This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

69431

Vol. 65, No. 223

Friday, November 17, 2000

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Final rule.

SUMMARY: This final rule implements a

provision of Public Law 106–9, enacted

April 5, 1999, under which certain types

of consideration paid to a small

business investment company (SBIC) by

a small business are excluded from

‘‘cost of money’’ limitations.

DATES: This final rule is effective

December 18, 2000.

FOR FURTHER INFORMATION CONTACT:

Leonard W. Fagan, Investment Division,

at (202) 205–7583.

SUPPLEMENTARY INFORMATION: On June

20, 2000, SBA published a proposed

rule to implement a provision of Public

Law 106–9, enacted April 5, 1999, that

amended section 308(i)(2) of the Small

Business Investment Act of 1958. See 65

FR 38223. This amendment provided

that certain types of consideration paid

to an SBIC by a small business are

excluded from the regulatory limitations

on ‘‘Cost of Money’’ established by the

Small Business Administration (SBA).

The amendment excluded from these

Cost of Money limits any consideration

consisting of ‘‘contingent obligations’’

granting the SBIC an interest in the

‘‘equity or increased future revenue’’ of

the small business.

SBA received no comments on the

proposed rule during the 30-day public

comment period and is finalizing the

proposed rule without change. The final

rule contains the following provisions:

Revised § 107.855(g)(12) allows the

exclusion of royalty payments for all

SBIC financings. Previously, this

exclusion applied only to ‘‘LMI

Investments’’ as defined in § 107.50. To

qualify for the exclusion, the royalty

must be based on improvement in the

performance of the small business after

the date of the financing. The royalty

could be expressed, for example, as a

percentage of any increase in an

underlying unit of measurement (e.g.,

revenues or sales) after the date of the

financing. The royalty can be based on

an increase in more than one unit of

measurement; for example, a royalty

could provide for payment to the SBIC

if either the revenue or the profits of the

small business increased.

If an SBIC makes an investment

through a holding company or an

investment vehicle, as permitted under

§ 107.720(b), SBA will evaluate

performance improvements by looking

through the holding company or

investment vehicle to the performance

of the operating business itself.

Also with respect to royalty

payments, the definition of a Debt

Security in § 107.815(a) is revised to

include a loan with a right to receive

royalties that are excluded from the Cost

of Money. As a result, a financing of this

type will be subject to the lower Cost of

Money ceiling applicable to Debt

Securities, rather than the higher ceiling

applicable to Loans with no upside

potential.

This rule also adds § 107.855(g)(13),

which excludes from Cost of Money any

gains realized by an SBIC from the

disposition of Equity Securities issued

by a small business. This provision has

been added as a clarification, since

SBA’s longstanding practice has been to

exclude such gains from the Cost of

Money limits. For example, if an SBIC

receives warrants that qualify as Equity

Securities, or converts debt to an Equity

Security, any gains realized on the

disposition of these interests do not

count against the Cost of Money ceiling.

Finally, § 107.855(i) has been

removed. This paragraph allowed an

SBIC that was lending to a small

business to receive a one-time ‘‘bonus’’

at the end of the loan term, contingent

upon one or more factors reflecting the

performance of the business during the

loan period. Such bonus payments were

excluded from the Cost of Money. The

revision of § 107.855(g)(12), which

provides a broader exclusion of

contingent payments from the Cost of

Money, renders the bonus provision

redundant.

Compliance With Executive Orders,

12866, 12988, and 13132, the

Regulatory Flexibility Act (5 U.S.C. 601,

et seq.), and the Paperwork Reduction

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

This final rule does not constitute a

‘‘significant’’ regulatory action within

the meaning of section 3(f) of Executive

Order 12866 and thus, was not reviewed

by the Office of Management and

Budget (OMB).

Under the Regulatory Flexibility Act,

5 U.S.C. 601, et seq., SBA has

determined that this final rule will not

have a significant economic impact on

a substantial number of small entities.

The purpose of the final rule is to

implement a provision of Public Law

106–9 allowing small business

investment companies (SBICs) to realize

contingent payments, such as royalties,

from small businesses without being

subject to regulatory limits on the

amount of consideration received.

Interest and other non-contingent

payments made to SBICs by small

businesses will continue to be subject to

the existing Cost of Money regulations.

This provision is expected to be

attractive primarily to SBICs

considering investments in small

businesses that are seeking to grow, but

whose owners do not want to give

substantial equity interests to outside

investors. In such cases, the SBIC can

participate in the growth of the business

by collecting a royalty rather than

through an ownership interest.

Based on recent statistics for the SBIC

program, the circumstances that this

final rule addresses do not appear to

apply to most small businesses

currently receiving SBIC financing. In

fiscal year 1999, SBICs provided

financing to 1,983 different small

businesses. In approximately two-thirds

of all the financings closed during that

year, the SBIC obtained an actual or

potential equity interest in the small

business; even if the proposed rule had

been in place, it is unlikely that these

transactions would have included

royalty provisions. The remaining onethird of SBIC financings typically

consist of loans to very small businesses

with low growth potential, which are

unlikely to have the ability to make

royalty payments under any

circumstances. Thus, it is unlikely that

this final rule will affect a substantial

number of small entities. The final rule

is expected to expand financing

69432 Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Rules and Regulations

opportunities for certain small

businesses wishing to grow while

remaining closely held, rather than

make SBIC financing more expensive for

small businesses currently being served

by the program.

