately due and payable. 

Finally, § 107.1810(j) provides SBA 

with additional remedies to help 

maximize recoveries from Early Stage 

SBICs that have been transferred to a 

liquidation status. Under this section, if 

SBA must honor its guarantee and pay 

the interest and principal of an Early 

Stage SBIC’s debentures, upon such 

payment SBA has the right to prohibit 

the SBIC from making additional 

investments without SBA approval 

(except for any investments the SBIC 

had already legally committed itself to 

make); to prohibit Distributions by the 

SBIC to any party other than SBA until 

all leverage and other amounts due to 

SBA have been repaid; to require all the 

SBIC’s investor commitments to be 

funded at the earliest time(s) permitted 

under the SBIC’s limited partnership 

agreement and other applicable 

documents; to review and re-determine 

the SBIC’s approved Management 

Expenses (as defined in existing 

§ 107.520); and to the appointment of 

SBA or its designee as receiver for the 

SBIC. The receivership would be for the 

purpose of continuing the SBIC’s 

operations; the appointment of a 

liquidating receiver is governed by 

existing provisions of the Small 

Business Investment Act and is not 

affected by this rule. 

Section 107.1830—Licensee’s Capital 

Impairment—definitions and general 

requirements. As discussed in the 

preamble to the proposed rule, SBA did 

not propose to change the maximum 

permitted Capital Impairment 

Percentages set forth in § 107.1830. 

Under the existing regulation, the 

maximum allowable CIP for a debenture 

SBIC with one tier of leverage or less is 

70 percent. SBA received one comment 

suggesting that the maximum allowable 

CIP should be raised to 80 percent for 

an Early Stage SBIC with a highest 

leverage ratio of 0.4 or less. SBA agrees 

that a lower leverage ratio corresponds 

to lower credit risk, but has declined to 

adopt this suggestion, primarily because 

the CIP formula already allows a fund 

with a low leverage ratio to incur 

substantially higher dollar losses than a 

more highly leveraged fund of the same 

size before becoming impaired. For 

example, an Early Stage SBIC with $30 

million of private capital and $30 

million of leverage (i.e., a leverage ratio 

of 1.0) would be impaired (based on a 

CIP of 70 percent) if it incurred total net 

losses of $21 million. In contrast, an 

Early Stage SBIC with $40 million of 

private capital and $20 million of 

leverage (i.e., a leverage ratio of 0.5), 

and the same $21 million of losses, 

would have a CIP of only 52.5 percent 

and would not be impaired. 

Section 107.1840—Computation of 

Licensee’s Capital Impairment 

Percentage. SBA did not propose any 

changes to this section, but is making 

one change in this final rule in response 

to comments regarding the need for 

more flexible capital impairment 

regulations for Early Stage SBICs. As 

discussed under ‘‘General Comments’’ 

in section II of this preamble, SBA is 

adding an exception for Early Stage 

SBICs that affects the way Class 2 

appreciation is accounted for in the 

computation of the Capital Impairment 

Percentage. In § 107.1840(d)(3)(iii) and 

(d)(4), the final rule provides for the 

exception and refers the user to new 

§ 107.1845 for the applicable 

information. 

Section 107.1845—Computation of 

Capital Impairment Percentage for Early 

Stage SBICs. This new section provides 

the specific details of a change in the 

treatment of Class 2 appreciation for 

Early Stage SBICs. This section 

represents an exception, for Early Stage 

SBICs only, to certain provisions of 

existing § 107.1840(d). Under 

§ 107.1840(d)(3), appreciation qualifies 

as Class 2 only if it is based on a 

financing that occurred within 24 

months of the date when the SBIC is 

computing its CIP, or if the financed 

small business meets a test for positive 

net operating cash flow. Under 

§ 107.1840(d)(4), an SBIC can use 50 

percent of its Class 2 appreciation in the 

calculation of its ‘‘adjusted unrealized 

gain’’, which in turn is the amount that 

the SBIC can use to offset realized losses 

in the CIP computation. 

Under § 107.1845, at the end of the 

initial 24 months, an Early Stage SBIC 

with ‘‘expiring’’ Class 2 appreciation 

will be able to request an extension. In 

considering this request, SBA may 

obtain its own valuation of the 

investments or require the Early Stage 

SBIC to obtain a valuation performed by 

an independent third party acceptable 

to SBA. SBA may also consider any 

other information that it deems relevant. 

If supported by the valuation and other 

information, SBA may grant an 

extension allowing the Early Stage SBIC 

to use all or part of the orginal Class 2 

appreciation for up to an additional 24 

months; reasons for granting a shorter or 

no extension might include a high 

degree of uncertainty associated with 

the valuation or the expectation that 

events occurring within a shorter period 

will further clarify or determine a 

company’s value. At the end of any 

extension period, the Early Stage SBIC 

could request a further extension, 

repeating the original steps. SBA may 

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reconsider its approval of an extension 

at any time based on new information 

that may affect the value of an 

investment. 

At the time of any extension request, 

an Early Stage SBIC will also be able to 

request an exception to the requirement 

to discount Class 2 appreciation by 50 

percent in the ‘‘adjusted unrealized 

gain’’ calculation. SBA may grant this 

exception based on its consideration of 

relevant information, including its 

determination that the appreciation on 

the Early Stage SBIC’s investment, based 

on its current fair value, is at least two 

times the original Class 2 appreciation. 

If the exception is granted, the Early 

Stage SBIC will be able to use the 

original Class 2 appreciation in its CIP 

computation without the 50 percent 

discount, for the duration of the 

extension period. 

B. Technical Changes to Regulations 

Section 107.130—Requirement for 

qualified management. SBA proposed 

one clarification in this section, which 

has been finalized without change. The 

revision makes clear that a licensed 

SBIC (including an Early Stage SBIC) 

must have qualified management not 

only when applying for a license, but as 

long as it holds the license. 

Section 107.1130—Leverage fees and 

additional charges payable by Licensee. 

This section, which SBA is finalizing as 

proposed, includes two changes to bring 

the regulation into conformity with 

statutory requirements for determining 

the annual Charge to be paid by SBICs 

on their outstanding SBA leverage. 

