Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3189

the Agency intends to seek a solution

that will provide Licensees with greater

flexibility in making distributions of

securities, and to publish a proposed

rule dealing with this problem as soon

as possible.

One change concerning the timing of

distributions is being incorporated in

the final rule. In the preamble to the

proposed rule, SBA indicated that it was

willing to consider allowing tax

distributions under § 107.1550 to be

made during some window period

between the February 1 and May 1

Payment Dates, in order to allow

investors to receive cash before their

Federal tax filing deadlines. Based on

the comments received, SBA is

finalizing § 107.1550(d) with revised

language permitting a tax Distribution to

be made between March 1 and April 15

by a Licensee with a December 31 year

end. Licensees still must pay all

Prioritized Payments before being

eligible to make a tax distribution.

o. Trust Certificates

During the comment period, SBA

reviewed proposed §§ 107.1600 through

107.1680 pertaining to Trust Certificates

guaranteed by SBA to fund Leverage.

Section 321 of the Act and the

documentation of the Trust Certificates

are very specific with respect to the

terms and conditions. SBA has chosen

to shorten these sections by eliminating

language contained in the statute or

detailed in the Trust Certificates. None

of the changes made to the proposed

§§ 107.1600 through 107.1680 are

substantive. In the final rule, Trust

Certificates are covered in renumbered

§§ 107.1600 through 107.1640.

p. Miscellaneous Leverage Provisions

In the final rule, SBA has eliminated

proposed § 107.1700(a) and (c) as

redundant and unnecessary language.

Section 321(a) of the Act is specific with

respect to SBA’s unconditional

guarantee and the requirement for a

bond. SBA will continue to provide for

an unconditional guarantee. The

bonding requirement has been

eliminated in this section as well as in

the Trust Certificate sections because

the bond is required by statute.

10. Subpart J—Licensee’s

Noncompliance With Terms of Leverage

a. Capital Impairment

SBA received one comment on

proposed § 107.1840(d)(6), which would

have required a Licensee, in computing

its Capital Impairment Percentage, to

reduce its ‘‘Adjusted Unrealized Gain’’

by the amount of any borrowing or other

obligation associated with portfolio

securities that were the source of the

Unrealized Appreciation used as the

basis for determining the Adjusted

Unrealized Gain. The commenter

correctly pointed out that the reduction

should be limited to the extent of the

Unrealized Appreciation. SBA agrees

and has finalized the provision

accordingly.

11. Appendices to Part 107

The existing regulations include two

appendices: Appendix I, Accounting

Standards and Financial Reporting

Requirements for Small Business

Investment Companies, and appendix II,

Valuation Guidelines for SBICs. SBA

has decided to delete the appendices

from Part 107, and will publish them in

a different format at a later date.

Although they are no longer part of the

regulations themselves, both the

accounting standards and the valuation

guidelines remain applicable to all

Licensees.

Compliance With Executive Orders

12612, 12778, and 12866, the

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

et seq.), and the Paperwork Reduction

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

SBA certifies that this final rule will

not be a significant regulatory action for

purposes of Executive Order 12866

because it will not have an annual effect

on the economy of more than $100

million, and that it 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, et seq.

The primary purpose of the rule is to

streamline the regulations governing the

SBIC program by eliminating obsolete

regulations and reorganizing the

remainder in a more logical and

readable format.

Two areas of the regulations will have

some economic effect, including

possible effects on small entities. First,

license application fees and

examination fees will be raised. An

SBIC license applicant will pay a fee of

$10,000 to $20,000, compared with the

current $5,000. This increase is not

significant relative to the private capital

of an average Licensee, which exceeds

$10 million. Exam fees will continue to

be based on the total assets of a

Licensee, but at higher rates. The largest

Licensees, generally those with several

hundred million dollars of assets, could

experience fee increases of $20,000 or

more; however, the number of such

Licensees is currently very small.

Second, the changes in the regulations

governing ‘‘Cost of Money’’ (the

maximum amount a Licensee can charge

on loans and debt securities) will

potentially affect the borrowing costs of

small entities. Although the interest rate

on loans is determined primarily by

market forces, the final rule will raise

the interest rate ceiling on loans

extended by Licensees from 15 percent

to 19 percent. The total amount of loans

provided to small businesses by

Licensees is approximately $240 million

per year. Even if the additional four

percentage points were charged on the

entire balance of such loans, the annual

economic impact would be less than

$10 million.

For purposes of the Paperwork

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

certifies that this final rule contains no

new reporting or record keeping

requirements that have not already been

approved by the Office of Management

and Budget. The ‘‘Financing Eligibility

Statement’’ (SBA Form 1941) which is

required under § 107.610 has already

been approved by OMB under Control

Number 3245–0301.

For purposes of Executive Order

12612, SBA certifies that this rule does

not have any federalism implications

warranting the preparation of a

Federalism Assessment.

For purposes of Executive Order

12778, SBA certifies that this rule is

drafted, to the extent practicable, in

accordance with the standards set forth

in Section 2 of that Order.

List of Subjects in 13 CFR Part 107

Investment companies, Loan

programs-business, Reporting and

recordkeeping requirements, Small

businesses.

For the reasons set forth above, SBA

hereby revises Part 107 of Title 13 of the

Code of Federal Regulations to read as

follows:

BILLING CODE 8025–01–M

PART 107—SMALL BUSINESS

INVESTMENT COMPANIES

Subpart A—Introduction to Part 107

Sec.

107.20 Legal basis and applicability of this

part 107.

107.30 Amendments to Act and regulations.

107.40 How to read this part 107.

Subpart B—Definition of Terms Used in Part

107

107.50 Definition of terms.

Subpart C—Qualifying for an SBIC License

Organizing an SBIC

107.100 Organizing a Section 301(c)

Licensee.

107.110 Organizing a Section 301(d)

Licensee.

107.115 1940 Act and 1980 Act Companies.

107.120 Special rules for a Section 301(d)

Licensee owned by another Licensee.
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107.130 Requirement for qualified

management.

107.140 SBA approval of initial

Management Expenses.

107.150 Management and ownership

diversity requirement.

107.160 Special rules for Licensees formed

as limited partnerships.

Capitalizing an SBIC

107.200 Adequate capital for Licensees.

107.210 Minimum capital requirements for

Licensees.

107.220 Special minimum capital

requirements for Licensees issuing

Leverage.

107.230 Permitted sources of Private

Capital for Licensees.

107.240 Limitations on including non-cash

capital contributions in Private Capital.

107.250 Exclusion of stock options issued

by Licensee from Management Expenses.

Applying for an SBIC License

107.300 License application form and fee.

Subpart D—Changes in Ownership, Control,

or Structure of Licensee; Transfer of

License

Changes in Control or Ownership of

Licensee

107.400 Changes in ownership of 10

percent or more of Licensee but no

change of Control.

107.410 Changes in Control of Licensee

(through change in ownership or

otherwise).

107.420 Prohibition on exercise of

ownership or Control rights in Licensee

before SBA approval.

107.430 Notification to SBA of transactions

that may change ownership or Control.

107.440 Standards governing prior SBA

approval for a proposed transfer of

Control.

107.450 Notification to SBA of pledge of

Licensee’s shares.

Restrictions on Common Control or

Ownership of Two or More Licensees

107.460 Restrictions on Common Control or

ownership of two (or more) Licensees.

Change in Structure of Licensee

107.470 SBA approval of merger,

consolidation, or reorganization of

Licensee.

Transfer of License

107.475 Transfer of license.

Subpart E—Managing the Operations of a

Licensee

General Requirements

107.500 Lawful operations under the Act.

107.501 Identification as a Licensee.

107.502 Representations to the public.

107.503 Licensee’s adoption of an approved

Valuation Policy.

107.504 Computer capability requirements

of Licensee.

107.505 Facsimile requirement.

107.506 Safeguarding Licensee’s assets/

Internal controls.

107.507 Violations based on false filings

and nonperformance of agreements with

SBA.

107.508 Accessible office.

107.509 Employment of SBA officials.

Management and Compensation

107.510 SBA approval of Licensee’s

Investment Adviser/Manager

107.520 Management Expenses of a

Licensee.

Cash Management by a Licensee

107.530 Restrictions on investments of idle

funds by leveraged Licensees.

Borrowing by Licensees From Non-SBA

Sources

107.550 Prior approval of secured thirdparty debt of leveraged Licensees.

107.560 Subordination of SBA’s creditor

position.

107.570 Restrictions on third-party debt of

issuers of Participating Securities.

Voluntary Decrease in Licensee’s Regulatory

Capital

107.585 Voluntary decrease in Licensee’s

Regulatory Capital.

Requirement To Conduct Active Investment

Operations

107.590 Licensee’s requirement to maintain

active operations.

Subpart F—Recordkeeping, Reporting, and

Examination Requirements for Licensees

Recordkeeping Requirements for Licensees

107.600 General requirement for Licensee

to maintain and preserve records.

107.610 Required certifications for Loans

and Investments.

107.620 Requirements to obtain information

from Portfolio Concerns.

Reporting Requirements for Licensees

107.630 Requirement for Licensees to file

financial statements with SBA (Form

468).

107.640 Requirement to file Portfolio

Financing Reports (SBA Form 1031).

107.650 Requirement to report portfolio

valuations to SBA.

107.660 Other items required to be filed by

Licensee with SBA.

107.670 Application for exemption from

civil penalty for late filing of reports.

107.680 Reporting changes in Licensee not

subject to prior SBA approval.

Examinations of Licensees by SBA for

Regulatory Compliance

107.690 Examinations.

107.691 Responsibilities of Licensee during

examination.

107.692 Examination fees.

Subpart G—Financing of Small Businesses

by Licensees

Determining the Eligibility of a Small

Business for SBIC Financing

107.700 Compliance with size standards in

Part 121 of this Chapter as a condition

of Assistance.

107.710 Requirement to finance Smaller

Businesses.

107.720 Small Businesses that may be

ineligible for Financing.

107.730 Financings which constitute

conflicts of interest.

107.740 Portfolio diversification

(‘‘overline’’ limitation).

107.750 Conditions for financing a change

of ownership of a Small Business.

107.760 How a change in size or activity of

a Portfolio Concern affects the Licensee

and the Portfolio Concern.

Structuring Licensee’s Financing of Eligible

Small Businesses: Types of Financing

107.800 Financings in the form of Equity

Securities.

107.810 Financings in the form of Loans.

107.815 Financings in the form of Debt

Securities.

107.820 Financings in the form of

guarantees.

107.825 Purchasing Securities from an

underwriter or other third party.

Structuring Licensee’s Financing of an

Eligible Small Business: Terms and

Conditions of Financing

107.830 Minimum duration/term of

financing.

107.835 Exceptions to minimum duration/

term of Financing.

107.840 Maximum term of Financing.

107.845 Maximum rate of amortization on

Loans and Debt Securities.

107.850 Restrictions on redemption of

Equity Securities.

107.855 Interest rate ceiling and limitations

on fees charged to Small Businesses

(‘‘Cost of Money’’).

107.860 Financing fees and expense

reimbursements a Licensee may receive

from a Small Business.

107.865 Restrictions on Control of a Small

Business by a Licensee.

107.880 Assets acquired in liquidation of

Portfolio securities.

Limitations on Disposition of Assets

107.885 Disposition of assets to Licensee’s

Associates or to competitors of Portfolio

Concern.

Management Services and Fees

107.900 Management fees for services

provided to a Small Business by

Licensee or its Associate.

Subpart H—Non-leveraged LicenseesExceptions to Regulations

107.1000 Licensees without Leverage—

exceptions to the regulations.

Subpart I—SBA Financial Assistance for

Licensees (Leverage)

General Information About Obtaining

Leverage

107.1100 Types of Leverage available.

107.1110 How to apply for Leverage.

107.1120 General eligibility requirements

for Leverage.

107.1130 Leverage fees payable by

Licensee.

