28602 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

SMALL BUSINESS ADMINISTRATION

13 CFR Part 108

RIN 3245–AE40

New Markets Venture Capital Program

AGENCY: U.S. Small Business

Administration.

ACTION: Final rule; Withdrawal of

interim final rule.

SUMMARY: The U.S. Small Business

Administration (‘‘SBA’’) adds a new

regulation to implement the New

Markets Venture Capital Program Act of

2000 (‘‘the Act’’). The Act authorizes

SBA to issue regulations necessary to

implement the program. The regulations

set forth the requirements for: Newlyformed venture capital companies to

qualify to become New Markets Venture

Capital (‘‘NMVC’’) companies to make

developmental venture capital

investments in smaller enterprises

located in low-income geographic areas

and provide operational assistance to

such enterprises receiving such

investments; and Existing Specialized

Small Business Investment Companies

(‘‘SSBICs’’) to qualify for grants to

provide operational assistance to

smaller enterprises located in lowincome geographic areas and which

such SSBICs have financed or expect to

finance.

SBA also withdraws the interim final

rule on the New Markets Venture

Capital Program originally published on

January 22, 2001, the effective date of

which subsequently was delayed until

June 22, 2001. Because the interim final

rule is withdrawn, it will not take effect

on June 22, 2001.

DATES: Effective Date: This final rule is

effective on May 23, 2001.

Applicability Date: This final rule

applies to all applications received no

later than the application deadline date

and time.

Withdrawal Date: The interim final

rule adding 40 CFR part 108, which was

published at 66 FR 7218 and delayed at

66 FR 10811 and 66 FR 20530, is

withdrawn as of May 23, 2001.

FOR FURTHER INFORMATION CONTACT:

Austin Belton, Director, Office of New

Markets Venture Capital, Investment

Division, or Louis Cupp, Policy Analyst,

Investment Division, at (202) 205–6510.

This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

I. Background

The New Markets Venture Capital

Program Act of 2000 (‘‘the Act’’) was

created by the Consolidated

Appropriations Act of 2001, Public Law

106–554, enacted December 21, 2000.

Congress recognized that despite the

nation’s overall economic prosperity,

many underserved areas in America

have not experienced such prosperity

and millions of Americans living in

these areas do not have access to jobs or

entrepreneurial opportunities. It enacted

the New Markets Venture Capital

(‘‘NMVC’’) program to help create an

economic infrastructure in such

underserved areas by encouraging

business growth through programsupported investment. This type of

investing is known in the community

development venture capital industry as

‘‘double bottom line’’ investing, because

the investments have both an

anticipated financial and social return.

Social returns include creating

sustainable jobs at businesses receiving

investments from NMVC companies,

and encouraging such businesses to

provide much-needed new products and

services within underserved areas.

Congress noted that between 1997 and

1998, the median income for the

nation’s households rose 3.5 percent in

real terms, yet 12.7 percent of

Americans (34.5 million people) still

live below the poverty line. Many of

these Americans live in inner city and

rural areas, where job opportunities are

scarce and there is little to attract small

business investors. In rural and urban

communities, poverty remains a

persistent problem. Job growth is well

below the national average, with

unemployment at or above 14%.

Unemployment is 7.5% in the African

American urban community, and is

6.4% in the Hispanic urban population;

both are nearly double the national

average. Despite these statistics,

Congress found that it is not enough to

create jobs in these pockets of poverty,

rather these communities need a new

economic infrastructure to enable them

to develop their full potential and

participate fully in the economic

mainstream. The NMVC program will

encourage the growth of such an

infrastructure by supporting new equity

capital investments by NMVC

companies and SSBICs and by

providing operational assistance to

smaller enterprises located in lowincome geographic areas whose growth

will foster the creation of wealth and job

opportunities in such areas.

SBA will enter into participation

agreements with NMVC companies to

fulfill these statutory purposes. The Act

authorizes SBA to guarantee debentures

of NMVC companies. Such debentures

leverage the private capital that NMVC

companies must raise and enable them

to make the equity investments in lowincome geographic areas contemplated

by the Act. The Act also authorizes SBA

to provide grants to NMVC companies

to provide operational assistance to

smaller enterprises in which they

invest. In addition, the Act enhances the

ability of existing SSBICs to invest in

smaller enterprises in low-income areas

by giving them grants to provide

operational assistance to such

enterprises in connection with such

investments.

SBA will enter into participation

agreements with NMVC companies that

have a solid business plan for making

investments in the low-income

geographic areas targeted by the Act,

and that have the most likelihood of

expanding economic opportunities in

such areas.

II. Rulemaking History

On January 22, 2001, 66 FR 7218, SBA

published in the Federal Register an

interim final rule with an effective date

of February 21, 2001. SBA subsequently

published in the Federal Register on

February 20, 2001, 66 FR 10811, a delay

of the effective date of the final rule

until April 23, 2001. The delay was for

the purpose of giving Administration

officials the opportunity for further

review and consideration of new

regulations, consistent with the

Assistant to the President and Chief of

Staff memorandum entitled ‘‘Regulatory

Review Plan,’’ published in the Federal

Register on January 24, 2001.

On April 23, 2001, 66 FR 20530, SBA

published in the Federal Register notice

of a further delay of the effective date

of the interim final rule, to June 22,

2001. The purpose of this further delay

was to give Administration officials

additional time for further review and

consideration of new regulations,

consistent with that ‘‘Regulatory Review

Plan,’’ before the interim final rule

became effective.

Also on April 23, 2001, 66 FR 20531,

SBA published in the Federal Register

a proposed rule implementing the

NMVC program, and a proposed

withdrawal of the previously published

interim final rule. The proposed rule

incorporated substantive changes

resulting from the Administration’s

review of the interim final rule. The

deadline for public comments on the

proposed rule was May 4, 2001. SBA

received one comment, which is

addressed in Section IV.A, below.

III. Withdrawal of Interim Final Rule

SBA withdraws the interim final rule

it published in the Federal Register on

January 22, 2001 (66 FR 7218). SBA

received no comments on its proposed

rulemaking action of withdrawing its

previously published interim final rule

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28603

and implementing the NMVC program

instead with this final rule. SBA

withdraws the interim final rule before

it becomes effective on June 22, 2001,

for the purpose of implementing the

NMVC program instead with this final

rule, which is based on the proposed

rule SBA published in the Federal

Register on April 23, 2001 (66 FR

20531). The purpose of implementing

the NMVC program with this final rule

instead of the interim final rule is to

implement the program with

substantive changes resulting from the

Administration’s review of the interim

final rule.

IV. Discussion of Comments on and

Changes to the Proposed Rule

A. Public Comments

SBA received one comment in

response to the proposed rule. The

majority of the commenter’s comments

concern the ways in which SBA

changed various regulations in the

proposed rule from the versions of those

regulations in the previously published

interim final rule. This section focuses

on only those comments, and does not

discuss those comments that reiterate

comments already made and already

discussed in the preamble to the

proposed rule.

With regard to the proposed

definition of ‘‘Relevant Venture Capital

Finance’’ in § 108.50, as changed from

the version of this definition previously

published in the interim final rule, the

commenter recommends that SBA

implement its earlier version of this

definition. The commenter believes that

SBA’s proposed change will result in

SBA not considering the organizational

mission of the NMVC company when

determining the qualifications of the

management team. SBA will implement

this regulation as proposed, for the

following reasons. First, SBA believes

that the proposed definition does not

have any effect on the separate

regulatory requirement in § 108.120 that

in order to be eligible for the program,

a NMVC company applicant must have

as its primary mission the economic

development of one or more low-income

areas. Second, the change will allow

applicants and SBA to focus on

management team members’

demonstrable prior equity investment

activities in small business in lowincome areas, rather than attempting to

prove the intent behind such prior

activities.

The commenter noted that SBA

eliminated from the proposed rule

§ 108.240, which had been included in

the previously published interim final

rule, and recommended that SBA put

that section back into the final rule.

That section concerns the circumstances

in which non-cash assets may be

included in private capital. The

commenter suggested that the NMVC

program should not be more stringent

than the Small Business Investment

Company (‘‘SBIC’’) program in this

regard. SBA declines to implement this

regulation in the final rule. SBA

believes that, unlike SBICs, NMVC

companies should not be allowed to

include non-cash assets in their private

capital. First, SBA selects SBICs through

a non-competitive process, but will

select NMVC companies through a

competitive process in which SBA will

compare applicants to one another. SBA

will not have sufficient time in the

selection process to first evaluate an

applicant’s proposed non-cash assets

before that applicant is compared to

other applicants. SBA could not ensure

the integrity and fairness of the

selection process if it were to compare

an applicant that proposes to raise all of

its capital in the form of cash to an

applicant that proposes to have some of

its capital be in the form of non-cash

assets, without first reviewing and

evaluating such non-cash assets.

Second, even in the SBIC program, the

permitted contribution of non-cash

assets for inclusion in private capital is

extremely limited. In practice, generally

the only non-cash assets SBA approves

are ‘‘pre-licensing investments,’’ which

are not expected in the NMVC program.

The commenter objected to the

change SBA made in the proposed rule

to § 108.330, from the version

previously published in the interim

final rule. SBA revised a $5,000

application fee due in two installments,

$2,000 at application submission and

$3,000 at the time of final approval, to

a $5,000 grant issuance fee due in

advance at application submission. The

commenter suggested that the only

purpose for this change is to deter

applicants. On the contrary, SBA desires

to encourage professional venture

capital funds, committed to

participating in the program, to apply

for NMVC company designation. SBA

believes that asking applicants to pay

the grant issuance fee at the time of

application will ensure this result. As

stated in the preamble to the proposed

rule, SBA has determined that the Act

authorizes SBA to charge a fee in

connection with its issuance of a grant.

SBA has decided to collect the entire fee

in advance, as opposed to just a portion,

in order to avoid the administrative

costs of collecting the fee in two

installments. SBA continues to believe

that the amount of the fee is reasonable,

and the fee ultimately will be borne

only by successful applicants.

The commenter addressed the

requirements in proposed § 108.710 that

80 percent of the businesses receiving

financing from a NMVC company be

smaller enterprises, be located in lowincome areas, and receive equity capital

investments, and that 80 percent of the

total dollars invested by a NMVC

company be in the form of equity capital

investments in smaller enterprises

located in low-income areas. The

commenter makes several

recommendations: First, that SBA

eliminate the requirement that 80

percent of businesses receive equity

capital investments; second, that SBA

eliminate the 80 percent of dollars

requirement and replace it with a

requirement that an NMVC company

only must invest 100 percent of its

leverage (but none of its regulatory

capital) in the form of equity capital

investments; and third, that SBA replace

the proposed 80 percent of businesses

and 80 percent of total investment

dollars requirement with only an 80

percent of businesses requirement.

Some of these suggestions reiterate

comments this commenter made in

response to the interim final rule, and

some relate to the changes SBA made to

this regulation between the version

published in the interim final rule and

the version published in the proposed

rule.

The commenter presents several

reasons for its recommendations. First,

it believes that the Act does not state

that 80 percent of businesses must

receive equity capital investments.

Second, it states that NMVC companies

need to have more investment flexibility

to offset the higher risks of investments

in low-income areas, including an

ability to invest a portion of funds as

amortizing debt. SBA has considered

the commenter’s suggestions and has

decided to implement § 108.710 as

proposed for the following reasons.

With regard to the requirement that 80

percent of the businesses in which a

NMVC company invests must receive

equity capital investments, as well as be

smaller enterprises located in lowincome areas, SBA believes that the Act

requires this. This implements the

requirement outlined in the definition

of ‘‘participation agreement’’ in section

351(6)(B) of the Small Business

Investment Act (‘‘SBI Act’’), as amended

by the Act, that a NMVC company must

make investments in smaller enterprises

at least 80 percent of which are located

in low-income areas. This also

implements the legislative purposes

stated in section 352 of the SBI Act, as

amended by the Act, which include

28604 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

‘‘encouraging developmental venture

capital investments in smaller

enterprises primarily located in lowincome geographic areas’’ and ‘‘to

establish a developmental venture

capital program with the mission of

addressing the unmet equity investment

needs of small enterprises located in

low-income geographic areas.’’

‘‘Developmental venture capital’’ is

defined in section 351(1) of the SBI Act,

as amended by the Act, as equity capital

investments with the primary objective

of fostering economic development in

low-income areas. SBA believes that the

clear purpose of the Act, read as a

whole, is to promote equity capital

investments in smaller enterprises in

low-income areas. Accordingly, SBA

believes § 108.710(a)(1) is required by

the Act.

SBA also believes that the additional

requirement SBA proposed in

§ 108.710(a)(2), that 80 percent of the

total dollars a NMVC company has

invested also must be in the form of

equity capital investments in smaller

enterprises located in low-income areas,

fulfills the purposes of the Act,

discussed above. SBA believes that the

Act as a whole encourages NMVC

companies to take a proactive posture

with respect to the companies in which

they invest, and to take reasonable risks

in making investments in such

companies. Several features of the

NMVC program already offset the

expectation of higher risk and lower rate

of return to a NMVC company in

making equity capital investments in

smaller enterprises located in lowincome areas. First, a NMVC company

does not have to repay interest on its

guaranteed debentures during the first

five years after issuance, which gives

the company time patiently to allow the

businesses in which it invests to grow

and, thus, for its investments to generate

returns. Second, there is no limitation

on the amount of ownership interest a

NMVC company can take in a business

in which it invests, thus giving the

company the ability to act to reduce the

risk of the business’ failure. Third, the

program includes a grant component,

which gives a NMVC company

additional resources to help increase the

potential for a return on its investment

in a business.

The commenter commented on the

change SBA made in proposed

§ 108.2030, from the version previously

published in the interim final rule,

regarding the acceptable length of time

within which commitments or annuities

for grant matching resources may be

payable. The commenter suggested that

SBA allow NMVC companies to expend

their grant matching resources over a

period of 10 years as originally stated,

rather than five years as stated in the

proposed rule. The commenter

suggested that doing so is not

specifically prohibited by statute and

would give NMVC companies the ability

to provide operational assistance

throughout the term of their

investments.

SBA considered the consequences of

implementing this suggestion, including

the fact that it could result in a NMVC

company expending all of its SBA grant

funds before it expends any of its grant

matching resources. After deliberation

SBA has decided to implement the

regulation as proposed, for several

reasons.

First, SBA believes that implicit in the

Act is a requirement that SBA’s grant

funds and a NMVC company’s or

SSBIC’s grant matching resources be

expended simultaneously within the

same period of time. Since SBA believes

that by law it can make its grants funds

available for expenditure only for a

period of time not exceeding five years,

SBA believes it also should place the

same time restriction on the expenditure

of grant matching resources.

Second, from a grant administration

perspective, it would not be the most

efficient use of SBA’s resources to

continue to monitor grants to SSBICs

and NMVC companies for a 10-year

period when SBA’s grant funds have

been fully expended within the first five

years. Pursuant to paragraph .71 of

Circular A–110 of the Office of

Management and Budget (‘‘OMB’’), SBA

must not perform a close-out on such

grants until the grant project is

complete. Pursuant to the Act, the

purpose of the grant is providing

operational assistance to small

businesses in connection with

investments, and the grant project

would not be complete until both the

SBA grant funds and the NMVC

company’s or SSBIC’s grant matching

resources had been expended for this

purpose.

Third, SBA believes that

simultaneous expenditure by SSBICs

and NMVC companies of both grant

funds and grant matching resources will

give SBA the best ability to ensure

proper implementation of the NMVC

program. If SBA monitors the use of

both resources simultaneously, SBA can

ensure that grants are being used for

purposes that are authorized by the Act

and that best fulfill the objectives of the

NMVC program. If SBA finds that such

funds and resources are not being used

properly, or if a NMVC company or

SSBIC is not complying with other grant

requirements, pursuant to paragraph

.22(h) of OMB Circular A–110, SBA can

withhold payment of further grant funds

until the situation is remedied.

B. Other Changes to the Proposed Rule

SBA made substantive changes to

§§ 108.380(a)(1)(i)(A) and (B)

concerning the amounts of regulatory

capital and operational assistance grant

matching resources a conditionally

approved NMVC company must raise in

order to receive from SBA final approval

as a NMVC company. These changes

implement a solution to a problem

raised by a comment SBA received in

response to the interim final rule, and

already discussed in the preamble to

SBA’s proposed rule.

The commenter had advised that if

SBA over-commits its grant funds, it

could result in SBA giving applicants

less than the 30 percent ‘‘grant-toprivate-capital ratio’’ contemplated by

the Act, due to the pro rata reduction in

the amount of grant award each

applicant would receive. The

commenter suggested that SBA revise

§ 108.380(a)(1)(i)(B) to limit the amount

of grant matching resources a

conditionally approved NMVC company

must raise in order to receive final

approval. The commenter suggested this

limit should be an amount not more

than the amount of operational

assistance grant that SBA has

‘‘conditionally designated for that

NMVC company.’’ In essence, the

commenter suggested that SBA place a

limit on the amount of grant funds SBA

would award to an applicant.

SBA proposed not to implement this

suggestion for several reasons discussed

in the preamble to the proposed rule (66

FR 20532–20533). However, SBA

recognized that the possibility remained

that an applicant might raise more

regulatory capital and grant matching

resources than it proposed to raise in its

application, and more than SBA

anticipated when SBA evaluated the

applicant’s application and made

conditional approvals based on its

selection process and the amount of

appropriated funds available.

SBA continues to believe that the

solution suggested by the commenter,

placing a limit on the amount of grant

funds SBA will award, is not allowable

under § 358(a)(4) of the SBI Act, as

amended by the Act. Under that section,

SBA must award a grant in an amount

equal to the amount of grant matching

resources an applicant actually raises.

Upon further deliberation, however,

SBA believes it does have the discretion

under the statutory scheme to place a

limit on the amount of regulatory capital

and grant matching resources an

applicant is allowed to raise after filing

its application. SBA believes that this

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28605

solution will achieve the result sought

by the commenter but using a different

approach.

SBA’s selection process will include

an evaluation of the proposals

submitted by applicants, which will

include specific amounts of capital and

grant matching resources the applicants

propose to raise. SBA will evaluate,

among other things, the extent to which

an applicant will concentrate its

resources in particular low-income

geographic areas, and the extent to

which the applicant’s proposed

activities will promote economic

development and the creation of wealth

and job opportunities in such areas.

This evaluation necessarily will include

an assessment of the amounts of capital

and grant matching resources an

applicant intends to raise and to

concentrate in particular low-income

areas, in relation to the impact those

resources might have on those areas.

SBA also will be selecting applicants

for conditional approval so as to achieve

the greatest extent of potential

nationwide and rural/urban impact of

the program. This process necessarily

will include an assessment of the

amounts of capital and grant matching

resources an applicant intends to raise,

in relation of the number of particular

low-income areas toward which the

applicant proposes to direct its

activities.

For these reasons, a key factor in

SBA’s selection of applicants for

conditional approval will be the

amounts of capital and grant matching

resources an applicant proposes in its

application. In order to preserve both

the integrity of the competitive selection

process and the delicate balance

between the various aspects of the

applications SBA selects for conditional

approval, SBA believes it must hold the

selected applicants to fulfilling the

plans as they have proposed in their

applications and upon which SBA

based its decision to select them.

Accordingly, SBA has changed

§§ 108.380(a)(1)(i)(A) and (B) to state

that in order to receive final approval

from SBA, a conditionally approved

applicant must raise amounts of capital

and grant matching resources equal to

the amounts it set forth in its

application to SBA. An applicant must

not raise more or less than such

amounts.

For these same reasons, SBA also has

made similar substantive changes to

§§ 108.2000(b)(6) and 108.2030(d)(2)

regarding the amount of capital and

grant matching resources that SSBIC

applicants must raise.

SBA has made technical corrections

to §§ 108.720(c)(1)(i) and (ii),

concerning real estate businesses that

are ineligible to receive financings from

NMVC companies. SBA modeled this

regulation on § 107.720(c), concerning

real estate businesses that are ineligible

to receive financings from SBICs. This

SBIC regulation refers to particular

major group and industry numbers

contained in the Standard Industrial

Classification (‘‘SIC’’) Manual. In

promulgating a similar regulation for the

NMVC program, SBA attempted to

translate the SIC Manual references into

equivalent references to the North

American Industrial Classification

System (NAICS) Manual, which is

SBA’s current size standard

classification system. SBA re-examined

this proposed regulation as a result of a

question received by an interested

member of the public and realized that

SBA had not correctly translated the SIC

Manual references into NAICS Manual

references. This final rule corrects this

technical error and conforms this

regulation to the parallel regulation

applicable to SBICs.

V. Section by Section Analysis

The following is a section by section

analysis of SBA’s regulations to add a

new part 108 to title 13 of the Code of

Federal Regulations to implement the

Act.

A. General Information About the

Regulations

As you read through the section by

section analysis of particular

regulations, you will see that SBA

models many of these regulations on

similar regulations governing SBA’s

SBIC program, found in part 107 of this

title. In addressing the challenge of

implementing the NMVC program, SBA

is able to draw upon the experience that

it has gained over the last 43 years in

administering the SBIC program.

The SBIC program was created by the

Small Business Investment Act of 1958

in response to a Federal Reserve study

finding that small businesses in general

were unable to obtain the long-term debt

and equity funds that they needed for

success. The basic objective of the

program is to attract and supplement

private capital, managed by private

investment managers, to meet that need.

SBA licenses such companies as SBICs,

regulates their activities to ensure that

they are financially sound and serve the

program’s public policy objectives, and

supplements their private capital by

guaranteeing debentures or other

securities that they issue.

The SBIC program has been

extraordinarily successful in recent

years and today represents a major

factor in small business financing. It is

estimated that 34 percent of all

companies receiving institutional

venture capital in 1999 obtained it from

an SBIC. In fiscal year 2000, SBICs

invested a record $5.5 billion in more

than 3,000 small growth companies.

This was accomplished with a budget

appropriation of just $24.3 million.

A key strength of the SBIC program

lies in the fact that all investment

decisions are made by private

individuals with their own money at

first risk. However, this also represents

a limitation in that such investment

activities are profit driven and generally

are not targeted to small businesses

located in low-income areas. Lowincome investments typically are

smaller and more costly to make, and

they require significantly more

assistance over the investment period

than most SBIC investments. At the

same time, they generally offer a more

limited profit potential to the investor.

The NMVC program addresses these

factors by adding to the SBIC structure

an operational assistance grant subsidy

and by recruiting managers and

investors that have an economic

development objective in addition to

their financial one.

Because of these many similarities

between SBICs and NMVC companies

and between these two venture capital

programs, SBA incorporates into the

NMVC program many of the SBIC

regulations that SBA believes are

fundamental to the safety and

soundness of the SBIC program.