IV. Justification for Immediate Effective 

Date 

The Administrative Procedure Act 

(APA), 5 U.S.C. 553(d)(3), requires that 

‘‘publication or service of a substantive 

rule shall be made not less than 30 days 

before its effective date, except * * * as 

otherwise provided by the agency for 

good cause found and published with 

the rule.’’ 

The purpose of this provision is to 

provide interested and affected 

members of the public sufficient time to 

adjust their behavior before the rule 

takes effect. In the case of this 

rulemaking, however, there should be 

no need for any member of the public, 

including any SBIC, to make any 

changes in order to prepare for the rule 

taking effect. This rule implements 

changes to the SBIC program to 

stimulate private sector investment in 

early stage companies, which are 

expected to contribute to the important 

goals of creating jobs and fostering 

innovation. Any further delay in making 

leverage available to Early Stage SBICs 

will only hold back the potential 

benefits of investment in early stage 

small businesses. SBA therefore finds 

that there is good cause for making this 

rule effective immediately instead of 

observing the 30-day period between 

publication and effective date. 

Compliance With Executive Orders 

12866, 12988 and 13132, the Paperwork 

Reduction Act (44 U.S.C. Ch. 35) and 

the Regulatory Flexibility Act (5 U.S.C. 

601–612) 

Executive Order 12866 

The Office of Management and Budget 

has determined that this rule is a 

‘‘significant’’ regulatory action under 

Executive Order 12866. In the proposed 

rule, SBA set forth its initial regulatory 

impact analysis, which addressed the 

following: (1) Necessity of the 

regulation; (2) alternative approaches to 

the proposed rule; and (3) the potential 

benefits and costs of the regulation. SBA 

received comments which addressed 

both alternative approaches to and 

potential costs of the regulation. Those 

comments are discussed in the final 

Regulatory Impact Analysis set forth 

below: 

1. Necessity of Regulation 

The Small Business Investment Act of 

1958 identifies the SBIC program’s 

mission as follows: ‘‘to stimulate and 

supplement 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 * * *’’ Based on venture capital 

industry data (ThomsonOne 

VentureXpert), SBA believes that early 

stage businesses lack access to needed 

financing capital. Although the venture 

industry provided over $22 billion in 

financings to U.S. businesses in 

calendar year 2010, this represented 

over a 23% decline from 2007. Less than 

a third of these financing dollars went 

to early stage or start-up businesses. 

Given the decline in venture capital 

financings over the past 3 years, SBA 

seeks to expand access to early stage 

businesses by implementing an 

initiative to provide up to $1 billion in 

debenture leverage over five years 

(beginning in FY 2012) to a limited 

number of SBICs focused on early stage 

investments. 

If SBA debenture leverage is to be 

used to finance early stage small 

businesses, the high risk associated with 

such investments indicates the need for 

more protections than those provided by 

the standard SBIC debenture and 

current regulations to mitigate risk and 

cost to the taxpayer. This final rule 

includes a number of regulatory changes 

to manage the risks associated with an 

early stage portfolio, including: (1) 

Limiting leverage for an individual 

Early Stage SBIC to 100 percent of 

Regulatory Capital or $50 million, 

whichever is less; (2) establishing 

special distribution rules to require 

repayment of leverage whenever an 

Early Stage SBIC makes distributions to 

its investors; and (3) implementing risk 

monitoring actions appropriate to SBA’s 

leverage guarantor/creditor status. Even 

with these actions, in order to maintain 

an initial subsidy rate of zero for the 

debenture program while limiting the 

increase in leverage fees, SBA can only 

issue leverage to Early Stage SBICs as a 

very small percentage of its portfolio. 

2. Alternative Approaches to Regulation 

SBA considered several alternatives to 

these regulations. The first alternative 

was for SBA not to pursue the Early 

Stage initiative and continue with its 

current credit policy of not providing 

debenture leverage to SBICs that focus 

on early stage equity investing. SBA 

rejected this alternative because of the 

critical need for early-stage funding, 

particularly in the $1 to $5 million 

range that fits well with SBA’s small 

business size standards. 

SBA also considered seeking 

legislation for a new program 

specifically focused on investing in 

early stage small businesses. Although 

such an alternative could have provided 

an opportunity to introduce useful riskmanagement provisions, such as SBA 

profit sharing, SBA chose not to pursue 

this alternative because of the 

compelling need to begin assisting early 

stage small businesses as quickly as 

possible. A third alternative was for 

SBA to modify its credit policies to 

license and approve leverage to 

qualified early stage focused SBICs 

without changes in program regulations 

or in the terms of debenture leverage. 

SBA believes that doing so would not be 

financially responsible and would 

present an excessively high risk of 

losses to the taxpayer. Ultimately, SBA 

decided that it could responsibly license 

a limited number of early stage SBICs 

after implementing appropriate 

regulatory changes to manage the 

associated risk. 

In proposing the definition for an 

Early Stage SBIC, SBA considered both 

the type of investment that should 

qualify as ‘‘early stage’’ and whether an 

Early Stage SBIC’s portfolio should be 

limited to early stage investments 

exclusively. Many small businesses in 

the earliest stages of product 

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25050 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

development (‘‘seed stage’’ companies) 

could benefit from access to additional 

capital. However, SBA chose not to 

limit the Early Stage initiative to seed 

stage investments because of their high 

risk and the long holding periods they 

typically require. Although Early Stage 

SBICs would not be prohibited from 

investing in seed stage companies, to 

use SBA debenture leverage 

successfully they will likely need to 

start generating cash returns on 

investments within 4 to 6 years after 

licensing. This timing concern is also 

why the proposed definition required 

only 50 percent of an Early Stage SBIC’s 

portfolio to be in early stage 

investments. SBA received one 

comment suggesting that Early Stage 

SBICs should be required to invest at 

least 75% of their investment dollars in 

early stage small businesses. However, 

two other commenters believed not only 

that the 50% requirement was 

sufficient, but that SBA should also 

consider requiring an Early Stage SBIC 

to invest at least 25% of its total 

financing dollars in current pay 

investments in later stage businesses. 