For purposes of Executive Order

12988, SBA has determined that this

final rule is drafted, to the extent

practicable, in accordance with the

standards set forth in section 3 of that

Order.

For purposes of Executive Order

13132, SBA has determined that this

final rule has no federalism

implications.

For purposes of the Paperwork

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

certifies that this final rule contains no

new reporting or recordkeeping

requirements.

List of Subjects in 13 CFR Part 107

Investment companies, Loan

programs-business, Reporting and

recordkeeping requirements, Small

businesses.

For the reasons set forth above, SBA

is amending 13 CFR part 107 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 and 687m.

2. In § 107.815, revise the first

sentence of paragraph (a) to read as

follows:

§ 107.815 Financings in the form of Debt

Securities.

* * * * *

(a) Definitions. Debt Securities are

instruments evidencing a loan with an

option or any other right to acquire

Equity Securities in a Small Business or

its Affiliates, or a loan which by its

terms is convertible into an equity

position, or a loan with a right to receive

royalties that are excluded from the Cost

of Money pursuant to

§ 107.855(g)(12).* * *

* * * * *

3. In § 107.855, revise paragraph

(g)(12), add paragraph (g)(13) and

remove paragraph (i) to read as follows:

§ 107.855 Interest rate ceiling and

limitations on fees charged to Small

Businesses (‘‘Cost of Money’’).

* * * * *

(g) * * *

(12) Royalty payments based on

improvement in the performance of the

Small Business after the date of the

Financing.

(13) Gains realized on the disposition

of Equity Securities issued by the Small

Business.

* * * * *

Dated: November 3, 2000.

Aida Alvarez,

Administrator.

[FR Doc. 00–29522 Filed 11–16–00; 8:45 am]

BILLING CODE 8025–01–P

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

Small Business Size Standards; Health

Care

AGENCY: Small Business Administration.

ACTION: Final rule.

SUMMARY: The Small Business

Administration is adopting new size

standards for 19 Health Care industries

and retaining the existing $5 million

size standard for the remaining 11

Health Care industries. The North

American Industry Classification

System classifies Health Care industries

under Subsector 621, Ambulatory

Health Care Services; Subsector 622,

Hospitals; and Subsector 623, Nursing

and Residential Care Facilities. These

revisions are made to more

appropriately define the size of

businesses in these industries that SBA

believes should be eligible for Federal

small business assistance programs.

DATES: This final rule is effective on

December 18, 2000.

FOR FURTHER INFORMATION CONTACT: Gary

M. Jackson, Assistant Administrator for

Size Standards, (202) 205–6618.

SUPPLEMENTARY INFORMATION: On May 4,

1999, the Small Business

Administration (SBA) proposed

revisions to 11 size standards for the

Health Care industries (64 FR 23798). At

that time, SBA size standards were

established for industries defined by the

Standard Industrial Classification (SIC)

System. Effective October 1, 2000, SBA

established its size standards based on

industries defined by the new North

American Industry Classification

System (NAICS), and no longer uses the

SIC System (65 FR 30836, dated May 15,

2000). Accordingly, the changes to the

Health Care size standards adopted in

this final rule pertain to the NAICS

industries.

The NAICS makes several noteworthy

changes to the Health Care industries

listed in the SIC System. First, the

NAICS changes the terminology of the

health related industries to ‘‘Health

Care’’ from ‘‘Health Services’’ under the

SIC System. Second, the NAICS

establishes a Sector (equivalent to a

Division in the SIC System) titled

‘‘Health Care and Social Assistance.’’

Health Services was a Major Group

under the Services Division with 19

industries. The Health Care industries

are grouped into three Subsectors

(equivalent to a Major Group in the SIC

System). Third, the number of Health

Care industries increases to 30 NAICS

industries from 19 Health Services SIC

industries.

SBA has decided to adopt the

proposed revisions of May 4, 1999 to the

Health Care size standards. Most SIC

Health Services industries correspond to

a NAICS industry. However, there are

some Health Services industries, or

activities within an industry, that are

combined with other SIC industries to

form a new Health Care NAICS

industry. In these cases, SBA has

followed the guidelines it used to

establish NAICS size standards. These

guidelines are described in the proposed

rule of October 22, 1999 (64 FR 57188)

and the final rule of May 15, 2000 (65

FR 30836). In most cases, the NAICS

size standard is the same as or higher

than the size standard SBA had

proposed for the SIC industry. Two

activities in one Health Services

industry, however, were reclassified

into industries outside of the Health

Care with a size standard lower than

proposed for their SIC industries. The

following table lists the proposed size

standards by SIC industry and adopted

size standards corresponding to the

NAICS industries.

SIC code SIC industry

Proposed size

standard

(millions of

dollars)

NAICS code NAICS industry

Adopted size

standard

(millions of

dollars)

8011 ............ Offices and Clinics of Doctors of

Medicine.

$7.5

Surgical and Emergency Centers ...... ........................ 621493 Freestanding Ambulatory Surgical

and Emergency Centers.

$7.5