[Federal Register Volume 77, Number 84 (Tuesday, May 1, 2012)]
[Notices]
[Pages 25775-25779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10412]


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SMALL BUSINESS ADMINISTRATION


Small Business Investment Companies--Early Stage SBICs

AGENCY: U.S. Small Business Administration.

ACTION: Call for Early Stage Fund Managers.

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SUMMARY: This Call invites experienced early stage fund managers to 
submit the preliminary materials discussed in Section II, in the form 
of the Small Business Investment Company (``SBIC'') Management 
Assessment Questionnaire (``MAQ''), for consideration by the Small 
Business Administration (``SBA'') to be licensed as Early Stage Small 
Business Investment Companies. Licensed Early Stage SBICs may receive 
SBA-guaranteed debenture leverage of up to 100 percent of their 
Regulatory Capital, up to a maximum of $50 million. Early Stage SBICs 
must invest at least 50% of their investment dollars in early stage 
small businesses. For the purposes of this initiative, an ``early 
stage'' business is one that has never achieved positive cash flow from 
operations in any fiscal year. By licensing and providing SBA 
guaranteed leverage to 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. More information on the Early Stage SBIC Initiative and the 
regulations governing these SBICs may be found at www.sba.gov/inv/earlystage.

DATES: In order to expedite licensing of qualified applicants that have 
already raised the required capital, SBA has established two ``tracks'' 
for the Early Stage SBIC Licensing Process as follows:
    [rtrif] Track 1--Applicants with Capital: This includes all 
applicants that have signed commitments for at least $15 million in 
Regulatory Capital and the remaining capital needed to achieve the 
minimum $20 million in Regulatory Capital for Early Stage SBICs ``soft-
circled''. (This may include drop-down funds.) Track 1 applicants that 
receive a Greenlight will need signed commitments of at least $20 
million in Regulatory Capital when they file their Licensing 
Application on or before July 30, 2012. SBA will accept a commitment 
that is conditioned upon issuance of an Early Stage SBIC license and/or 
approval of the applicant's organizational documents, but will not 
accept a commitment that is subject to any other conditions.
    [rtrif] Track 2--All Other Applicants.
    The following table provides the key milestones for each track.

------------------------------------------------------------------------
                                       Track 1--
            Milestone               Applicants with   Track 2--all other
                                        capital            applicants
------------------------------------------------------------------------
FAQ Process Closed..............    5 p.m. Eastern Time (``ET'') on May
                                                 18, 2012.
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Initial Review Period:
<bullet> Management Assessment    5 p.m. ET.........  5 p.m. ET.
 Questionnaires (``MAQs'') Due.   May 25, 2012......  June 19, 2012.
<bullet> Interview Period.......  June 6, 2012-June   July 23, 2012-
                                   13, 2012.           August 3, 2012.
<bullet> Anticipated Greenlight   June 29, 2012.....  September 28,
 Decision.                                             2012.
Licensing Period:
<bullet> Licensing Applications   5 p.m. ET July 30,  5 p.m. ET May 15,
 Due with at least $20 million     2012.               2013.
 in Regulatory Capital.
<bullet> Anticipated Licensing    September 28, 2012  September 30,
 Date.                                                 2013.
------------------------------------------------------------------------
Notes:
<bullet> SBA will notify applicants with Greenlight Letters of any
  further Licensing Periods.
<bullet> SBA reserves the right to extend its interview, due diligence,
  committee, and approval timelines as appropriate. SBA will update its
  Web site at www.sba.gov/inv/earlystage should these dates change.
  Applicants will be notified by email should these dates change.
<bullet> SBA expects to issue additional calls for Early Stage Fund
  Managers on an annual basis. SBA will announce these calls via a call
  notice in the Federal Register.