107.1140 Licensee’s acceptance of SBA

remedies under §§ 107.1800 through

107.1820.
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Maximum Amount of Leverage for Which a

Licensee Is Eligible

107.1150 Maximum amount of Leverage for

a Section 301(c) Licensee.

107.1160 Maximum amount of Leverage for

a Section 301(d) Licensee.

107.1170 Maximum amount of Participating

Securities for any Licensee.

Conditional Commitments by SBA To

Reserve Leverage for a Licensee

107.1200 SBA’s Leverage commitment to a

Licensee—application procedure,

amount, and term.

107.1210 Commitment fees payable by

Licensee.

107.1220 Requirement for Licensee to file

quarterly financial statements.

107.1230 Draw-downs by Licensee under

SBA’s Leverage commitment.

107.1240 Funding of Licensee’s draw

request through sale to short-term

investor.

Exchange of Outstanding Debentures for

Participating or Preferred Securities—

Section 301(d) Licensees

107.1350 Exchange by Section 301(d)

Licensee of Debentures for Preferred or

Participating Securities.

Preferred Securities Leverage—Section

301(d) Licensees

107.1400 Stock dividends or partnership

distributions on 4 percent Preferred

Securities.

107.1410 Requirement to redeem 4 percent

Preferred Securities.

107.1420 Articles requirements for 4

percent Preferred Securities issuers.

107.1430 Redeeming 4 percent Preferred

Securities with proceeds of nonsubsidized Debentures.

107.1440 Three percent preferred stock

issued before November 21, 1989.

107.1450 Optional redemption of Preferred

Securities.

Participating Securities Leverage

107.1500 General description of

Participating Securities.

107.1505 Liquidity requirements for

Licensees issuing Participating

Securities.

107.1510 How a Licensee computes

Earmarked Profit (Loss).

107.1520 How a Licensee computes and

allocates Prioritized Payments to SBA.

107.1530 How a Licensee computes SBA’s

Profit Participation.

107.1540 Distributions by Licensee—

Prioritized Payments and Adjustments.

107.1550 Distributions by Licensee—

permitted ‘‘tax Distributions’’ to private

investors and SBA.

107.1560 Distributions by Licensee—

required Distributions to private

investors and SBA.

107.1570 Distributions by Licensee—

optional Distribution to private investors

and SBA.

107.1580 Special rules for In-Kind

Distributions by Licensees.

107.1590 Special rules for companies

licensed on or before March 31, 1993.

Funding Leverage by Use of SBAGuaranteed Trust Certificates (‘‘TCs’’)

107.1600 SBA authority to issue and

guarantee Trust Certificates.

107.1610 Effect of prepayment or early

redemption of Leverage on a Trust

Certificate.

107.1620 Functions of agents, including

Central Registration Agent, Selling Agent

and Fiscal Agent.

107.1630 SBA regulation of Brokers and

Dealers and disclosure to purchasers of

Leverage or Trust Certificates.

107.1640 SBA access to records of the CRA,

Brokers, Dealers and Pool or Trust

assemblers.

Miscellaneous

107.1700 Transfer by SBA of its interest in

Licensee’s Leverage security.

107.1710 SBA authority to collect or

compromise its claims.

Subpart J—Licensee’s Noncompliance With

Terms of Leverage

107.1800 Licensee’s agreement to terms and

conditions in §§ 107.1810 and 107.1820.

107.1810 Events of default and SBA’s

remedies for Licensee’s noncompliance

with terms of Debentures.

107.1820 Conditions affecting issuers of

Preferred Securities and/or Participating

Securities.

Computation of Licensee’s Capital

Impairment

107.1830 Licensee’s Capital Impairment—

definition and general requirements.

107.1840 Computation of Licensee’s Capital

Impairment Percentage.

107.1850 Exceptions to Capital Impairment

provisions for Licensees with

outstanding Participating Securities.

Subpart K—Ending Operations as a

Licensee

107.1900 Surrender of license.

Subpart L—Miscellaneous

107.1910 Non-waiver of SBA’s rights or

terms of Leverage security.

107.1920 Licensee’s application for

exemption from a regulation in this part

107.

107.1930 Effect of changes in this part 107

on transactions previously

consummated.

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

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

Subpart A—Introduction to Part 107

§ 107.20 Legal basis and applicability of

this part 107.

(a) The regulations in this part

implement Title III of the Small

Business Investment Act of 1958, as

amended. All Licensees must comply

with all applicable regulations,

accounting guidelines and valuation

guidelines for Licensees.

(b) Provisions of this part which are

not mandated by the Act shall not

supersede existing State law. A party

claiming that a conflict exists shall

submit an opinion of independent

counsel, citing authorities, for SBA’s

resolution of the issues involved.

§ 107.30 Amendments to Act and

regulations.

A Licensee shall be subject to all

existing and future provisions of the Act

and Parts 107 and 112 of Title 13 of the

Code of Federal Regulations.

§ 107.40 How to read this part 107.

(a) Center Headings. All references in

this part to SBA forms, and instructions

for their preparation, are to the current

issue of such forms. Center headings are

descriptive and are used for

convenience only. They have no

regulatory effect.

(b) Capitalizing defined terms. Terms

defined in § 107.50 are capitalized in

this part 107.

(c) The pronoun ‘‘you’’ as used in this

part 107 means a Licensee or license

applicant, as appropriate, unless

otherwise noted.

Subpart B—Definition of Terms Used

in Part 107

§ 107.50 Definition of terms.

Accumulated Prioritized Payments

has the meaning set forth in § 107.1520.

Act means the Small Business

Investment Act of 1958, as amended.

Adjustments has the meaning set forth

in § 107.1520.

Affiliate or Affiliates has the meaning

set forth in § 121.401 of this chapter.

Articles mean articles of incorporation

or charter for a Corporate Licensee and

the partnership agreement or certificate

for a Partnership Licensee.

Assistance or Assisted means

Financing of or management services

rendered to a Small Business by a

Licensee pursuant to the Act and these

regulations.

Associate of a Licensee means any of

the following:

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

agent of a Corporate Licensee;

(ii) A Control Person, employee or

agent of a Partnership Licensee;

(iii) An Investment Adviser/Manager

of any Licensee, including any Person

who contracts with a Control Person of

a Partnership Licensee to be the

Investment Adviser/Manager of such

Licensee; or

(iv) Any Person regularly serving a

Licensee 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 Licensee or a limited

partner’s interest of at least 10 percent

of the partnership capital of a
3192 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

Partnership Licensee. However, a

limited partner in a Partnership

Licensee is not 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 partnership capital of the Licensee

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

Licensee.

(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; 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 Licensee).

(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 Licensee provides Financing,

then that Associate relationship is

considered to exist on the date of the

Financing.

(11) If any Licensee has any

ownership interest in another Licensee,

the two Licensees are Associates of each

other.

Capital Impairment has the meaning

set forth in § 107.1830(c).

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

§ 107.1620 and performing similar

functions for Debentures and

Participating Securities 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.

Combined Capital means the sum of

Regulatory Capital and outstanding

Leverage.

Commitment means a written

agreement between you and an eligible

Small Business that obligates you 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. You

may include in the agreement

reasonable conditions precedent to your

obligation to fund the commitment but

these conditions must be outside your

control.

Common Control means a condition

where two or more Licensees either

through ownership, management,

contract, or otherwise, are under the

Control of one group or Person. Two or

more Licensees 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.

Control means the possession, direct

or indirect, of the power to direct or

cause the direction of the management

and policies of a Licensee or other

concern, whether through the

ownership of voting securities, by

contract, or otherwise.

Control Person means any Person that

controls a Licensee, either directly or

through an intervening entity. A Control

Person includes:

(1) A general partner of a Partnership

Licensee;

(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 Licensee,

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 Licensee 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 Licensee;

(4) Any Person that controls or owns,

directly or through an intervening

entity, at least 50 percent of a

Partnership Licensee or any entity

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

definition.

Corporate Licensee. See definition of

Licensee in this section.

Cost of Money has the meaning set

forth in § 107.855.

Debenture Rate means the interest

rate, as published from time to time in

the Federal Register by SBA, for ten

year debentures issued by Licensees and

funded through public sales of

certificates bearing SBA’s guarantee.

User or guarantee fees, if any, paid by

a Licensee are not considered in

determining the Debenture Rate.

Debentures means debt obligations

issued by Licensees pursuant to section

303(a) of the Act and held or guaranteed

by SBA.

Debt Securities has the meaning set

forth in § 107.815.

Disadvantaged Business means a

Small Business that is at least 50

percent owned, and controlled and

managed, on a day to day basis, by a

person or persons whose participation

in the free enterprise system is

hampered because of social or economic

disadvantages.

Distribution means any transfer of

cash or non-cash assets to SBA, its agent

or Trustee, or to partners in a

Partnership Licensee, or to shareholders

in a Corporate Licensee. Capitalization

of Retained Earnings Available for

Distribution constitutes a Distribution to

the Licensee’s non-SBA partners or

shareholders.

Earmarked Assets has the meaning set

forth in § 107.1510(b). (See also

§ 107.1590.)

Earmarked Profit (Loss) has the

meaning set forth in § 107.1510.

Earned Prioritized Payments has the

meaning set forth in § 107.1520.

Equity Capital Investments means

investments in a Small Business 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;

however, neither Equity Capital

Investments nor such guarantee may be
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3193

collateralized or otherwise secured.

Investments classified as Debt Securities

(see §§ 107.800 and 107.815) are not

precluded from qualifying as Equity

Capital Investments.

Equity Securities has the meaning set

forth in § 107.800.

Financing or Financed means

outstanding financial assistance

provided to a Small Business by a

Licensee, 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 § 107.825).

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 or the

Redemption Price of and Prioritized

Payments on Participating Securities

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 Licensee 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

paragraph (1) of this definition. (See

also § 107.230(b)(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 (1)(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 (Pub. L. 93–406, 88 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 (1)(i) through (1)(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 Licensee 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 Licensee. 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 (determined in accordance with

paragraph (2)(i)(B) of this definition) 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 Licensee under a written contract

executed in accordance with the

provisions of § 107.510.

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 Associates’s sales or business

operations.

Leverage means financial assistance

provided to a Licensee by SBA, either

through the purchase or guaranty of a

Licensee’s Debentures or Participating

Securities, or the purchase of a

Licensee’s Preferred Securities, and any

other SBA financial assistance

evidenced by a security of the Licensee.

Leverageable Capital means

Regulatory Capital, excluding unfunded

commitments and Qualified Non-private

Funds whose source is Federal funds.

Licensee means either a corporation

(Corporate Licensee), or a limited

partnership organized pursuant to

§ 107.160 (Partnership Licensee), to

which a license has been granted

pursuant to the Act. For certain

purposes, the Entity General Partner of

a Partnership Licensee is treated as if it

were a Licensee (see § 107.160(b)(2)).

Loan has the meaning set forth in

§ 107.810.

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.

Management Expenses has the

meaning set forth in § 107.520.

1940 Act Company means a Licensee

which is registered under the

Investment Company Act of 1940.

1980 Act Company means a Licensee

which is registered under the Small

Business Investment Incentive Act of

1980.

Original Issue Price means the price

paid by the purchaser for securities at

the time of issuance.

Participating Securities means

preferred stock, preferred limited

partnership interests, or similar

instruments issued by Licensees,

including debentures having interest

payable only to the extent of earnings,

all of which are subject to the terms set

forth in §§ 107.1500 through 107.1590

and section 303(g) of the Act.

Partnership Licensee. See definition

of Licensee in this section.
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Payment Date means, for a

Participating Securities issuer, each

February 1, May 1, August 1, and

November 1 during the term of a

Participating Security.

Person means a natural person or

legal entity.

Pool means an aggregation of SBA

guaranteed Debentures or SBA

guaranteed Participating Securities

approved by SBA.

Portfolio means the securities

representing a Licensee’s total

outstanding Financing of Small

Businesses. It does not include idle

funds or assets acquired in liquidation

of Portfolio securities.

Portfolio Concern means a Small

Business Assisted by a Licensee.