The commenters felt this would 

decrease the risks of Early Stage SBICs, 

thereby lowering the costs, and could 

perhaps offset the need for an interest 

reserve. SBA believes these varying 

points of view illustrate that fund 

managers are in the best position to 

identify the portfolio mix that would be 

best suited to their skills and 

experience, and has finalized the Early 

Stage SBIC definition as proposed. 

In determining the maximum amount 

of leverage for which an Early Stage 

SBIC would be eligible, SBA decided 

that a one-to-one match between 

leverage and private capital (one ‘‘tier’’ 

of leverage) would provide the best 

balance between program cost and 

attractiveness to fund managers and 

investors. A second tier of leverage 

would result in a much higher projected 

loss rate, and a correspondingly greater 

increase in annual leverage fees for all 

debenture SBICs receiving new leverage 

commitments. SBA also considered a 

model in which SBA would have 

provided only half a tier of leverage. 

This lower ratio of leverage to private 

capital would have a much lower 

impact on leverage fees but would be 

unlikely to attract some high quality 

fund managers and investors. 

SBA also considered various dollar 

limits on the maximum leverage 

available to an Early Stage SBIC, in 

order to avoid an excessive 

concentration of risk in a small number 

of funds. A low dollar limit could allow 

more funds to be licensed, but could be 

unattractive to stronger applicants with 

the ability to raise and deploy larger 

amounts of capital. SBA believes the 

proposed limit of $50 million is 

sufficient to attract high quality 

applicants. SBA also believes that $50 

million of leverage, in combination with 

at least $50 million of private capital, is 

more than adequate to support a 

primarily early stage portfolio, with 

most financings expected to be in the $1 

to $5 million range. 

3. Potential Benefits and Costs 

SBA anticipates that this rule will 

provide significant benefit to early stage 

small businesses seeking investments by 

Early Stage SBICs. In estimating the 

impact, SBA considered that $1 billion 

in anticipated leverage will be matched 

by a minimum of $1 billion in private 

capital over the next 5 years, beginning 

in FY 2012. SBA expects that Early 

Stage SBICs will invest over a 5 to 7 

year period after licensing. Allowing for 

payment of management expenses and 

interest, SBA estimates that the $1 

billion in leverage guaranteed by the 

Early Stage initiative will result in 

approximately $125 million annually in 

financings to small businesses over an 8 

to 10 year period. 

As stated in the proposed rule, Early 

Stage debentures will impose additional 

cost in the form of increased annual fees 

on all debenture SBICs seeking new 

leverage commitments. The estimated 

cost has been incorporated into the 

program formulation model which 

determines the annual fee needed to 

keep the debenture program’s original 

subsidy cost at zero, as required by law. 

For FY 2012, SBA has budgeted $150 

million in leverage commitments to 

Early Stage SBICs, within the 

anticipated appropriated SBIC 

Debenture loan levels, representing 

approximately 7 percent of total 

expected debenture commitments. This 

7 percent allocation would increase the 

annual fee on all new debenture 

commitments by approximately 13.7 

basis points. For FY 2013, SBA has 

budgeted $200 million in leverage 

commitments to Early Stage SBICs, 

representing approximately 8.3 percent 

of all new expected debenture 

commitments. This 8.3 percent 

allocation would increase the annual fee 

on all new debenture commitments by 

approximately 11.5 basis points using 

updated model assumptions. The fee 

increases reflect the additional risk 

associated with the early stage equity 

investments contemplated by the Early 

Stage initiative. Early stage investing is 

higher-risk than the typical SBIC 

portfolio, and would have required fees 

in excess of statutory caps if operated on 

a stand-alone basis. To align fees and 

costs to the taxpayers with the overall 

policy goals, the Early Stage initiative 

incorporates terms designed to mitigate 

risk, and is limited to no more than 

$200 million per fiscal year to keep the 

annual fees at reasonable levels. The 

cost is expected to vary each year based 

on the factors and assumptions used to 

develop the annual fee, including the 

total amount of debenture leverage 

commitments estimated, the amount 

committed to Early Stage SBICs, and 

interest rates. 

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 13563 

A description of the need for this 

regulatory action and benefits and costs 

associated with this action is included 

above in the Regulatory Impact Analysis 

under Executive Order 12866. 

In connection with the launch of the 

President’s ‘‘Start-Up America 

Initiative’’, SBA announced its 

commitment to making financing 

available to early stage small businesses 

through the SBIC program. In an effort 

to engage interested parties in this 

regulatory action, SBA has since made 

presentations at SBIC association 

meetings, Start-up America-related 

public events, and venture capital 

industry forums to discuss both the 

market need for new sources of early 

stage financing and key issues 

associated with the design of the Early 

Stage initiative. SBA announced a series 

of public Webinars regarding the Early 

Stage Initiative during the comment 

period. 76 FR 81430 (December 28, 

2011). SBA also placed explanatory 

material on its Web site to assist the 

public with understanding the program, 

as proposed. http://www.sba.gov/ 

content/early-stage-small-businessinvestment-company-sbic-inititative. 

The public Webinars attracted a range of 

participants, including individuals with 

prior experience managing either 

participating securities SBICs or nonSBIC equity funds; SBIC industry 

service providers; and current debenture 

program participants. The Webinar 

presentations provided a general 

introduction to the SBIC program as 

well as to the goals and proposed 

structure of the Early Stage initiative. 

Among other things, participants asked 

questions about the timetable for 

implementing the initiative, when an 

Early Stage SBIC applicant would have 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25051 

to complete its fundraising, and 

procedures for submitting license 

application and obtaining a leverage 

commitment. Participants were broadly 

supportive of using the SBIC program to 

expand the financing options available 

to early stage small businesses, while 

adding key protective provisions to 

manage program risk. 

Executive Order 13132 

SBA has determined that this final 

rule will not have substantial, direct 

effects on the States, on the relationship 

between the national government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. Therefore, 

for the purposes of Executive Order 

13132, Federalism, SBA has determined 

that this final rule has no federalism 

implications warranting the preparation 

of a federalism assessment. 

Paperwork Reduction Act, 44 U.S.C. 

Ch. 35 

SBA has determined that this final 

rule will not impose additional 

reporting or recordkeeping 

requirements. Early Stage SBIC 

applicants will submit the same license 

application form as other SBIC program 

applicants (OMB Control Number 3245– 

0062). Post-licensing, Early Stage SBICs 

will have the same recordkeeping and 

reporting requirements as any other 

licensed SBIC. 