ADDRESSES: Email <a href="/cdn-cgi/l/email-protection#87cac6d6f5e2f6f2e2f4f3c7f4e5e6a9e0e8f1"><span class="__cf_email__" data-cfemail="91dcd0c0e3f4e0e4f4e2e5d1e2f3f0bff6fee7">[email protected]</span></a> to obtain a copy of the Management 
Assessment Questionnaire (``MAQ'') for your proposal as discussed in 
Section II. You must submit via express or next day delivery service 
two (2) paper copies of the MAQ to the following:

Chief Administrative Officer, Office of Investment, U.S. Small Business 
Administration, 409 3rd St. SW., Suite <greek-i>6300, Washington, DC 
20416.
    You must provide with the MAQ a CD-ROM containing an electronic 
version of your completed MAQ in Word and Excel format. SBA will not 
accept MAQs via regular mail due to irradiation requirements nor will 
SBA accept MAQs via hand delivery or courier service.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    SBA invites early stage fund managers to submit the preliminary 
materials, as discussed in Section II, in the form of a Management 
Assessment Questionnaire (``MAQ'') for the formation and management of 
an Early Stage SBIC. Early Stage SBICs represent a new sub-category of 
SBICs that will focus on making investments in early stage small 
businesses. Go to www.sba.gov/inv/earlystage for information on the 
Early Stage Initiative and links to the Early Stage SBIC Final Rule 
(``Final Rule''). This initiative is part of President Obama's ``Start-
Up America Initiative'' to promote American innovation and job creation 
by encouraging private sector investment in job-creating startups and 
small firms, accelerating research, and addressing barriers to success 
for entrepreneurs and small businesses.

II. Management Assessment Questionnaire/License Application Materials

    The first required submission in the Early Stage Licensing process 
is SBA's MAQ. The MAQ consists of two forms that cover qualitative and 
quantitative information on the management team, the proposed strategy 
for the SBIC, the principals' investment track record, and the proposed 
fund structure and economics. The MAQ consists of SBA

[[Page 25776]]

Form 2181 and the exhibits in SBA Form 2183.
    If, after submitting the MAQ, you are invited to be interviewed 
(see paragraph III.B.2), you will be required to bring to the interview 
a completed Exhibit N from SBA Form 2182, consisting of your financial 
forecast and a written narrative which identifies how you will manage 
SBA leverage as part of your business plan. Whether you choose 
discounted leverage or standard leverage with a 5 year interest 
reserve, each as described in the Final Rule, your plan must address 
how you will meet interest payments after 5 years from the date of 
debenture issue.
    Should SBA issue you a ``Green Light letter'' (described in 
paragraph III.B.6), you must submit the SBIC License Application, 
consisting of SBA Form 2181 (updated as needed) and SBA Form 2182, for 
the final licensing phase (paragraph III.D). Exhibit Q in SBA Form 2182 
includes the fund's limited partnership agreement (``LPA''). Applicants 
should review Section IV of this notice for special instructions 
associated with the LPA for Early Stage SBICs.
    To obtain a copy of the most recent versions of these forms, please 
send an email to <a href="/cdn-cgi/l/email-protection#cf828e9ebdaabebaaabcbb8fbcadaee1a8a0b9"><span class="__cf_email__" data-cfemail="7d303c2c0f180c08180e093d0e1f1c531a120b">[email protected]</span></a>. Read only examples of these forms 
may be found at www.sba.gov/content/application-forms.