Preferred Securities means nonvoting

preferred stock issued to SBA by a forprofit Section 301(d) Corporate

Licensee, or securities having similar

characteristics issued by a Section

301(d) Licensee organized as a nonprofit

corporation, or nonvoting preferred

limited partnership interests issued by a

Section 301(d) Partnership Licensee.

Prioritized Payments has the meaning

set forth in § 107.1520.

Private Capital has the meaning set

forth in § 107.230.

Profit Participation has the meaning

set forth in § 107.1500(c)(3).

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 (or in

the case of an In-kind Distribution by

the distributee 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.

Qualified Non-private Funds has the

meaning set forth in § 107.230.

Redemption Price means the amount

required to be paid by the issuer, or

successor to the issuer, of Preferred or

Participating Securities to repurchase

such securities from the holder. The

Redemption Price shall be the Original

Issue Price less any prepayments or

prior redemptions.

Regulatory Capital means:

(1) General. Regulatory Capital means

Private Capital, excluding non-cash

assets contributed to a Licensee or a

license applicant, and non-cash assets

purchased by a license 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 Licensee is excluded

from Regulatory Capital if SBA

determines that the collectibility of the

commitment is questionable.

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 Licensee

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.

Section 301(c) Licensee has the

meaning set forth in § 107.100.

Section 301(d) Licensee has the

meaning set forth in § 107.110.

Short-term Financing means

Financing for a term of less than five

years in accordance with the

regulations.

SIC Manual means the latest issue of

the Standard Industrial Classification

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.

Small Business means a small

business concern as defined in section

103(5) of the Act (including its

Affiliates), which for purposes of size

eligibility, meets the applicable criteria

set forth in Part 121 of this chapter.

Smaller Business has the meaning set

forth in § 107.710.

Start-up Financing means an Equity

Capital Investment in a Small Business

that—

(1) Has not had sales exceeding

$3,000,000 or positive cash flow from

operations in any of its last three full

fiscal years; and

(2) Was not formed to acquire any

existing business, unless the acquired

business satisfies paragraphs (1) and (2)

of this definition.

Temporary Debt has the meaning set

forth in § 107.570.

Trust means the legal entity created

for the purpose of holding guaranteed

Debentures or Participating Securities

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 Participating

Securities are issued by the Secretary of

the Treasury taking into consideration

the current average market yield on

outstanding marketable obligations of

the United States with maturities

comparable to the maturities of the

Trust Certificates being guaranteed by

SBA, adjusted to the nearest one-eighth

of one percent.

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 or Participating

Securities.

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 Licensee’s valuation

of each of its Loans and Investments, as

determined by its Board of Directors or

General Partner(s) in accordance with

Licensee’s valuation policies, exceeds

the cost basis thereof.

Unrealized Depreciation means the

amount by which a Licensee’s valuation

of each of its Loans and Investments, as

determined by its Board of Directors or

General Partner(s) in accordance with

Licensee’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 Licensee’s

Loans and Investments, less estimated

future income tax expense or estimated

realizable future income tax benefit, as

appropriate.

Venture Capital Financing has the

meaning set forth in § 107.1160.

Wind-up Plan has the meaning set

forth in § 107.590.

Subpart C—Qualifying for an SBIC

License

Organizing an SBIC

§ 107.100 Organizing a Section 301(c)

Licensee.

Section 301(c) Licensee means a

company licensed under section 301(c)
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of the Act. It may be organized as a forprofit corporation or as a limited

partnership created in accordance with

the special rules of § 107.160.

§ 107.110 Organizing a Section 301(d)

Licensee.

Section 301(d) Licensee means a

company licensed under section 301(d)

of the Act that may provide Assistance

only to Disadvantaged Businesses. A

Section 301(d) Licensee may be

organized as a for-profit corporation, a

non-profit corporation, or as a limited

partnership created in accordance with

the special rules of § 107.160.

§ 107.115 1940 Act and 1980 Act

Companies.

A 1940 Act or 1980 Act Company is

eligible to apply for an SBIC license,

and an existing Licensee is eligible to

apply for SBA’s approval to convert to

a 1940 Act or 1980 Act Company. In

either case, the 1940 Act or 1980 Act

Company may elect to be taxed as a

regulated investment company under

section 851 of the Internal Revenue

Code of 1986, as amended (26 U.S.C.

851). However, a Licensee making such

election may make Distributions only as

permitted under the applicable sections

of this part (see the definition of

Retained Earnings Available for

Distribution, § 107.585, and §§ 107.1540

through 107.1580).

§ 107.120 Special rules for a Section

301(d) Licensee owned by another

Licensee.

A Section 301(d) Licensee may be

licensed to operate as the subsidiary of

one or more Licensees (participant

Licensee), with or without non-Licensee

participation, subject to the following:

(a) Application. In reviewing the

license application, SBA will consider

what effect, if any, a capital contribution

to the proposed Section 301(d) Licensee

will have on the participant Licensee.

(b) Participant Licensees. Each

participant Licensee must propose to

own at least twenty percent of the

voting securities of the proposed

Section 301(d)Licensee.

(c) Capital contribution. A subsidiary

Section 301(d) Licensee must receive

capital contributions in cash, in an

amount at least equal to the minimum

capital requirement under § 107.210.

Capital contributed by a participant

Licensee in excess of the required

minimum may be in the form of

securities of a Disadvantaged Business,

valued at the lower of cost or fair value.

A participant Licensee must treat its

entire capital contribution to the

subsidiary as a reduction of its

Leveragable Capital. The participant

Licensee’s remaining Leverageable

Capital must be sufficient to support its

outstanding Leverage.

(d) No transfer of Leverage. A

participant Licensee may not transfer its

Leverage to a subsidiary Section 301(d)

Licensee.

§ 107.130 Requirement for qualified

management.

When applying for a license, you

must show, to the satisfaction of SBA,

that your current or proposed

management is qualified and has the

knowledge, experience, and capability

necessary for investing in the types of

businesses contemplated by the Act,

these regulations and your business

plan. You must designate at least one

individual as the official responsible for

contact with SBA.

§ 107.140 SBA approval of initial

Management Expenses.

If you plan to obtain Leverage, you

must have your Management Expenses

approved by SBA at the time of

licensing. (See § 107.520 for the

definition of Management Expenses.)

§ 107.150 Management and ownership

diversity requirement.

You must have diversity between

management and ownership in order to

be licensed, unless you do not plan to

obtain Leverage. To establish diversity,

you must meet the requirements in

paragraphs (a) and (b) of this section

unless SBA approves otherwise.

(a) Requirement one. You must satisfy

either paragraph (a)(1) or paragraph

(a)(2)of this section.

(1) You must have at least three

shareholders or limited partners, or at

least one acceptable Institutional

Investor, in either case with an aggregate

ownership interest equal to at least 30

percent of your Regulatory Capital. Such

investors must not be your Associates

(except for their status as your

shareholders or limited partners) or

Affiliates of any of your Associates. For

purposes of this paragraph (a)(1), the

following Institutional Investors are

acceptable:

(i) Entities regulated by state or

Federal authorities satisfactory to SBA;

(ii) Public or private employee

pension funds;

(iii) Trusts, foundations, or

endowments which are exempt from

Federal income taxation; or

(iv) Other Institutional Investors

satisfactory to SBA.

(2) Your common stock or limited

partnership interests are publicly

traded.

(b) Requirement two. Your

shareholders or limited partners may

not delegate their voting rights to any

other Person without prior SBA

approval. This restriction does not

apply to:

(1) Publicly traded Licensees.

(2) Proxies given to vote at single

specified meetings.

(3) Delegations of voting rights by

your investors to their investment

advisors, provided such advisors are not

your Associates (except for their status

as your shareholder or partner).

(c) Diversity based on Licensee’s

parent company. If you do not have

diversity as defined in paragraphs (a)

and (b) of this section, SBA in its sole

discretion may accept diversity

achieved on the same basis through

your parent company as a substitute. As

used in this paragraph (c), ‘‘parent

company’’ means an entity that directly

or indirectly has an interest of more

than 50 percent of your Regulatory

Capital.

(d) Requirement to maintain diversity

after licensing. If you were required to

have diversity between management

and ownership at the time you were

licensed, you must maintain such

diversity while you have outstanding

Leverage or Earmarked Assets, unless

SBA approves otherwise. If, at any time,

you no longer satisfy the diversity

criteria in paragraph (a) or (b) of this

section, you must:

(1) Notify SBA within 10 days; and

(2) Re-establish diversity within six

months.

(e) Exception to diversity rule. This

§ 107.150 does not apply if you are not

licensed to issue participating securities

and:

(1) You received your license before

November 28, 1995; or

(2) SBA received your license

application before November 28, 1995

and, as of such date, you had raised the

funds needed to begin operations as

contemplated in your business plan.

§ 107.160 Special rules for Licensees

formed as limited partnerships.

A limited partnership organized

under State law solely for the purpose

of performing the functions and

conducting the activities contemplated

under the Act may apply for a license

under section 301(c) or section 301 (d)

of the Act (‘‘Partnership Licensee’’).

(a) Number of Licensee’s General

Partners. If you are a Partnership

Licensee, you must have as your general

partner(s) at least two individuals, or at

least one corporation, partnership, or

limited liability company (LLC), or any

combination of individuals,

corporations, partnerships, or LLCs.

(b) Entity General Partner of Licensee.

A general partner which is a

corporation, limited liability company

or partnership (an ‘‘Entity General
3196 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

Partner’’) shall be organized under state

law solely for the purpose of serving as

the general partner of one or more

Licensees.

(1) 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, member

agreement, Limited Partnership

Agreement or other similar governing

instrument which must, in each case,

accompany the license application.

(2) An Entity General Partner is

subject to the same examination and

reporting requirements as a Licensee

under section 310(b) of the Act. The

restrictions and obligations imposed

upon a Licensee by §§ 107.1800 through

107.1820, and 107.30, 107.410 through

107.450, 107.470, 107.475, 107.500,

107.510, 107.585, 107.600, 107.680,

107.690 through 107.692, 107.865, and

107.1910 apply also to an Entity General

Partner of a Licensee.

(3) The general partner(s) of your

Entity General Partner(s) will be

considered your general partner.

(4) 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 § 107.50.

(5) If your Entity General Partner is a

limited partnership, it is subject to

paragraph (a) of this section.

(c) Other requirements for Partnership

Licensees. If you are a Partnership

Licensee:

(1) You must have a minimum

duration of ten 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

Licensee may be terminated by a vote of

your partners. (For purposes of this

provision SBA is not considered a

partner.);

(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 (c) in your

Limited Partnership Agreement.

(d) Obligations of a Control Person.

All Control Persons are bound by the

disciplinary provisions of sections 313

and 314 of the Act and by the conflictof-interest rules under section 312 of the

Act. The term Licensee, as used in

§§ 107.30, 107.460, and 107.680

includes all of the Licensee’s Control

Persons. The term Licensee as used in

§ 107.670 includes only the Licensee’s

general partner(s). The conditions

specified in §§ 107.1800 through

107.1820 and § 107.1910 apply to all

general partners.

(e) Liability of general partner for

partnership debts to SBA. Subject to

section 314 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.

(f) Reorganization of Licensee. A

corporate Licensee wishing to

reorganize as a Partnership Licensee, or

a Partnership Licensee wishing to

reorganize as a Corporate Licensee, may

apply to SBA for approval under

§ 107.470.

(g) 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 an SBIC

§ 107.200 Adequate capital for Licensees.

You must meet the requirements of

this § 107.200 to qualify for a license, to

continue as a Licensee, and to receive

Leverage.

(a) You must have enough Regulatory

Capital to provide reasonable assurance

that:

(1) You will operate soundly and

profitably over the long term; and

(2) You will be able to operate

actively in accordance with your

Articles and within the context of your

business plan, as approved by SBA.

(b) In SBA’s sole discretion, you must

be economically viable, taking into

consideration actual and anticipated

income and losses on your Loans and

Investments, and the experience and

qualifications of your owners and

managers.