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 

a final regulatory flexibility analysis 

(FRFA) describing 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 a FRFA, if the 

rulemaking is not expected to have a 

significant economic impact on a 

substantial number of small entities. 

This final rule affects all SBICs issuing 

debentures, of which there are 

approximately 150, most of which are 

small entities. Therefore, SBA has 

determined that this final 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. SBA intends to maintain the 

SBIC program’s initial subsidy cost to 

taxpayers at zero by charging up front 

and annual fees on its leverage. SBA 

calculates the annual fee each year 

using historical data to assess the 

appropriate fee to offset expected losses. 

The actual costs for SBIC guarantees 

may be higher or lower, and SBA will 

monitor program performance closely. 

Because SBA expects Early Stage SBICs 

to be riskier than standard SBICs, the 

annual fees needed to keep the 

debenture program’s original subsidy 

cost at zero are higher than if there were 

no Early Stage SBICs. For FY 2012, SBA 

estimates $150 million in leverage 

commitments to Early Stage SBICs, 

which increases the annual fee charged 

to all SBICs seeking new debenture 

commitments by approximately 13.7 

basis points. For FY 2013, SBA 

estimates $200 million in leverage 

commitments to Early Stage SBICs, 

which increases the annual fee charged 

to all SBICs seeking new debenture 

commitments by approximately 11.5 

basis points. Since annual leverage fees 

were introduced in FY 1998, the annual 

fee has ranged from a high of 100 basis 

points (1 percent) to a low of 29 basis 

points, with a 13-year median of 88 

basis points. Although the cost will vary 

in the future based on economic factors 

and assumptions used to develop the 

annual fee, SBA expects the fee to 

remain under 1 percent, comparable to 

historical annual fees and below the 

statutory maximum of 1.38 percent. For 

debenture leverage committed and 

drawn by SBICs in FY 2012, SBA 

estimates that the sum of the debenture 

interest rate plus the annual fee will be 

in the vicinity of 5 percent. Debenture 

SBICs typically use the proceeds of 

debenture leverage to make loans to 

small businesses at interest rates in the 

12 to 16 percent range, providing them 

with a significant spread over their cost 

of funds. Accordingly, the 

Administrator of the SBA hereby 

certifies that this final rule will not have 

a significant impact on a substantial 

number of small entities. In the 

proposed rule, SBA solicited comments 

from the public regarding any perceived 

significant impact, either on SBICs or on 

companies that receive funding from 

SBICs, and received none. 

List of Subjects in 13 CFR Part 107 

Investment companies, Loan 

programs—business, Reporting and 

recordkeeping requirements, Small 

businesses. 

For the reasons stated in the 

preamble, SBA amends part 107 of title 

13 of the Code of Federal Regulations as 

follows: 

PART 107—SMALL BUSINESS 

INVESTMENT COMPANIES 

■ 1. The authority citation for part 107 

continues to read as follows: 

Authority: 15 U.S.C. 681 et seq., 683, 

687(c), 687b, 687d, 687g, 687m and Pub. L. 

106–554, 114 Stat. 2763; and Pub. L. 111–5, 

123 Stat. 115. 

■ 2. Amend § 107.50 by adding a 

definition of ‘‘Early Stage SBIC’’ and 

revising the definition of ‘‘Payment 

Date’’ to read as follows: 

§ 107.50 Definition of terms. 

* * * * * 

Early Stage SBIC means a Section 

301(c) Partnership Licensee, licensed 

pursuant to § 107.310 of this part, in 

which at least 50 percent of all Loans 

and Investments (in dollars) must be 

made to Small Businesses that are 

‘‘early stage’’ companies at the time of 

the Licensee’s initial Financing (see also 

§ 107.1810(f)(11)). For the purposes of 

this definition, an ‘‘early stage’’ 

company is one that has never achieved 

positive cash flow from operations in 

any fiscal year. 

* * * * * 

Payment Date means: 

(1) For a Participating Securities 

issuer, each February 1, May 1, August 

1, and November 1 during the term of 

a Participating Security, or 

(2) For an Early Stage SBIC, each 

March 1, June 1, September 1, and 

December 1 during the term of a 

Debenture. 

* * * * * 

■ 3. Amend § 107.130 by revising the 

first sentence to read as follows: 

§ 107.130 Requirement for qualified 

management. 

When applying for a license, and 

while you have a license, you must 

show, to the satisfaction of SBA, that 

your current or proposed management 

team is qualified and has the 

knowledge, experience and capability 

necessary for investing in the types of 

businesses contemplated by the Act, the 

regulations in this part 107, and your 

business plan. * * * 

■ 4. Amend § 107.210 by revising 

paragraph (a)(1) subject heading and the 

first sentence of its introductory text 

and by adding a paragraph (a)(3) to read 

as follows: 

§ 107.210 Minimum capital requirements 

for Licensees. 

(a) * * * 

(1) Licensees other than Participating 

Securities issuers and Early Stage 

SBICs. Except for Participating 

Securities issuers and Early Stage SBICs, 

a Licensee must have Regulatory Capital 

of at least $5,000,000. * * * 

* * * * * 

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25052 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

(3) Early Stage SBICs. An Early Stage 

SBIC must have Regulatory Capital of at 

least $20 million. 

* * * * * 

■ 5. Amend § 107.300 by revising the 

introductory text and adding a 

paragraph (d) to read as follows: 

§ 107.300 License application form and 

fee. 

The license application must be 

submitted on SBA Form 2181 together 

with all applicable exhibits on SBA 

Form 2182 and a non-refundable 

processing fee computed as follows: 

* * * * * 

(d) All applicants seeking to be 

licensed as Early Stage SBICs will pay 

the fee for a Partnership Licensee plus 

an additional $10,000 fee, for a total of 

$25,000. 

■ 6. Add § 107.305 to subpart C to read 

as follows: 

§ 107.305 Evaluation of license applicants. 