III. Early Stage Licensing Process

    There are four stages in SBA's Early Stage Licensing Process: (A) 
Call Period; (B) Initial Review; (C) Applicant Fundraising and Document 
Preparation; and (D) Licensing. Each of these stages is discussed 
below.
    A. Call Period. This notice signals the start of the Fiscal Year 
2012 Early Stage SBIC call period. SBA intends to hold no more than one 
Early Stage SBIC call period for accepting MAQs per fiscal year and SBA 
will issue a new notice in the Federal Register for the next call 
period. Interested parties should request a MAQ from SBA, per paragraph 
II above. Please take time to read the instructions included with each 
form identified in Section II. You should also review the information 
at www.sba.gov/inv/earlystage which includes a list of frequently asked 
questions (``FAQs'') regarding the Early Stage Initiative. If you still 
have questions regarding the Early Stage process, please email your 
questions to <a href="/cdn-cgi/l/email-protection#d3a0a7b2a1a7a6a3b2beb6a1bab0b293a0b1b2fdb4bca5"><span class="__cf_email__" data-cfemail="6013140112141510010d0512090301201302014e070f16">[email protected]</span></a>. SBA will endeavor to respond to 
your question within three business days, depending on volume. SBA may 
not be able to respond to fund specific questions or questions that 
require a legal opinion. SBA will not take any further questions after 
the end of the Question and Answer Period identified under the Dates 
section.
    B. Initial Review. At the end of the Initial Review phase, SBA will 
issue Green Light letters to those applicants that meet the evaluation 
criteria for an Early Stage SBIC, including the vintage year and 
geographic diversification criteria. Section V of this notice describes 
the criteria by which SBA will evaluate applicants. The process for 
SBA's Initial Review is as follows:
    1. Submit MAQ. SBA must receive your completed MAQ no later than 
the date and time specified under the Dates section of this notice. SBA 
will send a confirmation that it has received your MAQ within 3 
business days of your submission. If you have not fully completed all 
sections of the MAQ or provided sufficient information to allow SBA to 
evaluate your management team, you may be ineligible for this call 
period. If so, SBA will notify you by email.
    2. Pre-Screen. SBA will review all MAQs against the evaluation 
criteria identified in Section V. SBA may engage a contractor to assist 
in evaluating MAQs received in response to this Call. The Investment 
Committee (composed of senior managers from the Office of Investment) 
will consider each MAQ, and if the Investment Committee concludes that 
the management team may be qualified for an Early Stage SBIC license, 
the entire team will be invited to SBA Headquarters in Washington, DC 
for an interview. Those applicants not invited for interviews will also 
be notified. SBA will provide feedback to applicants not selected for 
an interview after the first Early Stage SBIC Licensing cycle is 
complete.
    3. Interview Period. SBA's invitation for an interview will 
identify a 1 hour time block during the Interview Period identified in 
the Dates Section, along with the topics that the applicants should be 
prepared to address. SBA will conduct interviews at SBA Headquarters, 
at 409 Third Street SW., Washington, DC. At the interview, you must 
bring your financial forecast as described under Section II of this 
document.
    Track 1 applicants are encouraged to bring the following completed 
exhibits from SBA Form 2182 to the Interview:
    a. Exhibit B--Fingerprint cards and
    b. Exhibit C--Statements of Personal History.
    If the applicant receives a Green Light letter, SBA will forward 
the fingerprint cards and Statements of Personal History to SBA's 
Office of Inspector General for processing by the FBI. (Note: Track 1 
applicants may wait until the licensing stage to submit these 
documents. However, you will not be able to draw SBA leverage until 
your FBI checks are complete.)
    If after the Interview, the Investment Committee decides that an 
applicant does not meet the criteria for an Early Stage SBIC license, 
the SBA will notify the applicant that it will not be considered 
further for this call period. SBA will provide feedback to those 
applicants after the first Early Stage SBIC Licensing cycle is 
complete.
    4. Due Diligence. SBA will conduct due diligence on all applicants 
that successfully pass the Interview process. SBA may be assisted in 
this process by a contractor engaged by SBA.
    5. Green Light Letter. Following the interview and the completion 
of SBA's due diligence, the SBA will issue a ``Green Light'' letter to 
all applicants that meet the criteria identified in Section V, as 
determined by the Investment Committee. The ``Green Light'' letter 
formally invites an applicant to submit the SBIC License application 
for the Licensing stage. Applicants approved by the Investment 
Committee can expect to receive the Green Light letter via email within 
a few days of the Investment Committee's decision. The Green Light 
letter is only an invitation to proceed to the next stage in the 
process, not a guarantee that you will be issued an Early Stage SBIC 
license. Those applicants that do not receive a Green Light letter will 
also be notified by email within a few days of the Investment 
Committee's decision. SBA will provide feedback to those applicants 
that do not receive a Green Light letter after the first Early Stage 
SBIC Licensing cycle is complete.
    C. Fundraising and Document Preparation. If you receive a Green 
Light letter, you will need to raise the minimum Regulatory Capital 
needed to execute your strategy (which can be no less than $20 million) 
and submit your completed license application by the start of the 
licensing period identified in the Dates Section of this notice for 
your Track.
    1. Raise Regulatory Capital. Early Stage SBIC applicants must have 
signed commitments for at least $20 million in Regulatory Capital prior 
to filing their license application.
    2. SBIC Education. All principals of an Early Stage SBIC applicant 
that has received a Green Light letter must attend a one-day SBIC 
Regulations training class. This training is normally held several 
times per year in Washington, DC. The purpose of this class is to 
familiarize SBIC principals with the SBIC rules, regulations and 
compliance procedures. Classes are