B. Section by Section Analysis

Sections 108.10 through 108.50

briefly describe the NMVC program,

state the legal basis for the program,

definitions, and provide guidance on

how to read part 108. Most of the

definitions come directly from 13 CFR

part 107, which governs the SBIC

program. Most of the newly defined

terms come directly from the Act, and

SBA does not supplement or modify

them. SBA also adds several new

definitions, including the terms ‘‘LowIncome Enterprise’’ and ‘‘Low-Income

Investment,’’ as a shorter way to

describe equity capital investments in a

smaller enterprise that, at the time of the

initial financing, has its principal office

located in a low-income geographic

area.

Sections 108.100 through 108.160

describe the qualifications for the

NMVC program. Under the Act, NMVC

companies must be newly formed forprofit entities. SBA requires that NMVC

companies be organized under state law

and be either corporations, limited

liability companies, or limited

partnerships. SBA requires that they

28606 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

have qualified management, have

economic development as their primary

mission, and identify particular lowincome geographic areas in which they

propose to focus their investment

activities. SBA models these regulations

on the SBIC program, including the

requirements that NMVC companies

must have management and ownership

diversity and that SBA will require preapproval of all management expenses of

a NMVC company (see 13 CFR 107.100

through 107.160).

Sections 108.200 through 108.240

address capitalization of a NMVC

company, including minimum capital

requirements, permitted sources of

capital, and limitations on non-cash

contributions to capital. These

regulations also are modeled on similar

regulations in the SBIC program (see 13

CFR 107.200 through 107.250).

Sections 108.300 through 108.330 set

forth policies and procedures for

application for designation as a NMVC

company. SBA will allow submission of

applications for participation in the

NMVC program only during a specific

application period, to be set forth in a

Notice of Funds Availability published

in the Federal Register, as opposed to

a rolling admissions process. SBA will

use this method of selecting applicants

for three reasons. First, SBA believes

this method will enable SBA to achieve

the statutory directive of ensuring, to

the extent possible and given the

applications received, nationwide

availability of developmental venture

capital. SBA will compare applications

both for quality and other criteria

described in the regulations, and for the

geographic areas they intend to cover so

as to choose the best applications for

each geographic area and avoid

duplication within specific geographic

areas. Second, SBA has received oneyear appropriated funds for operational

assistance grants, and the statute

requires SBA to distribute available

appropriated funds pro rata among

NMVC companies and SSBICs that

apply for such grants. (See discussion of

§§ 108.2000 through 108.2040 for more

information about how SBA proposes to

administer the operational assistance

grant program.) Submission of all

applications for these grant funds at the

same time will allow SBA to distribute

these funds among all eligible and

qualified recipients. Third, SBA

believes this procedure will allow SBA

to orderly administer appropriated

funds it may receive in subsequent

fiscal years, by allowing SBA to open up

the NMVC program to new rounds of

applicants.

SBA will require applicants for

participation in the NMVC program to

submit an application, similar to the

application for the SBIC program but

which also includes the requirement for

a comprehensive business plan. Many of

the topics SBA will require applicants

to include in their business plans are

outlined in section 354(b) of the SBI

Act, as amended by the Act, regarding

application for the NMVC program. In

addition, SBA will use the following

additional topics: market analysis of the

specific low-income areas towards

which the applicant proposes to target

its investments and other activities,

operational capacity and investment

strategies, plans for raising capital and

matching funds for operational

assistance grants, and projected amount

of investment in low-income areas as

opposed to outside those areas. Based in

part on the experience of other Federal

agencies with similar economic

development programs, SBA believes

these additional topics will allow SBA

to ensure that applicants understand the

objectives of the NMVC program and

have a good plan for accomplishing

those objectives and for creating and

maintaining a viable investment fund.

SBA also will assess a fee for

receiving a grant under the NMVC

program to ensure that applicants are

professional venture capital firms

committed to participate in the program.

Sections 108.340 through 108.395

describe SBA’s evaluation criteria and

selection process for participation in the

NMVC program. SBA will consider ten

criteria in its evaluation and selection of

applicants for participation in the

NVMC program. Most of the specified

criteria are set forth in the Act. SBA will

use the following additional selection

criteria not specifically described in the

Act: the quality of the applicant’s

business plan in terms of meeting the

objectives of the program; the strength

and likelihood for success of the

applicant’s operations and investment

strategies; the need for developmental

venture capital investments in the

geographic areas in which the applicant

proposes to concentrate its activities;

and the extent of the applicant’s

understanding of the markets in such

geographic areas. Based in part on the

experience of other Federal agencies

with similar economic development

programs, SBA believes these additional

evaluation criteria are effective

indicators of whether the objectives of

the NMVC program will be met.

The Act provides for SBA to

conditionally approve companies for

participation in the NMVC program,

based on SBA’s evaluation of their

applications. Conditionally approved

companies must raise the required

amounts of capital and of matching

funds for the operational assistance

grant award from SBA within a time

period specified by SBA. As provided in

the Act, SBA will finally approve as

NMVC companies all conditionally

approved NMVC companies that raise

the required amount of capital within

the time period specified by SBA and

sign a participation agreement with

SBA. Section 108.380(b) also sets forth

procedures under which SBA may grant

to conditionally approved companies, as

provided in the Act, an exception to the

requirement to raise all of their required

matching funds for their operational

assistance grants before SBA designates

them as finally approved NMVC

companies.

Sections 108.400 through 108.470

describe SBA’s requirements for

changes in ownership, control, or

structure of a NMVC company. These

regulations are modeled after similar

regulations for the SBIC program (see 13

CFR 107.400 through 107.475).

Sections 108.500 through 108.585

describe SBA’s requirements for

managing the operations of a NMVC

company. These regulations are

modeled after similar regulations for the

SBIC program (see 13 CFR 107.500

through 107.590).

Sections 108.600 through 108.680

describe SBA’s record keeping, record

retention, and reporting requirements

for NMVC companies. These regulations

are modeled after similar regulations for

the SBIC program (see 13 CFR 107.600

through 107.680). SBA also will require

each NMVC company to provide reports

concerning the community development

impact of each investment it makes, as

well as reports on its administration and

use of grant funds as required by

Circular A–110 of the Office of

Management and Budget, ‘‘Uniform

Administrative Requirements for Grants

and Agreements with Institutions of

Higher Education, Hospitals, and other

Non-Profit Organizations.’’ SBA

anticipates that to the extent not

inconsistent with SBA’s regulations for

the NMVC program, NMVC companies’

administration and use of grant funds

will be subject to OMB Circular A–110

and to Part 31 of the Federal Acquisition

Regulations, 48 CFR part 31, ‘‘Contract

Cost Principles and Procedures.’’ OMB

Circular A–110 is optional for use in

connection with grants to commercial

organizations. SBA will apply it to

NMVC companies in order to take

advantage of existing and well-known

grant administrative procedures and

policies to facilitate SBA’s orderly

administration of grants to NMVC

companies. (See the discussion of

§§ 108.2000 through 108.2040

concerning applicability of these same

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28607

procedures and policies to grants to

SSBICs.)

Sections 108.690 through 108.692

describe SBA’s requirements for SBA’s

examinations of NMVC companies.

These regulations are modeled after

similar regulations for the SBIC program

(see 13 CFR 107.690 through 107.692).

Sections 108.700 through 108.885

describe SBA’s requirements for

determining the eligibility of financings

of small businesses by NMVC

companies, and regarding types of

allowable financings. These regulations

are modeled after similar regulations for

the SBIC program (see 13 CFR 107.700

through 107.885).

Section 108.710 sets forth the

requirement that at the close of each

year, 80 percent of the concerns that

NMVC companies have financed must

be smaller enterprises that, as of the

time of the initial financing, had their

principal office in a low-income

geographic area and in which the NMVC

companies have made equity capital

investments as defined in the

regulations (see proposed § 108.50).

This regulation implements the

requirement outlined in the definition

of ‘‘participation agreement’’ in section

351(6)(B) of the SBI Act. SBA interprets

this statutory section to refer to 80

percent of the businesses in which a

NMVC company invests. Section

108.710 also requires that for all

financings extended by a NMVC

company, the NMVC company must

have invested at least 80 percent (in

total dollars) in low-income

investments. In other words, 80 percent

of the dollars used to finance business

concerns must be invested in equity

capital investments in smaller

enterprises located in low-income areas.

This provision will require that a

substantial portion of a NMVC

company’s capital and leverage go

toward making equity investments in

smaller enterprises located in lowincome areas. SBA believes that this

will fulfill one of the Act’s purposes—

to address the unmet equity investment

needs of businesses located in lowincome areas.

Sections 108.1100 through 108.1720

describe SBA’s requirements and

procedures for NMVC companies to

obtain leverage from SBA and the

procedures governing how SBA will

fund leverage. These regulations are

modeled after similar regulations for the

SBIC program (see 13 CFR 107.1100

through 107.1720).

Sections 108.1810 through 108.1840

describe defaults by NMVC companies

on the terms and conditions governing

their participation in the NMVC

program, and SBA’s remedies upon

such defaults. These regulations are

modeled after similar regulations for the

SBIC program (see 13 CFR 107.1810

through 107.1840).

Section 108.1900 concerns

termination by a NMVC company of its

participation in the NMVC program.

This regulation is modeled after a

similar regulation for the SBIC program

(see 13 CFR 107.1900).

Sections 108.1910 through 108.1930

address miscellaneous issues, including

application for an exemption from

regulatory requirements and the effect of

regulation changes on transactions

previously consummated. These

regulations are modeled after similar

regulations for the SBIC program (see 13

CFR 107.1910 through 107.1930).

Section 108.1940 sets forth

procedures under which SBA may

designate additional census tracts or

equivalent county divisions as lowincome geographic areas. This

regulation implements the authority

given to SBA’s Administrator in section

351(3)(A)(iii) of the SBI Act, as amended

by the Act. SBA has designed these

procedures to allow for maximum

opportunity by interested members of

the public to ask SBA to designate

specific census tracts or equivalent

county divisions as additional lowincome geographic areas.

Sections 108.2000 through 108.2040

set forth requirements and procedures

for operational assistance grants to both

NMVC companies and to SSBICs. SBA

will award such grants only after

receiving and evaluating applications in

response to a Notice of Funds

Availability published in the Federal

Register. SBA will award grants to

SSBICs and to NMVC companies in

such a way as to promote

developmental venture capital

investments nationwide and in both

urban and rural areas.

SBA also will require SSBICs to

provide reports on its administration

and use of grant funds as required by

OMB Circular A–110, ‘‘Uniform

Administrative Requirements for Grants

and Agreements with Institutions of

Higher Education, Hospitals, and other

Non-Profit Organizations.’’ SBA

anticipates that to the extent not

inconsistent with these regulations,

SSBICs’ administration and use of grant

funds will be subject to OMB Circular

A–110 and to part 31 of the Federal

Acquisition Regulations, 48 CFR part

31, ‘‘Contract Cost Principles and

Procedures.’’ OMB Circular A–110 is

optional for use in connection with

grants to commercial organizations

(some SSBICs are for-profit, others are

non-profit). SBA will apply it to SSBICs

in order to take advantage of existing

and well-known grant administrative

procedures and policies to facilitate

SBA’s orderly administration of grants

to SSBICs.

VI. Justification for Immediate Effective

Date of Final Rule

The Administrative Procedures Act

(‘‘APA’’) 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.’’ 5 U.S.C. 553(d)(3). SBA finds

that good cause exists to make this final

rule become effective immediately the

same day it is published in the Federal

Register.

The purpose of this APA provision is

to provide interested and affected

members of the public sufficient time to

adjust their behavior before the rule

takes effect. Potential NMVC company

and SSBIC applicants have had since

January 22, 2001 to consider, digest, and

understand these regulations, the vast

majority of which have not changed

from the form in which they were

published on January 22, 2001. Potential

applicants and other interested parties

also have had two opportunities to

participate in notice and comment

proceedings concerning these

regulations. For these reasons, SBA

believes that potential applicants and

other interested parties have had ample

time to adjust their behavior to comply

with these regulations. In addition, SBA

believes that potential applicants have a

strong interest in seeing this rule get

implemented in final form so that they

may apply for the benefits of the NMVC

program and so that SBA may select

applicants and award appropriated

funds before such funds expire at the

end of this fiscal year.

SBA first published these regulations

in the Federal Register on January 22,

2001, in the form of an interim final

rule. On that same date, SBA made

available to the public, via its web site,

the application forms for NMVC

company designation. SBA has made

available to potential SSBIC applicants

the appropriate application forms upon

request.

Despite the fact that the regulations

originally were promulgated as an

interim final rule, SBA offered a 60-day

comment period that expired on March

23, 2001. SBA received three public

comments.

SBA republished these regulations,

with several limited substantive and

technical changes, as a proposed rule in

the Federal Register on April 23, 2001.

Some of the changes SBA made were

the result of its consideration of

28608 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

comments received on the interim final

rule. Again, SBA provided an

opportunity for public comment, and

SBA received one comment. This final

rule implements the regulations as

proposed, with the exception of one

technical change that arose from a

question received from an interested

member of the public, and one

substantive change that arose from a

public comment. Accordingly, SBA

believes that interested members of the

public have had ample opportunity to

participate formally in SBA’s

rulemaking process as well as to

influence informally SBA’s

development of these governing

regulations and administrative

procedures.

In addition to the four months since

January 22, 2001, when these

regulations first were published,

potential applicants also will have an

additional time period of approximately

one week between the effective date of

the final rule and SBA’s anticipated

application deadline. This will allow

potential applicants to review their

behavior and applications and

determine whether they wish or need to

make any adjustments before submitting

their applications.

SBA also believes, based on its

contacts with interested members of the

public, that there is stronger interest in

the immediate implementation of the

NMVC program, than in a further 30-day

delay in program implementation. In

addition to its formal rulemaking

activities, over the past three months

SBA officials have talked and met with

many potential applicants, investors,

and donors of grant matching resources,

and other interested parties, to explain

the application forms, the regulations,

and SBA’s proposed administration of

the NMVC program. SBA is aware of

many potential applicants that have

been putting together their application

packages, contacting and obtaining

commitments from potential investors

and donors, and working with counsel

on legal documentation, since January

22, 2001.

SBA also believes that interested

members of the public are fully aware

of the time constraints upon its

implementation of the NMVC program

during this fiscal year. SBA posted on

its web site on January 22, 2001, a

preliminary overview of the NMVC

program. The overview describes the

NMVC program generally and its

implementation during SBA’s fiscal year

2001 specifically. As a result of this

overview and of the many contacts SBA

staff have had with interested members

of the public, potential applicants are

fully aware of the fact that SBA believes

its funds for operational assistance grant

awards, appropriated to SBA for fiscal

year 2001, expire on September 30,

2001. SBA believes that potential

applicants are fully aware of the

implication of this limitation on SBA’s

appropriated funds. SBA must evaluate

and select applicants for conditional

approval, provide time for conditionally

approved applicants to raise capital and

grant matching resources, and finalize

legal documentation and agreements

with finally selected applicants, in the

time period between the application

deadline and September 30, 2001. An

additional 30-day delay will only

shorten this extremely tight time frame.

For these reasons, SBA believes that

potential applicants have a stronger

interest in the immediate

implementation of the NMVC program,

than in a further 30-day delay in

program implementation.

VII. Regulatory Compliance Section—

Compliance With Executive Orders

12866, 12988 and 13132, the Regulatory

Flexibility Act (5 U.S.C. 601–612), and

the Paperwork Reduction Act (44

U.S.C. Ch. 35)

Compliance With Executive Order

12866

The Office of Management and Budget

(OMB) has reviewed this rule as a

‘‘significant’’ regulatory action under

Executive Order 12866. A regulatory

assessment is set forth below.

Low-income communities in the

United States face multiple and varied

barriers to sustainable growth. But a

common obstacle for virtually all such

communities is that they are unable to

attract sufficient equity capital and

technical assistance for starting and

expanding businesses. Federal Reserve

Board Chair Alan Greenspan has

observed that equity capital is crucial to

the existence of an innovative and

productive business community,

especially in lower-income

communities. Yet the existing private

venture capital industry is heavily

concentrated in affluent, high

technology regions located in only a

handful of states.

In order to promote economic

development and address the unmet

equity needs of smaller businesses

located in low-income areas, Congress

passed and President Clinton signed

into law the legislation creating the

NMVC program. SBA will use these

regulations to implement and

administer the NMVC program. NMVC

companies will be newly formed forprofit investment companies with

private management. Their objective

will be to create an economic

infrastructure in underserved areas.

NMVC companies will accomplish this

by making equity investments in smaller

enterprises, primarily located in lowincome geographic areas. SBA

anticipates that this type of investing

will generate both financial and social

returns. The social returns can include

creating sustainable jobs at businesses

receiving investments from NMVC

companies, and encouraging such

businesses to provide much-needed new

products and services within

underserved areas.

SBA estimates that the NMVC

program will cost approximately $1

million annually to administer. The cost

to the government includes the costs of

staff (including benefits) and all other

overhead expenses. SBA proposes to

select participants for the NMVC

program and regulate NMVC operations

to ensure that public policy objectives

are being met. Toward that end, SBA

proposes to require NMVC companies to

provide regular performance reports and

take part in annual financial

examinations.

SBA estimates that it will cost a

NMVC company approximately $6,000

to apply for designation as a NMVC

company, not including a $5,000 grant

issuance fee due in advance at the time

of application. This includes the cost of

one staff person at a level comparable to

a Federal employee at a GS–13 grade

level spending 160 hours to complete

the application. After receiving

designation as a NMVC company, the

annual cost to the NMVC company will

be based on compliance with the

reporting requirements of the program.

SBA anticipates that compliance with

the reporting requirements of the

program will cost approximately $1,500.

This includes the cost of one staff

person at a level comparable to a

Federal employee at a GS–13 grade level

spending approximately 40 hours

preparing the required performance and

financial reports. The costs to NMVC

companies and SSBICs that choose to

participate in the grant aspect of the

program include approximately $1,500

to prepare the initial grant application

(approximately 40 hours of work), and

approximately $600 annually thereafter

to prepare the required quarterly status

reports (approximately 16 hours of

work). Again, these costs are estimated

based upon one staff person at a level

comparable to a Federal employee at a

GS–13 grade level. There also is a fee

payable by the NMVC company each

time SBA examines the company. This

rule sets forth a base fee for the

examination of $3,500.

SBA believes that there are no

alternatives to this regulatory action that

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28609

could more adequately address the

equity needs of the nation’s low-income

areas. In developing the regulations,

application package and reporting

materials SBA purposefully followed

proven industry practices. Based upon

the foregoing, SBA believes that its rule

implements the congressionally

mandated NMVC program in the most

cost effective and efficient manner.

Compliance With Executive Order

12988

SBA certifies that this rule is drafted,

to the extent practicable, in accordance

with the standards set forth in section

3 of Executive Order 12988.

Compliance With Executive Order

13132

For purposes of Executive Order

13132, SBA has determined that this

rule has no federalism implications

because the legislation authorizing it

addresses private, for-profit concerns

(NMVC companies) working directly

with entrepreneurs.

Compliance With Regulatory Flexibility

Act, 5 U.S.C. 601–612

The NMVC program is expected to

result in the creation of approximately

15–20 NMVC companies. The program’s

impact will be felt to a greater extent on

the small businesses that the NMVC

companies invest in and assist through

this program. However, SBA has

determined that this rule will not have

a significant economic impact on a

substantial number of small entities

within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601–612.

The legislation creating the NMVC

program authorizes $100 million to

guarantee debentures to NMVC

companies and $30 million for

operational assistance grants to NMVC

companies and SSBICs. In addition,

NMVC companies must raise capital

totaling $100 million, and NMVC

companies and SSBICs must raise grant

matching resources totaling $30 million.

Thus, the total funding allocation for the

NMVC program, including matching

funds raised by NMVC companies and

SSBICs, is $260 million. These funds

have been authorized for use over a

period of five years. Based upon

industry practices, it is highly unlikely

that the funds will be disbursed in total

in one year. A NMVC company’s

minimum life is 10 years and NMVC

companies’ investments are typically

made during their first five to seven

years of existence. Generally, a NMVC

company will fund three or at most four

businesses in one year out of the 20 to

30 businesses it will fund over its life.

The average size of an investment by

a community development company is

approximately $300,000. Based upon a

total funding allocation of $260 million

and an average investment in a small

business of $300,000, approximately

867 small businesses will be affected by

this program during the lives of the

NMVC companies authorized with this

legislation. Based upon 1997 Economic

Census data, SBA estimates that there

are approximately 5 million small

businesses in the United States and 867

constitutes less than 1% of those

businesses.

Further, NMVC companies must

invest in ‘‘smaller enterprises’’ which

are defined as businesses with a net

worth not greater than $6 million and

average net income of not greater than

$2 million. Based upon an average

investment of $300,000, an investment

in a business with a net worth of $6

million would equate to 5% of the

business’s net worth. A 5% investment

is not likely to have a significant effect

on a small business. Additionally,

industry practices indicate that while

the average investment in a particular

business is $300,000, this amount may

not be disbursed all at once. The average

investment per round in the industry is

approximately $185,000, which is only

3% of the business’s net worth.

Compliance with Paperwork Reduction

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

For purposes of the Paperwork

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

collection of information (‘‘collection’’)

for this program includes the NMVC

program application package and

reporting and recordkeeping

requirements. SBA previously requested

from the Office of Management and

Budget (‘‘OMB’’) an emergency

clearance of this collection. OMB

reviewed and approved the collection

and assigned OMB control number

3245–0332.

SBA has made the collection available

to the public on SBA’s web site at http:/

/www.sba.gov/inv and by calling Terri

Dennin at (202) 205–6234. SBA already

has provided the public with a 60-day

comment period on this collection (66

FR 7218). SBA received no comments

on the collection.

List of Subjects in 13 CFR Part 108

Community development,

Government securities, Grant

programs—business, Reporting and

recordkeeping requirements, Securities,

Small businesses.

For the reasons stated in the

preamble, the Small Business

Administration adds 13 CFR part 108 to

read as follows:

PART 108—NEW MARKETS VENTURE

CAPITAL (‘‘NMVC’’) PROGRAM

Subpart A—Introduction to Part 108

Sec.

108.10 Description of the New Markets

Venture Capital Program.

108.20 Legal basis and applicability of this

part 108.

108.30 Amendments to Act and regulations.

108.40 How to read this part 108.

Subpart B—Definition of Terms Used in

This Part 108

108.50 Definition of terms.

Subpart C—Qualifications for the NMVC

Program

Organizing a NMVC Company

108.100 Business form.

108.110 Qualified management.

108.120 Economic development primary

mission.