§ 107.210 Minimum capital requirements

for Licensees.

(a) Minimum capital for Section

301(c) Licensees—general rule. A

Section 301(c) Licensee or applicant

must have Regulatory Capital (excluding

commitments from your investors) of at

least $2,500,000.

(b) Minimum capital for Section

301(d) Licensees—general rule. A

Section 301(d) Licensee or applicant

must have Regulatory Capital (excluding

commitments from your investors) of at

least $1,500,000.

(c) Exception to general rule—

grandfather clause. The minimum

capital requirements in paragraphs (a)

and (b) of this section do not apply if

you were licensed before October 2,

1990, or if SBA had your license

application on file before October 2,

1990 and granted you a license on the

basis of such application. If you qualify

for this exception, you must have at

least the minimum Private Capital

required by the regulations in effect on

October 1, 1990.

(d) Additional capital requirements

for Licensees seeking Leverage. If you

are a license applicant who intends to

seek Leverage, see § 107.220.

§ 107.220 Special minimum capital

requirements for Licensees issuing

Leverage.

(a) Participating Securities. You must

have Regulatory Capital of at least

$10,000,000 in order to apply for

Participating Securities, unless you

demonstrate to SBA’s satisfaction that

you can be financially viable over the

long term with a lower amount. You are

not permitted under any circumstances

to apply for Participating Securities if

your Regulatory Capital is less than

$5,000,000.

(b) Debentures. If you are licensed

after January 31, 1996, you must have

Regulatory Capital of at least $5,000,000

in order to apply for Debentures, unless

you demonstrate to SBA’s satisfaction

that you can be financially viable over

the long term with a lower amount.

(c) Companies licensed before October

2, 1990. If § 107.210(c) applies to you

and your Regulatory Capital (excluding

commitments from investors) is below

$2,500,000 (for a Section 301(c)

Licensee) or $1,500,000 (for a Section

301(d) Licensee):

(1) You are eligible for Leverage (other

than refinancing) only if you can

demonstrate to SBA’s satisfaction that

you have been profitable for three out of

your last four fiscal years before

applying for Leverage and, on the

average, have been profitable for all

such fiscal years.

(2) Even if you do not satisfy

paragraph (c)(1) of this section, you may

apply for Leverage needed to refinance

any Debenture outstanding on October

2, 1990, one time only, for a term to be

determined by SBA.

§ 107.230 Permitted sources of Private

Capital for Licensees.

Private Capital means the contributed

capital of a Licensee, plus unfunded
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3197

binding commitments by Institutional

Investors (including commitments

evidenced by a promissory note) to

contribute capital to a Licensee.

(a) Contributed capital. For purposes

of this section, contributed capital

means the paid-in capital and paid-in

surplus of a Corporate Licensee, or the

partners’ contributed capital of a

Partnership Licensee, in either case

subject to the limitations in paragraph

(b) of this section.

(b) Exclusions from Private Capital.

Private Capital does not include:

(1) Funds borrowed by a Licensee

from any source.

(2) Funds obtained through the

issuance of Leverage.

(3) Funds obtained directly or

indirectly from any Federal, State, or

local government, or any government

agency or instrumentality, except for

funds invested by a public pension fund

and ‘‘Qualified Non-private Funds’’ as

defined in paragraph (d) of this section.

(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 and is not backed

by a letter of credit from a State or

National bank acceptable to SBA.

(c) Non-cash capital contributions.

Capital contributions in a form other

than cash are subject to the limitations

in § 107.240.

(d) Qualified Non-private Funds.

Private Capital includes ‘‘Qualified

Non-private Funds’’ as defined in this

paragraph (d); however, investors of

Qualified Non-private Funds must not

control, directly or indirectly, a

Licensee’s management, or its board of

directors or general partner(s). Qualified

Non-private Funds are:

(1) Funds directly or indirectly

invested in any Licensee on or before

August 16, 1982 by any Federal agency

except SBA, under a statute explicitly

mandating the inclusion of such funds

in ‘‘Private Capital’’;

(2) Funds directly or indirectly

invested in any Licensee by any Federal

agency under a statute that is enacted

after September 4, 1992, explicitly

mandating the inclusion of such funds

in ‘‘Private Capital’’;

(3) Funds invested in any Licensee or

license applicant by one or more State

or local government entities (including

any guarantee extended by such

entities) in an aggregate amount that

does not exceed 33 percent of

Regulatory Capital; and

(4) Funds invested in any Section

301(d) Licensee or such license

applicant from the following sources:

(i) A State financing agency, or similar

agency or instrumentality, if the funds

invested are derived from such agency’s

net income and not from appropriated

State or local funds; and

(ii) Grants made by a state or local

government agency or instrumentality

into a nonprofit corporation or

institution exercising discretionary

authority with respect to such funds, if

SBA determines that such funds have

taken on a private character and the

nonprofit corporation or institution is

not a mere conduit.

(e) 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.

§ 107.240 Limitations on including noncash capital contributions in Private

Capital.

Non-cash capital contributions to a

Licensee or license applicant are

included in Private Capital only if they

fall into one of the following categories:

(a) Direct obligations of, or obligations

guaranteed as to principal and interest

by, the United States.

(b) Services rendered or to be

rendered to you, priced at no more than

their fair market value.

(c) Tangible assets used in your

operations, priced at no more than their

fair market value.

(d) Shares in a Disadvantaged

Business received by a subsidiary

Section 301(d) Licensee from its parent

Licensee, valued at the lower of cost or

fair value.

(e) Other non-cash assets approved by

SBA.

§ 107.250 Exclusion of stock options

issued by Licensee from Management

Expenses.

Stock options issued by any Licensee,

including a 1940 or 1980 Act Company,

are not considered compensation and

therefore do not count as part of a

Licensee’s Management Expenses.

Applying for an SBIC License

§ 107.300 License application form and

fee.

The license application must be

submitted on SBA Form 415 together

with a processing fee computed as

follows:

(a) All license applicants will pay a

base fee of $10,000.

(b) All applicants who will be

Partnership Licensees will pay an

additional $5,000 fee, for a total of

$15,000.

(c) All applicants who will be issuing

Participating Securities will pay an

additional $5,000 fee, for a total of

$15,000, or a total fee of $20,000 if they

also intend to be Partnership Licensees.

Subpart D—Changes in Ownership,

Control, or Structure of Licensee;

Transfer of License

Changes in Control or Ownership of

Licensee

§ 107.400 Changes in ownership of 10

percent or more of Licensee but no change

of Control.

(a) Prior approval requirements. 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 or

partnership capital.

(b) Fee. A processing fee of $200 must

accompany each such request for

approval of a change of ownership.

§ 107.410 Changes in Control of Licensee

(through change in ownership or

otherwise).

(a) Prior approval requirements. 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.

(b) Fee. A processing fee of $10,000

must accompany any application for

approval of one or more transactions or

events that will result in a transfer of

Control.

§ 107.420 Prohibition on exercise of

ownership or Control rights in Licensee

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 shareholders’ or partnership

meeting);

(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
3198 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

officer, director, partner, employee or

agent); or

(d) Allow ownership or Control to

pass to another Person.

§ 107.430 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.

§ 107.440 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.

§ 107.450 Notification to SBA of pledge of

Licensee’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 § 107.400 or § 107.410, as

appropriate.

Restrictions on Common Control or

Ownership of Two or More Licensees

§ 107.460 Restrictions on Common

Control or ownership of two (or more)

Licensees.

(a) General rule. 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:

(1) An officer, director, manager,

Control Person, or owner (with a direct

or indirect ownership interest of at least

10 percent) of another Licensee; or

(2) An officer or director of any

Person that directly or indirectly

controls, or is controlled by, or is under

Common Control with, another

Licensee.

(b) Exceptions to general rule. This

§ 107.460 does not apply to:

(1) Common officers, directors,

managers, or owners of a Section 301(c)

Licensee and its Section 301(d)

subsidiary; or

(2) Common officers, directors,

managers, Control Persons, or owners of

two (or more) Licensees which have no

Leverage.

Change in Structure of Licensee

§ 107.470 SBA approval of merger,

consolidation, or reorganization of

Licensee.

(a) Prior approval requirements. 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 § 107.440.

(b) Fee. A processing fee of $5,000

must accompany any application for

approval of a change in your form of

organization (from corporation to

partnership or partnership to

corporation).

Transfer of License

§ 107.475 Transfer of license.

You may not transfer your license in

any manner without SBA’s prior written

approval.

Subpart E—Managing the Operations

of a Licensee

General Requirements

§ 107.500 Lawful operations under the Act.

You must engage only in the activities

contemplated by the Act and in no other

activities.

§ 107.501 Identification as a Licensee.

You must display your SBIC license

in a prominent location. You must also

have a listed telephone number. Before

collecting an application fee or

extending Financing to a Small

Business, you must obtain a written

statement from the concern

acknowledging its awareness that you

are ‘‘a Federal licensee under the Small

Business Investment Act of 1958, as

amended.’’

§ 107.502 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 Licensee’’ or that

‘‘Your capital is safe because SBA’s

experts review proposed investments to

make sure they are safe for the

Licensee.’’

§ 107.503 Licensee’s adoption of an

approved Valuation Policy.

(a) SBA approval. You must have a

written valuation policy for use in

determining the value of your Loans and

Investments. You must include this

policy as part of your initial application

to SBA.

(b) Adopting SBA’s valuation

guidelines/automatic approval. If you

adopt the exact wording of the Model

Valuation Policy, ‘‘Valuation Guidelines

for SBICs’’, and make absolutely no

additions or changes, then SBA will

automatically accept your Valuation

Policy. With SBA’s prior written

approval, you may adopt a policy that

differs from the model.

(c) Licensee’s adoption of policy. Your

board of directors or general partners

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) If you

have outstanding Leverage or Earmarked

Assets, 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) Otherwise, you must value your

Loans and Investments only at your

fiscal year end.

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

require you to perform valuations more

frequently.

(4) 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. Your

independent public accountant must

review only valuations performed as of

the end of your fiscal year. The

accountant’s responsibility includes

reviewing your valuation procedures

and the implementation of such

procedures, including adequacy of

documentation. The accountant also has

reporting responsibilities concerning the

results of this review.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3199

§ 107.504 Computer capability

requirements of Licensee.

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 by modem to SBA.

§ 107.505 Facsimile requirement.

You must be able to receive fax

messages 24 hours per day at your

primary office.

§ 107.506 Safeguarding Licensee’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.

§ 107.507 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, Participating Security or

Preferred Security, 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 which is

necessary to make a statement not

misleading in light of the circumstances

under which the statement was made.

§ 107.508 Accessible office.

You must maintain an office that is

convenient to the public and is open for

business during normal working hours.

§ 107.509 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 Assistance

under the Act.

Management and Compensation

§ 107.510 SBA approval of Licensee’s

Investment Adviser/Manager.

You may employ an Investment

Adviser/Manager who will be subject to

the supervision of your board of

directors 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/

Advisor Manager for one Licensee does

not indicate approval of that manager

for any other Licensee.

(a) Management contract. The

contract must:

(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.

§ 107.520 Management Expenses of a

Licensee.

SBA must approve any increases in

your Management Expenses if you have

outstanding Leverage or Earmarked

Assets.

(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.

(c) If your Management Expenses have

not already been approved by SBA, you

must submit such expenses for approval

with your SBA Form 468 for your first

fiscal year ending after January 31, 1996.

Cash Management by a Licensee

§ 107.530 Restrictions on investments of

idle funds by leveraged Licensees.

(a) Applicability of this section. This

§ 107.530 applies if you have

outstanding Leverage or if you have

applied for Leverage.

(b) 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.

(c) 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.

(d) 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 § 107.730, provided the

terms of such deposit or repurchase

agreement are no less favorable than

those available to the general public.

Borrowing by Licensees From Non-SBA

Sources

§ 107.550 Prior approval of secured thirdparty debt of leveraged Licensees.