SBA will evaluate a license applicant 

based on the submitted application 

materials, any interviews with the 

applicant’s management team, and the 

results of background investigations, 

public record searches, and other due 

diligence conducted by SBA and other 

Federal agencies. SBA’s evaluation will 

consider factors including the following: 

(a) Management qualifications, 

including demonstrated investment 

skills and experience as a principal 

investor; business reputation; adherence 

to legal and ethical standards; record of 

active involvement in making and 

monitoring investments and assisting 

portfolio companies; successful history 

of working as a team; and experience in 

developing appropriate processes for 

evaluating investments and 

implementing best practices for 

investment firms. 

(b) Performance of managers’ prior 

investments, including investment 

returns measured both in percentage 

terms and in comparison to appropriate 

industry benchmarks; the extent to 

which investments have been realized 

as a result of sales, repayments, or other 

exit mechanisms; and the contribution 

of prior investments to the growth of 

portfolio company revenues and 

number of employees. 

(c) Applicant’s proposed investment 

strategy, including clarity of objectives; 

strength of management’s rationale for 

pursuing the selected strategy; 

compliance with this part 107 and 

applicable provisions of part 121 of this 

chapter; fit with management’s skills 

and experience; and the availability of 

sufficient resources to carry out the 

proposed strategy. 

(d) Applicant’s proposed 

organizational structure and fund 

economics, including compliance with 

this part 107; soundness of financial 

projections and underlying 

assumptions; a compensation plan that 

provides managers with appropriate 

economic incentives; a reasonable basis 

for allocations of profits and fees to 

Persons not involved in management; 

and governance procedures that provide 

appropriate checks and balances. 

■ 7. Add § 107.310 to subpart C to read 

as follows: 

§ 107.310 When and how to apply for 

licensing as an Early Stage SBIC. 

From time to time, SBA will publish 

a Notice in the Federal Register, 

inviting the submission of applications 

for licensing as an Early Stage SBIC. 

SBA will not consider an application 

from an Early Stage SBIC applicant that 

is under Common Control with another 

Early Stage SBIC applicant or an 

existing Early Stage SBIC (unless it has 

no outstanding Leverage or Leverage 

commitments and will not seek 

additional Leverage in the future). 

Applicants must comply with both the 

regulations in this part 107 and any 

requirements specified in the Notice, 

including submission deadlines. The 

Notice will specify procedures for a 

particular application period. 

■ 8. Add § 107.320 to subpart C to read 

as follows: 

§ 107.320 Evaluation of Early Stage SBICs. 

SBA will evaluate an Early Stage SBIC 

license applicant based on the same 

factors applicable to other license 

applicants, as set forth in § 107.305, 

with particular emphasis on managers’ 

skills and experience in evaluating and 

investing in early stage companies. In 

addition, SBA reserves the right to 

maintain diversification among Early 

Stage SBICs with respect to: 

(a) The year in which they commence 

operations, and 

(b) Their geographic location. 

■ 9. Add § 107.565 to subpart E to read 

as follows: 

§ 107.565 Restrictions on third-party debt 

of Early Stage SBICs. 

If you are an Early Stage SBIC and you 

have outstanding Leverage or a Leverage 

commitment, you must get SBA’s prior 

written approval to have, incur, or 

refinance any third-party debt other 

than accounts payable from routine 

business operations. 

■ 10. Amend § 107.585 by revising the 

first sentence to read as follows: 

§ 107.585 Voluntary decrease in 

Licensee’s Regulatory Capital. 

You must obtain SBA’s prior written 

approval to reduce your Regulatory 

Capital by more than two percent in any 

fiscal year, unless otherwise permitted 

under §§ 107.1560 and 107.1570, 

provided however, that if you are an 

Early Stage SBIC, you must obtain 

SBA’s prior written approval for any 

reduction of your Regulatory Capital, 

including any reduction pursuant to a 

Distribution under § 107.1180 of this 

part. * * * 

■ 11. Amend § 107.692 by redesignating 

paragraphs (c)(4) and (5) as paragraphs 

(c)(5) and (6), adding a new paragraph 

(c)(4), and revising the table in 

paragraph (d) to read as follows: 

§ 107.692 Examination fees. 

* * * * * 

(c) * * * 

* * * * * 

(4) If you are an Early Stage SBIC with 

outstanding Leverage or Leverage 

commitments, you will pay an 

additional charge equal to 10% of your 

base fee; 

* * * * * 

(d) * * * 

Examination fee discounts 

Amount of 

discount— 

% 

of base 

examination 

fee 

Examination fee additions 

Amount of 

addition— 

% 

of base 

examination 

fee 

No prior violations ......................................................... 15 Partnership or limited liability company ........................ 5 

Responsiveness ........................................................... 10 Participating Security Licensee .................................... 10 

Records/Files at multiple locations ............................... 10 

Early Stage SBIC ......................................................... 10 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25053 

* * * * * 

■ 12. Amend § 107.1120 by adding 

paragraph (k) to read as follows: 

§ 107.1120 General eligibility requirements 

for Leverage. 

* * * * * 

(k) If you are an Early Stage SBIC, 

certify in writing that in accordance 

with § 107.1810(f)(11), at least 50 

percent of the aggregate dollar amount 

of your Financings will be provided to 

‘‘early stage’’ companies as defined 

under the definition of Early Stage SBIC 

in § 107.50 of this part. 

■ 13. Amend § 107.1130 by revising the 

first sentence of paragraph (d)(1) and the 

first sentence of paragraph (d)(2) to read 

as follows: 

§ 107.1130 Leverage fees and additional 

charges payable by Licensee. 

* * * * * 

(d) * * * 

(1) Debentures. You must pay to SBA 

a Charge, not to exceed 1.38 percent per 

annum, on the outstanding amount of 

your Debentures issued on or after 

October 1, 1996, payable under the same 

terms and conditions as the interest on 

the Debentures. * * * 

(2) Participating Securities. You must 

pay to SBA a Charge, not to exceed 1.46 

percent per annum, on the outstanding 

amount of your Participating Securities 

issued on or after October 1, 1996, 

payable under the same terms and 

conditions as the Prioritized Payments 

on the Participating Securities. * * * 

* * * * * 

■ 14. Amend § 107.1150 by revising the 

first sentence of the introductory text, 

redesignating paragraphs (c) and (d) and 

paragraphs (d) and (e), respectively, and 

adding a new paragraph (c) to read as 

follows: 

§ 107.1150 Maximum amount of Leverage 

for a Section 301(c) Licensee. 