108.130 Identified Low Income Geographic

Areas.

108.140 SBA approval of initial

Management Expenses.

108.150 Management and ownership

diversity requirement.

108.160 Special rules for NMVC Companies

formed as limited partnerships.

Capitalizing a NMVC Company

108.200 Adequate capital for NMVC

Companies.

108.210 Minimum capital requirements for

NMVC Companies.

108.230 Private Capital for NMVC

Companies.

Subpart D—Application and Approval

Process for NMVC Company Designation

108.300 When and how to apply for

designation as a NMVC Company.

108.310 Contents of application.

108.320 Contents of comprehensive

business plan.

108.330 Grant issuance fee.

Subpart E—Evaluation and Selection of

NMVC Companies

108.340 Evaluation and selection—general.

108.350 Eligibility and completeness.

108.360 Evaluation criteria.

108.370 Conditional approval.

108.380 Final approval as a NMVC

Company.

Subpart F—Changes in Ownership,

Structure, or Control

Changes in Control or Ownership of NMVC

Company

108.400 Changes in ownership of 10

percent or more of NMVC Company but

no change of Control.

108.410 Changes in Control of NMVC

Company (through change in ownership

or otherwise).

108.420 Prohibition on exercise of

ownership or Control rights in NMVC

Company before SBA approval.

108.430 Notification to SBA of transactions

that may change ownership or Control.

28610 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

108.440 Standards governing prior SBA

approval for a proposed transfer of

Control.

108.450 Notification to SBA of pledge of

NMVC Company’s shares.

Restrictions on Common Control or

Ownership of Two or More NMVC

Companies

108.460 Restrictions on Common Control or

ownership of two (or more) NMVC

Companies.

Change in Structure of NMVC Company

108.470 SBA approval of merger,

consolidation, or reorganization of

NMVC Company.

Subpart G—Managing the Operations of a

NMVC Company

General Requirements

108.500 Lawful operations under the Act.

108.502 Representations to the public.

108.503 NMVC Company’s adoption of an

approved valuation policy.

108.504 Equipment and office

requirements.

108.506 Safeguarding the NMVC

Company’s assets/Internal controls.

108.507 Violations based on false filings

and nonperformance of agreements with

SBA.

108.509 Employment of SBA officials.

Management and Compensation

108.510 SBA approval of NMVC Company’s

Investment Adviser/Manager.

108.520 Management Expenses of a NMVC

Company.

Cash Management by a NMVC Company

108.530 Restrictions on investments of idle

funds by NMVC Companies.

Borrowing by NMVC Companies From NonSBA Sources

108.550 Prior approval of secured thirdparty debt of NMVC companies.

Voluntary Decrease in Regulatory Capital

108.585 Voluntary decrease in NMVC

Company’s Regulatory Capital.

Subpart H—Recordkeeping, Reporting, and

Examination Requirements for NMVC

Companies

Recordkeeping Requirements For NMVC

Companies

108.600 General requirement for NMVC

Company to maintain and preserve

records.

108.610 Required certifications for Loans

and Investments.

108.620 Requirements to obtain information

from Portfolio Concerns.

Reporting Requirements for NMVC

Companies

108.630 Requirement for NMVC companies

to file financial statements and

supplementary information with SBA

(SBA Form 468).

108.640 Requirement to file portfolio

financing reports (SBA Form 1031).

108.650 Requirement to report portfolio

valuations to SBA.

108.660 Other items required to be filed by

NMVC Company with SBA.

108.680 Reporting changes in NMVC

Company not subject to prior SBA

approval.

Examinations of NMVC Companies by SBA

for Regulatory Compliance

108.690 Examinations.

108.691 Responsibilities of NMVC

Company during examination.

108.692 Examination fees.

Subpart I—Financing of Small Businesses

by NMVC Companies

Determining the Eligibility of a Small

Business for NMVC Financing

108.700 Compliance with size standards in

part 121 of this chapter as a condition of

Assistance.

108.710 Requirement to finance LowIncome Enterprises.

108.720 Small Businesses that may be

ineligible for financing.

108.730 Financings which constitute

conflicts of interest.

108.740 Portfolio diversification

(‘‘overline’’ limitation).

108.760 How a change in size or activity of

a Portfolio Concern affects the NMVC

Company and the Portfolio Concern.

Structuring NMVC Company’s Financing of

Eligible Small Businesses

108.800 Financings in the form of equity

interests.

108.820 Financings in the form of

guarantees.

108.825 Purchasing securities from an

underwriter or other third party.

Limitations on Disposition of Assets

108.885 Disposition of assets to NMVC

Company’s Associates.

Subpart J—SBA Financial Assistance for

NMVC Companies (Leverage)

General Information About Obtaining

Leverage

108.1100 Type of Leverage and application

procedures.

108.1120 General eligibility requirement for

Leverage.

108.1130 Leverage fees payable by NMVC

Company.

108.1140 NMVC Company’s acceptance of

SBA remedies under § 108.1810.

Maximum Amount of Leverage for Which a

NMVC Company is Eligible

108.1150 Maximum amount of Leverage for

a NMVC Company.

Conditional Commitments by SBA to

Reserve Leverage for a NMVC Company

108.1200 SBA’s Leverage commitment to a

NMVC Company’application procedure,

amount, and term.

108.1220 Requirement for NMVC Company

to file financial statements at the time of

request for a draw.

108.1230 Draw-downs by NMVC Company

under SBA’s Leverage commitment.

108.1240 Funding of NMVC Company’s

draw request through sale to third-party.

Funding Leverage by Use of SBA Guaranteed

Trust Certificates (‘‘TCs’’)

108.1600 SBA authority to issue and

guarantee Trust Certificates.

108.1610 Effect of prepayment or early

redemption of Leverage on a Trust

Certificate.

108.1620 Functions of agents, including

Central Registration Agent, Selling Agent

and Fiscal Agent.

108.1630 SBA regulation of Brokers and

Dealers and disclosure to purchasers of

Leverage or Trust Certificates.

108.1640 SBA access to records of the CRA,

Brokers, Dealers and Pool or Trust

assemblers.

Miscellaneous

108.1700 Transfer by SBA of its interest in

a NMVC Company’s Leverage security.

108.1710 SBA authority to collect or

compromise its claims.

108.1720 Characteristics of SBA’s

guarantee.

Subpart K—NMVC Company’s

Noncompliance With Terms of Leverage

108.1810 Events of default and SBA’s

remedies for NMVC Company’s

noncompliance with terms of

Debentures.

Computation of NMVC Company’s Capital

Impairment

108.1830 NMVC Company’s Capital

Impairment definition and general

requirements.

108.1840 Computation of NMVC

Company’s Capital Impairment

Percentage.

Subpart L—Ending Operations as a NMVC

Company

108.1900 Termination of participation as a

NMVC Company.

Subpart M—Miscellaneous

108.1910 Non-waiver of SBA’s rights or

terms of Leverage security.

108.1920 NMVC Company’s application for

exemption from a regulation in this part

108.

108.1930 Effect of changes in this part 108

on transactions previously

consummated.

108.1940 Procedures for designation of

additional Low-Income Geographic

Areas

Subpart N—Requirements and Procedures

for Operational Assistance Grants to NMVC

Companies and SSBICs

108.2000 Operational Assistance grants to

NMVC Companies and SSBICs.

108.2010 Restrictions on use of Operational

Assistance grant funds.

108.2020 Amount of Operational Assistance

grant.

108.2030 Matching requirements.

108.2040 Reporting and recordkeeping

requirements.

Authority: 15 U.S.C. 689–689q and Pub. L.

106–554, 114 Stat. 2762A.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28611

Subpart A—Introduction to Part 108

§ 108.10 Description of the New Markets

Venture Capital Program.

The New Markets Venture Capital

(‘‘NMVC’’) Program is a developmental

venture capital program for the purpose

of promoting economic development

and the creation of wealth and job

opportunities in low-income geographic

areas and among individuals living in

such areas. SBA selects and then enters

into participation agreements with

selected newly formed venture capital

companies, and provides leverage in the

form of debenture guarantees to such

companies to allow them to make equity

capital investments in smaller

enterprises located in low-income

geographic areas. SBA also awards

grants to such companies and to

Specialized Small Business Investment

Companies so that they can provide

operational assistance to such smaller

enterprises in connection with such

investments.

§ 108.20 Legal basis and applicability of

this part 108.

The regulations in this part

implement Part B of Title III of the

Small Business Investment Act of 1958,

as amended (15 U.S.C. 661 et seq.). All

NMVC Companies must comply with all

applicable SBA regulations, accounting

guidelines and valuation guidelines for

NMVC Companies, available from SBA.

§ 108.30 Amendments to Act and

regulations.

A NMVC Company is subject to all

provisions of the Act and parts 108 and

112 of title 13 of the Code of Federal

Regulations.

§ 108.40 How to read this part 108.

(a) Center headings. All references in

this part to SBA forms, and instructions

for their preparation, are to the current

issue of such forms (available from

Investment Division, SBA). Center

headings are descriptive and are used

for convenience only. They have no

regulatory effect.

(b) Capitalizing defined terms. Terms

defined in § 108.50 have initial

capitalization in this part 108.

(c) ‘‘You.’’ The pronoun ‘‘you’’ as

used in this part 108 means a NMVC

Company unless otherwise noted.

Subpart B—Definition of Terms Used

in This Part 108

§ 108.50 Definition of terms.

The following definitions apply to

this part 108:

Act means the Small Business

Investment Act of 1958, as amended (15

U.S.C. 661 et seq.).

Affiliate or Affiliates has the meaning

set forth in § 121.103 of this chapter.

Applicant means any entity

submitting an application to SBA for

designation as a NMVC Company under

this part.

Articles mean articles of incorporation

or charter for a Corporate NMVC

Company, the partnership agreement or

certificate for a Partnership NMVC

Company, and the operating agreement

or other organizational documents for a

LLC NMVC Company.

Assistance or Assisted means

Financing of or management services

rendered to a Small Business by or

through a NMVC Company pursuant to

the Act and this part.

Associate of a NMVC Company means

any of the following:

(1)(i) An officer, director, employee or

agent of a Corporate NMVC Company;

(ii) A Control Person, employee or

agent of a Partnership NMVC Company;

(iii) A managing member of a LLC

NMVC Company;

(iv) An Investment Adviser/Manager

of any NMVC Company, including any

Person who contracts with a Control

Person of a Partnership NMVC

Company to be the Investment Adviser/

Manager of such NMVC Company; or

(v) Any Person regularly serving a

NMVC Company on retainer in the

capacity of attorney at law.

(2) Any Person who owns or controls,

or who has entered into an agreement to

own or control, directly or indirectly, at

least 10 percent of any class of stock of

a Corporate NMVC Company or 10

percent of the membership interests of

an LLC NMVC Company, or a limited

partner’s interest of at least 10 percent

of the partnership capital of a

Partnership NMVC Company. However,

neither a limited partner in a

Partnership NMVC Company nor a nonmanaging member in an LLC NMVC

Company is considered an Associate if

such Person is an entity Institutional

Investor whose investment in the

Partnership, including commitments,

represents no more than 33 percent of

the capital of the NMVC Company and

no more than five percent of such

Person’s net worth.

(3) Any officer, director, partner

(other than a limited partner), manager,

agent, or employee of any Associate

described in paragraph (1) or (2) of this

definition.

(4) Any Person that directly or

indirectly Controls, or is Controlled by,

or is under Common Control with, a

NMVC Company.

(5) Any Person that directly or

indirectly Controls, or is Controlled by,

or is under Common Control with, any

Person described in paragraphs (1) and

(2) of this definition.

(6) Any Close Relative of any Person

described in paragraphs (1), (2), (4), and

(5) of this definition.

(7) Any Secondary Relative of any

Person described in paragraphs (1), (2),

(4), and (5) of this definition.

(8) Any concern in which—

(i) Any person described in

paragraphs (1) through (6) of this

definition is an officer; general partner,

or managing member; or

(ii) Any such Person(s) singly or

collectively Control or own, directly or

indirectly, an equity interest of at least

10 percent (excluding interests that such

Person(s) own indirectly through

ownership interests in the NMVC

Company).

(9) Any concern in which any

Person(s) described in paragraph (7) of

this definition singly or collectively

own (including beneficial ownership) a

majority equity interest, or otherwise

have Control. As used in this paragraph

(9), ‘‘collectively’’ means together with

any Person(s) described in paragraphs

(1) though (7) of this definition.

(10) For the purposes of this

definition, if any Associate relationship

described in paragraphs (1) through (7)

of this definition exists at any time

within six months before or after the

date that a NMVC Company provides

Financing, then that Associate

relationship is considered to exist on

the date of the Financing.

(11) If any NMVC Company has any

ownership interest in another NMVC

Company, the two NMVC companies are

Associates of each other.

Capital Impairment has the meaning

set forth in § 108.1830(b).

Central Registration Agent or CRA

means one or more agents appointed by

SBA for the purpose of issuing TCs and

performing the functions enumerated in

§ 108.1620 and performing similar

functions for Debentures funded outside

the pooling process.

Close Relative of an individual means:

(1) A current or former spouse;

(2) A father, mother, guardian,

brother, sister, son, daughter; or

(3) A father-in-law, mother-in-law,

brother-in-law, sister-in-law, son-in-law,

or daughter-in-law.

Commitment means a written

agreement between a NMVC Company

and an eligible Small Business that

obligates the NMVC Company to

provide Financing (except a guarantee)

to that Small Business in a fixed or

determinable sum, by a fixed or

determinable future date. In this context

the term ‘‘agreement’’ means that there

has been agreement on the principal

economic terms of the Financing. The

28612 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

agreement may include reasonable

conditions precedent to the NMVC

Company’s obligation to fund the

commitment, but these conditions must

be outside the NMVC Company’s

control.

Common Control means a condition

where two or more Persons, either

through ownership, management,

contract, or otherwise, are under the

Control of one group or Person. Two or

more NMVC companies are presumed to

be under Common Control if they are

Affiliates of each other by reason of

common ownership or common officers,

directors, or general partners; or if they

are managed or their investments are

significantly directed either by a

common independent investment

advisor or managerial contractor, or by

two or more such advisors or

contractors that are Affiliates of each

other. This presumption may be

rebutted by evidence satisfactory to

SBA.

Community Development Finance

means debt and equity-type investments

in low-income communities.

Conditionally Approved NMVC

Company means a company that—

(1) Has applied for participation as a

NMVC Company, and

(2) SBA has conditionally approved to

participate in the NMVC program for a

specified period of time not to exceed

two years, subject to the company

fulfilling the requirements to be a

NMVC Company within that specified

period of time.

Control means the possession, direct

or indirect, of the power to direct or

cause the direction of the management

and policies of a NMVC Company or

other concern, whether through the

ownership of voting securities, by

contract, or otherwise.

Control Person means any Person that

controls a NMVC Company, either

directly or through an intervening

entity. A Control Person includes:

(1) A general partner of a Partnership

NMVC Company;

(2) Any Person serving as the general

partner, officer, director, or manager (in

the case of a limited liability company)

of any entity that controls a NMVC

Company, either directly or through an

intervening entity;

(3) Any Person that—

(i) Controls or owns, directly or

through an intervening entity, at least 10

percent of a Partnership NMVC

Company or any entity described in

paragraphs (1) or (2) of this definition;

and

(ii) Participates in the investment

decisions of the general partner of such

Partnership NMVC Company;

(4) Any Person that controls or owns,

directly or through an intervening

entity, at least 50 percent of a

Partnership NMVC Company or any

entity described in paragraphs (1) or (2)

of this definition.

Corporate NMVC Company. See

definition of NMVC Company in this

section.

Debentures means debt obligations

issued by NMVC companies pursuant to

section 355 of the Act and held or

guaranteed by SBA.

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. Consideration

must be paid for all options that you

acquire.

Developmental Venture Capital

means capital in the form of Equity

Capital Investments in Smaller

Enterprises made with a primary

objective of fostering economic

development in Low-Income

Geographic Areas.

Distribution means any transfer of

cash or non-cash assets to SBA, its agent

or Trustee, or to partners in a

Partnership NMVC Company, or to

shareholders in a Corporate NMVC

Company, or to members in an LLC

NMVC Company. Capitalization of

Retained Earnings Available for

Distribution constitutes a Distribution to

the NMVC Company’s non-SBA

partners, shareholders, or members.

Equity Capital Investments means

investments in the form of common or

preferred stock, limited partnership

interests, options, warrants, or similar

equity instruments, including

subordinated debt with equity features

if such debt provides only for interest

payments contingent upon and limited

to the extent of earnings. Equity Capital

Investments must not require

amortization. Equity Capital

Investments may be guaranteed by one

or more third parties; however, neither

Equity Capital Investments nor such

guarantee may be collateralized or

otherwise secured. Investments

classified as Debt Securities are not

precluded from qualifying as Equity

Capital Investments. Equity Capital

Investments may provide for royalty

payments only if the royalty payments

are based on the earnings of the

concern.

Equity Securities means stock of any

class in a corporation, stock options,

warrants, limited partnership interests

in a limited partnership, membership

interests in a limited liability company,

or joint venture interests.

Financing or Financed means

outstanding financial assistance

provided to a Small Business by a

NMVC Company, whether through:

(1) Loans;

(2) Debt Securities;

(3) Equity Securities;

(4) Guarantees; or

(5) Purchases of securities of a Small

Business through or from an

underwriter (see § 108.825).

Guaranty Agreement means the

contract entered into by SBA which is

a guarantee backed by the full faith and

credit of the United States Government

as to timely payment of principal and

interest on Debentures and SBA’s rights

in connection with such guarantee.

Includible Non-Cash Gains means

those non-cash gains (as reported on

SBA Form 468) that are realized in the

form of Publicly Traded and Marketable

securities or investment grade debt

instruments. For purposes of this

definition, investment grade debt

instruments means those instruments

that are rated ‘‘BBB’’ or ‘‘Baa’’, or better,

by Standard & Poor’s Corporation or

Moody’s Investors Service, respectively.

Non-rated debt may be considered to be

investment grade if a NMVC Company

obtains a written opinion from an

investment banking firm acceptable to

SBA stating that the non-rated debt

instrument is equivalent in risk to the

issuer’s investment grade debt.

Institutional Investor means:

(1) Entities. Any of the following

entities if the entity has a net worth

(exclusive of unfunded commitments

from investors) of at least $1 million, or

such higher amount as is specified in

this paragraph (1). (See also

§ 108.230(c)(4) for limitations on the

amount of an Institutional Investor’s

commitment that may be included in

Private Capital.)

(i) A State or National bank, trust

company, savings bank, or savings and

loan association.

(ii) An insurance company.

(iii) A 1940 Act Investment Company

or Business Development Company

(each as defined in the Investment

Company Act of 1940, as amended (15

U.S.C. 8a–1 et seq.).

(iv) A holding company of any entity

described in paragraph (l)(i), (ii) or (iii)

of this definition.

(v) An employee benefit or pension

plan established for the benefit of

employees of the Federal government,

any State or political subdivision of a

State, or any agency or instrumentality

of such government unit.

(vi) An employee benefit or pension

plan (as defined in the Employee

Retirement Income Security Act of 1974,

as amended (Public Law 93–406, 88

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28613

Stat. 829), excluding plans established

under section 401(k) of the Internal

Revenue Code of 1986 (26 U.S.C.

401(k)), as amended).

(vii) A trust, foundation or

endowment exempt from Federal

income taxation under the Internal

Revenue Code of 1986, as amended.

(viii) A corporation, partnership or

other entity with a net worth (exclusive

of unfunded commitments from

investors) of more than $10 million.

(ix) A State, a political subdivision of

a State, or an agency or instrumentality

of a State or its political subdivision.

(x) An entity whose primary purpose

is to manage and invest non-Federal

funds on behalf of at least three

Institutional Investors described in

paragraphs (l)(i) through (l)(ix) of this

definition, each of whom must have at

least a 10 percent ownership interest in

the entity.

(xi) Any other entity that SBA

determines to be an Institutional

Investor.

(2) Individuals. (i) Any of the

following individuals if he/she is also a

permanent resident of the United States:

(A) An individual who is an

Accredited Investor (as defined in the

Securities Act of 1933, as amended (15

U.S.C. 77a-77aa)) and whose

commitment to the NMVC Company is

backed by a letter of credit from a State

or National bank acceptable to SBA.

(B) An individual whose personal net

worth is at least $2 million and at least

ten times the amount of his or her

commitment to the NMVC Company.

The individual’s personal net worth

must not include the value of any equity

in his or her most valuable residence.

(C) An individual whose personal net

worth, not including the value of any

equity in his or her most valuable

residence, is at least $10 million.

(ii) Any individual who is not a

permanent resident of the United States

but who otherwise satisfies paragraph

(2)(i) of this definition provided such

individual has irrevocably appointed an

agent within the United States for the

service of process.

Investment Adviser/Manager means

any Person who furnishes advice or

assistance with respect to operations of

a NMVC Company under a written

contract executed in accordance with

the provisions of § 108.510.

Lending Institution means a concern

that is operating under regulations of a

state or Federal licensing, supervising,

or examining body, or whose shares are

publicly traded and listed on a

recognized stock exchange or NASDAQ

and which has assets in excess of $500

million; and which, in either case, holds

itself out to the public as engaged in the

making of commercial and industrial

loans and whose lending operations are

not for the purpose of financing its own

or an Associate’s sales or business

operations.

Leverage means financial assistance

provided to a NMVC Company by SBA

through the guaranty of a NMVC

Company’s Debentures, and any other

SBA financial assistance evidenced by a

security of the NMVC Company.

Leverageable Capital means

Regulatory Capital, excluding unfunded

commitments.

LLC NMVC Company. See definition

of NMVC Company in this section.

Loan means a transaction evidenced

by a debt instrument with no provision

for you to acquire Equity Securities.

Loans and Investments means

Portfolio securities, assets acquired in

liquidation of Portfolio securities,

operating concerns acquired, and notes

and other securities received, as set

forth in the Statement of Financial

Position of SBA Form 468.

Low-Income Enterprise means a

Smaller Enterprise that, as of the time of

the initial Financing, has its Principal

Office located in a Low-Income

Geographic Area.