[[Page 25777]]

normally limited in size. Although an applicant may receive a license 
before all principals have completed the training, a majority must do 
so before licensing and all must do so before a licensed Early Stage 
SBIC will be permitted to draw leverage. (Track 1 applicants should 
note that training sessions are currently scheduled for June 14 and 
October 11, 2012.) Information concerning registration for classes can 
be obtained at www.sbia.org. Certain non-principals such as members of 
a board of directors may also be required to take the class. In 
addition, any employees or consultants whom you have assigned to handle 
regulatory matters or to interact with the Office of Investment should 
attend the class.
    3. Finalize Documents & Perform Checklist. The following items must 
be completed and submitted in order to proceed to the Licensing phase:

------------------------------------------------------------------------
                             Item                               [msquck]
------------------------------------------------------------------------
Updated SBA Form 2181 (See Section II for more information.)..
------------------------------------------------------------------------
SBA Form 2182 (See Section II for more information.)..........
------------------------------------------------------------------------
At least $20 million in Regulatory Capital evidenced by signed
 Capital Certificate in Form 2182 (Exhibit M).................
------------------------------------------------------------------------
$25,000 Non-refundable licensing fee..........................
------------------------------------------------------------------------

    D. Licensing. During this last stage, SBA will review your 
completed application, perform further due diligence and analysis if 
more than 3 months have passed since the Green Light Letter was issued, 
and make the final licensing decision. SBA will hold at most two Early 
Stage SBIC Licensing periods per year for those applicants that 
received a Green Light letter as a result of SBA's Initial Review. For 
calendar year 2012, SBA will only hold one licensing period. Early 
Stage SBIC applicants that receive a Green Light letter will be 
eligible to submit their license applications for the next two 
licensing periods after receipt of the Green Light letter. Track 1 
applicants that receive Green Light letters in 2012 and wish to be 
licensed in 2012 will need to submit their completed license 
application no later than July 30, 2012. Any Track 1 applicants that 
are unable to raise the minimum $20 million in Regulatory Capital and 
submit their license application by that date may submit their 
applications for the Track 2 licensing period. Similarly, Track 2 
applicants that are unable to raise sufficient capital and submit their 
license applications by the start of the Track 2 licensing period may 
submit their applications during the next Early Stage licensing period. 
SBA will notify Track 2 Green Light recipients when future licensing 
periods will take place. The process for Licensing is detailed below.
    1. Submit License application. To proceed to the Licensing stage, 
applicants that have received a Green Light letter will need to submit 
all items listed in the Checklist above to the address indicated in 
your Green Light Letter. Upon receipt of the application, SBA will 
acknowledge receipt by email. Within three business days, SBA will 
determine whether the application is complete, meets the minimum 
capital requirements and satisfies management ownership diversity 
requirements. If so, SBA will formally accept the application. If the 
applicant did not submit a completed licensing application, SBA may 
defer the applicant to the next licensing cycle.
    2. Background and Documentation Review. Once the application has 
been formally accepted, SBA will forward the fingerprint cards and 
Statements of Personal History to SBA's Office of Inspector General for 
processing by the FBI, if the applicant did not previously submit such 
information during or after the Interview. Following a review of the 
application and legal documents, SBA will provide the applicant with a 
``comment letter''. Applicants must respond in writing to the comment 
letter, via mail, fax or email within one week after the date SBA sends 
the comment letter. Applicants that do not address, to SBA's 
satisfaction, all of the comments contained in SBA's comment letter 
will be moved to the next licensing cycle in order to provide SBA with 
sufficient time to resolve outstanding issues. Through this process, 
SBA hopes to resolve all issues specified in SBA's comment letter as 
expeditiously as possible. Promptness and responsiveness in responding 
to SBA's comment letter are important. Due to the short timeframe for 
Licensing, Early Stage SBIC Applicants may not make pre-licensing 
investments.
    3. Divisional Licensing Committee. Once the applicant has 
satisfactorily addressed all issues and SBA has completed its review 
and any due diligence if necessary and the Office of General Counsel 
has signed off on legal sufficiency of the application (including the 
final form of the organizational and other legal documents), the 
license application is presented to the Divisional Licensing Committee. 
This committee is composed of the senior managers of the Office of 
Investment. If approved by the Divisional Licensing Committee, the 
application is forwarded to the Agency Licensing Committee which is 
comprised of certain senior managers of the SBA. Prior to consideration 
by the Agency Licensing Committee, an applicant must provide a signed, 
up-to-date capital certificate showing that it has at least $2.5 
million in Leverageable Capital, consisting of cash on deposit and/or 
approved organizational and operational expenses paid out of partners' 
contributed capital, and at least $20 million in Regulatory Capital. 
The applicant's selected bank must certify that the requisite funds are 
in the applicant's account and unencumbered. An applicant must also 
submit a commitment request for the amount of leverage it is seeking.
    4. Agency Licensing Committee and Administrator Approval. If the 
Agency Licensing Committee approves your license application, it will 
be forwarded to the SBA Administrator or her designee for final action 
as soon as you submit fully executed copies of all legal documents. 
(Please note that the executed documents must be identical to the 
``final form'' of the documents approved by SBA.) If the Administrator 
or her designee approves your application, your Early Stage SBIC 
license is issued.
    5. Leverage Commitments. SBA has allocated only $150 million in 
Fiscal Year (``FY'') 2012 and $200 million in FY 2013. SBA expects to 
allocate another $200 million each in FYs 2014 and 2015 and $250 
million in FY 2016. If total leverage commitments requested for the FY 
2012 licensing cycle exceed the amount available in FY 2012, SBA will 
allocate available leverage across all FY2012 Early Stage SBICs on a 
pro rata basis. Early Stage SBICs licensed in FY2012 will be eligible 
to request the remainder of their uncommitted leverage request in 
subsequent fiscal years based on availability. SBA expects to be able 
to commit the full amount of leverage that an Early Stage SBIC requests 
at the time of licensing. However, those commitments may be approved in 
multiple years, depending on availability in each year. Early Stage 
SBICs that raise additional private capital after licensing may request 
leverage commitments against that capital. However, such requests are 
subject to leverage availability and will not be considered until all 
other licensee requests are satisfied.