(a) Definition. In this § 107.550,

‘‘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, secured lines of

credit, and secured Temporary Debt of

a Licensee with outstanding

Participating Securities.
3200 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(b) General rule. If you have

outstanding Leverage, you must get

SBA’s written approval before you incur

any secured third-party debt or

refinance any debt with secured thirdparty 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) Additional rule for secured lines of

credit in existence on April 8, 1994. If

you have outstanding Leverage and you

have a secured line of credit that was

created on or before April 8, 1994, you

must receive SBA’s written approval of

the line before you increase the amounts

outstanding thereunder.

(d) Conditions for SBA approval. As a

condition of granting its approval under

this § 107.550, 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.

(e) 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 Leverage does not exceed 150

percent of your Leverageable Capital;

and

(4) 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.

§ 107.560 Subordination of SBA’s creditor

position.

(a) Debentures purchased or

guaranteed on or before July 1, 1991.

Under the terms of any Debenture

purchased or guaranteed by SBA on or

before July 1, 1991, SBA’s unsecured

claims against you, as a Debentureholder or as subrogee, are subordinated

in favor of all your other creditors,

except to the extent that such claims

may be subject to equitable

subordination in SBA’s favor.

(b) Debentures purchased or

guaranteed after July 1, 1991, including

refinancings of Debentures previously

purchased or guaranteed. (1) Under the

terms of any Debenture purchased or

guaranteed by SBA after July 1, 1991,

SBA’s unsecured claims against you, as

a Debenture-holder or as subrogee, are

subordinated only in favor of nonAssociate lenders; and, to the extent that

your indebtedness to such lenders

exceeds the lesser of $10,000,000 or 200

percent of your Regulatory Capital

(determined as of the date your

Debentures were purchased or

guaranteed), SBA’s unsecured claims

enjoy parity with those of other

unsecured creditors, except with respect

to indebtedness created on or before

July 1, 1991.

(2) In order to induce others to lend

you money after your Debenture has

been purchased or guaranteed, SBA may

agree in writing on a case-by-case basis

to subordinate its unsecured claims, on

such terms as it may determine, in favor

of one or more of your Associates, or in

favor of other lenders in excess of the

amounts mentioned in paragraph (b)(1)

of this section.

(3) SBA reserves the authority to

refuse to subordinate its claims if it

determines, at the time you request your

Debenture be purchased or guaranteed,

that the exercise of reasonable

investment prudence and your financial

condition warrant such refusal.

§ 107.570 Restrictions on third-party debt

of issuers of Participating Securities.

(a) General. Temporary Debt is the

only debt (other than Leverage) that you

are permitted to incur if you have

applied to issue Participating Securities

or if you have outstanding Participating

Securities. For additional rules

governing secured Temporary Debt, see

§ 107.550.

(b) Definition of Temporary Debt.

Temporary Debt means your short-term

borrowings if:

(1) Such borrowings are for the

purpose of maintaining your operating

liquidity or providing funds for a

particular Financing of a Small

Business;

(2) The funds are borrowed from a

regulated financial institution or a

regulated credit company (or, if

approved by SBA on a case-by-case

basis, from non-regulated lenders

including shareholders or partners);

(3) Your total outstanding borrowings

(not including Leverage) do not exceed

50 percent of your Leverageable Capital;

and

(4) All such borrowings are fully paid

off for at least 30 consecutive days

during your fiscal year so that you have

no outstanding third-party debt for 30

days.

Voluntary Decrease in Licensee’s

Regulatory Capital

§ 107.585 Voluntary decrease in

Licensee’s Regulatory Capital.

You must obtain SBA’s prior written

approval to reduce your Regulatory

Capital by more than two percent in any

fiscal year, unless otherwise permitted

under §§ 107.1560 and 107.1570. At all

times, you must retain sufficient

Regulatory Capital to meet the

minimum capital requirements in the

Act and § 107.210, and sufficient

Leverageable Capital to avoid having

excess Leverage in violation of section

303 of the Act and §§ 107.1150 through

107.1170.

Requirement To Conduct Active

Investment Operations

§ 107.590 Licensee’s requirement to

maintain active operations.

(a) Activity test. You must conduct

active operations, as determined under

this § 107.590, as a condition of your

license. You will be considered active if:

(1) During the eighteen months

preceding your most recent fiscal year

end, you made Financings totaling at

least 20 percent of your Regulatory

Capital; or

(2) Your idle funds did not exceed 20

percent of your total assets (at cost) at

your most recent fiscal year end.

(b) Permitted exceptions to activity

requirements. You are considered active

if your failure to meet the requirements

in paragraph (a) of this section is the

result of one or more of the following

factors:

(1) Your excess idle funds are the

result of the receipt, within the previous

nine months, of realized gains,

repayments, additional capital

contributions, or Leverage.

(2) It is necessary for you to maintain

excess idle funds to conduct your

operations because:

(i) Your unfunded commitments from

investors are no more than 20 percent of

your Regulatory Capital; and

(ii) You cannot receive additional

Leverage, solely because SBA has

insufficient funds available.

(3) You have not made sufficient

Financings because of a lack of available

funds, evidenced by Loans and

Investments (at cost) equal to at least 90

percent of your Combined Capital as of

your most recent fiscal year end.

(4) You have not made sufficient

Financings solely because SBA has
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3201

restricted your ability to make

investments.

(c) Applicability of activity

requirements. The activity requirements

in paragraph (a) of this section do not

apply if you have filed a ‘‘Wind-up

Plan’’ approved by SBA. ‘‘Wind-up

Plan’’ means a plan that you prepare

when you decide that you will no longer

make any Financings other than followon investments, and that you update

annually when you file your SBA Form

468. The plan must contain your best

estimates of the following:

(1) The remaining number of years

you expect to operate.

(2) For each of your Loans and

Investments, the expected liquidation

date and anticipated proceeds.

(3) The timing of your repayment of

obligations to SBA.

(4) The timing and amount of any

planned reductions in your

Management Expenses.

(d) Phase-in of activity requirements.

(1) General rule. You must meet the

activity requirements in this § 107.590

as of the end of your first full fiscal year

beginning after January 31, 1996. Until

then, you will be considered active if

you meet the activity requirements in

effect on January 30, 1996.

(2) Rule for new Licensees. If you

received your license after January 31,

1996, or if you received your license

less than eighteen months before the

fiscal year end determined under

paragraph (d)(1) of this section, you

must meet the activity requirements in

this § 107.590 as of the end of your

second full fiscal year beginning after

the date you received your license.

Subpart F—Recordkeeping, Reporting,

and Examination Requirements for

Licensees

Recordkeeping Requirements for

Licensees

§ 107.600 General requirement for

Licensee 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

Licensees, unless SBA approves

otherwise.

(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

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

Licensee, 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 license application.

(iii) All documents evidencing

ownership of the Licensee 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) and Financing Eligibility

Statements (SBA Form 1941).

(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).

§ 107.610 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) SBA Form 1941 (for Section 301(d)

Licensees only), executed both by you

and by the concern you are financing.

By executing this document, both

parties certify that the concern is a

Disadvantaged Business.

(d) 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.

§ 107.620 Requirements to obtain

information from Portfolio Concerns.

All the information required by this

section is subject to the requirements of

§ 107.600 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 and

projections 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 information. (1)

The terms of each Financing must

require the Portfolio Concern to provide,

at least annually, sufficient financial

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; and

(iii) Verify the use of Financing

proceeds.

(2) The information submitted to you

must be certified by the president, chief

executive officer, treasurer, chief

financial officer, general partner, or

proprietor of the Portfolio Concern.

(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
3202 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

acquire securities from an underwriter

in a public offering (see § 107.825). 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 § 107.610. 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 Licensees

§ 107.630 Requirement for Licensees to

file financial statements with 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 paragraph (e) 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. The annual

Form 468 must be audited by an

independent public accountant

acceptable to SBA.

(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. If you have an

outstanding Leverage commitment from

SBA, see the filing requirements in

§ 107.1220.

(c) Standards for preparation of Form

468. You must prepare SBA Form 468

in accordance with SBA’s Accounting

Standards and Financial Reporting

Requirements for Small Business

Investment Companies.

(d) Where to file Form 468. Submit all

filings of Form 468 to the Investment

Division of SBA.

(e) Reporting of economic impact

information on Form 468. Your annual

filing of SBA Form 468 must include an

assessment of the economic impact of

each Financing, specifying the full-time

equivalent jobs created or retained, and

the impact of the Financing on the

revenues and profits of the business and

on taxes paid by the business and its

employees.

§ 107.640 Requirement to file Portfolio

Financing Reports (SBA Form 1031).

For each Financing of a Small

Business (excluding guarantees), you

must submit a Portfolio Financing

Report on SBA Form 1031 within 30

days of the closing date.

§ 107.650 Requirement to report portfolio

valuations to SBA.

You must determine the value of your

Loans and Investments in accordance

with § 107.503. 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.

§ 107.660 Other items required to be filed

by Licensee 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) Other reports. You must file any

other reports that SBA may require by

written directive.

§ 107.670 Application for exemption from

civil penalty for late filing of reports.

(a) If it is impracticable to submit any

required report within the time allowed,

you may apply for an extension. The

request for an extension must:

(1) Be filed before the reporting

deadline;

(2) Certify to an extraordinary

occurrence, not within your control,

that makes timely filing of the report

impracticable; and

(3) Be accompanied by written

evidence of such occurrence, where

appropriate.

(b) Upon receipt of your request, SBA

may exempt you from the civil penalty

provision of section 315(a) of the Act, in

such manner and under such conditions

as SBA determines.

§ 107.680 Reporting changes in Licensee

not subject to prior SBA approval.

(a) Changes to be reported for post

approval. (1) 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. A processing fee

of $200 must accompany each request

for post approval of new officers,

directors, or Control Persons.

(2) Exception for non-leveraged

Licensees. If you do not have

outstanding Leverage or Earmarked

Assets, you are not required to obtain

post approval of new directors or new

officers other than your chief operating

officer; however, you must notify SBA

of the new directors or officers within

30 days.

(b) Approval by SBA. You may

consider any change submitted under

this section § 107.680 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 Licensees by SBA for

Regulatory Compliance

§ 107.690 Examinations.

SBA will examine all Licensees for

the purpose of evaluating regulatory

compliance.

§ 107.691 Responsibilities of Licensee

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 § 107.620(c). In

addition, the agreement between you

and the independent public accountant
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performing your audit must provide that

any information in the accountant’s

working papers be made available to

SBA upon request.

§ 107.692 Examination fees.

(a) SBA will assess fees for

examinations. Fees will be assessed

based on your assets as of the date of

your latest certified financial statement

submitted to SBA prior to the

examination. As a general rule, SBA

will not assess fees for special

examinations to obtain specific

information. The rate table is as follows:

Total assets of

Licensee Base rate Percent of assets

$0 to

$1,500,000.

$3,500 +0

$1,500,001 to

$5,000,000.

$3,700 +.065% over

$1,500,000

$5,000,001 to

$10,000,000.

$6,000 +.02% over

$5,000,000

$10,000,001 to

$15,000,000.

$7,000 +.01% over

$10,000,000

$15,000,001 to

$25,000,000.

$7,700 +.015% over

$15,000,000

$25,000,001 to

$50,000,000.

$9,200 +.015% over

$25,000,000

$50,000,001 to

$100,000,000.

$13,000 +.01% over

$50,000,000

$100,000,001

or more.

$18,000 +.009% over

$50,000,000

(b) 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 or your

records, SBA may assess an additional

fee of up to $500 per day.

Subpart G—Financing of Small

Businesses by Licensees

Determining the Eligibility of a Small

Business for SBIC Financing

§ 107.700 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 is 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.

§ 107.710 Requirement to finance Smaller

Businesses.

Your Portfolio must include

Financings to Smaller Businesses.

(a) Definition of Smaller Business. A

Smaller Business means a 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

the Financing for the industry in which

it is then primarily engaged.

(b) Phase 1 of Smaller Business

Financing requirement. At the close of

your first complete fiscal year beginning

on or after April 25, 1994, at least 10

percent of the total dollar amount of the

Financings you extended since April 25,

1994 must have been in Smaller

Businesses.