Low-Income Geographic Area (‘‘LI

Area’’) means—

(1) Any population census tract (or in

the case of an area that is not tracted for

population census tracts, the equivalent

county division, as defined by the

Bureau of the Census of the United

States Department of Commerce for

purposes of defining poverty areas), if—

(i) The poverty rate for that census

tract is not less than 20 percent;

(ii) In the case of a tract—

(A) That is located within a

metropolitan area, 50 percent or more of

the households in that census tract have

an income equal to less than 60 percent

of the area median gross income; or

(B) That is not located within a

metropolitan area, the median

household income for such tract does

not exceed 80 percent of the statewide

median household income; or

(C) As determined by the

Administrator in accordance with

§ 108.1940 of this part, a substantial

population of Low-Income Individuals

reside, an inadequate access to

investment capital exists, or other

indications of economic distress exist in

that census tract; or

(2) Any area located within—

(i) A Historically Underutilized

Business Zone (‘‘HUBZone’’) as defined

in section 3(p) of the Small Business Act

and 13 CFR 126.103;

(ii) An Urban Empowerment Zone or

Urban Enterprise Community (as

designated by the Secretary of the

United States Department of Housing

and Urban Development); or

(iii) A Rural Empowerment Zone or

Rural Enterprise Community (as

designated by the Secretary of the

United States Department of

Agriculture).

Low-Income Individual means an

individual whose income (adjusted for

family size) does not exceed—

(1) For metropolitan areas, 80 percent

of the area median income; and

(2) For nonmetropolitan areas, the

greater of—

(i) 80 percent of the area median

income, or

(ii) 80 percent of the statewide

nonmetropolitan area median income.

Low-Income Investment means an

Equity Capital Investment in a LowIncome Enterprise.

Management Expenses has the

meaning set forth in § 108.520.

NAICS Manual means the latest issue

of the North American Industrial

Classification System Manual, prepared

by the Office of Management and

Budget, and available from the U.S.

Government Printing Office,

Superintendent of Documents, P.O. Box

371954, Pittsburgh, Pa., 15250–7954.

New Markets Tax Credit program

means the tax credit created by the

Consolidated Appropriations Act of

2001, Public Law 106–554 (114 Stat.

2762A), enacted December 21, 2000, to

be implemented by the Internal Revenue

Service, United States Department of

Treasury.

New Markets Venture Capital

Company or NMVC Company means a

corporation (Corporate NMVC

Company), a limited partnership

organized as required by § 108.160

(Partnership NMVC Company), or a

limited liability company (LLC NMVC

Company) that—

(1) Has been granted final approval by

SBA under § 108.390, and

(2) Has entered into a Participation

Agreement with SBA. For certain

purposes, the Entity General Partner of

a Partnership NMVC Company is treated

as if it were a NMVC Company (see

§ 108.160(a)).

1940 Act Company means a NMVC

Company which is registered under the

Investment Company Act of 1940 (15

U.S.C. 80a-1 et seq.).

1980 Act Company means a NMVC

Company which is registered under the

Small Business Investment Incentive

Act of 1980 (Public Law 96–447, 94 Stat.

2275).

Operational Assistance means

management, marketing, and other

technical assistance that assists a Small

Business with its business development.

28614 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

Original Issue Price means the price

paid by the purchaser for securities at

the time of issuance.

Participation Agreement means an

agreement between SBA and a company

to which SBA has granted final approval

under § 108.390, that—

(1) Details the company’s operating

plan and investment criteria; and

(2) Requires the company to make

investments in Smaller Enterprises at

least 80 percent of which Smaller

Enterprises are located in LI Areas.

Partnership NMVC Company. See

definition of NMVC Company in this

section.

Person means a natural person or

legal entity.

Pool means an aggregation of SBA

guaranteed Debentures approved by

SBA.

Portfolio means the securities

representing a NMVC Company’s total

outstanding Financing of Smaller

Enterprises. It does not include idle

funds or assets acquired in liquidation

of Portfolio securities.

Portfolio Concern means a Small

Business Assisted by a NMVC

Company.

Principal Office means the location

where the greatest number of the

concern’s employees at any one location

perform their work. However, for those

concerns whose ‘‘primary industry’’ (see

13 CFR 121.107) is service or

construction (see 13 CFR 121.201), the

determination of principal office

excludes the concern’s employees who

perform the majority of their work at

job-site locations to fulfill specific

contract obligations.

Private Capital has the meaning set

forth in § 108.230.

Publicly Traded and Marketable

means securities that are salable without

restriction or that are salable within 12

months pursuant to Rule 144 (17 CFR

230.144) of the Securities Act of 1933,

as amended, by the holder thereof, and

are of a class which is traded on a

regulated stock exchange, or is listed in

the Automated Quotation System of the

National Association of Securities

Dealers (NASDAQ), or has, at a

minimum, at least two market makers as

defined in the relevant sections of the

Securities Exchange Act of 1934, as

amended (15 U.S.C. 77b et seq.), and in

all cases the quantity of which can be

sold over a reasonable period of time

without having an adverse impact upon

the price of the stock.

Regulatory Capital means:

(1) General. Regulatory Capital means

Private Capital, excluding non-cash

assets contributed to a NMVC Company,

a Conditionally Approved NMVC

Company, or an Applicant, and noncash assets purchased by a

Conditionally Approved NMVC

Company or an Applicant, unless such

assets have been converted to cash or

have been approved by SBA for

inclusion in Regulatory Capital. For

purposes of this definition, sales of

contributed non-cash assets with

recourse or borrowing against such

assets shall not constitute a conversion

to cash.

(2) Exclusion of questionable

commitments. An investor’s

commitment to a NMVC Company,

Conditionally Approved NMVC

Company, or Applicant is excluded

from Regulatory Capital if SBA

determines that the collectability of the

commitment is questionable.

(3) Exclusion of amounts designated

for Operational Assistance match.

Regulatory Capital excludes any portion

of Private Capital that is designated as

matching resources in accordance with

§ 108.2030(b)(3).

Relevant Venture Capital Finance

means Equity Capital Investments in

small businesses in low-income

communities or benefiting low-income

communities.

Retained Earnings Available for

Distribution means Undistributed Net

Realized Earnings less any Unrealized

Depreciation on Loans and Investments

(as reported on SBA Form 468), and

represents the amount that a NMVC

Company may distribute to investors

(including SBA) as a profit Distribution,

or transfer to Private Capital.

SBA means the Small Business

Administration, 409 Third Street, SW.,

Washington, DC 20416.

Secondary Relative of an individual

means:

(1) A grandparent, grandchild, or any

other ancestor or lineal descendent who

is not a Close Relative;

(2) An uncle, aunt, nephew, niece, or

first cousin; or

(3) A spouse of any person described

in paragraph (1) or (2) of this definition.

Small Business means a small

business concern as defined in section

103(5) of the Act (including its

Affiliates), and which meets the criteria

applicable to the Small Business

Investment Company program as set

forth in part 121 of this chapter.

Small Business Investment Company

(SBIC) means a Licensee, as that term is

defined in § 107.50 of this chapter.

Smaller Enterprise means any Small

Business that:

(1) Together with its Affiliates has a

net worth of not more than $6.0 million

and average net income after Federal

income taxes (excluding any carry-over

losses) for the preceding two years no

greater than $2.0 million; or

(2) Both together with its Affiliates,

and by itself, meets the size standard of

§ 121.201 of this chapter at the time of

Financing for the industry in which it

is then primarily engaged.

Specialized Small Business

Investment Companies (SSBICs) means

any Small Business Investment

Company that—

(1) Invests solely in small business

concerns that contribute to a wellbalanced national economy by

facilitating ownership in such concerns

by persons whose participation in the

free enterprise system is hampered

because of social or economic

disadvantages; and

(2) Was licensed under section 301(d)

of the Small Business Investment Act, as

in effect before September 30, 1996.

Trust means the legal entity created

for the purpose of holding guaranteed

Debentures and the guaranty agreement

related thereto, receiving, holding and

making any related payments, and

accounting for such payments.

Trust Certificate Rate means a fixed

rate determined at the time Debentures

are pooled.

Trust Certificates (TCs) means

certificates issued by SBA, its agent or

Trustee and representing ownership of

all or a fractional part of a Trust or Pool

of Debentures.

Trustee means the trustee or trustees

of a Trust.

Undistributed Net Realized Earnings

means Undistributed Realized Earnings

less Non-cash Gains/Income, each as

reported on SBA Form 468.

Unrealized Appreciation means the

amount by which a NMVC Company’s

valuation of each of its Loans and

Investments, as determined by its Board

of Directors or General Partner(s) in

accordance with NMVC Company’s

valuation policies, exceeds the cost

basis thereof.

Unrealized Depreciation means the

amount by which a NMVC Company’s

valuation of each of its Loans and

Investments, as determined by its Board

of Directors or General Partner(s) in

accordance with NMVC Company’s

valuation policies, is below the cost

basis thereof.

Unrealized Gain (Loss) on Securities

Held means the sum of the Unrealized

Appreciation and Unrealized

Depreciation on all of a NMVC

Company’s Loans and Investments, less

estimated future income tax expense or

estimated realizable future income tax

benefit, as appropriate.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28615

Subpart C—Qualifications for the

NMVC Program

Organizing a NMVC Company

§ 108.100 Business form.

A NMVC Company must be a newly

formed for-profit entity or, subject to

§ 108.150, a newly formed for-profit

subsidiary of an existing entity. It must

be organized under State law solely for

the purpose of performing the functions

and conducting the activities

contemplated under the Act. It may be

organized as a corporation (‘‘Corporate

NMVC Company’’), a limited

partnership (‘‘Partnership NMVC

Company’’), or a limited liability

company (‘‘LLC NMVC Company’’).

§ 108.110 Qualified management.

An Applicant must show, to the

satisfaction of SBA, that its current or

proposed management team is qualified

and has the knowledge, experience, and

capability in Community Development

Finance or Relevant Venture Capital

Finance, necessary for investing in the

types of businesses contemplated by the

Act, the regulations in this part and its

business plan. In determining whether

an Applicant’s current or proposed

management team has sufficient

qualifications, SBA will consider

information provided by the Applicant

and third parties concerning the

background, capability, education,

training and reputation of its general

partners, managers, officers, key

personnel, and investment committee

and governing board members. The

Applicant must designate at least one

individual as the official responsible for

contact with SBA.

§ 108.120 Economic development primary

mission.

The primary mission of a NMVC

Company must be economic

development of one or more LI Areas.

§ 108.130 Identified Low Income

Geographic Areas.

A NMVC Company must identify the

specific LI Areas in which it intends to

make Developmental Venture Capital

investments and provide Operational

Assistance under the NMVC program.

§ 108.140 SBA approval of initial

Management Expenses.

A NMVC Company must have its

Management Expenses approved by

SBA at the time of designation as a

NMVC Company. (See § 108.520 for the

definition of Management Expenses.)

§ 108.150 Management and ownership

diversity requirement.

(a) Diversity requirement. You must

have diversity between management

and ownership in order to be a NMVC

Company. To establish diversity, you

must meet the requirements in

paragraphs (b) and (c) of this section.

(b) Percentage ownership

requirement. No Person or group of

Persons who are Affiliates of one

another may own or control, directly or

indirectly, more than 70 percent of your

Regulatory Capital or your Leverageable

Capital.

(c) Non-affiliation requirement. At

least 30 percent of your Regulatory

Capital and Leverageable Capital must

be owned and controlled by Persons

unaffiliated with your management and

unaffiliated with each other, and whose

investments are significant in dollar and

percentage terms as determined by SBA.

Such Persons must not be your

Associates (except for their status as

your shareholders, limited partners or

members) and must not Control, be

Controlled by, or be under Common

Control with any of your Associates. A

single ‘‘acceptable’’ Institutional

Investor may be substituted for two or

three of the three investors who are

otherwise required. The following

Institutional Investors are ‘‘acceptable’’

for this purpose:

(1) Entities whose overall activities

are regulated and periodically examined

by state, Federal or other governmental

authorities satisfactory to SBA;

(2) Entities listed on the New York

Stock Exchange;

(3) Entities that are publicly-traded

and that meet both the minimum

numerical listing standards and the

corporate governance listing standards

of the New York Stock Exchange:

(4) Public or private employee

pension funds;

(5) Trusts, foundations, or

endowments, but only if exempt from

Federal income taxation; and

(6) Other Institutional Investors

satisfactory to SBA.

(d) Voting requirement. The investors

required for you to satisfy diversity may

not delegate their voting rights to any

Person who is your Associate, or who

Controls, is Controlled by, or is under

Common Control with any of your

Associates, without prior SBA approval.

(e) Requirement to maintain diversity.

You must maintain managementownership diversity while you are a

NMVC Company. If, at any time, you no

longer have the required managementownership diversity, you must:

(1) Notify SBA within 10 days; and

(2) Re-establish diversity within six

months.

§ 108.160 Special rules for NMVC

Companies formed as limited partnerships.

(a) Entity General Partner. (1) A

general partner which is a corporation,

limited liability company or partnership

(an ‘‘Entity General Partner’’) shall be

organized under state law solely for the

purpose of serving as the general partner

of one or more NMVC companies.

(2) SBA must approve any person

who will serve as an officer, director,

manager, or general partner of the Entity

General Partner. This provision must be

stated in an Entity General Partner’s

Certificate of Incorporation, operating

agreement, limited partnership

agreement or other similar governing

instrument.

(3) An Entity General Partner is

subject to the same examination and

reporting requirements as a NMVC

Company under sections 361 and 362 of

the Act. The restrictions and obligations

imposed upon a NMVC Company by

§§ 108.1810, 108.30, 108.410 through

108.450, 108.470, 108.500, 108.510,

108.585, 108.600, 108.680, 108.690

through 108.692, and 108.1910 apply

also to an Entity General Partner of a

NMVC Company.

(4) The general partner(s) of your

Entity General Partner(s) will be

considered your general partner.

(5) If your Entity General Partner is a

limited partnership, its limited partners

may be considered your Control

Person(s) if they meet the definition for

Control Person in § 108.50.

(b) Other requirements for Partnership

NMVC Companies. If you are a

Partnership NMVC Company:

(1) You must have a minimum

duration of 10 years or two years

following the maturity of your lastmaturing Leverage security, whichever

is longer. After 10 years, if all Leverage

has been repaid or redeemed and all

amounts due SBA, its agent, or Trustee

have been paid, the Partnership NMVC

Company may be terminated by a vote

of your partners;

(2) None of your general partner(s)

may be removed or replaced by your

limited partners without prior written

approval of SBA;

(3) Any transferee of, or successor in

interest to, your general partner shall

have only the rights and liabilities of a

limited partner pending SBA’s written

approval of such transfer or succession;

and

(4) You must incorporate all the

provisions in this paragraph (b) in your

limited partnership agreement.

(c) Obligations of a Control Person.

All Control Persons are bound by the

disciplinary provisions of sections 365

and 366 of the Act and by the conflictof-interest rules under § 108.730. The

term NMVC Company, as used in

§§ 108.30, 108.460, and 108.680,

includes all of the NMVC Company’s

Control Persons. The conditions

28616 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

specified in § 108.1810 and § 108.1910

apply to all general partners.

(d) Liability of general partner for

partnership debts to SBA. Subject to

section 365 of the Act, your general

partner is not liable solely by reason of

its status as a general partner for

repayment of any Leverage or debts you

owe to SBA unless SBA, in the exercise

of reasonable investment prudence, and

with regard to your financial soundness,

determines otherwise prior to the

purchase or guaranty of your Leverage.

(e) Special Leverage requirement.

Before your first issuance of Leverage,

you must furnish SBA with evidence

that you qualify as a partnership for tax

purposes, either by a ruling from the

Internal Revenue Service or by an

opinion of counsel.

Capitalizing a NMVC Company

§ 108.200 Adequate capital for NMVC

Companies.

You must meet the requirements of

§§ 108.200–108.230 in order to qualify

for designation as a NMVC Company

and to receive Leverage.

§ 108.210 Minimum capital requirements

for NMVC Companies.

You must have Regulatory Capital of

at least $5,000,000 and Leverageable

Capital of at least $500,000 to become a

NMVC Company.

§ 108.230 Private Capital for NMVC

Companies.

(a) General. Private Capital means the

contributed capital of a NMVC

Company, plus unfunded binding

commitments by Institutional Investors

(including commitments evidenced by a

promissory note) to contribute capital to

a NMVC Company.

(b) Contributed capital. For purposes

of this section, contributed capital

means the paid-in capital and paid-in

surplus of a Corporate NMVC Company,

the members’ contributed capital of a

LLC NMVC Company, or the partners’

contributed capital of a Partnership

NMVC Company, in each case subject to

the limitations in paragraph (c) of this

section.

(c) Exclusions from Private Capital.

Private Capital does not include:

(1) Funds borrowed by a NMVC

Company from any source.

(2) Funds obtained through the

issuance of Leverage.

(3) Funds obtained directly from any

Federal agency or department.

(4) Any portion of a commitment from

an Institutional Investor with a net

worth of less than $10 million that

exceeds 10 percent of such Institutional

Investor’s net worth.

(d) Non-cash capital contributions.

Capital contributions in a form other

than cash are excluded from Private

Capital.

(e) Contributions with borrowed

funds. You may not accept any capital

contribution made with funds borrowed

by a Person seeking to own an equity

interest (whether direct or indirect,

beneficial or of record) of at least 10

percent of your Private Capital. This

exclusion does not apply if:

(1) Such Person’s net worth is at least

twice the amount borrowed; or

(2) SBA gives its prior written

approval of the capital contribution.

Subpart D—Application and Approval

Process for NMVC Company

Designation

§ 108.300 When and how to apply for

designation as a NMVC Company.

(a) Notice of Funds Availability (‘‘NOFA’’).

SBA will publish a NOFA in the

Federal Register, advising potential

applicants of the availability of funds

for the NMVC program. An entity may

then submit an application for

designation as a NMVC Company. When

submitting its application, an Applicant

must comply with both these

regulations and any requirements

specified in the NOFA, including

submission deadlines. The NOFA may

specify limitations, special rules,

procedures, and restrictions for a

particular funding round.

(b) Application form. An Applicant

must apply for designation as a NMVC

Company using the application packet

provided by SBA. Upon receipt of an

application, SBA may request clarifying

or technical information on the

materials submitted as part of the

application.

§ 108.310 Contents of application.

Each Applicant must submit a

complete application, including the

following:

(a) Amounts. The Applicant must

indicate the amounts of—

(1) Regulatory Capital it proposes to

raise;

(2) Binding commitments for

contributions in cash or in-kind it

proposes to raise, and/or an annuity it

proposes to purchase, in accordance

with the requirements of § 108.2030, as

its matching resources for its

Operational Assistance grant award (the

aggregate of which must be not less than

30 percent of the Regulatory Capital it

proposes to raise under paragraph (a)(1)

of this section).

(b) Comprehensive business plan. The

Applicant must submit a comprehensive

business plan covering at least a fiveyear period, addressing the specific

items described in § 108.320, and which

demonstrates that the Applicant has the

capacity to operate successfully as a

NMVC Company.

(c) New Markets Tax Credit program.

Applicant must address if and to what

extent it intends to conform its activities

to the New Markets Tax Credit laws. If

Applicant plans to seek a New Markets

Tax Credit, Applicant also must state

the amount of tax credit allocation it

intends to seek.

§ 108.320 Contents of comprehensive

business plan.

(a) Executive summary. The executive

summary must include a description

of—

(1) The Applicant;

(2) Its strategy for how it proposes to

make successful Developmental Venture

Capital investments in identified LI

Areas;

(3) The markets in the LI Areas it

proposes to serve; and

(4) How it intends to work with

community organizations in and be

accountable to the residents of

identified LI Areas in order to facilitate

its Developmental Venture Capital

investments.

(b) Capacity, skills, and experience of

the management team. An Applicant

must provide information generally as

to the background, capability,

education, reputation and training of its

general partners, managers, officers, key

personnel, investment committee and

governing board members. The

Applicant also must provide

information specifically on these

individuals’ qualifications and

reputation in the areas of Community

Development Finance and/or Relevant

Venture Capital Finance, including the

impact of these individuals’ activities in

these areas.

(c) Market analysis. An Applicant

must provide an analysis of the LI Areas

in which it intends to focus its

Developmental Venture Capital

investments and Operational Assistance

to Smaller Enterprises, demonstrating

that the Applicant understands the

market and the unmet capital needs in

such areas and how its activities will

meet these unmet capital needs through

Developmental Venture Capital

investments and will have a positive

economic impact on those areas. The

analysis must include a description of

the extent of the economic distress in

the identified LI Areas. An Applicant

also must analyze the extent of the

demand in such areas for

Developmental Venture Capital

investments and any factors or trends

that may affect the Applicant’s ability to

make effective Developmental Venture

Capital investments.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28617

(d) Operational capacity and

investment strategies. An Applicant

must submit information concerning its

policies and procedures for

underwriting and approving its

Developmental Venture Capital

investments, monitoring its portfolio,

and maintaining internal controls and

operations.

(e) Regulatory Capital. An Applicant

must include a detailed description of

how it plans to raise its Regulatory

Capital. An Applicant must discuss its

potential sources of Regulatory Capital,

the estimated timing on raising such

funds, and the extent of the expressions

of interest to commit such funds to the

Applicant.

(f) Plan for providing Operational

Assistance. An Applicant must describe

how it plans to use its grant funds to

provide Operational Assistance to

Smaller Enterprises in which it will

make Developmental Venture Capital

investments. Its plan must address the

types of Operational Assistance it

proposes to provide, and how it plans

to provide the Operational Assistance

through the use of licensed

professionals, when necessary, either

from its own staff or from outside

entities.

(g) Matching resources for

Operational Assistance grant. An

Applicant must include a detailed

description of how it plans to obtain

binding commitments for cash or inkind contributions, and/or to purchase

an annuity, to match the funds

requested from SBA for the Applicant’s

Operational Assistance grant. If it

proposes to obtain commitments for

cash or in-kind contributions, it also

must estimate the ratio of cash to inkind contributions (in no event may inkind contributions exceed 50 percent of

the total contributions). Applicant must

discuss its potential sources of matching

resources, the estimated timing on

raising such funds, and the extent of the

expressions of interest to commit such

funds to the Applicant. Potential

sources of matching resources must

satisfy the requirements in

§ 108.2030(b)(1).

(h) Projected amount of investment in

LI Areas. An Applicant must describe

the amount of its total Regulatory

Capital and Leverage that it proposes to

invest in Smaller Enterprises located in

LI Areas, as compared to the amount

that it proposes to invest in Small

Businesses located outside of LI Areas.

(i) Projected impact. An Applicant

must describe the criteria and economic

measurements to be used to evaluate

whether and to what extent it has met

the objectives of the NMVC program. It

must include:

(1) A description of the extent to

which it will concentrate its

Developmental Venture Capital

investments and Operational Assistance

activities in identified LI Areas;

(2) An estimate of the social,

economic, and community development

benefits to be created within identified

LI Areas over the next five years or more

as a result of its activities;

(3) A description of the criteria to be

used to measure the benefits created as

a result of its activities;

(4) A discussion about the amount of

such benefits created that it will

consider to constitute successfully

meeting the objectives of the NMVC

program.