IV. Early Stage SBIC LPA and Organizational Instructions

    A. Early Stage SBIC Model LPA. In order to expedite the review of 
Early

[[Page 25778]]

Stage SBIC license applications, SBA has adopted a Model Early Stage 
SBIC Limited Partnership Agreement (``Model LPA'') that incorporates in 
Bold Arial type those provisions required by SBA. You must download the 
Model LPA at www.sba.gov/content/earlystage-model-partnership-agreement. Applicants must use the Model LPA as a template and follow 
the organizational structure of the Model LPA. Further, Applicants must 
include in their limited partnership agreements all of those provisions 
of the Model LPA that appear in Bold Arial type in the Model LPA. 
Additions, deletions and other changes or modifications to any of those 
provisions of the Model LPA that appear in Bold Arial type will not be 
accepted. Applicants are required to submit a copy of their limited 
partnership agreement black-lined against the Model LPA, with all of 
the provisions of the Model LPA in Bold Arial type retained in Bold 
Arial type, as explained in the instructions provided at the beginning 
of the Model LPA. SBA provides the following further guidance on 
limited partnership agreements:
    1. SBA encourages applicants to adhere to the Model LPA to the 
maximum extent possible. All deviations from those provisions of the 
Model LPA that do not appear in Bold Arial type must be accompanied by 
a narrative explanation for those deviations. Please note that any 
deviations must have a substantive basis and may not be deemed 
acceptable by SBA.
    2. There must be no conditions or restrictions on the ability of 
the GP to call private capital commitments except under the ``no fault 
termination of the investment period'' or ``key person'' provisions 
included in the Model LPA.
    3. Withdrawal rights are limited to those permitted by the Model 
LPA.
    4. Applicants must adhere to SBA's management fee policies 
available at www.sba.gov/content/sbic-technotes-number-7a-revised-april-2008. This policy sets a maximum allowable management fee only. 
The actual management fee will be set by negotiation between the 
management team and the limited partners and may be less than the 
maximum. Early Stage SBIC applicants should be aware that the 
calculation of an SBIC's capital impairment percentage is affected by 
all fund expenses, including management fees. SBA will consider the 
management fee in its licensing evaluation criteria as part of fund 
economics. SBA believes that the primary incentive for fund managers 
should be carried interest rather than fees.
    5. The designation of fund expenses and expenses to be paid out of 
the management fee must be consistent with SBIC program regulations 
(see 13 CFR 107.520).
    a. Organizational costs, expenses incurred in applying for a 
license and forming the SBIC and its entity general partner (but not 
its parent fund or any other affiliate), are considered a partnership 
expense. Organizational expenses typically include items such as the 
licensing fee, cost of legal and other professional and consulting 
services, travel and other fundraising expenses, costs of preparing, 
printing and distributing the private placement memorandum or other 
offering materials, and other related expenses such as telephone and 
supply costs. SBA strongly encourages applicants to include in the LP 
agreement a reasonable cap on the total organizational costs to be paid 
by the applicant. Costs deemed excessive can be paid by the GP or 
management company or deducted from the applicant's Regulatory Capital 
prior to licensing.
    b. Unreimbursed expenses on deals that do not close may be 
designated as a partnership expense but must be capped at a reasonable 
level.
    6. Right of limited partners to remove general partner--Provisions 