(c) Phase 2 of Smaller Business

Financing requirement. At the close of

each of your next fiscal years, at least 20

percent of the total dollar amount of the

Financings you extended since April 25,

1994 must have been invested in

Smaller Businesses.

(d) Financing a change of ownership

which results in the creation of a

Smaller Business. The Financing of a

change of ownership under § 107.750

which results in the creation of a

Smaller Business qualifies as a Smaller

Business Financing.

(e) Non-compliance with this section.

If you have not reached the required

percentage of Smaller Business

Financings at the end of any fiscal year,

then you must be in compliance by the

end of the following fiscal year.

§ 107.720 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.

(1) Definition. 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.

(2) Exception. You may provide

Venture Capital Financing to

Disadvantaged Businesses that are

relenders or reinvestors (except banks or

savings and loans not insured by

agencies of the federal government, and

agricultural credit companies). Without

SBA’s prior written approval, total

Financings under this paragraph (a)(2)

that are outstanding as of the close of

your fiscal year must not exceed your

Regulatory Capital.

(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. You may finance a

passive business if, for all Financings

extended, it passes substantially all the

proceeds through to the same eligible

Small Business that is not passive.

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

not permitted to finance any business

classified under Major Group 65 (Real

Estate) or Industry No. 1532 (Operative

Builders) of the SIC Manual, with the

following exceptions:

(i) Title Abstract companies (Industry

No. 6541); and

(ii) Companies listed under Industry

No. 6531 (for example, real estate

agents, brokers, escrow agents, managers

and multiple listing services) that derive

at least 80 percent of their revenue from

non-Affiliate sources.

(2) You are not permitted to finance

a business, regardless of SIC

classification, if the Financing is to be

used to acquire realty or to discharge an

obligation relating to the prior

acquisition of realty, 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.

(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.
3204 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(e) Farm land purchases. You are not

permitted to finance the acquisition of

farm land. Farm land 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) Associated supplier. You are not

permitted to finance a business that

purchases, or will purchase, goods or

services from a supplier who is your

Associate, except under the following

conditions:

(1) The amount of goods and services

purchased (or to be purchased) from

your Associate with the proceeds of the

Financing, or with funds released as a

result of the Financing, is less than 50

percent of the total amount of the

Financing (75 percent for a Section

301(d) Licensee);

(2) The price of such goods and

services is no higher than that charged

other customers of your Associate; and

(3) The Small Business purchases no

capital goods from your Associate.

(i) Financing Licensees. 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 Licensee; or

(2) To repay an indebtedness incurred

for the purpose of investing in a

Licensee.

§ 107.730 Financings which constitute

conflicts of interest.

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

Business, the Licensee, its shareholders

or partners, or SBA. Unless you obtain

a prior written exemption 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.

(2) Provide Financing to an Associate

of another Licensee if one of your

Associates has received or will receive

any direct or indirect Financing or a

Commitment from that Licensee or a

third Licensee (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.

(5) Provide Financing to a Small

Business for the purpose of purchasing

property from your Associate, except as

permitted under § 107.720(h).

(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 §§ 107.825(c) and

107.900), 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.

(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)(1)

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

leveraged Licensees, and both have

outstanding Participating Securities or

neither has outstanding Participating

Securities.

(iv) Both you and your Associate are

non-leveraged Licensees.

(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

§ 107.600. 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, 5 percent of the

Portfolio Concern’s equity.

(2) Have served for more than 30 days

as an officer, director or other

participant in the management of the

Portfolio Concern before you provided

Financing.

(3) 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 § 107.730, you need

not obtain SBA’s approval of the

transaction. However, you must

promptly notify SBA of the transaction

and satisfy the public notice

requirements in paragraph (g) of this

section.

(g) Public notice. Before SBA grants

an exemption under this § 107.730, you
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3205

must publish notice of the transaction in

a newspaper of general circulation in

the locality most directly affected by the

transaction, and furnish a certified copy

to SBA within 10 days of publication.

SBA will publish a similar notice in the

Federal Register.

§ 107.740 Portfolio diversification

(‘‘overline’’ limitation).

(a) General rule. This § 107.740

applies if you have outstanding

Leverage or want to be eligible for

Leverage. Without SBA’s prior written

approval, your aggregate outstanding

Financings and Commitments to a Small

Business (including its Affiliates) must

not exceed:

(1) 20 percent of Regulatory Capital

for a Section 301(c) Licensee; or

(2) 30 percent of Regulatory Capital

for a Section 301(d)Licensee.

(b) Outstanding Financings. 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.

(c) Adjustment to Regulatory Capital.

For the purposes of paragraph (a) of this

section, you may compute a higher

maximum permitted investment in a

Small Business (an ‘‘increased limit’’)

by adding ‘‘net unrealized gains’’ on

Publicly Traded and Marketable

securities to your Regulatory Capital,

subject to the following conditions:

(1) ‘‘Net unrealized gains’’ on Publicly

Traded and Marketable securities means

unrealized gains on Publicly Traded and

Marketable securities minus unrealized

losses on all Loans and Investments.

(2) You must value your Publicly

Traded and Marketable securities in

accordance with your SBA-approved

valuation policy.

(3) You must have positive Retained

Earnings Available for Distribution at

the time you compute an increased limit

under this paragraph (c).

(4) At the time you first compute an

increased limit, and as of the first

business day of each calendar quarter

that the increased limit is in effect, you

must keep copies in your files of the

NASDAQ listings (or the Wall Street

Journal) or written quotations from the

market makers quoting the Publicly

Traded and Marketable securities which

support the adjustment.

(5) If your net unrealized gains on

Publicly Traded and Marketable

securities are more than 30 percent

below their original level on the first

business day of any calendar quarter,

and remain so for the next 30 days, you

agree to do one of the following to

remain in compliance with the terms of

your Leverage:

(i) By the first day of the next calendar

quarter, increase your Regulatory

Capital sufficiently to restore support

for the increased limit; or

(ii) Lower the increased limit to

reflect the decrease in net unrealized

gains on Publicly Traded and

Marketable securities, and reduce any

Financings that exceed the lower limit.

Example to paragraph (c) of this section.

Your Regulatory Capital is $2,500,000 and

your overline limit is $500,000 (20 percent of

$2,500,000). On January 15, 1995, you

document net unrealized gains on Publicly

Traded and Marketable securities of $200,000

and compute an increased limit of $540,000

(20 percent of $2,700,000). You now make an

investment of $540,000 in a Small Business.

Nothing changes until the first business day

of April, 1996, when you document net

unrealized gains on Publicly Traded and

Marketable securities of only $120,000, a

reduction of more than 30 percent. Your net

unrealized gains remain at this level for the

next 30 days. Your increased limit is now

only $524,000 (20 percent of $2,620,000). By

July 1, 1996, you must either increase

Regulatory Capital by $80,000 to restore your

increased limit to $540,000, or reduce your

portfolio investment from $540,000 to

$524,000.

§ 107.750 Conditions for financing a

change of ownership of a Small Business.

You may finance a change of

ownership of a Small Business only

under the conditions set forth in this

section.

(a) The Financing must:

(1) Promote the sound development or

preserve the existence of the Small

Business;

(2) Help create a Small Business as a

result of a corporate divestiture; or

(3) Facilitate ownership in a

Disadvantaged Business.

(b) The Resulting Concern (as defined

in paragraph (c) of this section) must:

(1) Be a Small Business under

§ 107.700;

(2) Have 500 or fewer full-time

equivalent employees; or meet one of

the appropriate debt/equity ratio tests:

(i) If you have outstanding Leverage,

the Resulting Concern’s ratio of debt to

equity must be no more than 5 to 1; or

(ii) If you have no outstanding

Leverage, the Resulting Concern’s ratio

of debt to equity must be no more than

8 to 1.

(c) Definitions. (1) The ‘‘Resulting

Concern’’ is determined by viewing the

business as though the change of

ownership had already occurred, giving

effect to all contemplated financing,

mergers, and acquisitions.

(2) For purposes of this section,

‘‘debt’’ means long-term debt, including

contingent liabilities, but excluding

accounts payable, operating leases,

letters of credit, subordinated notes

payable to the seller, any other

liabilities approved for exclusion by

SBA and short-term working capital

loans (so long as the loans carry a zero

balance for 30 consecutive days during

the concern’s fiscal year).

(3) For purposes of this section,

‘‘equity’’ means common and preferred

stock (corporation), contributed capital

(partnership), or membership interests

(limited liability company).

§ 107.760 How a change in size or activity

of a Portfolio Concern affects the Licensee

and the Portfolio Concern.

(a) Effect on Licensee 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 § 107.740, you may provide

additional Financing to the concern up

to the time it makes a public offering of

its securities.

(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

Licensee’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 § 107.740.

(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
3206 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(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

§ 107.740.

Structuring Licensee’s Financing of

Eligible Small Businesses: Types of

Financing

§ 107.800 Financings in the form of Equity

Securities.

(a) You may purchase the Equity

Securities of a Small Business. You may

not, inadvertently or otherwise:

(1) Become a general partner in any

unincorporated business; or

(2) Become jointly or severally liable

for any obligations of an unincorporated

business.

(b) Definition. 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. If the

Financing agreement contains debt-type

acceleration provisions or includes

redemption provisions other than those

permitted under § 107.850, the security

will be considered a Debt Security for

purposes of § 107.855.

§ 107.810 Financings in the form of Loans.

You may make Loans to Small

Businesses. A Loan means a transaction

evidenced by a debt instrument with no

provision for you to acquire Equity

Securities.

§ 107.815 Financings in the form of Debt

Securities.

You may purchase Debt Securities

from Small Businesses.

(a) Definition. 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.

(b) Restriction on options obtained by

Licensee’s management and employees.

If you have outstanding Leverage or

plan to obtain Leverage, your

employees, officers, directors 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.

§ 107.820 Financings in the form of

guarantees.

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 non-Associate creditor.

(a) You may not issue a guaranty if:

(1) You would become subject to State

regulation as an insurance, guaranty or

surety business;

(2) The amount of the guaranty plus

any direct Financings to the Small

Business exceed the overline limitations

of § 107.740, 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; or

(3) The total financing cost to the

Small Business exceeds the cost of

money limits of § 107.855.

(b) Pledge of Licensee’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.

§ 107.825 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. If

you have outstanding Leverage or plan

to obtain Leverage, 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 paragraph (c) of this section.

(c) Underwriter’s requirements. If you

have outstanding Leverage or plan to

obtain Leverage, 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, provided

it is no more than 25 percent of the total

offering. If you buy more than 25

percent of the offering, the amount you

pay to the Associate underwriter must

not exceed the total of the application

and closing fees and reimbursable

expenses permitted by § 107.860.

(d) Securities purchased from another

Licensee or from SBA. You may

purchase from, or exchange with,

another Licensee, Portfolio securities (or

any interest therein). Such purchase or

exchange may only be made on a nonrecourse 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 § 107.825 if:

(1) Such acquisition is a reasonably

necessary part of the overall sound

Financing of the Small Business under

the Act; or

(2) The securities are acquired to

finance a change of ownership under

§ 107.750.

Structuring Licensee’s Financing of an

Eligible Small Business: Terms and

Conditions of Financing

§ 107.830 Minimum duration/term of

financing.

(a) General rule for Section 301(c)

Licensees. If you are a Section 301(c)

Licensee, the duration/term of all your

Financings must be for a minimum

period of five years. Exception: You may

finance a Disadvantaged Business for a

minimum term of four years.

(b) General rule for Section 301(d)

Licensees. The duration/term of your

Financings may be for a minimum

period of four years.

(c) Restrictions on mandatory

redemption of Equity Securities. If you

have acquired Equity Securities, options

or warrants on terms that include

redemption by the Small Business, you

must not require redemption by the

Small Business within the first five

years of your acquisition except as

permitted in § 107.850.