(j) Affiliates and business

relationships. Applicant must submit

information regarding the management

and financial strength of any parent or

holding entity, affiliated firm or entity,

or any other firm or entity essential to

the success of the Applicant’s business

plan.

§ 108.330 Grant issuance fee.

An Applicant must pay to SBA a grant

issuance fee of $5,000. An Applicant

must submit this fee in advance, at the

time of application submission. If SBA

does not select an Applicant as a

Conditionally Approved NMVC

Company or designate an Applicant as

a NMVC Company, SBA will refund this

fee to the Applicant.

Subpart E—Evaluation and Selection

of NMVC Companies

§ 108.340 Evaluation and selection—

general.

SBA will evaluate and select an

Applicant to participate in the NMVC

program solely at SBA’s discretion,

based on SBA’s review of the

Applicant’s application materials,

interviews or site visits with the

Applicant (if any), and background

investigations conducted by SBA and

other Federal agencies. SBA’s

evaluation and selection process is

intended to—

(a) Ensure that Applicants are

evaluated on a competitive basis and in

a fair and consistent manner;

(b) Take into consideration the unique

proposals presented by Applicants;

(c) Ensure that each Applicant that

SBA designates as a NMVC Company

can fulfill successfully the goals of its

comprehensive business plan; and

(d) Ensure that SBA selects

Applicants in such a way as to promote

Developmental Venture Capital

investments nationwide and in both

urban and rural areas.

§ 108.350 Eligibility and completeness.

SBA will not consider any application

that is not complete or that is submitted

by an Applicant that does not meet the

eligibility criteria described in subpart C

of this part. SBA, at its sole discretion,

may request from an Applicant

additional information concerning

eligibility criteria or easily completed

portions of the application in order to

allow SBA to consider that Applicant’s

application.

§ 108.360 Evaluation criteria.

SBA will evaluate and select an

Applicant for participation in the

NMVC program by considering the

following criteria—

(a) The quality of the Applicant’s

comprehensive business plan in terms

of meeting the objectives of the NMVC

program;

(b) The likelihood that the Applicant

will fulfill the goals described in its

comprehensive business plan;

(c) The capability of the Applicant’s

management team;

(d) The strength and likelihood for

success of the Applicant’s operations

and investment strategies;

(e) The need for Developmental

Venture Capital investments in the LI

Areas in which the Applicant intends to

invest;

(f) The extent to which the Applicant

will concentrate its activities on serving

the LI Areas in which it intends to

invest, including the ratio of resources

that it proposes to invest in such areas

as compared to other areas;

(g) The Applicant’s demonstrated

understanding of the markets in the LI

Areas in which it intends to focus its

activities;

(h) The likelihood that and the time

frame within which the Applicant will

be able to—

(1) Raise the Regulatory Capital it

proposes to raise for its investments,

and

(2) Obtain the binding commitments

for contributions in cash or in-kind and/

or an annuity it proposes to obtain as its

matching resources for its Operational

Assistance grant award;

(i) The strength of the Applicant’s

proposal to provide Operational

Assistance to Smaller Enterprises in

which it plans to invest;

(j) The extent to which the activities

proposed by the Applicant will promote

economic development and the creation

of wealth and job opportunities in the

LI Areas in which it intends to invest

and among individuals living in LI

Areas; and

(k) The strength of the Applicant’s

application compared to applications

submitted by other Applicants

28618 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

intending to invest in the same or

proximate LI Areas.

§ 108.370 Conditional approval.

From among the Applicants

submitting eligible and complete

applications, SBA will select a number

of Applicants and will conditionally

approve such selected Applicants to

participate in the NMVC program. SBA

will give each such Conditionally

Approved NMVC Company a specific

period of time, not to exceed two years,

to satisfy the requirements to become a

NMVC Company.

§ 108.380 Final approval as a NMVC

Company.

(a) General rule. With respect to each

Conditionally Approved NMVC

Company, SBA will either:

(1) Grant final approval to participate

in the NMVC program and designate

such company as a NMVC Company, if

such Conditionally Approved NMVC

Company:

(i) Within the specific period of time

SBA gave to it when SBA conditionally

approved it for participation in the

NMVC program, has raised:

(A) The amount of Regulatory Capital

set forth in its application, pursuant to

§ 108.310(a)(1), which must be at least

$5,000,000; and

(B) The amount of matching resources

for its Operational Assistance grant

award set forth in its application,

pursuant to § 108.310(a)(2), which must

be at least $1,500,000 or 30 percent of

the Regulatory Capital it raised,

whichever is greater; and

(ii) Enters into a Participation

Agreement with SBA; or

(2) Revoke SBA’s conditional

approval of the company, at which time

it is no longer a Conditionally Approved

NMVC Company and must not

participate in the NMVC program or

represent itself as a Conditionally

Approved NMVC Company.

(b) Exception to requirement to raise

matching resources. (1) General. At its

discretion and based upon a showing of

good cause, SBA may consider a

Conditionally Approved NMVC

Company to have satisfied the

requirement in paragraph (a)(1)(i)(B) of

this section to raise matching resources

in the amount of at least 30 percent of

its Regulatory Capital if the

Conditionally Approved NMVC

Company—

(i) Already has raised at least 20

percent of the total amount of required

matching resources; and

(ii) Has a viable plan that reasonably

projects its capacity to raise the

remainder of the required amount of

matching resources.

(2) Request for exception. Before the

expiration of the time period given to it

by SBA to meet the requirements to

become a NMVC Company, a

Conditionally Approved NMVC

Company may submit to SBA a request

that SBA grant the exception described

in paragraph (b)(1) of this section. Such

Conditionally Approved NMVC must

present to SBA evidence of good cause

for such request, as well as evidence

supporting the elements of the

exception described in paragraph (b)(1)

of this section.

(3) No applicability to Regulatory

Capital. The exception described in this

section applies only to matching

resources for the Operational Assistance

grant award. Under no circumstances

will SBA designate a Conditionally

Approved NMVC Company as a NMVC

Company if such Conditionally

Approved NMVC Company does not

raise the required minimum amount of

Regulatory Capital within the time

period SBA gave it to do so.

Subpart F—Changes in Ownership,

Structure, or Control

Changes in Control or Ownership of

NMVC Company

§ 108.400 Changes in ownership of 10

percent or more of NMVC Company but no

change of Control.

You must obtain SBA’s prior written

approval for any proposed transfer or

issuance of ownership interests that

results in the ownership (beneficial or of

record) by any Person, or group of

Persons acting in concert, of at least 10

percent of any class of your stock,

partnership capital or membership

interests.

§ 108.410 Changes in Control of NMVC

Company (through change in ownership or

otherwise).

You must obtain SBA’s prior written

approval for any proposed transaction

or event that results in Control by any

Person(s) not previously approved by

SBA.

§ 108.420 Prohibition on exercise of

ownership or Control rights in NMVC

Company before SBA approval.

Without prior written SBA approval,

no change of ownership or Control may

take effect and no officer, director,

employee or other Person acting on your

behalf shall:

(a) Register on your books any transfer

of ownership interest to the proposed

new owner(s);

(b) Permit the proposed new owner(s)

to exercise voting rights with respect to

such ownership interest (including

directly or indirectly procuring or

voting any proxy, consent or

authorization as to such voting rights at

any meeting of shareholders, partners or

members);

(c) Permit the proposed new owner(s)

to participate in any manner in the

conduct of your affairs (including

exercising control over your books,

records, funds or other assets;

participating directly or indirectly in

any disposition thereof; or serving as an

officer, director, partner, manager,

employee or agent); or

(d) Allow ownership or Control to

pass to another Person.

§ 108.430 Notification to SBA of

transactions that may change ownership or

Control.

You must promptly notify SBA as

soon as you have knowledge of

transactions or events that may result in

a transfer of Control or ownership of at

least 10 percent of your capital. If there

is any doubt as to whether a particular

transaction or event will result in such

a change, report the facts to SBA.

§ 108.440 Standards governing prior SBA

approval for a proposed transfer of Control.

SBA approval is contingent upon full

disclosure of the real parties in interest,

the source of funds for the new owners’

interest, and other data requested by

SBA. As a condition of approving a

proposed transfer of control, SBA may:

(a) Require an increase in your

Regulatory Capital;

(b) Require the new owners or the

transferee’s Control Person(s) to assume,

in writing, personal liability for your

Leverage, effective only in the event of

their direct or indirect participation in

any transfer of Control not approved by

SBA; or

(c) Require compliance with any other

conditions set by SBA, including

compliance with the requirements for

minimum capital and managementownership diversity as in effect at such

time for new NMVC Companies.

§ 108.450 Notification to SBA of pledge of

NMVC Company’s shares.

(a) You must notify SBA in writing,

within 30 calendar days, of the terms of

any transaction in which:

(1) Any Person, or group of Persons

acting in concert, pledges shares of your

stock (or equivalent ownership

interests) as collateral for indebtedness;

and

(2) The shares pledged are at least 10

percent of your Regulatory Capital.

(b) If the transaction creates a change

of ownership or Control, you must

comply with § 108.400 or § 108.410, as

appropriate.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28619

Restrictions on Common Control or

Ownership of Two or More NMVC

Companies

§ 108.460 Restrictions on Common

Control or ownership of two (or more)

NMVC Companies.

Without SBA’s prior written approval,

you must not have an officer, director,

manager, Control Person, or owner (with

a direct or indirect ownership interest of

at least 10 percent) who is also:

(a) An officer, director, manager,

Control Person, or owner (with a direct

or indirect ownership interest of at least

10 percent) of another NMVC Company;

or

(b) An officer or director of any

Person that directly or indirectly

controls, or is controlled by, or is under

Common Control with, another NMVC

Company.

Change in Structure of NMVC Company

§ 108.470 SBA approval of merger,

consolidation, or reorganization of NMVC

Company.

You may not merge, consolidate,

change form of organization

(corporation or partnership) or

reorganize without SBA’s prior written

approval. Any such merger or

consolidation will be subject to

§ 108.440.

Subpart G—Managing the Operations

of a NMVC Company

General Requirements

§ 108.500 Lawful operations under the Act.

You must engage only in the activities

contemplated by the Act and in no other

activities.

§ 108.502 Representations to the public.

You may not represent or imply to

anyone that the SBA, the U.S.

Government or any of its agencies or

officers has approved any ownership

interests you have issued or obligations

you have incurred. Be certain to include

a statement to this effect in any

solicitation to investors. Example: You

may not represent or imply that ‘‘SBA

stands behind the NMVC Company’’ or

that ‘‘Your capital is safe because SBA’s

experts review proposed investments to

make sure they are safe for the NMVC

Company.’’

§ 108.503 NMVC Company’s adoption of

an approved valuation policy.

(a) Valuation guidelines. You must

prepare, document and report the

valuations of your Loans and

Investments in accordance with the

Valuation Guidelines for SBICs issued

by SBA. These guidelines may be

obtained from SBA’s Investment

Division.

(b) SBA approval of valuation policy.

You must have a written valuation

policy approved by SBA for use in

determining the value of your Loans and

Investments. You must either:

(1) Adopt without change the model

valuation policy set forth in section III

of the Valuation Guidelines for SBICs;

or

(2) Obtain SBA’s prior written

approval of an alternative valuation

policy.

(c) Responsibility for valuations. Your

board of directors, managing members,

or general partner(s) will be solely

responsible for adopting your valuation

policy and for using it to prepare

valuations of your Loans and

Investments for submission to SBA. If

SBA reasonably believes that your

valuations, individually or in the

aggregate, are materially misstated, it

reserves the right to require you to

engage, at your expense, an independent

third party acceptable to SBA to

substantiate the valuations.

(d) Frequency of valuations. (1) You

must value your Loans and Investments

at the end of the second quarter of your

fiscal year, and at the end of your fiscal

year.

(2) On a case-by-case basis, SBA may

require you to perform valuations more

frequently.

(3) You must report material adverse

changes in valuations at least quarterly,

within thirty days following the close of

the quarter.

(e) Review of valuations by

independent public accountant. (1) For

valuations performed as of the end of

your fiscal year, your independent

public accountant must review your

valuation procedures and the

implementation of such procedures,

including adequacy of documentation.

(2) The independent public

accountant’s report on your audited

annual financial statements (SBA Form

468) must include a statement that your

valuations were prepared in accordance

with your approved valuation policy.

§ 108.504 Equipment and office

requirements.

(a) Computer capability. You must

have a personal computer with a

modem, and be able to use this

equipment to prepare reports (using

SBA provided software) and transmit

them to SBA. In addition, you must

have access to the Internet and the

capability to send and receive electronic

mail via the Internet.

(b) Facsimile capability. You must be

able to receive facsimile messages 24

hours per day at your primary office.

(c) Accessible office. You must

maintain an office that is convenient to

the public and is open for business

during normal working hours.

§ 108.506 Safeguarding the NMVC

Company’s assets/Internal controls.

You must adopt a plan to safeguard

your assets and monitor the reliability of

your financial data, personnel, Portfolio,

funds and equipment. You must provide

your bank and custodian with a certified

copy of your resolution or other formal

document describing your control

procedures.

§ 108.507 Violations based on false filings

and nonperformance of agreements with

SBA.

The following shall constitute a

violation of this part:

(a) Nonperformance. Nonperformance

of any of the requirements of any

Debenture or of any written agreement

with SBA.

(b) False statement. In any document

submitted to SBA:

(1) Any false statement knowingly

made; or

(2) Any misrepresentation of a

material fact; or

(3) Any failure to state a material fact.

A material fact is any fact that is

necessary to make a statement not

misleading in light of the circumstances

under which the statement was made.

§ 108.509 Employment of SBA officials.

Without SBA’s prior written approval,

for a period of two years after the date

of your most recent issuance of Leverage

(or the receipt of any SBA Assistance as

defined in part 105 of this chapter), you

are not permitted to employ, offer

employment to, or retain for

professional services, any person who:

(a) Served as an officer, attorney,

agent, or employee of SBA on or within

one year before such date; and

(b) As such, occupied a position or

engaged in activities which, in SBA’s

determination, involved discretion with

respect to the granting of SBA

Assistance.

Management and Compensation

§ 108.510 SBA approval of NMVC

Company’s Investment Adviser/Manager.

You may employ an Investment

Adviser/Manager who will be subject to

the supervision of your board of

directors, managing members, or general

partner. If you have Leverage or plan to

seek Leverage, you must obtain SBA’s

prior written approval of the

management contract. SBA’s approval of

an Investment Adviser/Manager for one

NMVC Company does not indicate

approval of that manager for any other

NMVC Company.

(a) Management contract. The

contract must:

28620 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

(1) Specify the services the

Investment Adviser/Manager will

render to you and to the Small

Businesses in your Portfolio; and

(2) Indicate the basis for computing

Management Expenses.

(b) Material change to approved

management contract. If there is a

material change, both you and SBA

must approve such change in advance.

If you are uncertain if the change is

material, submit the proposed revision

to SBA.

§ 108.520 Management Expenses of a

NMVC Company.

SBA must approve your initial

Management Expenses and any

increases in your Management

Expenses.

(a) Definition of Management

Expenses. Management Expenses

include:

(1) Salaries;

(2) Office expenses;

(3) Travel;

(4) Business development;

(5) Office and equipment rental;

(6) Bookkeeping; and

(7) Expenses related to developing,

investigating and monitoring

investments.

(b) Management Expenses do not

include services provided by

specialized outside consultants, outside

lawyers and independent public

accountants, if they perform services not

generally performed by a venture capital

company.

Cash Management by a NMVC

Company

§ 108.530 Restrictions on investments of

idle funds by NMVC Companies.

(a) Permitted investments of idle

funds. Funds not invested in Small

Businesses must be maintained in:

(1) Direct obligations of, or obligations

guaranteed as to principal and interest

by, the United States, which mature

within 15 months from the date of the

investment; or

(2) Repurchase agreements with

federally insured institutions, with a

maturity of seven days or less. The

securities underlying the repurchase

agreements must be direct obligations

of, or obligations guaranteed as to

principal and interest by, the United

States. The securities must be

maintained in a custodial account at a

federally insured institution; or

(3) Certificates of deposit with a

maturity of one year or less, issued by

a federally insured institution; or

(4) A deposit account in a federally

insured institution, subject to a

withdrawal restriction of one year or

less; or

(5) A checking account in a federally

insured institution; or

(6) A reasonable petty cash fund.

(b) Deposit of funds in excess of the

insured amount. (1) You are permitted

to deposit funds in a federally insured

institution in excess of the institution’s

insured amount, but only if the

institution is ‘‘well capitalized’’ in

accordance with the definition set forth

in regulations of the Federal Deposit

Insurance Corporation, as amended (12

CFR 325.103).

(2) Exception: You may make a

temporary deposit (not to exceed 30

days) in excess of the insured amount,

in a transfer account established to

facilitate the receipt and disbursement

of funds or to hold funds necessary to

honor Commitments issued.

(c) Deposit of funds in Associate

institution. A deposit in, or a repurchase

agreement with, a federally insured

institution that is your Associate is not

considered a Financing of such

Associate under § 108.730, provided the

terms of such deposit or repurchase

agreement are no less favorable than

those available to the general public.

Borrowing by NMVC Companies From

Non-SBA Sources

§ 108.550 Prior approval of secured thirdparty debt of NMVC companies.

(a) Definition. In this section,

‘‘secured third-party debt’’ means any

non-SBA debt secured by any of your

assets, including secured guarantees and

other contingent obligations that you

voluntarily assume and secured lines of

credit.

(b) General rule. You must get SBA’s

written approval before you incur any

secured third-party debt or refinance

any debt with secured third-party debt,

including any renewal of a secured line

of credit, increase in the maximum

amount available under a secured line

of credit, or expansion of the scope of

a security interest or lien. For purposes

of this paragraph (b), ‘‘expansion of the

scope of a security interest or lien’’ does

not include the substitution of one asset

or group of assets for another, provided

the asset values (as reported on your

most recent annual Form 468) are

comparable.

(c) Conditions for SBA approval. As a

condition of granting its approval under

this section, SBA may impose such

restrictions or limitations as it deems

appropriate, taking into account your

historical performance, current financial

position, proposed terms of the secured

debt and amount of aggregate debt you

will have outstanding (including

Leverage). SBA will not favorably

consider any requests for approval

which include a blanket lien on all your

assets, or a security interest in your

investor commitments in excess of 125

percent of the proposed borrowing.

(d) Thirty-day approval. Unless SBA

notifies you otherwise within 30 days

after it receives your request, you may

consider your request automatically

approved if:

(1) You are in regulatory compliance;

(2) The security interest in your assets

is limited to either those assets being

acquired with the borrowed funds or an

asset coverage ratio of no more than 2:1;

(3) Your request is for approval of a

secured line of credit that would not

cause your total outstanding borrowings

(not including Leverage) to exceed 50

percent of your Leverageable Capital.

Voluntary Decrease in Regulatory

Capital

§ 108.585 Voluntary decrease in NMVC

Company’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. At all times, you must retain

sufficient Regulatory Capital to meet the

minimum capital requirements in the

Act and § 108.210, and sufficient

Leverageable Capital to avoid having

excess Leverage in violation of section

355(d) of the Act.

Subpart H—Recordkeeping, Reporting,

and Examination Requirements for

NMVC Companies

Recordkeeping Requirements for

NMVC Companies

§ 108.600 General requirement for NMVC

Company to maintain and preserve records.

(a) Maintaining your accounting

records. You must establish and

maintain your accounting records using

SBA’s standard chart of accounts for

SBICs, unless SBA approves otherwise.

You may obtain this chart of accounts

from SBA.

(b) Location of records. You must

keep the following records at your

principal place of business or, in the

case of paragraph (b)(3) of this section,

at the branch office that is primarily

responsible for the transaction:

(1) All your accounting and other

financial records;

(2) All minutes of meetings of

directors, stockholders, executive

committees, partners, or other officials;

and

(3) All documents and supporting

materials related to your business

transactions, except for any items held

by a custodian under a written

agreement between you and a Portfolio

Concern or non-SBA lender, or any

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28621

securities held in a safe deposit box, or

by a licensed securities broker in an

amount not exceeding the broker’s peraccount insurance coverage.

(c) Preservation of records. You must

retain all the records that are the basis

for your financial reports. Such records

must be preserved for the periods

specified in this paragraph (c), and must

remain accessible for the first two years

of the preservation period.

(1) You must preserve for at least 15

years or, in the case of a Partnership

NMVC Company or LLC NMVC

Company, at least two years beyond the

date of liquidation:

(i) All your accounting ledgers and

journals, and any other records of assets,

asset valuations, liabilities, equity,

income, and expenses.

(ii) Your Articles, bylaws, minute

books, and NMVC Company

application.

(iii) All documents evidencing

ownership of the NMVC Company

including ownership ledgers, and

ownership transfer registers.

(2) You must preserve for at least six

years all supporting documentation

(such as vouchers, bank statements, or

canceled checks) for the records listed

in paragraph (b)(1) of this section.

(3) After final disposition of any item

in your Portfolio, you must preserve for

at least six years:

(i) Financing applications and

Financing instruments.

(ii) All loan, participation, and escrow

agreements.

(iii) Size status declarations (SBA

Form 480).

(iv) Any capital stock certificates and

warrants of the Portfolio Concern that

you did not surrender or exercise.

(v) All other documents and

supporting material relating to the

Portfolio Concern, including

correspondence.

(4) You may substitute a microfilm or

computer-scanned or generated copy for

the original of any record covered by

this paragraph (c).

(d) Additional requirement. You must

comply with the recordkeeping and

record retention requirements set forth

in Circular A–110 of the Office of

Management and Budget. (OMB

circulars are available from the

addresses in 5 CFR 1310.3.)

§ 108.610 Required certifications for Loans

and Investments.

For each of your Loans and

Investments, you must have the

documents listed in this section. You

must keep these documents in your files

and make them available to SBA upon

request.

(a) SBA Form 480, the Size Status

Declaration, executed both by you and

by the concern you are financing. By

executing this document, both parties

certify that the concern is a Small

Business. For securities purchased from

an underwriter in a public offering, you

may substitute a prospectus showing

that the concern is a Small Business.

(b) SBA Form 652, a certification by

the concern you are financing that it

will not illegally discriminate (see part

112 of this chapter).

(c) A certification by the concern you

are financing of the intended use of the

proceeds. For securities purchased from

an underwriter in a public offering, you

may substitute a prospectus indicating

the intended use of proceeds.