allowing removal of the general partner without cause (``no-fault 
divorce'' provisions) are permitted only after the Early Stage SBIC has 
repaid all outstanding leverage and any other amounts payable to SBA 
and has surrendered its SBIC license.
    7. SBA will not consider amendments to an Early Stage SBIC's LPA 
for a minimum of six months after licensing.
    B. Organization. Early Stage SBIC applicants must adhere to the 
following rules regarding organizational structure:
    1. Applicant cannot be a BDC or other public entity or a subsidiary 
of any such entity.
    2. All provisions governing the operation of the SBIC must be 
included in the limited partnership agreement (no side letters).
    3. Applicant must adopt SBA Model Valuation Guidelines.
    4. Drop-down SBICs.
    a. The drop-down structure should be used only when it has a clear 
business purpose:
    i. Example 1--Parent fund has already raised capital and begun 
operating and wants to commit a portion of its capital to an Early 
Stage SBIC.
    ii. Example 2--Substantial capital will be retained for investment 
at the parent level (SBA suggests that managers consider the 
alternative of structuring a non-SBIC fund side by side with the SBIC).
    b. Drop-down funds must have one parent fund only and the parent 
fund must be a U.S. entity.
    c. Parent must qualify as a traditional investment company based on 
established SBA precedent.
    d. Parent must disclose the identity of all of its investors.
    e. All of the investors in the parent fund (the SBIC's ``Class A'' 
limited partner) must agree to be ``Class B'' limited partners of the 
SBIC with an obligation to fund the Early Stage SBIC capital calls if 
the Class A limited partner does not. The obligation of the Class B 
limited partners to the Early Stage SBIC is reduced dollar for dollar 
as the Parent Fund contributes capital to the SBIC. The Model LPA 
contains required provisions for drop-down funds.
    f. The Class B limited partners' commitments to the SBIC applicant 
must be expressed as a specific dollar amount (not just as the 
``proportionate share'' of parent fund's commitment).
    g. The total dollar amount of Class B commitments must be equal to 
the Class A limited partner's unfunded commitment to the SBIC. SBA will 
not require Class B commitments if the SBIC's Regulatory Capital will 
not include any unfunded commitments from the Class A limited partner.
    C. Capitalization. Applicants must raise the minimum $20 million in 
Regulatory Capital by the time the license application is submitted 
(see section III.D).
    1. Capital commitments from limited partners must be made directly 
to the SBIC (and its parent fund, in the case of a drop-down) with no 
intermediaries involved.
    2. The Early Stage SBIC applicant must have the unconditional 
ability to legally enforce collection of each capital commitment.
    3. Capital Certificate. Capital commitments must be documented in 
the capital certificate (Section M of SBA Form 2182) and comply with 
the following:
    a. A signed Capital Certificate must be submitted with the license 
application.
    b. The only permitted conditions on private capital commitments 
are:
    iii. Receipt of Early Stage SBIC license
    iv. Approval of limited partnership agreement.
    c. Individual investors must list primary residence address, not a 
business address.
    d. Street addresses are required (no P.O. Box addresses).
    4. A dual commitment may be obtained to back up the commitment of

[[Page 25779]]

any direct investor in the SBIC who is not an Institutional Investor. 
SBA will not permit an Early Stage SBIC applicant that is a drop-down 
to utilize dual commitments.
    5. Capital commitments by the principals, general partner, or their 
affiliates must be payable in cash when called (cannot be satisfied 
with notes or management fee waivers).