A Section 301(c) Licensee, other than 

an Early Stage SBIC, may have 

maximum outstanding Leverage as set 

forth in paragraphs (a) through (c) of 

this section. An Early Stage SBIC may 

have maximum outstanding Leverage as 

set forth in paragraph (d) of this section. 

* * * 

* * * * * 

(c) Early Stage SBICs. Subject to 

SBA’s credit policies, if you are an Early 

Stage SBIC: 

(1) The total amount of any and all 

Leverage commitments you receive from 

SBA shall not exceed 100 percent of 

your highest Regulatory Capital or $50 

million, whichever is less; 

(2) On a cumulative basis, the total 

amount of Leverage you have issued 

shall not exceed the total amount of 

capital paid in by your investors; and 

(3) The maximum amount of Leverage 

you may have outstanding at any time 

is the lesser of: 

(i) 100 percent of your Leverageable 

Capital, or 

(ii) $50 million. 

■ 15. Amend subpart I of part 107 by 

adding an undesignated center heading 

and §§ 107.1180, 107.1181, and 

107.1182 to read as follows: 

Subpart I—SBA Financial Assistance 

for Licenses (Leverage) 

* * * * * 

Special Rules for Leverage Issued by an 

Early Stage SBIC 

Sec. 

107.1180 Required distributions to SBA by 

Early Stage SBICs. 

107.1181 Interest reserve requirements for 

Early Stage SBICs. 

107.1182 Valuation requirements for Early 

Stage SBICs based on Capital Impairment 

Percentage. 

* * * * * 

§ 107.1180 Required distributions to SBA 

by Early Stage SBICs. 

(a) Distribution requirement. If you 

are an Early Stage SBIC with 

outstanding Leverage, you may make 

Distributions to your investors and to 

SBA only as permitted under this 

section. See also § 107.585. For the 

purposes of this section, ‘‘Distributions’’ 

do not include required payments to 

SBA of interest and Charges and 

payments of Leverage principal at 

maturity, all of which shall be paid in 

accordance with the terms of the 

Leverage. You may make a Distribution 

on any Payment Date. Unless SBA 

permits otherwise, you must notify SBA 

in writing of any planned distribution 

under this section, including 

computations of the amounts 

distributable to SBA and your investors, 

at least 10 business days before the 

distribution date. 

(b) How SBA will apply Distributions. 

Any amounts you distribute to SBA, or 

its designated agent or Trustee, under 

this section will be applied to 

repayment of principal of outstanding 

Debentures in order of issue. You may 

prepay any Debenture in whole, but not 

in part, on any Payment Date without 

penalty. 

(c) Condition for making a 

Distribution. You may make a 

Distribution under this section only if 

you have paid all interest and Charges 

on your outstanding Debentures that are 

due and payable, or will pay such 

interest and Charges simultaneously 

with your Distribution. 

(d) SBA’s share of Distribution. For 

each proposed Distribution, determine 

SBA’s share of the Distribution as 

follows: 

(1) Determine the highest ratio of 

outstanding Leverage to Leverageable 

Capital that you have ever attained 

(your ‘‘Highest Leverage Ratio’’). For the 

purpose of determining your Highest 

Leverage Ratio, any deferred interest 

Debentures issued at a discount must be 

included in the computation at their 

face value. 

(2) Determine SBA’s percentage share 

of cumulative Distributions: 

(i) If your Capital Impairment 

Percentage under § 107.1840 is less than 

50 percent as of the Distribution date or 

your Highest Leverage Ratio equals 0.5 

or less, except as provided in paragraph 

(d)(2)(iii) of this section, SBA’s 

percentage share of cumulative 

Distributions equals: 

[Highest Leverage Ratio/(Highest 

Leverage Ratio + 1)] × 100 

For example, if your Highest Leverage 

Ratio equals 1, then SBA’s share of 

any distribution you make will be 

50 percent. 

(ii) If your Capital Impairment 

Percentage under § 107.1840 is 50 

percent or greater as of the Distribution 

date and your Highest Leverage Ratio is 

greater than 0.5, SBA’s percentage share 

of cumulative Distributions equals 100 

percent. 

(iii) If you have a condition of Capital 

Impairment under § 107.1830 and your 

Highest Leverage Ratio equals 0.5 or less 

as of the Distribution date, SBA’s 

percentage share of cumulative 

Distributions equals 100 percent. 

(3) Multiply the sum of all your prior 

Distributions and your current proposed 

Distribution (including Distributions to 

SBA, your limited partners and your 

General Partner) by SBA’s percentage 

share of cumulative Distributions as 

determined in paragraph (d)(2) of this 

section. 

(4) From the result in paragraph (d)(3) 

of this section, subtract the sum of all 

your prior Distributions to SBA under 

this § 107.1180. 

(5) The amount of your Distribution to 

SBA will be the least of: 

(i) The result in paragraph (d)(4) of 

this section; 

(ii) Your current proposed 

Distribution; or 

(iii) Your outstanding Leverage. 

(e) Additional Leverage prepayment. 

On any Payment Date, subject to the 

terms of your Leverage, you may make 

a payment to SBA to be applied to 

repayment of the principal of one or 

more outstanding Debentures in order of 

issue, without making any Distribution 

to your investors. 

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25054 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

§ 107.1181 Interest reserve requirements 

for Early Stage SBICs. 

(a) Reserve requirement. If you are an 

Early Stage SBIC with outstanding 

Leverage, for each Debenture which 

requires periodic interest payments to 

SBA during the first five years of its 

term, you must maintain a reserve 

sufficient to pay the interest and 

Charges on such Debenture for the first 

21 Payment Dates following the date of 

issuance. This reserve may consist of 

any combination of the following: 

(1) Binding unfunded commitments 

from your Institutional Investors that 

cannot be called for any purpose other 

than the payment of interest and 

Charges to SBA, or the payment of any 

amounts due to SBA; and 

(2) Cash maintained in a separate 

bank account or separate investment 

account permitted under § 107.530 of 

this part and separately identified in 

your financial statements as ‘‘restricted 

cash’’ available only for the purpose of 

paying interest and Charges to SBA, or 

for the payment of any amounts due to 

SBA. 