(d) For each Low-Income Investment,

a certification by the concern you are

financing as to the basis for its

qualification as a Low-Income

Enterprise.

§ 108.620 Requirements to obtain

information from Portfolio Concerns.

All the information required by this

section is subject to the requirements of

§ 108.600 and must be in English.

(a) Information for initial Financing

decision. Before extending any

Financing, you must require the

applicant to submit such financial

statements, plans of operation

(including intended use of financing

proceeds), cash flow analyses,

projections, and such community

economic development information

about the company, as are necessary to

support your investment decision. The

information submitted must be

consistent with the size and type of the

business and the amount of the

proposed Financing.

(b) Updated financial and community

economic development information. (1)

The terms of each Financing must

require the Portfolio Concern to provide,

at least annually, sufficient financial

and community economic development

information to enable you to perform

the following required procedures:

(i) Evaluate the financial condition of

the Portfolio Concern for the purpose of

valuing your investment;

(ii) Determine the continued

eligibility of the Portfolio Concern;

(iii) Verify the use of Financing

proceeds; and

(iv) Evaluate the community

economic development impact of the

Financing.

(2) The president, chief executive

officer, treasurer, chief financial officer,

general partner, or proprietor of the

Portfolio Concern must certify the

information submitted to you.

(3) For financial and valuation

purposes, you may accept a complete

copy of the Federal income tax return

filed by the Portfolio Concern (or its

proprietor) in lieu of financial

statements, but only if appropriate for

the size and type of the business

involved.

(4) The requirements in this

paragraph (b) do not apply when you

acquire securities from an underwriter

in a public offering (see § 108.825). In

that case, you must keep copies of all

reports furnished by the Portfolio

Concern to the holders of its securities.

(c) Information required for

examination purposes. You must obtain

any information requested by SBA’s

examiners for the purpose of verifying

the certifications made by a Portfolio

Concern under § 108.610. In this regard,

your Financing documents must contain

provisions requiring the Portfolio

Concern to give you and/or SBA’s

examiners access to its books and

records for such purpose.

Reporting Requirements for NMVC

Companies

§ 108.630 Requirement for NMVC

companies to file financial statements and

supplementary information with SBA (SBA

Form 468).

(a) Annual filing of Form 468. For

each fiscal year, you must submit to

SBA financial statements and

supplementary information prepared on

SBA Form 468. You must file Form 468

on or before the last day of the third

month following the end of your fiscal

year, except for the information required

under paragraphs (e) and (f) of this

section, which must be filed on or

before the last day of the fifth month

following the end of your fiscal year.

(1) Audit of Form 468. An

independent public accountant

acceptable to SBA must audit the

annual Form 468.

(2) Insurance requirement for public

accountant. Unless SBA approves

otherwise, your independent public

accountant must carry at least

$1,000,000 of Errors and Omissions

insurance, or be self-insured and have a

net worth of at least $1,000,000.

(b) Interim filings of Form 468. When

requested by SBA, you must file interim

reports on Form 468. SBA may require

you to file the entire form or only

certain statements and schedules. You

must file such reports on or before the

last day of the month following the end

of the reporting period. When you

submit a request for a draw under an

SBA Leverage commitment, you must

also comply with any applicable filing

requirements set forth in § 108.1220.

(c) Standards for preparation of Form

468. You must prepare SBA Form 468

in accordance with SBA’s Accounting

Standards and Financial Reporting

28622 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

Requirements for Small Business

Investment Companies, which you may

obtain from SBA.

(d) Where to file Form 468. Submit all

filings of Form 468 to the Office of New

Markets Venture Capital in the

Investment Division of SBA.

(e) Reporting of social, economic, or

community development impact

information on Form 468. Your annual

filing of SBA Form 468 must include an

assessment of the social, economic, or

community development impact of each

Financing. This assessment must

specify the fulltime equivalent jobs

created, the impact of the Financing on

the revenues and profits of the business

and on taxes paid by the business and

its employees, and a listing of the

number and percentage of employees

who reside in LI Areas.

(f) Reporting of community

development information. For each

Financing of a Low-Income Enterprise,

your Form 468 must include an

assessment of such Financing with

respect to:

(1) The social, economic or

community development benefits

achieved as a result of the Financing;

(2) How and to what extent such

benefits fulfilled the goals of your

comprehensive business plan and

Participation Agreement;

(3) Whether you consider the

Financing or the results of the Financing

to have fulfilled the objectives of the

NMVC program; and

(4) Whether, and if so, how you

achieved accountability to the residents

of the LI Area in connection with that

Financing.

§ 108.640 Requirement to file portfolio

financing reports (SBA Form 1031).

For each Financing you make

(excluding guarantees), you must submit

a Portfolio Financing Report on SBA

Form 1031 within 30 days of the closing

date.

§ 108.650 Requirement to report portfolio

valuations to SBA.

You must determine the value of your

Loans and Investments in accordance

with § 108.503. You must report such

valuations to SBA within 90 days of the

end of the fiscal year in the case of

annual valuations, and within 30 days

following the close of other reporting

periods. You must report material

adverse changes in valuations at least

quarterly, within thirty days following

the close of the quarter.

§ 108.660 Other items required to be filed

by NMVC Company with SBA.

(a) Reports to owners. You must give

SBA a copy of any report you furnish to

your investors, including any

prospectus, letter, or other publication

concerning your financial operations or

those of any Portfolio Concern.

(b) Documents filed with SEC. You

must give SBA a copy of any report,

application or document you file with

the Securities and Exchange

Commission.

(c) Litigation reports. When you

become a party to litigation or other

proceedings, you must give SBA a

report within 30 days that describes the

proceedings and identifies the other

parties involved and your relationship

to them.

(1) The proceedings covered by this

paragraph (c) include any action by you,

or by your security holder(s) in a

personal or derivative capacity, against

an officer, director, Investment Adviser

or other Associate of yours for alleged

breach of official duty.

(2) SBA may require you to submit

copies of the pleadings and other

documents SBA may specify.

(3) Where proceedings have been

terminated by settlement or final

judgment, you must promptly advise

SBA of the terms.

(4) This paragraph (c) does not apply

to collection actions or proceedings to

enforce your ordinary creditors’ rights.

(d) Notification of criminal charges. If

any officer, director, or general partner

of the NMVC Company, or any other

person who was required by SBA to

complete a personal history statement,

is charged with or convicted of any

criminal offense other than a

misdemeanor involving a minor motor

vehicle violation, you must report the

incident to SBA within 5 calendar days.

Such report must fully describe the facts

that pertain to the incident.

(e) Reports concerning Operational

Assistance grant funds. You must

comply with all reporting requirements

set forth in Circular A–110 of the Office

of Management and Budget and any

grant award document executed

between you and SBA.

(f) Other reports. You must file any

other reports SBA may require in

writing.

§ 108.680 Reporting changes in NMVC

Company not subject to prior SBA

approval.

(a) Changes to be reported for postapproval. This section applies to any

changes in your Articles, ownership,

capitalization, management, operating

area, or investment policies that do not

require SBA’s prior approval. You must

report such changes to SBA within 30

days for post approval.

(b) Approval by SBA. You may

consider any change submitted under

this section to be approved unless SBA

notifies you to the contrary within 90

days after receiving it. SBA’s approval is

contingent upon your full disclosure of

all relevant facts and is subject to any

conditions SBA may prescribe.

Examinations of NMVC Companies by

SBA for Regulatory Compliance

§ 108.690 Examinations.

All NMVC companies must submit to

annual examinations by or at the

direction of SBA for the purpose of

evaluating regulatory compliance.

§ 108.691 Responsibilities of NMVC

Company during examination.

You must make all books, records and

other pertinent documents and

materials available for the examination,

including any information required by

the examiner under § 108.620(c). In

addition, the agreement between you

and the independent public accountant

performing your audit must provide that

any information in the accountant’s

working papers be made available to

SBA upon request.

§ 108.692 Examination fees.

(a) General. SBA will assess fees for

examinations in accordance with this

section. Unless SBA determines

otherwise on a case by case basis, SBA

will not assess fees for special

examinations to obtain specific

information.

(b) Base fee. A base fee of $3,500 will

be assessed, subject to adjustment in

accordance with paragraph (c) of this

section.

(c) Adjustments to base fee. The base

fee will be decreased based on the

following criteria:

(1) If you have no outstanding

regulatory violations at the time of the

commencement of the examination and

SBA did not identify any violations as

a result of the most recent prior

examination, you will receive a 15%

discount on your base fee; and

(2) If you were fully responsive to the

letter of notification of examination

(that is, you provided all requested

documents and information within the

time period stipulated in the

notification letter in a complete and

accurate manner, and you prepared and

had available all information requested

by the examiner for on-site review), you

will receive a 10% discount on your

base fee.

(d) Delay fee. If, in the judgment of

SBA, the time required to complete your

examination is delayed due to your lack

of cooperation or the condition of your

records, SBA may assess an additional

fee of up to $500 per day.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28623

Subpart I—Financing of Small

Businesses by NMVC Companies

Determining the Eligibility of a Small

Business for NMVC Financing

§ 108.700 Compliance with size standards

in part 121 of this chapter as a condition of

Assistance.

You are permitted to provide financial

assistance and management services

only to a Small Business. To determine

whether an applicant meets the size

standards for a Small Business, you may

use either the financial size standards in

§ 121.301(c)(1) of this chapter or the

industry standard covering the industry

in which the applicant is primarily

engaged, as set forth in § 121.301(c)(2) of

this chapter.

§ 108.710 Requirement to finance LowIncome Enterprises.

(a) Low-Income Enterprise Financings.

At the close of each of your fiscal

years—

(1) At least 80 percent of your

Portfolio Concerns must be Low-Income

Enterprises in which you have an Equity

Capital Investment; and

(2) For all Financings you have

extended, you must have invested at

least 80 percent (in total dollars) in

Equity Capital Investments in LowIncome Enterprises.

(b) Non-compliance with this section.

If you have not reached the percentages

required in paragraph (a) of this section

at the end of any fiscal year, then you

must be in compliance by the end of the

following fiscal year. However, you will

not be eligible for additional Leverage

until such time as you reach the

required percentages (see § 108.1120).

§ 108.720 Small Businesses that may be

ineligible for financing.

(a) Relenders or reinvestors. You are

not permitted to finance any business

that is a relender or reinvestor.

Relenders or reinvestors are businesses

whose primary business activity

involves, directly or indirectly,

providing funds to others, purchasing

debt obligations, factoring, or long-term

leasing of equipment with no provision

for maintenance or repair.

(b) Passive Businesses. You are not

permitted to finance a passive business.

(1) Definition. A business is passive if:

(i) It is not engaged in a regular and

continuous business operation (for

purposes of this paragraph (b), the mere

receipt of payments such as dividends,

rents, lease payments, or royalties is not

considered a regular and continuous

business operation); or

(ii) Its employees are not carrying on

the majority of day to day operations,

and the company does not provide

effective control and supervision, on a

day to day basis, over persons employed

under contract; or

(iii) It passes through substantially all

of the proceeds of the Financing to

another entity.

(2) Exception for pass-through of

proceeds to subsidiary. With the prior

written approval of SBA, you may

finance a passive business if it is a

Small Business and it passes

substantially all the proceeds through to

one or more subsidiary companies, each

of which is an eligible Small Business

that is not passive. For the purpose of

this paragraph (b) (2), ‘‘subsidiary

company’’ means a company in which

at least 50 percent of the outstanding

voting securities are owned by the

Financed passive business.

(3) Exception for certain Partnership

NMVC companies. With the prior

written approval of SBA, if you are a

Partnership NMVC Company, you may

form one or more wholly owned

corporations in accordance with this

paragraph (b) (3). The sole purpose of

such corporation(s) must be to provide

Financing to one or more eligible,

unincorporated Small Businesses. You

may form such corporation(s) only if a

direct Financing to such Small

Businesses would cause any of your

investors to incur unrelated business

taxable income under section 511 of the

Internal Revenue Code of 1986, as

amended (26 U.S.C. 511). Your

investment of funds in such

corporation(s) will not constitute a

violation of § 108.730(a).

(c) Real Estate Businesses. (1) You are

not permitted to finance:

(i) Any business classified under

subsector 5311 (Lessors of Real Estate)

of the NAICS Manual; or

(ii) Any business listed under

subsector 5312 (Offices of Real Estate

Agents and Brokers) unless at least 80

percent of the revenue is derived from

non-Affiliate sources.

(2) You are not permitted to finance

a business, regardless of NAICS

classification, if the Financing is to be

used to acquire or refinance real

property, unless the Small Business:

(i) Is acquiring an existing property

and will use at least 51 percent of the

usable square footage for an eligible

business purpose; or

(ii) Is building or renovating a

building and will use at least 67 percent

of the usable square footage for an

eligible business purpose; or

(iii) Occupies the subject property and

uses at least 67 percent of the usable

square footage for an eligible business

purpose.

(d) Project Financing. You are not

permitted to finance a business if:

(1) The assets of the business are to

be reduced or consumed, generally

without replacement, as the life of the

business progresses, and the nature of

the business requires that a stream of

cash payments be made to the

business’s financing sources, on a basis

associated with the continuing sale of

assets. Examples include real estate

development projects and oil and gas

wells; or

(2) The primary purpose of the

Financing is to fund production of a

single item or defined limited number of

items, generally over a defined

production period, and such production

will constitute the majority of the

activities of the Small Business.

Examples include motion pictures and

electric generating plants.

(e) Farm land purchases. You are not

permitted to finance the acquisition of

farmland. Farmland means land, which

is or is intended to be used for

agricultural or forestry purposes, such

as the production of food, fiber, or

wood, or is so taxed or zoned.

(f) Public interest. You are not

permitted to finance any business if the

proceeds are to be used for purposes

contrary to the public interest, including

but not limited to activities which are in

violation of law, or inconsistent with

free competitive enterprise.

(g) Foreign investment. (1) General

rule. You are not permitted to finance a

business if:

(i) The funds will be used

substantially for a foreign operation; or

(ii) At the time of the Financing or

within one year thereafter, more than 49

percent of the employees or tangible

assets of the Small Business are located

outside the United States (unless you

can show, to SBA’s satisfaction, that the

Financing was used for a specific

domestic purpose).

(2) Exception. This paragraph (g) does

not prohibit a Financing used to acquire

foreign materials and equipment or

foreign property rights for use or sale in

the United States.

(h) Financing NMVC companies or

SBICs. You are not permitted to provide

funds, directly or indirectly, that the

Small Business will use:

(1) To purchase stock in or provide

capital to a NMVC Company or SBIC; or

(2) To repay an indebtedness incurred

for the purpose of investing in a NMVC

Company or SBIC.

§ 108.730 Financings which constitute

conflicts of interest.

(a) General rule. You must not selfdeal to the prejudice of a Small

Business, the NMVC Company, its

shareholders or partners, or SBA. Unless

you obtain a prior written exemption

28624 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

from SBA for special instances in which

a Financing may further the purposes of

the Act despite presenting a conflict of

interest, you must not directly or

indirectly:

(1) Provide Financing to any of your

Associates, except for a Small Business

that satisfies all of the following

conditions:

(i) Your Associate relationship with

the Small Business is described by

paragraph (8) or (9) of the definition of

Associate in § 108.50;

(ii) No Person triggering the Associate

relationship identified in paragraph

(a)(1)(i) of this section is a Close

Relative or Secondary Relative of any

Person described in paragraph (1), (2),

(4), or (5) of the definition of Associate

in § 108.50; and

(iii) No single Associate of yours has

either a voting interest or an economic

interest in the Small Business exceeding

20 percent, and no two or more of your

Associates have either a voting interest

or an economic interest exceeding 33

percent. Economic interests shall be

computed on a fully diluted basis, and

both voting and economic interests shall

exclude any interest owned through the

NMVC Company.

(2) Provide Financing to an Associate

of another NMVC Company if one of

your Associates has received or will

receive any direct or indirect Financing

or a Commitment from that NMVC

Company or a third NMVC Company

(including Financing or Commitments

received under any understanding,

agreement, or cross dealing, reciprocal

or circular arrangement).

(3) Borrow money from:

(i) A Small Business Financed by you;

(ii) An officer, director, or owner of at

least a 10 percent equity interest in such

business; or

(iii) A Close Relative of any such

officer, director, or equity owner.

(4) Provide Financing to a Small

Business to discharge an obligation to

your Associate or free other funds to pay

such obligation. This paragraph (a)(4)

does not apply if the obligation is to an

Associate Lending Institution and is a

line of credit or other obligation

incurred in the normal course of

business.

(b) Rules applicable to Associates.

Without SBA’ s prior written approval,

your Associates must not, directly or

indirectly:

(1) Borrow money from any Person

described in paragraph (a)(3) of this

section.

(2) Receive from a Small Business any

compensation in connection with

Assistance you provide (except as

permitted under § 108.825(c)), or

anything of value for procuring,

attempting to procure, or influencing

your action with respect to such

Assistance.

(c) Applicability of other laws. You

are also bound by any restrictions in

Federal or State laws governing conflicts

of interest and fiduciary obligations.

(d) Financings with Associates. (1)

Financings with Associates requiring

prior approval. Without SBA’s prior

written approval, you may not Finance

any business in which your Associate

has either a voting equity interest or

total equity interests (including

potential interests) of at least five

percent, except as otherwise permitted

under paragraph (a)(1) of this section.

(2) Other Financings with Associates.

If you and an Associate provide

Financing to the same Small Business,

either at the same time or at different

times, you must be able to demonstrate

to SBA’s satisfaction that the terms and

conditions are (or were) fair and

equitable to you, taking into account

any differences in the timing of each

party’s financing transactions.

(3) Exceptions to paragraphs (d)(l)

and (d)(2) of this section. A Financing

that falls into one of the following

categories is exempt from the prior

approval requirement in paragraph

(d)(1) of this section or is presumed to

be fair and equitable to you for the

purposes of paragraph (d)(2) of this

section, as appropriate:

(i) Your Associate is a Lending

Institution that is providing financing

under a credit facility in order to meet

the operational needs of the Small

Business, and the terms of such

financing are usual and customary.

(ii) Your Associate invests in the

Small Business on the same terms and

conditions and at the same time as you.

(iii) Both you and your Associate are

NMVC companies.

(e) Use of Associates to manage

Portfolio Concerns. To protect your

investment, you may designate an

Associate to serve as an officer, director,

or other participant in the management

of a Small Business. You must identify

any such Associate in your records

available for SBA’s review under

§ 108.600. Without SBA’s prior written

approval, the Associate must not:

(1) Have any other direct or indirect

financial interest in the Portfolio

Concern that exceeds, or has the

potential to exceed, the percentages of

the Portfolio Concern’s equity set forth

in paragraph (a)(1) of this section.

(2) Receive any income or anything of

value from the Portfolio Concern unless

it is for your benefit, with the exception

of director’s fees, expenses, and

distributions based upon the Associate’s

ownership interest in the Concern.

(f) 1940 and 1980 Act Companies:

SEC exemptions. If you are a 1940 or

1980 Act Company and you receive an

exemption from the Securities and

Exchange Commission for a transaction

described in this section, you need not

obtain SBA’s approval of the

transaction. However, you must

promptly notify SBA of the transaction.

(g) Restriction on options obtained by

NMVC Company’s management and

employees. Your employees, officers,

directors, managing members or general

partners, or the general partners of the

management company that is providing

services to you or to your general

partner, may obtain options in a

Financed Small Business only if:

(1) They participate in the Financing

on a pari passu basis with you; or

(2) SBA gives its prior written

approval; or

(3) The options received are

compensation for service as a member of

the board of directors of the Small

Business, and such compensation does

not exceed that paid to other outside

directors. In the absence of such

directors, fees must be reasonable when

compared with amounts paid to outside

directors of similar companies.

§ 108.740 Portfolio diversification

(‘‘overline’’ limitation).

(a) Without SBA’s prior written

approval, you may provide Financing or

a Commitment to a Small Business only

if the resulting amount of your aggregate

outstanding Financings and

Commitments to such Small Business

and its Affiliates does not exceed 20

percent of the sum of:

(1) Your Regulatory Capital as of the

date of the Financing or Commitment;

plus

(2) Any permitted Distribution(s) you

made during the five years preceding

the date of the Financing or

Commitment which reduced your

Regulatory Capital.

(b) For the purposes of paragraph (a)

of this section, you must measure each

outstanding Financing at its current cost

plus any amount of the Financing that

was previously written off.

§ 108.760 How a change in size or activity

of a Portfolio Concern affects the NMVC

Company and the Portfolio Concern.

(a) Effect on NMVC Company of a

change in size of a Portfolio Concern. If

a Portfolio Concern no longer qualifies

as a Small Business you may keep your

investment in the concern and:

(1) Subject to the overline limitations

of § 108.740, you may provide

additional Financing to the concern up

to the time it makes a public offering of

its securities.

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28625

(2) Even after the concern makes a

public offering, you may exercise any

stock options, warrants, or other rights

to purchase Equity Securities which you

acquired before the public offering, or

fund Commitments you made before the

public offering.

(b) Effect of a change in business

activity occurring within one year of

NMVC Company’s initial Financing. (1)

Retention of Investment. Unless you

receive SBA’s written approval, you

may not keep your investment in a

Portfolio Concern, small or otherwise,

which becomes ineligible by reason of a

change in its business activity within

one year of your initial investment.

(2) Request for SBA ’s approval to

retain investment. If you request that

SBA approve the retention of your

investment, your request must include

sufficient evidence to demonstrate that

the change in business activity was

caused by an unforeseen change in

circumstances and was not

contemplated at the time the Financing

was made.

(3) Additional Financing. If SBA

approves your request to retain an

investment under paragraph (b)(2) of

this section, you may provide additional

Financing to the Portfolio Concern to

the extent necessary to protect against

the loss of the amount of your original

investment, subject to the overline

limitations of § 108.740.

(c) Effect of a change in business

activity occurring more than one year

after the initial Financing. If a Portfolio

Concern becomes ineligible because of a

change in business activity more than

one year after your initial Financing you

may:

(1) Retain your investment; and

(2) Provide additional Financing to

the Portfolio Concern to the extent

necessary to protect against the loss of

the amount of your original investment,

subject to the overline limitations of

§ 108.740.

Structuring NMVC Company’s

Financing of Eligible Small Businesses

§ 108.800 Financings in the form of equity

interests.

You may not, inadvertently or

otherwise:

(a) Become a general partner in any

unincorporated business; or

(b) Become jointly or severally liable

for any obligations of an unincorporated

business.

§ 108.820 Financings in the form of

guarantees.

(a) General rule. At the request of a

Small Business or where necessary to

protect your existing investment, you

may guarantee the monetary obligation

of a Small Business to any nonAssociate creditor.