(d) Special rules for Loans and Debt

Securities. (1) Term. The minimum term

for Loans and Debt Securities starts with

the first disbursement of the Financing.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3207

(2) Prepayment before five years. You

must permit voluntary prepayment of

Loans and Debt Securities by the Small

Business at any time during the initial

five year term. You must obtain SBA’s

prior written approval of any

restrictions on the ability of the Small

Business to prepay other than the

imposition of a reasonable prepayment

penalty under paragraph (d)(3) of this

section.

(3) Prepayment penalties. You may

charge a reasonable prepayment penalty

which must be agreed upon at the time

of the Financing. If SBA determines that

a prepayment penalty is unreasonable,

you must refund the entire penalty to

the Small Business. A prepayment

penalty equal to 5 percent of the

outstanding balance during the first year

of any Financing, declining by one

percentage point per year through the

fifth year, is considered reasonable.

§ 107.835 Exceptions to minimum

duration/term of Financing.

You may make a Short-term

Financing for a term less than five years

if the Financing is:

(a) An interim financing (for a period

not to exceed one year) in

contemplation of long-term Financing.

The contemplated long-term Financing

must be in an amount at least equal to

the short-term Financing, and must be

made by you alone or in participation

with other investors; or

(b) For protection of your prior

investment(s); or

(c) For the purpose of Financing a

change of ownership under § 107.750.

The total amount of such Financings

may not exceed 20 percent of your

Loans and Investments (at cost) at the

end of any fiscal year; or

(d) For the purpose of aiding a Small

Business in performing a contract

awarded under a Federal, State, or local

government set-aside program for

‘‘minority’’ or ‘‘disadvantaged’’

contractors.

§ 107.840 Maximum term of Financing.

The maximum term of any Loan or

Debt Security Financing must be no

longer than 20 years.

§ 107.845 Maximum rate of amortization on

Loans and Debt Securities.

The principal of any Loan (or the loan

portion of a Debt Security) with a term

of five years or less cannot be amortized

faster than straight line. If the term is

greater than five years, the principal

cannot be amortized faster than straight

line for the first five years.

§ 107.850 Restrictions on redemption of

Equity Securities.

(a) A Portfolio Concern cannot be

required to redeem Equity Securities

earlier than five years from the date of

the first closing unless:

(1) The concern makes a public

offering, or has a change of management

or control, or files for protection under

the provisions of the Bankruptcy Code,

or materially breaches your Financing

agreement; or

(2) You make a follow-on investment,

in which case the new securities may be

redeemed in less than five years, but no

earlier than the redemption date

associated with your earliest Financing

of the concern.

(b) The redemption price must be

either:

(1) A fixed amount that is no higher

than the price you paid for the

securities; or

(2) An amount that cannot be fixed or

determined before the time of

redemption. In this case, the redemption

price must be based on:

(i) A reasonable formula that reflects

the performance of the concern (such as

one based on earnings or book value); or

(ii) The fair market value of the

concern at the time of redemption, as

determined by a professional appraisal

performed under an agreement

acceptable to both parties.

(c) Any method for determining the

redemption price must be agreed upon

no later than the date of the first (or

only) closing of the Financing.

§ 107.855 Interest rate ceiling and

limitations on fees charged to Small

Businesses (‘‘Cost of Money’’).

‘‘Cost of Money’’ means the interest

and other consideration that you receive

from a Small Business. Subject to lower

ceilings prescribed by local law, the

Cost of Money to the Small Business

must not exceed the ceiling determined

under this section.

(a) Financings to which the Cost of

Money rules apply. This section applies

to all Loans and Debt Securities. As

required by § 107.800(b), you must

include as Debt Securities any equity

interests with redemption provisions

that do not meet the restrictions in

§ 107.850.

(b) When to determine the Cost of

Money ceiling for a Financing. You may

determine your Cost of Money ceiling

for a particular Financing as of the date

you issue a Commitment or as of the

date of the first closing of the Financing.

Once determined, the Cost of Money

ceiling remains fixed for the duration of

the Financing.

(c) How to determine the Cost of

Money ceiling for a Financing. At a

minimum, you may use a Cost of Money

ceiling of 19 percent for a Loan and 14

percent for a Debt Security. To

determine whether you may charge

more, do the following:

(1) Choose a base rate for your Cost of

Money computation. The base rate may

be either the Debenture Rate currently

in effect or your own ‘‘Cost of Capital’’

as determined under paragraph (d) of

this section.

(2) For a Loan, add 11 percentage

points to the base rate; for a Debt

Security, add 6 percentage points. In

either case, round the sum down to the

nearest eighth of one percent.

(3) If the result is more than 19

percent (for a Loan) or 14 percent (for

a Debt Security), you may use it as your

Cost of Money ceiling.

(4) If two or more Licensees

participate in the same Financing of a

Small Business, the base rate used in

this paragraph (c) is the highest of the

following:

(i) The current Debenture rate;

(ii) The Cost of Capital of the lead

Licensee; or

(iii) The weighted average of the Cost

of Capital for all Licensees participating

in the Financing.

(d) How to determine your Cost of

Capital. ‘‘Cost of Capital’’ is an optional

computation of the weighted average

interest rate you pay on your ‘‘qualified

borrowings’’. ‘‘Qualified borrowings’’

means your Debentures together with

your borrowings at or below the usual

interest rate charged by banks in your

locality on the date your loan was made.

(1) For any fiscal year, you may

compute your Cost of Capital:

(i) As of the first day of your fiscal

year, to remain in effect for the entire

year; or

(ii) As of the first day of every fiscal

quarter during the fiscal year, to remain

in effect for the duration of the quarter.

(2) For each qualified borrowing

outstanding at your last fiscal year or

fiscal quarter end, multiply the ending

principal balance (net of related

unamortized fees) by the number of

days during the past four fiscal quarters

that the borrowing was outstanding, and

divide the result by 365.

(3) Add together the amounts

computed for all borrowings under

paragraph (d)(2)of this section. The

result is your weighted average

borrowings.

(4) For all qualified borrowings

outstanding at your last fiscal year or

fiscal quarter end, determine the

aggregate interest expense for the past

four fiscal quarters (excluding

amortization of loan fees).

(5) Divide the interest expense from

paragraph (d)(4)of this section by the
3208 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

weighted average borrowings from

paragraph (d)(3)of this section, and

multiply by 100. The result is your Cost

of Capital, which you may use to

compute a Cost of Money ceiling under

paragraph (c) of this section.

(e) SBA review of Cost of Capital

computation. You must keep your Cost

of Capital computations in a separate

file available for SBA’s review.

(1) A computation that is kept in such

a file and is audited by your

independent public accountant is

considered correct unless SBA

demonstrates otherwise.

(2) If a computation is not kept in

such a file or is unaudited, you must

prove its accuracy to SBA’s satisfaction.

(f) Charges included in the Cost of

Money. The Cost of Money includes all

interest, points, discounts, fees,

royalties, profit participation, and any

other consideration you receive from a

Small Business, except for the specific

exclusions in paragraph (g) of this

section. For equity interests subject to

the Cost of Money rules (see paragraph

(a) of this section), you must include:

(1) The portion of the fixed

redemption price that exceeds your

original cost.

(2) Any amount of a redemption that

is paid out of accounts other than the

Small Business’s capital accounts

(capital, paid-in surplus, or retained

earnings of a corporation; or partners’

capital of a partnership).

(g) Charges excluded from the Cost of

Money. You may exclude from the Cost

of Money:

(1) Closing fees, application fees, and

expense reimbursements, each as

permitted under § 107.860.

(2) Reasonable prepayment penalties

permitted under § 107.830(d)(3).

(3) Out-of-pocket conveyance and/or

recordation fees and taxes.

(4) Reasonable closing costs.

(5) Fees for management services as

permitted under § 107.900.

(6) Reasonable and necessary out-ofpocket expenses you incur to monitor

the Financing.

(7) Board of director fees not in excess

of those paid to other outside directors,

if your board representation meets the

requirements of § 107.730(e).

(8) A reasonable fee for arranging

financing for a Small Business from a

source that is neither a Licensee nor an

Associate of yours. The Small Business

must agree in writing to pay such a fee

before you arrange the financing.

(9) A one-time ‘‘bonus’’ that satisfies

the requirements in paragraph (i) of this

section.

(10) The difference between the

contractual interest rate of the Financing

and a default rate of interest permitted

as follows:

(i) If a Small Business is in default,

you may charge a default rate of interest

as much as 7 percentage points higher

than the contractual rate until the

default is cured.

(ii) For this purpose, ‘‘default’’ means

either failure to pay an amount when

due or failure to provide information

required under the Financing

documents.

(h) How to evaluate compliance with

the Cost of Money ceiling. You must

determine whether a Financing is

within the Cost of Money ceiling based

on its discounted cash flows, as follows:

(1) Beginning with the date of the first

disbursement (‘‘period zero’’), identify

your cash inflows and cash outflows for

each period of the Financing. The

appropriate period to use (such as years,

quarters, or months) depends on how

you have structured the disbursements

and payments.

(2) Discount the cash flows back to

the first disbursement date using the

Cost of Money ceiling from paragraph

(d) of this section as the discount rate.

(3) If the result is zero or less, the

Financing is within the Cost of Money

ceiling; if it is greater than zero, the

Financing exceeds the Cost of Money

ceiling.

(i) ‘‘Bonus’’ paid by a Small Business.

You may provide Financing to a Small

Business that includes both a loan and

a one-time ‘‘bonus’’ determined at the

end of the loan term. For Cost of Money

purposes, you must treat such a

Financing as a Debt Security. You may

exclude a bonus from the Cost of Money

only if it is:

(1) Computed on or after the date that

the Financing is repaid in full or was

originally due to be repaid in full,

whichever is earlier;

(2) Not fixed or determinable before

the computation date; and

(3) Fully contingent upon factor(s)

that reflect the performance of the Small

Business. The period for which such

performance is measured must not

extend beyond the Small Business’s

fiscal year end immediately following

repayment of the Financing. You must

demonstrate to SBA’s satisfaction that

the factor(s) used are appropriate

indicators of performance. Examples of

generally acceptable factors include net

income and operating cash flow;

examples of generally unacceptable

factors include gross revenues or gross

margin.

§ 107.860 Financing fees and expense

reimbursements a Licensee may receive

from a Small Business.

You may collect Financing fees and

receive expense reimbursements from a

Small Business only as permitted under

this § 107.860.

(a) Application fee. You may collect a

nonrefundable application fee from a

Small Business to review its Financing

application. The application fee may be

collected at the same time as the closing

fee under paragraph (c) or (d) of this

section, or earlier. The fee must be:

(1) No more than 1 percent of the

amount of Financing requested (or, if

two or more Licensees participate in the

Financing, their combined application

fees are no more than 1 percent of the

total Financing requested); and

(2) Agreed to in writing by the

Financing applicant.

(b) SBA review of application fees. For

any fiscal year, if the number of

application fees you collect is more than

twice the number of Financings closed,

SBA in its sole discretion may

determine that you are engaged in

activities not contemplated by the Act,

in violation of § 107.115.

(c) Closing fee—Loans. You may

charge a closing fee on a Loan if:

(1) The fee is no more than 2 percent

of the Financing amount (or, if two or

more Licensees participate in the

Financing, their combined closing fees

are no more than 2 percent of the total

Financing amount); and

(2) You charge the fee no earlier than

the date of the first disbursement.

(d) Closing fee—Debt or Equity

Financings. You may charge a Closing

Fee on a Debt Security or Equity

Security Financing if:

(1) The fee is no more than 4 percent

of the Financing amount (or, if two or

more Licensees participate in the

Financing, their combined closing fees

are no more than 4 percent of the total

Financing amount); and

(2) You charge the fee no earlier than

the date of the first disbursement.

(e) Limitation on dual fees. If another

Licensee or an Associate of yours

collects a transaction fee under

§ 107.900(e) in connection with your

Financing of a Small Business, the sum

of the transaction fee and your

application and closing fees cannot

exceed the maximum application and

closing fees permitted under this

§ 107.860.