(b) The required reserve associated 

with an individual Debenture shall be 

reduced on each Payment Date upon 

payment of the required interest and 

Charges. If you prepay a Debenture prior 

to the 21st Payment Date following its 

date of issuance, the reserve 

requirement associated with that 

Debenture shall be correspondingly 

eliminated. 

(c) Your limited partnership 

agreement must incorporate the reserve 

requirement in paragraph (a) of this 

section. 

§ 107.1182 Valuation requirements for 

Early Stage SBICs based on Capital 

Impairment Percentage. 

(a) If you are an Early Stage SBIC, you 

must compute your Capital Impairment 

Percentage and determine whether you 

have a condition of Capital Impairment 

in accordance with §§ 107.1830 and 

107.1840 of this part. 

(b) You must promptly notify SBA in 

writing if your Capital Impairment 

Percentage is at least 50 percent, even if 

your maximum permitted Capital 

Impairment Percentage is higher. 

(c) Upon receipt of your notification 

under paragraph (b) of this section, or 

upon making its own determination that 

your Capital Impairment Percentage is 

at least 50 percent, SBA has the right to 

require you to engage, at your expense, 

an independent third party, acceptable 

to SBA, to prepare valuations of some or 

all of your Loans and Investments, as 

designated by SBA. 

■ 16. Amend § 107.1810 by revising 

paragraphs (f)(2)(ii) and (iii) and adding 

paragraphs (f)(2)(iv), (f)(11), (f)(12), and 

(j) to read as follows: 

§ 107.1810 Events of default and SBA’s 

remedies for Licensee’s noncompliance 

with terms of Debentures. 

* * * * * 

(f) * * * 

(2) * * * 

(ii) Payments from Retained Earnings 

Available for Distribution based on 

either the shareholders’ pro-rata 

interests or the provisions for profit 

distributions in your partnership 

agreement, as appropriate; 

(iii) Distributions by Participating 

Securities issuers as permitted under 

§§ 107.1540 through 107.1580; and 

(iv) Distributions by Early Stage SBICs 

as permitted under § 107.1180. 

* * * * * 

(11) Failure by an Early Stage SBIC to 

meet investment requirements. You are 

an Early Stage SBIC and, beginning on 

the first fiscal quarter end when your 

cumulative total Financings (in dollars) 

are at least equal to your Regulatory 

Capital, you have not made at least 50 

percent of such Financings to Small 

Businesses that at the time of your 

initial Financing were ‘‘early stage’’ 

companies, as defined under the 

definition of Early Stage SBIC in 

§ 107.50 of this part. 

(12) Failure by an Early Stage SBIC to 

maintain required interest reserve. You 

are an Early Stage SBIC and you fail to 

maintain a sufficient reserve to pay 

interest and Charges on your Debentures 

as required under § 107.1181 of this 

part. 

* * * * * 

(j) Additional SBA remedies 

applicable to Debentures issued by Early 

Stage SBICs. If you are an Early Stage 

SBIC, upon SBA’s payment pursuant to 

its guarantee of any of your Debentures, 

SBA shall have the following additional 

rights and you consent to SBA’s exercise 

of any or all of such rights: 

(1) To prohibit you from making any 

additional investments except for 

investments under legally binding 

commitments you entered into before 

such payment by SBA and, subject to 

SBA’s prior written approval, 

investments that are necessary to protect 

your investments; 

(2) Until all Leverage is repaid and 

amounts related thereto are paid in full, 

to prohibit Distributions by you to any 

party other than SBA, its agent or 

Trustee; 

(3) To require all your commitments 

from investors to be funded at the 

earliest time(s) permitted in accordance 

with your Articles; 

(4) To review and re-determine your 

approved Management Expenses; and 

(5) To the appointment of SBA or its 

designee as your receiver under section 

311(c) of the Act for the purpose of 

continuing your operations. 

■ 17. Amend § 107.1840 by revising 

paragraph (d)(3)(iii) and paragraph 

(d)(4) introductory text to read as 

follows: 

§ 107.1840 Computation of Licensee’s 

Capital Impairment Percentage. 

* * * * * 

(d) * * * 

(3) * * * 

(iii) Except as provided for Early Stage 

SBICs in § 107.1845, such financing 

occurred within 24 months of the date 

of the Capital Impairment computation, 

or the Small Business’s pre-tax cash 

flow from operations for its most recent 

fiscal year was at least 10 percent of the 

Small Business’s average contributed 

capital for such fiscal year. 

(4) Except as provided for Early Stage 

SBICs in § 107.1845, perform the 

appropriate computation from the 

following table: 

* * * * * 

■ 18. Add § 107.1845 to read as follows: 

§ 107.1845 Determination of Capital 

Impairment Percentage for Early Stage 

SBICs. 

This section applies to Early Stage 

SBICs only. Except as modified by this 

section, all provisions of § 107.1840 

apply to an Early Stage SBIC. 

(a) To determine your Class 2 

Appreciation under § 107.1840(d)(3), 

use the following provisions instead of 

§ 107.1840(d)(3)(iii): 

(1) Such financing occurred within 24 

months of the date of the Capital 

Impairment computation. At the end of 

the 24 month period following the 

financing, you may request SBA’s 

written approval to retain the use of the 

original Class 2 Appreciation on the 

investment for up to 24 additional 

months. 

(2) In considering your request, SBA 

may obtain its own valuation of the 

investment, require you to obtain a 

valuation performed by an independent 

third party acceptable to SBA, and may 

consider any other information that it 

deems relevant. To the extent that the 

valuation and any other relevant 

information conclusively support the 

original Class 2 appreciation, SBA may 

approve an extension to use all or part 

of the original Class 2 Appreciation for 

up to an additional 24 months (the 

‘‘extension period’’). 

(3) At the end of any extension 

period, you may submit a new request 

to retain the use of the original Class 2 

Appreciation, repeating the steps in 

paragraphs (a)(1) and (2) of this section. 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25055 

(4) SBA may reconsider its approval 

to retain the use of the original Class 2 

Appreciation at any time based on 

information that may affect the value of 

an investment. 