(b) Exception. You may not issue a

guaranty if:

(1) You would become subject to State

regulation as an insurance, guaranty or

surety business; or

(2) The amount of the guaranty plus

any direct Financings to the Small

Business exceed the overline limitations

of § 108.740, except that a pledge of the

Equity Securities of the issuer or a

subordination of your lien or creditor

position does not count toward your

overline.

(c) Pledge of NMVC Company’s assets

as guaranty. For purposes of this

section, a guaranty with recourse only to

specific asset(s) you have pledged is

equal to the fair market value of such

asset(s) or the amount of the debt

guaranteed, whichever is less.

§ 108.825 Purchasing securities from an

underwriter or other third party.

(a) Securities purchased through or

from an underwriter. You may purchase

the securities of a Small Business

through or from an underwriter if:

(1) You purchase such securities

within 90 days of the date the public

offering is first made;

(2) Your purchase price is no more

than the original public offering price;

and

(3) The amount paid by you for the

securities (less ordinary and reasonable

underwriting charges and commissions)

has been, or will be, paid to the Small

Business, and the underwriter certifies

in writing that this requirement has

been met.

(b) Recordkeeping requirements. You

must keep records available for SBA’s

inspection which show the relevant

details of the transaction, including, but

not limited to, date, price, commissions,

and the underwriter’s certifications

required under paragraphs (a)(3) and (c)

of this section.

(c) Underwriter’s requirements. The

underwriter must certify whether it is

your Associate. You may pay reasonable

and customary commissions and

expenses to an Associate underwriter

for the portion of an offering that you

purchase.

(d) Securities purchased from another

NMVC Company or from SBA. You may

purchase from, or exchange with,

another NMVC Company, Portfolio

securities (or any interest therein). Such

purchase or exchange may only be made

on a non-recourse basis. You may not

have more than one-third of your total

assets (valued at cost) invested in such

securities. If you have previously sold

Portfolio securities (or any interest

therein) on a recourse basis, you shall

include the amount for which you may

be contingently liable in your overline

computation.

(e) Purchases of securities from other

non-issuers. You may purchase

securities of a Small Business from a

non-issuer not previously described in

this section if such acquisition is a

reasonably necessary part of the overall

sound Financing of the Small Business.

Limitations on Disposition of Assets

§ 108.885 Disposition of assets to NMVC

Company’s Associates.

Except with SBA’s prior written

approval, you are not permitted to

dispose of assets (including assets

acquired in liquidation) to any

Associate. As a prerequisite to such

approval, you must demonstrate that the

proposed terms of disposal are at least

as favorable to you as the terms

obtainable elsewhere.

Subpart J—SBA Financial Assistance

for NMVC Companies (Leverage)

General Information About Obtaining

Leverage

§ 108.1100 Type of Leverage and

application procedures.

(a) Type of Leverage available. You

may apply for Leverage from SBA in the

form of a guarantee of your Debentures.

(b) Applying for Leverage. The

Leverage application process has two

parts. You must first apply for SBA’s

conditional commitment to reserve a

specific amount of Leverage for your

future use. You may then apply to draw

down Leverage against the commitment.

See §§ 108.1200 through 108.1240.

(c) Where to send your application.

Send all Leverage applications to SBA,

Investment Division Office of New

Markets Venture Capital, 409 Third

Street, SW., Washington, DC 20416.

§ 108.1120 General eligibility requirement

for Leverage.

To be eligible for Leverage, you must

be in compliance with the Act, the

regulations in this part, and your

Participation Agreement.

§ 108.1130 Leverage fees payable by

NMVC Company.

There is no fee for the issuance of

Debentures by a NMVC Company.

§ 108.1140 NMVC Company’s acceptance

of SBA remedies under § 108.1810.

If you issue Leverage, you

automatically agree to the terms and

conditions in § 108.1810 as it exists at

the time of issuance. The effect of these

terms and conditions is the same as if

they were fully incorporated in the

terms of your Leverage.

28626 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

Maximum Amount of Leverage for

Which a NMVC Company Is Eligible

§ 108.1150 Maximum amount of Leverage

for a NMVC Company.

The face amount of a NMVC

Company’s outstanding Debentures may

not exceed 150 percent of its

Leverageable Capital.

Conditional Commitments by SBA To

Reserve Leverage for a NMVC Company

§ 108.1200 SBA’s Leverage commitment to

a NMVC Company—application procedure,

amount, and term.

(a) General. Under the provisions in

§§ 108.1200 through 108.1240, you may

apply for SBA’s conditional

commitment to reserve a specific

amount and type of Leverage for your

future use. You may then apply to draw

down Leverage against the commitment.

(b) Applying for a Leverage

commitment. SBA will notify you when

it is accepting requests for Leverage

commitments. Upon receipt of your

request, SBA will send you a complete

application package.

(c) Limitations on the amount of a

Leverage commitment. The amount of a

Leverage commitment must be a

multiple of $5,000. SBA, in its

discretion, may determine a minimum

dollar amount for Leverage

commitments. Any such minimum

amounts will be published in Notices in

the Federal Register from time to time.

(d) Term of Leverage commitment.

SBA’s Leverage commitment will

automatically lapse on the expiration

date stated in the commitment letter

issued to you by SBA.

§ 108.1220 Requirement for NMVC

Company to file financial statements at the

time of request for a draw.

(a) If you submit a request for a draw

against SBA’s Leverage commitment

more than 90 days since your

submission of an annual Form 468 or a

Form 468 (Short Form), you must:

(1) Give SBA a financial statement on

Form 468 (Short Form); and

(2) File a statement of no material

adverse change in your financial

condition since your last filing of Form

468.

(b) You will not be eligible for a draw

if you are not in compliance with this

section.

§ 108.1230 Draw-downs by NMVC

Company under SBA’s Leverage

commitment.

(a) NMVC Company’s authorization of

SBA to guarantee securities. By

submitting a request for a draw against

SBA’s Leverage commitment, you

authorize SBA, or any agent or trustee

SBA designates, to guarantee your

Debenture and to sell it with SBA’s

guarantee.

(b) Limitations on amount of draw.

The amount of a draw must be a

multiple of $5,000. SBA, in its

discretion, may determine a minimum

dollar amount for draws against SBA’s

Leverage commitments. Any such

minimum amounts will be published in

Notices in the Federal Register from

time to time.

(c) Effect of regulatory violations on

NMVC Company’s eligibility for draws.

(1) General rule. You are eligible to

make a draw against SBA’s Leverage

commitment only if you are in

compliance with all applicable

provisions of the Act and SBA

regulations (i.e., no unresolved statutory

or regulatory violations) and your

Participation Agreement.

(2) Exception to general rule. If you

are not in compliance, you may still be

eligible for draws if:

(i) SBA determines that your

outstanding violations are of nonsubstantive provisions of the Act or

regulations or your Participation

Agreement and that you have not

repeatedly violated any non-substantive

provisions; or

(ii) You have agreed with SBA on a

course of action to resolve your

violations and such agreement does not

prevent you from issuing Leverage.

(d) Procedures for funding draws. You

may request a draw at any time during

the term of the commitment. With each

request, submit the following

documentation:

(1) A statement certifying that there

has been no material adverse change in

your financial condition since your last

filing of SBA Form 468 (see also

§ 108.1220 for SBA Form 468 filing

requirements).

(2) If your request is submitted more

than 30 days following the end of your

fiscal year, but before you have

submitted your annual filing of SBA

Form 468 (Long Form) in accordance

with § 108.630(a), a preliminary

unaudited annual financial statement on

SBA Form 468 (Short Form).

(3) A statement certifying that to the

best of your knowledge and belief, you

are in compliance with all provisions of

the Act and SBA regulations (i.e., no

unresolved regulatory or statutory

violations) and your Participation

Agreement, or a statement listing any

specific violations you are aware of.

Either statement must be executed by

one of the following:

(i) An officer of the NMVC Company;

(ii) An officer of a corporate general

partner of the NMVC Company;

(iii) An individual who is authorized

to act as or for a general partner of the

NMVC Company; or

(iv) An individual who is authorized

to act as or for a member-manager of the

NMVC Company.

(4) A statement that the proceeds are

needed to fund one or more particular

Small Businesses or to provide liquidity

for your operations. If required by SBA,

the statement must include the name

and address of each Small Business, and

the amount and anticipated closing date

of each proposed Financing.

(e) Reporting requirements after

drawing funds. (1) Within 30 calendar

days after the actual closing date of each

Financing funded with the proceeds of

your draw, you must file an SBA Form

1031 confirming the closing of the

transaction.

(2) If SBA required you to provide

information concerning a specific

planned Financing under paragraph

(d)(4) of this section, and such

Financing has not closed within 60

calendar days after the anticipated

closing date, you must give SBA a

written explanation of the failure to

close.

(3) If you do not comply with this

paragraph (e), you will not be eligible

for additional draws. SBA may also

determine that you are not in

compliance with the terms of your

Leverage under § 108.1810.

§ 108.1240 Funding of NMVC Company’s

draw request through sale to third-party.

(a) NMVC Company’s authorization of

SBA to arrange sale of securities to

third-party. By submitting a request for

a draw of Debenture Leverage, you

authorize SBA, or any agent or trustee

SBA designates, to enter into any

agreements (and to bind you to such

agreements) necessary to accomplish:

(1) The sale of your Debenture to a

third-party at a rate approved by SBA;

and

(2) The purchase of your security from

the third-party and the pooling of your

security with other securities with the

same maturity date.

(b) Sale of Debentures to a third-party.

If SBA arranges for the sale of your

Debenture to a third-party, the sale price

may be an amount discounted from the

face amount of the Debenture.

Funding Leverage by use of SBA

Guaranteed Trust Certificates (‘‘TCs’’)

§ 108.1600 SBA authority to issue and

guarantee Trust Certificates.

(a) Authorization. Section 356 of the

Act authorizes SBA to issue TCs and to

guarantee the timely payment of the

principal and interest thereon. Any

guarantee by SBA of such TC is limited

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28627

to the principal and interest due on the

Debentures in any Trust or Pool backing

such TC. The full faith and credit of the

United States is pledged to the payment

of all amounts due under the guarantee

of any TC.

(b) SBA authority to arrange public or

private fundings of Leverage. SBA in its

discretion may arrange for public or

private financing under its guarantee

authority. Such financing arranged by

SBA may be accomplished by the sale

of individual Debentures, aggregations

of Debentures, or Pools or Trusts of

Debentures.

(c) Pass-through provisions. TCs shall

provide for a pass-through to their

holders of all amounts of principal and

interest paid on the Debentures in the

Pool or Trust against which they are

issued.

(d) Formation of a Pool or Trust

holding Leverage Securities. SBA shall

approve the formation of each Pool or

Trust. SBA may, in its discretion,

establish the size of the Pools and their

composition, the interest rate on the TCs

issued against Trusts or Pools, fees,

discounts, premiums and other charges

made in connection with the Pools,

Trusts, and TCs, and any other

characteristics of a Pool or Trust it

deems appropriate.

§ 108.1610 Effect of prepayment or early

redemption of Leverage on a Trust

Certificate.

(a) The rights, if any, of a NMVC

Company to prepay any Debenture is

established by the terms of such

security, and no such right is created or

denied by the regulations in this part.

(b) SBA’s rights to purchase or prepay

any Debenture without premium are

established by the terms of the Guaranty

Agreement relating to the Debenture.

(c) Any prepayment of a Debenture

pursuant to the terms of the Guaranty

Agreement relating to such security

shall reduce the SBA guarantee of

timely payment of principal and interest

on a TC in proportion to the amount of

principal that such prepaid Debenture

represents in the Trust or Pool backing

such TC.

(d) SBA shall be discharged from its

guarantee obligation to the holder or

holders of any TC, or any successor or

transferee of such holder, to the extent

of any such prepayment. whether or not

such successor or transferee shall have

notice of any such prepayment.

(e) Interest on prepaid Debentures

shall accrue only through the date of

prepayment.

(f) In the event that all Debentures

constituting a Trust or Pool are prepaid,

the TCs backed by such Trust or Pool

shall be redeemed by payment of the

unpaid principal and interest on the

TCs; provided, however, that in the case

of the prepayment of a Debenture

pursuant to the provisions of the

Guaranty Agreement relating to the

Debenture, the CRA shall pass through

pro rata to the holders of the TCs any

such prepayments including any

prepayment penalty paid by the obligor

NMVC Company pursuant to the terms

of the Debenture.

§ 108.1620 Functions of agents, including

Central Registration Agent, Selling Agent

and Fiscal Agent.

(a) Agents. SBA may appoint or cause

to be appointed agent(s) to perform

functions necessary to market and

service Debentures or TCs pursuant to

this part.

(1) Selling Agent. As a condition of

guaranteeing a Debenture, SBA may

cause each NMVC Company to appoint

a Selling Agent to perform functions

that include, but are not limited to:

(i) Selecting qualified entities to

become pool or Trust assemblers

(‘‘Poolers’’).

(ii) Receiving guaranteed Debentures

as well as negotiating the terms and

conditions of sales or periodic offerings

of Debentures and/or TCs on behalf of

NMVC companies.

(iii) Directing and coordinating

periodic sales of Debentures and/or TCs.

(iv) Arranging for the production of

Offering Circulars, certificates, and such

other documents as may be required

from time to time.

(2) Fiscal Agent. SBA shall appoint a

Fiscal Agent to:

(i) Establish performance criteria for

Poolers.

(ii) Monitor and evaluate the financial

markets to determine those factors that

will minimize or reduce the cost of

funding Debentures.

(iii) Monitor the performance of the

Selling Agent, Poolers, CRA, and the

Trustee.

(iv) Perform such other functions as

SBA, from time to time, may prescribe.

(3) Central Registration Agent.

Pursuant to a contract entered into with

SBA, the CRA, as SBA’s agent, will do

the following with respect to the Pools

or Trust Certificates for the Debentures:

(i) Form an SBA-approved Pool or

Trust;

(ii) Issue the TCs in the form

prescribed by SBA;

(iii) Transfer the TCs upon the sale of

original issue TCs in any secondary

market transaction;

(iv) Receive payments from NMVC

companies;

(v) Make periodic payments as

scheduled or required by the terms of

the TCs, and pay all amounts required

to be paid upon prepayment of

Debentures;

(vi) Hold, safeguard, and release all

Debentures constituting Trusts or Pools

upon instructions from SBA;

(vii) Remain custodian of such other

documentation as SBA shall direct by

written instructions;

(viii) Provide for the registration of all

pooled Debentures, all Pools and Trusts,

and all TCs;

(ix) Perform such other functions as

SBA may deem necessary to implement

the provisions of this section.

(b) Functions. Either SBA or an agent

appointed by SBA may perform the

function of locating purchasers, and

negotiating and closing the sale of

Debentures and TCs. Nothing in the

regulations in this part shall be

interpreted to prevent the CRA from

acting as SBA’s agent for this purpose.

§ 108.1630 SBA regulation of Brokers and

Dealers and disclosure to purchasers of

Leverage or Trust Certificates.

(a) Brokers and Dealers. Each broker,

dealer, and Pool or Trust assembler

approved by SBA pursuant to these

regulations shall either be regulated by

a Federal financial regulatory agency, or

be a member of the National Association

of Securities Dealers (NASD), and shall

be in good standing in respect to

compliance with the financial, ethical,

and reporting requirements of such

body. They also shall be in good

standing with SBA as determined by the

SBA Associate Administrator for

Investment (see paragraph (c) of this

section) and shall provide a fidelity

bond or insurance in such amount as

SBA may require.

(b) Suspension and/or termination of

Broker or Dealer. SBA shall exclude

from the sale and all other dealings in

Debentures or TCs any broker or dealer:

(1) If such broker’s or dealer’s

authority to engage in the securities

business has been revoked or suspended

by a supervisory agency. When such

authority has been suspended, SBA will

suspend such broker or dealer for the

duration of such suspension by the

supervisory agency.

(2) If such broker or dealer has been

indicted or otherwise formally charged

with a misdemeanor or felony bearing

on its fitness, such broker or dealer may

be suspended while the charge is

pending. Upon conviction, participation

may be terminated.

(3) If such broker or dealer has

suffered an adverse final civil judgment

holding that such broker or dealer has

committed a breach of trust or violation

of law or regulation protecting the

integrity of business transactions or

relationships, participation in the

28628 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

market for Debentures or TCs may be

terminated.

(c) Termination/suspension

proceedings. A broker’s or dealer’s

participation in the market for

Debentures or TCs will be conducted in

accordance with part 134 of this

chapter. SBA may, for any of the reasons

stated in paragraphs (b)(1) through (b)(3)

of this section, suspend the privilege of

any broker or dealer to participate in

this market. SBA shall give written

notice at least ten (10) business days

prior to the effective date of such

suspension. Such notice shall inform

the broker or dealer of the opportunity

for a hearing pursuant to part 134 of this

chapter.

§ 108.1640 SBA access to records of the

CRA, Brokers, Dealers and Pool or Trust

assemblers.

The CRA and any broker, dealer and

Pool or Trust assembler operating under

the regulations in this part shall make

all books, records and related materials

associated with Debentures and TCs

available to SBA for review and copying

purposes. Such access shall be at such

party’s primary place of business during

normal business hours.

Miscellaneous

§ 108.1700 Transfer by SBA of its interest

in a NMVC Company’s Leverage security.

Upon such conditions and for such

consideration as it deems reasonable,

SBA may sell, assign, transfer, or

otherwise dispose of any Debenture

held by or on behalf of SBA. Upon

notice by SBA, a NMVC Company will

make all payments of principal and

interest as shall be directed by SBA. A

NMVC Company will be liable for all

damage or loss which SBA may sustain

by reason of such disposal, up to the

amount of the NMVC Company’s

liability under such security, plus court

costs and reasonable attorney’s fees

incurred by SBA.

§ 108.1710 SBA authority to collect or

compromise its claims.

SBA may, upon such conditions and

for such consideration as it deems

reasonable, collect or compromise all

claims relating to obligations held or

guaranteed by SBA, and all legal or

equitable rights accruing to SBA.

§ 108.1720 Characteristics of SBA’s

guarantee.

If SBA agrees to guarantee a NMVC

Company’s Debentures, such guarantee

will be unconditional, irrespective of

the validity, regularity or enforceability

of the Debentures or any other

circumstances that might constitute a

legal or equitable discharge or defense

of a guarantor. Pursuant to its guarantee,

SBA will make timely payments of

principal and interest on the

Debentures.

Subpart K—NMVC Company’s

Noncompliance With Terms of

Leverage

§ 108.1810 Events of default and SBA’s

remedies for NMVC Company’s

noncompliance with terms of Debentures.

(a) Applicability of this section. By

issuing Debentures, you automatically

agree to the terms, conditions and

remedies in this section, as in effect at

the time of issuance and as if fully set

forth in the Debentures.

(b) Automatic events of default. The

occurrence of one or more of the events

in this paragraph (b) causes the

remedies in paragraph (c) of this section

to take effect immediately.

(1) Insolvency. You become equitably

or legally insolvent.

(2) Voluntary assignment. You make a

voluntary assignment for the benefit of

creditors without SBA’s prior written

approval.

(3) Bankruptcy. You file a petition to

begin any bankruptcy or reorganization

proceeding, receivership, dissolution or

other similar creditors’ rights

proceeding, or such action is initiated

against you and is not dismissed within

60 days.

(c) SBA remedies for automatic events

of default. Upon the occurrence of one

or more of the events in paragraph (b)

of this section:

(1) Without notice, presentation or

demand, the entire indebtedness

evidenced by your Debentures,

including accrued interest, and any

other amounts owed SBA with respect

to your Debentures, is immediately due

and payable; and

(2) You automatically consent to the

appointment of SBA or its designee as

your receiver under section 363(c) of the

Act.

(d) Events of default with notice. For

any occurrence (as determined by SBA)

of one or more of the events in this

paragraph (d), SBA may avail itself of

one or more of the remedies in

paragraph (e) of this section.

(1) Fraud. You commit a fraudulent

act that causes detriment to SBA’s

position as a creditor or guarantor.

(2) Fraudulent transfers. You make

any transfer or incur any obligation that

is fraudulent under the terms of 11

U.S.C. 548.

(3) Willful conflicts of interest. You

willfully violate § 108.730.

(4) Willful non-compliance. You

willfully violate one or more of the

substantive provisions of the Act or any

substantive regulation promulgated

under the Act or any substantive

provision of your Participation

Agreement.

(5) Repeated Events of Default. At any

time after being notified by SBA of the

occurrence of an event of default under

paragraph (f) of this section, you engage

in similar behavior that results in

another occurrence of the same event of

default.

(6) Transfer of Control. You willfully

violate § 108.410, and as a result of such

violation you undergo a transfer of

Control.

(7) Non-cooperation under paragraph

(h) of this section. You fail to take

appropriate steps, satisfactory to SBA, to

accomplish any action SBA may have

required under paragraph (h) of this

section.

(8) Non-notification of Events of

Default. You fail to notify SBA as soon

as you know or reasonably should have

known that any event of default exists

under this section.

(9) Non-notification of defaults to

others. You fail to notify SBA in writing

within ten days from the date of a

declaration of an event of default or

nonperformance under any note,

debenture or indebtedness of yours,

issued to or held by anyone other than

SBA.

(e) SBA remedies for events of default

with notice. Upon written notice to you

of the occurrence (as determined by

SBA) of one or more of the events in

paragraph (d) of this section:

(1) SBA may declare the entire

indebtedness evidenced by your

Debentures, including accrued interest.

and/or any other amounts owed SBA

with respect to your Debentures,

immediately due and payable; and

(2) SBA may avail itself of any remedy

available under the Act, specifically

including institution of proceedings for

the appointment of SBA or its designee

as your receiver under section 363 (c) of

the Act.

(f) Events of default with opportunity

to cure. For any occurrence (as

determined by SBA) of one or more of

the events in this paragraph (f), SBA

may avail itself of one or more of the

remedies in paragraph (g) of this

section.

(1) Excessive Management Expenses.

Without the prior written consent of

SBA, you incur Management Expenses

in excess of those permitted under

§§ 108.510 and 108.520.

(2) Improper Distributions. You make

any Distribution to your shareholders or

partners, except with the prior written

consent of SBA, other than:

(i) Distributions permitted under

§ 108.585; and

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28629

(ii) Payments from Retained Earnings

Available for Distribution based on

either the shareholders’ or members’

pro-rata interests or the provisions for

profit distributions in your partnership

agreement, as appropriate.

(3) Failure to make payment. Unless

otherwise approved by SBA, you fail to

make timely payment of any amount

due under any security or obligation of

yours that is issued to, held or

guaranteed by SBA.