D. General Partner

    1. All principals must:
    a. Hold direct ownership interests in and be the direct individual 
managers of the general partner, with no intervening entities.
    b. Receive carried interest directly from the general partner; for 
drop-down SBICs, carried interest may be received from the parent 
fund's general partner.
    2. A maximum of 25% of the carried interest may be allocated to 
non-principals.
    3. Any provision to remove or terminate a principal must be spelled 
out within the general partner's organizational document and must not 
be tied to events occurring under other agreements (e.g., a principal's 
employment agreement with the management company).
    E. Investment Advisor (``Management Company''). Ownership of the 
Management Company that is highly disproportionate to the ownership of 
the general partner (e.g., one principal is the 100% owner) is not 
viewed favorably by SBA, but may be acceptable if there are adequate 
checks and balances on the powers of the dominant owner. Areas that 
cannot be subject to unilateral decision-making include the following:
    1. Power to remove or terminate other principals.
    2. Power to change the composition of the Early Stage SBIC's 
investment committee.

V. Early Stage SBIC Licensing Evaluation Criteria

    A. General Criteria. SBA will evaluate an Early Stage SBIC license 
applicant based on the submitted application materials, Investment 
Committee 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 will 
evaluate an Early Stage SBIC license applicant based on the same 
factors applicable to other license applicants, as set forth in 13 CFR 
107.305, with particular emphasis on managers' skills and experience in 
evaluating and investing in early stage companies. As discussed in the 
Final Rule, evaluation criteria fall into 4 areas: (A) Management Team; 
(B) Track Record; (C) Proposed Investment Strategy; and D) 
Organizational Structure and Fund Economics. You should review these 
regulations prior to completing your MAQ.
    B. Managing SBA Leverage. SBA will pay particular attention to how 
a team's investment strategy works with proposed SBA leverage. Early 
Stage Debenture leverage either requires a 5 year interest and annual 
charge reserve from the date of issue or is structured with an original 
issue discount that covers the interest and annual charges for the 
first 5 years. In either case, Early Stage SBICs must identify how 
quarterly interest payments beginning in the 6th year from Debenture 
issue will be met. Sources of liquidity to make interest payments may 
include (a) private capital; (b) realizations; or (c) current income. 
As part of your plan of operations, you should carefully consider how 
your investment strategy will work with SBA leverage and make 
appropriate suggestions to manage risk. Risk mitigation strategies 
might include making some investments in current pay instruments; 
taking down less than a full tier of leverage, (i.e., leverage less 
than 100% of Regulatory Capital); taking leverage down later in the 
fund's life; lowering management expenses; and reserving more private 
capital. The strategies you choose to employ should be appropriate for 
your management team's track record and investment strategy.
    C. SBA Diversification Rights. Per Sec.  107.320, SBA reserves the 
right to maintain diversification among Early Stage SBICs with respect 
to (i) the year in which they commence operations (``vintage year'') 
and (ii) geographic location.
    1. Vintage Year Diversification. Vintage year has a major impact on 
the return expectations of a fund and excessive concentration in a 
single year could substantially increase program risk. Therefore, SBA 
reserves the right, when licensing Early Stage SBICs, to maintain 
diversification across vintage years. SBA believes that it will be able 
to manage vintage year diversification through its call process. For 
example, if SBA approves a significant number of Green Lights in FY 
2012, it may not hold a call in FY 2013. This will also help facilitate 
the allocation of early stage debenture leverage. As such, potential 
applicants should not assume that SBA will hold calls for new MAQs each 
year. SBA will announce all new calls through the Federal Register.
    2. Geographic Diversification. All Early Stage SBICs must first 
meet SBA's basic licensing criteria. After those criteria are met, SBA 
reserves the right to maintain diversification among Early Stage SBICs 
with respect to where the Early Stage SBIC expects to invest.

Sean Greene,
Associate Administrator for Investment and Special Advisor for 
Innovation.
[FR Doc. 2012-10412 Filed 4-30-12; 8:45 am]
BILLING CODE 8025-01-P


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