(b) Any time you submit a request for 

SBA approval to retain the use of the 

original Class 2 Appreciation under 

paragraph (a) of this section, you may 

also request SBA’s written approval to 

modify your computation of Adjusted 

Unrealized Gain under § 107.1840(d)(4) 

as provided in paragraph (c) of this 

section. 

(c) If SBA determines that the 

appreciation on an investment, based on 

its current fair value, is at least two 

times the original Class 2 Appreciation 

on the investment, SBA may allow you, 

based on relevant information, to 

compute your Adjusted Unrealized Gain 

for the duration of the extension period 

as follows: 

(1) Compute Adjusted Unrealized 

Gain in accordance with 

§ 107.1840(d)(4). 

(2) If your result in paragraph (c)(1) of 

this section was computed using the 

first line of the table in § 107.1840(d)(4): 

(i) Calculate 50 percent of the original 

Class 2 Appreciation on the individual 

investment that is the subject of this 

paragraph (c), and 

(ii) Add it to the result from paragraph 

(c)(1) of this section to determine your 

Adjusted Unrealized Gain. 

(3) If your result in paragraph (c)(1) of 

this section was computed using the 

second line of the table in 

§ 107.1840(d)(4): 

(i) Calculate 50 percent of the original 

Class 2 Appreciation on the individual 

investment that is the subject of this 

paragraph (c). 

(ii) Subtract your Class 1 Appreciation 

from your Net Appreciation, and 

multiply the result by 50 percent. 

(iii) Add the lesser of (c)(3)(i) and (ii) 

of this section to the result from 

paragraph (c)(1) of this section to 

determine your Adjusted Unrealized 

Gain. 

Karen G. Mills, 

Administrator. 

[FR Doc. 2012–10120 Filed 4–26–12; 8:45 am] 

BILLING CODE 8025–01–P 

DEPARTMENT OF COMMERCE 

Bureau of Industry and Security 

15 CFR Part 744 

[Docket No. 120314191–2216–01] 

RIN 0694–AF61 

Addition of Certain Persons to the 

Entity List 

AGENCY: Bureau of Industry and 

Security, Commerce. 

ACTION: Final rule. 

SUMMARY: This rule amends the Export 

Administration Regulations (EAR) by 

adding sixteen persons under eighteen 

entries to the Entity List. The persons 

who are added to the Entity List have 

been determined by the U.S. 

Government to be acting contrary to the 

national security or foreign policy 

interests of the United States. These 

persons will be listed on the Entity List 

under the countries of Afghanistan, 

Pakistan and the United Arab Emirates 

(U.A.E.). 

The Entity List provides notice to the 

public that certain exports, reexports, 

and transfers (in-country) to entities 

identified on the Entity List require a 

license from the Bureau of Industry and 

Security (BIS) and that availability of 

license exceptions in such transactions 

is limited. 

DATES: Effective Date: This rule is 

effective April 27, 2012. 

FOR FURTHER INFORMATION CONTACT: 

Karen Nies-Vogel, Chair, End-User 

Review Committee, Office of the 

Assistant Secretary, Export 

Administration, Bureau of Industry and 

Security, Department of Commerce, 

Phone: (202) 482–5991, Fax: (202) 482– 

3911, Email: ERC@bis.doc.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

The Entity List (Supplement No. 4 to 

Part 744) provides notice to the public 

that certain exports, reexports, and 

transfers (in-country) to entities 

identified on the Entity List require a 

license from BIS and that the 

availability of license exceptions in 

such transactions is limited. Entities are 

placed on the Entity List on the basis of 

certain sections of part 744 (Control 

Policy: End-User and End-Use Based) of 

the EAR. 

The End-user Review Committee 

(ERC), composed of representatives of 

the Departments of Commerce (Chair), 

State, Defense, Energy and, where 

appropriate, the Treasury, makes all 

decisions regarding additions to, 

removals from, or other modifications to 

the Entity List. The ERC makes all 

decisions to add an entry to the Entity 

List by majority vote and all decisions 

to remove or modify an entry by 

unanimous vote. 

ERC Entity List Decisions 

Additions to the Entity List 

This rule implements the decision of 

the ERC to add sixteen persons under 

eighteen entries to the Entity List on the 

basis of Section 744.11 (license 

requirements that apply to entities 

acting contrary to the national security 

or foreign policy interests of the United 

States) of the EAR. The eighteen entries 

added to the Entity List consist of 

twelve entries in Afghanistan, three in 

Pakistan, and three in the U.A.E. Two of 

the eighteen entries cover multiple 

addresses, in different countries for two 

of the persons being added to the Entity 

List. 

The ERC reviewed Section 744.11(b) 

(Criteria for revising the Entity List) in 

making the determination to add these 

persons to the Entity List. Under that 

paragraph, persons for which there is 

reasonable cause to believe, based on 

specific and articulable facts, that the 

persons have been involved, are 

involved, or pose a significant risk of 

being or becoming involved in, 

activities that are contrary to the 

national security or foreign policy 

interests of the United States and those 

acting on behalf of such persons may be 

added to the Entity List pursuant to 

Section 744.11. Paragraphs (b)(1)–(b)(5) 

of Section 744.11 include an illustrative 

list of activities that could be contrary 

to the national security or foreign policy 

interests of the United States. All 

sixteen persons are believed to have 

been involved in activities described 

under paragraphs (b)(1) and (b)(2) of 

Section 744.11. Specifically, the sixteen 

persons are being added to the Entity 

List on the basis of their provision of 

support to persons engaged against U.S. 

and Coalition forces in Afghanistan. All 

sixteen of the persons are involved in 

supply networks that provide 

components used to make improvised 

explosive devices (IEDs) used against 

U.S. and coalition troops in 

Afghanistan. 

For the sixteen persons added to the 

Entity List under eighteen entries, the 

ERC specified a license requirement for 

all items subject to the EAR, and 

established a license application review 

policy of a presumption of denial. The 

license requirement applies to any 

transaction in which items are to be 

exported, reexported, or transferred (incountry) to such persons or in which 

such persons act as purchaser, 

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