(4) Failure to maintain Regulatory

Capital. You fail to maintain the

minimum Regulatory Capital required

under these regulations or, without the

prior written consent of SBA, you

reduce your Regulatory Capital except

as permitted by § 108.585.

(5) Capital Impairment. You have a

condition of Capital Impairment as

determined under § 108.1830.

(6) Cross-default. An obligation of

yours that is greater than $100,000

becomes due or payable (with or

without notice) before its stated

maturity date, for any reason including

your failure to pay any amount when

due. This provision does not apply if

you pay the amount due within any

applicable grace period or contest the

payment of the obligation in good faith

by appropriate proceedings.

(7) Nonperformance. You violate or

fail to perform one or more of the terms

and conditions of any security or

obligation of yours that is issued to,

held or guaranteed by SBA, or of any

agreement (including your Participation

Agreement) with or conditions imposed

by SBA in its administration of the Act

and the regulations promulgated under

the Act.

(8) Noncompliance. Except as

otherwise provided in paragraph (d) (5)

of this section, SBA determines that you

have violated one or more of the

substantive provisions of the Act or any

substantive regulation promulgated

under the Act.

(9) Failure to maintain diversity. You

fail to maintain diversity between

management and ownership as required

by § 108.150.

(g) SBA remedies for events of default

with opportunity to cure. (1) Upon

written notice to you of the occurrence

(as determined by SBA) of one or more

of the events of default in paragraph (f)

of this section, and subject to the

conditions in paragraph (g)(2) of this

section:

(i) SBA may declare the entire

indebtedness evidenced by your

Debentures, including accrued interest,

and/ or any other amounts owed SBA

with respect to your Debentures,

immediately due and payable; and

(ii) SBA may avail itself of any

remedy available under the Act,

specifically including institution of

proceedings for the appointment of SBA

or its designee as your receiver under

section 363(c) of the Act.

(2) SBA may invoke the remedies in

paragraph (g)(l) of this section only if:

(i) It has given you at least 15 days to

cure the default(s); and

(ii) You fail to cure the default(s) to

SBA’s satisfaction within the allotted

time.

(h) Repeated non-substantive

violations. If you repeatedly fail to

comply with one or more of the nonsubstantive provisions of the Act or any

non-substantive regulation promulgated

under the Act, SBA, after written

notification to you and until you cure

such condition to SBA’s satisfaction,

may deny you additional Leverage and/

or require you to take such actions as

SBA may determine to be appropriate

under the circumstances.

(i) Consent to removal of officers,

directors, or general partners and/or

appointment of receiver. The Articles of

each NMVC Company must include the

following provisions as a condition to

the purchase or guarantee by SBA of

Leverage. Upon the occurrence of any of

the events specified in paragraphs (d)(1)

through (d)(6) or (f)(1) through (f)(3) of

this section as determined by SBA, SBA

shall have the right, and you consent to

SBA’s exercise of such right:

(1) With respect to a Corporate NMVC

Company, upon written notice, to

require you to replace, with individuals

approved by SBA, one or more of your

officers and/or such number of directors

of your board of directors as is sufficient

to constitute a majority of such board;

or

(2) With respect to a Partnership

NMVC Company or an LLC NMVC

Company, upon written notice, to

require you to remove the person(s)

responsible for such occurrence and/or

to remove the general partner or

manager of the NMVC Company, which

general partner or manager shall then be

replaced in accordance with NMVC

Company’s Articles by a new general

partner or manager approved by SBA;

and/or

(3) With respect to a Corporate or

Partnership or LLC NMVC Company, to

obtain the appointment of SBA or its

designee as your receiver under section

363(c) of the Act for the purpose of

continuing your operations. The

appointment of a receiver to liquidate a

NMVC Company is not within such

consent, but is governed instead by the

relevant provisions of the Act.

Computation of NMVC Company’s

Capital Impairment

§ 108.1830 NMVC Company’s Capital

Impairment definition and general

requirements.

(a) Significance of Capital Impairment

condition. If you have a condition of

Capital Impairment, you are not in

compliance with the terms of your

Leverage. As a result, SBA has the right

to impose the applicable remedies for

noncompliance in § 108.1810(g).

(b) Definition of Capital Impairment

condition. You have a condition of

Capital Impairment if your Capital

Impairment Percentage, as computed in

§ 108.1840, exceeds 70 percent.

(c) Quarterly computation

requirement and procedure. You must

determine whether you have a condition

of Capital Impairment as of the end of

each fiscal quarter. You must notify

SBA promptly if you are capitally

impaired.

(d) SBA’s right to determine NMVC

Company’s Capital Impairment

condition. SBA may make its own

determination of your Capital

Impairment condition at any time.

§ 108.1840 Computation of NMVC

Company’s Capital Impairment Percentage.

(a) General. This section contains the

procedures you must use to determine

your Capital Impairment Percentage.

You must compare your Capital

Impairment Percentage to the maximum

permitted under § 108.1830(b) to

determine whether you have a condition

of Capital Impairment.

(b) Preliminary impairment test. If

you satisfy the preliminary impairment

test, your Capital Impairment

Percentage is zero and you do not have

to perform any more procedures in this

section. Otherwise, you must continue

with paragraph (c) of this section. You

satisfy the test if the following amounts

are both zero or greater:

(1) The sum of Undistributed Net

Realized Earnings, as reported on SBA

Form 468, and Includible Non-Cash

Gains.

(2) Unrealized Gain (Loss) on

Securities Held.

(c) How to compute your Capital

Impairment Percentage. (1) If you have

an Unrealized Gain on Securities Held,

compute your Adjusted Unrealized Gain

using paragraph (d) of this section. If

you have an Unrealized Loss on

Securities Held, continue with

paragraph (c)(2) of this section.

(2) Add together your Undistributed

Net Realized Earnings, your Includible

Non-cash Gains, and either your

Unrealized Loss on Securities Held or

your Adjusted Unrealized Gain.

28630 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

(3) If the sum in paragraph (c)(2) of

this section is zero or greater, your

Capital Impairment Percentage is zero.

(4) If the sum in paragraph (c)(2) of

this section is less than zero, drop the

negative sign, divide by your Regulatory

Capital (excluding Treasury Stock), and

multiply by 100. The result is your

Capital Impairment Percentage.

(d) How to compute your Adjusted

Unrealized Gain. (1) Subtract

Unrealized Depreciation from

Unrealized Appreciation. This is your

‘‘Net Appreciation’’.

(2) Determine your Unrealized

Appreciation on Publicly Traded and

Marketable securities. This is your

’’Class I Appreciation’’.

(3) Determine your Unrealized

Appreciation on securities that are not

Publicly Traded and Marketable and

meet the following criteria, which must

be substantiated to the satisfaction of

SBA (this is your ‘‘Class 2

Appreciation’’):

(i) The Small Business that issued the

security received a significant

subsequent equity financing by an

investor whose objectives were not

primarily strategic and at a price that

conclusively supports the Unrealized

Appreciation;

(ii) Such financing represents a

substantial investment in the form of an

arm’s length transaction by a

sophisticated new investor in the

issuer’s securities; and

(iii) Such financing occurred within

24 months of the date of the Capital

Impairment computation, or the Small

Business’ pre-tax cash flow from

operations for its most recent fiscal year

was at least 10 percent of the Small

Business’ average contributed capital for

such fiscal year.

(4) Perform the appropriate

computation from the table in

§ 107.1840(d)(4) of this chapter.

(5) Reduce the gain computed in

paragraph (d) (4) of this section by your

estimate of related future income tax

expense. Subject to any adjustment

required by paragraph (d)(6) of this

section, the result is your Adjusted

Unrealized Gain for use in paragraph

(c)(2) of this section.

(6) If any securities that are the source

of either Class 1 or Class 2 Appreciation

are pledged or encumbered in any way,

you must reduce the Adjusted

Unrealized Gain computed in paragraph

(d)(5) of this section by the amount of

the related borrowing or other

obligation, up to the amount of the

Unrealized Appreciation on the

securities.

Subpart L—Ending Operations as a

NMVC Company

§ 108.1900 Termination of participation as

a NMVC Company.

You may not terminate your

participation as a NMVC Company

without SBA’s prior written approval.

Your request for approval must be

accompanied by an offer of immediate

repayment of all of your outstanding

Leverage (including any prepayment

penalties thereon), or by a plan

satisfactory to SBA for the orderly

liquidation of the NMVC Company.

Subpart M—Miscellaneous

§ 108.1910 Non-waiver of SBA’s rights or

terms of Leverage security.

SBA’s failure to exercise or delay in

exercising any right or remedy under

the Act or the regulations in this part

does not constitute a waiver of such

right or remedy. SBA’s failure to require

you to perform any term or provision of

your Leverage does not affect SBA’s

right to enforce such term or provision.

Similarly, SBA’s waiver of, or failure to

enforce, any term or provision of your

Leverage or of any event or condition set

forth in § 108.1810 does not constitute

a waiver of any succeeding breach of

such term or provision or condition.

§ 108.1920 NMVC Company’s application

for exemption from a regulation in this part

108.

(a) General. You may file an

application in writing with SBA to have

a proposed action exempted from any

procedural or substantive requirement,

restriction, or prohibition to which it is

subject under this part, unless the

provision is mandated by the Act. SBA

may grant an exemption for such

applicant, conditionally or

unconditionally, provided the

exemption would not be contrary to the

purposes of the Act.

(b) Contents of application. Your

application must be accompanied by

supporting evidence that demonstrates

to SBA’s satisfaction that:

(1) The proposed action is fair and

equitable; and

(2) The exemption requested is

reasonably calculated to advance the

best interests of the NMVC program in

a manner consistent with the policy

objectives of the Act and the regulations

in this part.

§ 108.1930 Effect of changes in this part

108 on transactions previously

consummated.

The legality of a transaction covered

by the regulations in this part is

governed by the regulations in this part

in effect at the time the transaction was

consummated, regardless of later

changes. Nothing in this part bars SBA

enforcement action with respect to any

transaction consummated in violation of

provisions applicable at the time, but no

longer in effect.

§ 108.1940 Procedures for designation of

additional Low-Income Geographic Areas

(a) General. On its own initiative or

upon written request by a Person which

addresses the relevant factor(s) set forth

in paragraph (b) of this section, SBA

may consider whether to designate

additional census tracts (or equivalent

county divisions) as LI Areas.

(b) Criteria. SBA will consider one or

more of the following factors in

determining whether to designate a

particular census tract (or equivalent

county division) as an additional LI

Area:

(1) A substantial number of LowIncome Individuals reside in that census

tract (or equivalent county division).

(2) As adequately supported by

studies or other analyses or reliable

data, that census tract (or equivalent

county division) has a pattern of unmet

needs for investment capital.

(3) As adequately supported by

studies or other analyses or reliable

data, that census tract (or equivalent

county division) has indications of

economic distress.

(c) Procedure for designation. (1) If

SBA decides to consider the designation

of an additional LI Area, SBA will

publish in the Federal Register a notice

that it is considering such designation.

SBA will advise the public that it will

consider any comments supporting or

opposing the designation, submitted

within a specified time period.

(2) In making a final decision on

whether to designate a particular census

tract (or equivalent county division) as

an additional LI Area, SBA will

consider evidence submitted by any

requester, SBA’s own research, any

public comments submitted, and any

other information deemed relevant by

SBA.

(3) If SBA designates a particular

census tract (or equivalent county

division) as an additional LI Area, SBA

will publish a notice in the Federal

Register and, if appropriate, will amend

this part to include the additional LI

Area.

Subpart N—Requirements and

Procedures for Operational Assistance

Grants to NMVC Companies and

SSBICs

§ 108.2000 Operational Assistance Grants

to NMVC Companies and SSBICs.

(a) NMVC Companies. Regulations

governing Operational Assistance grants

Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations 28631

to NMVC Companies may be found in

subparts D and E of this part.

(b) SSBICs. (1) Notice of Funds

Availability (‘‘NOFA’’). SBA will

publish a NOFA in the Federal Register,

advising SSBICs of the availability of

funds for Operational Assistance grants

to SSBICs. This NOFA will be the same

as the NOFA described in § 108.300(a),

or will be published simultaneously

with that NOFA. An SSBIC may submit

an application for an Operational

Assistance grant only during the time

period specified for such purpose in the

NOFA.

(2) Eligibility. An SSBIC is eligible to

apply for an Operational Assistance

grant if:

(i) It intends to increase its Regulatory

Capital, as in effect on December 21,

2000, and to make Developmental

Venture Capital investments in the

amount of such increase;

(ii) It intends to raise binding

commitments for contributions in cash

or in-kind, and/or to purchase an

annuity, in an amount not less than 30

percent of the intended increase in its

Regulatory Capital described in

paragraph (b)(2)(i) of this section; and

(iii) It has a plan describing how it

intends to use the requested grant funds

to provide Operational Assistance to

Smaller Enterprises in which it has

made or expects to make Developmental

Venture Capital investments.

(3) Application requirements. (i) How

to apply. An SSBIC must apply for an

Operational Assistance grant using the

application packet provided by SBA.

Upon receipt of an application, SBA

may request clarifying or technical

information on the materials submitted

as part of the application.

(ii) Grant issuance fee. An SSBIC

must pay to SBA a grant issuance fee of

$5,000. An SSBIC must submit this fee

in advance, at the time of application

submission. If SBA does not award a

grant to the SSBIC, SBA will refund this

fee to the SSBIC.

(4) Contents of Application. Each

application must contain the

information specified in the application

packet provided by SBA, including the

following information:

(i) Amounts. An SSBIC must specify

the amount of Operational Assistance

grant funds it seeks from SBA and the

amount of Regulatory Capital it intends

to raise after December 21, 2000.

(ii) Plan. An SSBIC must submit a

plan addressing the following issues:

(A) Plan for providing Operational

Assistance. The SSBIC must describe

how it plans to use its grant funds to

provide Operational Assistance to

Smaller Enterprises in which it will

make Developmental Venture Capital

investments. Its plan must address the

types of Operational Assistance it

proposes to provide, and how it plans

to provide the Operational Assistance

through the use of licensed

professionals, when necessary, either

from its own staff or from outside

entities.

(B) Matching resources for

Operational Assistance grant. The

SSBIC must include a detailed

description of how it plans to obtain

binding commitments for contributions

in cash or in-kind, and/or to purchase

an annuity, to match the funds

requested from SBA for the SSBIC’s

Operational Assistance grant. If it

proposes to obtain commitments for

cash or in-kind contributions, it also

must estimate the ratio of cash to inkind contributions (in no event may inkind contributions exceed 50 percent of

the total contributions). The SSBIC must

discuss its potential sources of matching

resources, the estimated timing on

raising such match, and the extent of the

expressions of interest to commit such

match to the SSBIC.

(C) Projected amount of investment in

LI Areas. The SSBIC must describe the

amount of Developmental Venture

Capital investments it intends to make.

(D) Track record of management team

in obtaining public policy results

through investments. The SSBIC must

provide information concerning the past

track record of the SSBIC in making

investments that have had a

demonstrable impact on the socially or

economically disadvantaged businesses

targeted by the SSBIC program (for

example, new businesses created, jobs

created, or wealth created). Such

information might include case studies

or examples of the SSBIC’s successful

Financings.

(E) Market analysis. The SSBIC must

provide an analysis of the LI Areas in

which it intends to makes its

Developmental Venture Capital

investments and provide its Operational

Assistance to Smaller Enterprises,

demonstrating that the SSBIC

understands the market and the unmet

capital needs in such areas and how its

activities will meet these unmet capital

needs through Developmental Venture

Capital investments and have a positive

economic impact on those areas. The

analysis must include a description of

the extent of the economic distress in

the identified LI Areas. The SSBIC also

must analyze the extent of the demand

in such areas for Developmental

Venture Capital investments and any

factors or trends that may affect the

SSBIC’s ability to make effective

Developmental Venture Capital

investments.

(F) Regulatory Capital. The SSBIC

must include a detailed description of

how it plans to raise its Regulatory

Capital. The SSBIC must discuss its

potential sources of Regulatory Capital,

the estimated timing on raising such

funds, and the extent of the expressions

of interest to commit such funds to the

SSBIC.

(G) Projected impact. The SSBIC must

describe the criteria and economic

measurements to be used to evaluate

whether and to what extent it has met

the objectives of the NMVC program. It

must include:

(1) An estimate of the social,

economic, and community development

benefits to be created within identified

LI Areas over the next five years or more

as a result of its activities;

(2) A description of the criteria to be

used to measure the benefits created as

a result of its activities;

(3) A discussion about the amount of

such benefits created that it will

consider to constitute successfully

meeting the objectives of the NMVC

program.

(5) Evaluation and selection. SBA’s

evaluation and selection process is

intended to ensure that SSBIC requests

are evaluated on a competitive basis and

in a fair and consistent manner. SBA

will evaluate and select SSBICs for an

Operational Assistance grant award

solely at SBA’s discretion, by

considering the following criteria:

(i) The strength of the SSBIC’s

application, including the strength of its

proposal to provide Operational

Assistance to Smaller Enterprises in

which it intends to invest;

(ii) The SSBIC’s regulatory

compliance status and past track record

in being able to accomplish program

goals through its investment activity;

(iii) The likelihood that and the time

frame within which the SSBIC will be

able to raise the Regulatory Capital it

intends to raise and obtain the matching

resources described in paragraph

(b)(4)(ii)(B) of this section;

(iv) The need for Developmental

Venture Capital investments in the LI

Areas in which the SSBIC intends to

invest;

(v) The SSBIC’s demonstrated

understanding of the markets in the LI

Areas in which it intends to invest;

(vi) The extent to which the activities

proposed by the SSBIC will promote

economic development and the creation

of wealth and job opportunities in the

LI Areas in which it intends to invest

and among individuals living in LI

Areas;

(vii) The likelihood that the SSBIC

will fulfill the goals described in its

28632 Federal Register / Vol. 66, No. 100 / Wednesday, May 23, 2001 / Rules and Regulations

application and meet the objectives of

the NMVC program; and

(viii) The strength of the SSBIC’s

application compared to applications

submitted by other SSBICs intending to

invest in the same or proximate LI

Areas.

(6) Grant award. An SSBIC selected

for an Operational Assistance grant

award will receive a grant award only if

it increases its Regulatory Capital and

raises the amount of matching resources

set forth in its application, pursuant to

paragraph (b)(4)(i) of this section, which

must be at least the amount required in

§ 108.2030(d)(2), by a date established

by SBA.

§ 108.2010 Restrictions on use of

Operational Assistance grant funds.

(a) Restrictions applicable only to

SSBICs. An SSBIC that receives an

Operational Assistance grant must use

both grant funds awarded by SBA and

its matching resources only to provide

Operational Assistance in connection

with a Low-Income Investment made by

the SSBIC with Regulatory Capital

raised after December 21, 2000.

(b) Restrictions applicable to NMVC

Companies and SSBICs. A NMVC

Company or a SSBIC that receives an

Operational Assistance grant must not

use either grant funds awarded by SBA

or its matching resources for ‘‘general

and administrative expense,’’ as defined

in the Federal Acquisition Regulations,

‘‘Contract Cost Principles and

Procedures,’’ 48 CFR 31.001.

§ 108.2020 Amount of Operational

Assistance grant.

(a) Amount of grant to NMVC

Company. NMVC Companies are

eligible for an Operational Assistance

grant award equal to the amount of

matching resources raised by the NMVC

Company in accordance with

§§ 108.380(a)(1)(i)(B) and 108.2030.

(b) Amount of grant to SSBIC. SSBICs

are eligible for an Operational

Assistance grant award equal to the

amount of matching resources raised by

the SSBIC in accordance with

§§ 108.2000 and 108.2030.

(c) Pro rata reductions. In the event

that the total amount of funds available

to SBA for purposes of making

Operational Assistance grant awards to

NMVC Companies and SSBICs is not

sufficient to award grants in the

amounts described in paragraphs (a) and

(b) of this section, SBA will make pro

rata reductions in the amounts

otherwise awarded to each such NMVC

Company and SSBIC.

§ 108.2030 Matching requirements.

(a) General. All Operational

Assistance grant funds SBA awards to

an NMVC Company or a SSBIC must be

matched on a dollar for dollar basis with

funds or other resources raised by the

NMVC Company or SSBIC.

(b) Allowable sources. (1) Any source

other than SBA is an allowable source

of matching resources for an

Operational Assistance grant award.

(2) Neither a NMVC Company nor a

SSBIC may use funds or other resources

that it has used to satisfy a legal

requirement for obtaining funds under

any other Federal program, to satisfy the

matching resources requirements

described in this part.

(3) A portion of Private Capital may

be designated as matching resources if

the designated funds are used to

purchase an annuity pursuant to

paragraph (c)(2)(iv) of this section or are

otherwise segregated in a manner

acceptable to SBA.

(c) Type and form of matching

resources. (1) Matching resources may

come from cash contributions or in-kind

contributions. In-kind contributions

cannot exceed 50 percent of the total

amount of match raised by the NMVC

Company or SSBIC.

(2) Matching resources may be in the

form of:

(i) Cash;

(ii) In-kind contributions;

(iii) Binding commitments for cash or

in-kind contributions that may be

payable over a multiyear period

acceptable to SBA (but not to exceed

five years); and/or

(iv) An annuity, purchased with funds

other than Regulatory Capital, from an

insurance company acceptable to SBA

and that may be payable over a

multiyear period acceptable to SBA (but

not to exceed five years).

(d) Amount of matching resources.

(1) NMVC Companies. The amount of

matching resources required of an

NMVC Company is set forth in

§ 108.380(a)(1)(i)(B).

(2) SSBICs. The amount of matching

resources required of an SSBIC is 30

percent of the increase in its Regulatory

Capital since December 21, 2000, as set

forth in its application pursuant to

§ 108.2000(b)(4)(i), with which it has

made or will make Low-Income

Investments.

§ 108.2040 Reporting and recordkeeping

requirements.

(a) NMVC Companies. Policies

governing reporting, record retention,

and recordkeeping requirements

applicable to NMVC Companies may be

found in subpart H of this part.

(b) SSBICs. An SSBIC receiving an

Operational Assistance grant award

must comply with all reporting, record

retention and recordkeeping

requirements set forth in Circular A–110

of the Office of Management and Budget

and any grant award document executed

between SBA and the SSBIC, as well as

the reporting requirements in

§ 108.630(f) and the filing requirement

in § 108.640.

Dated: May 8, 2001.

John Whitmore,

Acting Administrator.

[FR Doc. 01–12501 Filed 5–22–01; 8:45 am]

BILLING CODE 8025–01–P