(f) Expense reimbursements. You may

charge a Small Business for the

reasonable out-of-pocket expenses, other

than Management Expenses, that you

incur to process its Financing

application. If SBA determines that any

of your reimbursed expenses are

unreasonable or are Management

Expenses, SBA will require you to

include such amounts in the Cost of

Money or refund them to the Small

Business.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3209

(g) Breakup fee. If a Small Business

accepts your Commitment and then fails

to close the Financing because it has

accepted funds from another source,

you may charge a ‘‘breakup fee’’ equal

to the closing fee that you would have

been permitted to charge under

paragraph (c) or (d) of this section.

§ 107.865 Restrictions on Control of a

Small Business by a Licensee.

(a) General. You must not operate a

business enterprise or function as a

holding company exercising Control

over a business enterprise. Neither you,

nor you and your Associates, nor you

and other Licensee(s) (in the latter two

cases, the ‘‘Investor Group’’) may,

except as set forth in this section,

assume Control over a Small Business

through management agreements, voting

trusts, majority representation on the

board of directors, or otherwise.

(b) Presumption of Control. Control

over a Small Business will be presumed

to exist whenever you or the Investor

Group own or control, directly or

indirectly:

(1) At least 50 percent of the

outstanding voting securities, if there

are fewer than 50 shareholders; or

(2) More than 25 percent of the

outstanding voting securities, if there

are 50 or more shareholders; or

(3) A block of at least 20 percent of

the outstanding voting securities, if

there are 50 or more shareholders and

no other party holds a larger block.

(c) Rebuttals to presumption of

Control. A presumption of Control

under paragraph (b) of this section is

rebutted if:

(1) The management of the Small

Business owns at least a 25 percent

interest in the voting securities of the

business; and

(2) The management of the Small

Business can elect at least 40 percent

(rounded down) of the board members

of a corporation, general partners of a

limited partnership, or managers of a

limited liability company, as

appropriate, and the Investor Group can

elect no more than 40 percent (rounded

up). The balance of such officials may

be elected through mutual agreement by

management and the Investor Group.

(d) Temporary Control permitted. You

may acquire temporary Control:

(1) Where reasonably necessary for

the protection of your investment;

(2) If there has been a material breach

of the Financing agreement by the Small

Business;

(3) If there has been a substantial

change in the Small Business’s

operations or products during the past

2 years, or such a change is the intended

result of the Financing, and the Investor

Group’s Financing constitutes the Small

Business’s major source of capital; or

(4) In the case of a Start-up Financing,

if you or the Investor Group constitute

the Small Business’s major source of

capital.

(e) Control certification. If you take

temporary Control of a Small Business

under paragraph (d) of this section, you

must file a Control certification with

SBA within 30 days. The certification

must state:

(1) The date on which you took

Control;

(2) The basis for taking Control; and

(3) Your agreement to relinquish

Control within five years (although you

may, under extraordinary

circumstances, request SBA’s approval

of an extension beyond five years).

(f) Control acquired through

enforcement actions. If you retain or

acquire Control through enforcement

action, you must notify SBA

immediately and submit a Control

certification within 30 days.

(g) Additional Financing for

businesses under Licensee’s Control. If

you assume Control of a Small Business,

you may later provide additional

Financing, without an exemption under

§ 107.730(a)(1).

§ 107.880 Assets acquired in liquidation of

Portfolio securities.

You may acquire assets in full or

partial liquidation of a Small Business’s

obligation to you under the conditions

permitted by this § 107.880. The assets

may be acquired from the Small

Business, a guarantor of its obligation,

or another party.

(a) Timely disposition of assets. You

must dispose of assets acquired in

liquidation of a Portfolio security within

a reasonable period of time.

(b) Permitted expenditures to preserve

assets. (1) You may incur reasonably

necessary expenditures to maintain and

preserve assets acquired.

(2) You may incur reasonably

necessary expenditures for

improvements to render such assets

saleable.

(3) You may make payments of

mortgage principal and interest

(including amounts in arrears when you

acquired the asset), pay taxes when due,

and pay for necessary insurance

coverage.

(c) SBA approval of expenditures.

This paragraph (c) applies if you have

outstanding Leverage or are applying for

Leverage. Any application for SBA

approval under this paragraph must

specify all expenses estimated to be

necessary pending disposal of the

assets. Without SBA’s prior written

approval:

(1) Your total expenditures under

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

section plus your total Financing(s) to

the Small Business must not exceed

your overline limit under § 107.740; and

(2) Your total expenditures under

paragraph (b) of this section plus your

total Financing(s) to the Small Business

must not exceed 35 percent of your

Regulatory Capital.

Limitations on Disposition of Assets

§ 107.885 Disposition of assets to

Licensee’s Associates or to competitors of

Portfolio Concern.

(a) Sale of assets to Associate. Except

with SBA’s prior written approval, you

are not permitted to dispose of assets

(including assets acquired in

liquidation) to any Associate if you have

outstanding Leverage or Earmarked

Assets. 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.

(b) Sale of assets to competitor of

Small Business. Except with the prior

written approval of the Portfolio

Concern (if it is not under your Control)

or of SBA, you are not permitted to

dispose of Portfolio securities to a

competitor of such concern. If SBA’s

prior approval is not required, you must

promptly notify SBA of any such

disposal.

Management Services and Fees

§ 107.900 Management fees for services

provided to a Small Business by Licensee

or its Associate.

This § 107.900 applies to management

services that you or your Associate

provide to a Small Business during the

term of a Financing or prior to

Financing. It does not apply to

management services that you or your

Associate provide to a Small Business

that you do not finance. Fees permitted

under this section are not included in

the Cost of Money (see § 107.855).

(a) Permitted management fees. You

or your Associate may provide

management services to a Small

Business financed by you if:

(1) You or your Associate have

entered into a written contract with the

Small Business;

(2) The fees charged are for services

actually performed;

(3) Services are provided on an hourly

fee, project fee, or other reasonable

basis; and

(4) You can demonstrate to SBA, upon

request, that the rate does not exceed

the prevailing rate charged for

comparable services by other

organizations in the geographic area of

the Small Business.
3210 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(b) Fees for service as a board

member. You or your Associate may

receive fees in the form of cash,

warrants, or other payments, for services

provided as members of the board of

directors of a Small Businesses

Financed by you. The fees must not

exceed those paid to other outside board

members. In the absence of such board

members, fees must be reasonable when

compared with amounts paid to outside

directors of similar companies.

(c) SBA approval required. You must

obtain SBA’s prior written approval of

any management contract that does not

satisfy paragraphs (a) or (b) of this

section.

(d) Recordkeeping requirements. You

must keep a record of hours spent and

amounts charged to the Small Business,

including expenses charged.

(e) Transaction fees. (1) You may

charge reasonable transaction fees for

work you or your Associate perform to

prepare a client for a public offering,

private offering, or sale of all or part of

the business, and for assisting with the

transaction. Compensation may be in

the form of cash, notes, stock, and/or

options.

(2) Your Associate may charge market

rate investment banking fees to a Small

Business on that portion of a Financing

that you do not provide.

Subpart H—Non-leveraged

Licensees—Exceptions to Regulations

§ 107.1000 Licensees without Leverage—

exceptions to the regulations.

The regulatory exceptions in this

section apply to Licensees with no

outstanding Leverage or Earmarked

Assets.

(a) You are exempt from the following

provisions (but you must come into

compliance with them to become

eligible for Leverage):

(1) The overline limitation in

§ 107.740.

(2) The restrictions in § 107.530 on

investments of idle funds, provided you

do not engage in activities not

contemplated by the Act.

(3) The restrictions in § 107.550 on

third-party debt.

(4) The restrictions in § 107.880 on

expenses incurred to maintain or

improve assets acquired in liquidation

of Portfolio securities.

(5) The recordkeeping requirements

and fee limitations in § 107.825(b) and

(c), respectively, for securities

purchased through or from an

underwriter.

(b) You are exempt from the

requirements to obtain SBA’s prior

approval for:

(1) A decrease in your Regulatory

Capital of more than two percent under

§ 107.585 (but not below the minimum

required under the Act or these

regulations). You must report the

reduction to SBA within 30 days.

(2) Disposition of any asset to your

Associate under § 107.885.

(3) A contract to employ an

Investment Adviser/Manager under

§ 107.510. However, you must notify

SBA of the Management Expenses to be

incurred under such contract, or of any

subsequent material changes in such

Management Expenses, within 30 days

of execution. In order to become eligible

for Leverage, you must have the contract

approved by SBA.

(4) Your initial Management Expenses

under § 107.140 and increases in your

Management Expenses under § 107.520.

However, you must have your

Management Expenses approved by

SBA in order to become eligible for

Leverage.

(5) Options obtained from a Small

Business by your management or

employees under § 107.815(b).

(c) You are exempt from the

requirement in § 107.680 to obtain

SBA’s post approval of new directors

and new officers, other than your chief

operating officer. However, you must

notify SBA of the new directors or

officers within 30 days, and you must

have all directors and officers approved

by SBA in order to become eligible for

Leverage.

Subpart I—SBA Financial Assistance

for Licensees (Leverage)

General Information About Obtaining

Leverage

§ 107.1100 Types of Leverage available.

(a) Types of Leverage available for

Section 301(c) Licensees. If you are a

Section 301(c) Licensee, you may apply

for Leverage from SBA in one or both of

the following forms:

(1) The purchase or guarantee of your

Debentures.

(2) The purchase or guarantee of your

Participating Securities.

(b) Types of Leverage available for

Section 301(d) Licensees. If you are a

Section 301(d) Licensee, you may apply

for Leverage from SBA in one or more

of the following forms:

(1) The purchase or guarantee of your

Debentures.

(2) The purchase or guarantee of your

Participating Securities.

(3) The purchase of your Preferred

Securities.

(c) Subsidized and non-subsidized

Debentures available to Licensees. If you

are a Section 301(d) Licensee, you may

issue both subsidized and nonsubsidized Debentures. If you are a

Section 301(c) Licensee, you may issue

only non-subsidized Debentures.

(1) Non-subsidized Debentures. SBA

may purchase or guarantee nonsubsidized Debentures under section

303(b) of the Act. You pay interest on

a non-subsidized Debenture at the rate

stated on its face.

(2) Subsidized Debentures. SBA may

purchase or guarantee subsidized

Debentures under section 303(c) of the

Act. On a guaranteed Debenture, during

the first 5 years of the term, you pay an

interest rate that is 300 basis points

below the rate stated on the face of the

Debenture. On a Debenture that SBA

purchases, you pay a reduced interest

rate determined under section 317 of the

Act.

§ 107.1110 How to apply for Leverage.

(a) Application forms. Select the

appropriate form from the following

table:

Type of Leverage you

are applying for: Application form:

Debentures (any type) ... SBA Form 1022.

4% Preferred Securities . SBA Form 1022A.

Participating Securities .. SBA Form 1022B.

(b) Where to send your application.

Send all Leverage applications to SBA,

Investment Division, 409 Third Street,

S.W., Washington, D.C. 20416.

§ 107.1120 General eligibility requirements

for Leverage.

To be eligible for Leverage, you must:

(a) Demonstrate a need for Leverage,

evidenced by your investment activity

and a lack of sufficient funds for

investment. For your first issuance of

Leverage, if you have invested at least

50 percent of your Leverageable Capital,

you are presumed to lack sufficient

funds for investment.

(b) Have adequate Private Capital to

satisfy the requirements for financial

viability under § 107.200.

(c) Meet the minimum capital

requirements of § 107.210 or § 107.220,

as appropriate.

(d) Show, to the satisfaction of SBA,

that your management is qualified and

has the knowledge, experience, and

capability necessary for investing in the

types of businesses contemplated by the

Act, the regulations in this part and

your business plan.

(e) Be in compliance with the

regulations in this part.

(f) If required by SBA, have your

Control Person(s) assume, in writing,

personal responsibility for your

Leverage, effective only if such Control

Person(s) participate (directly or

indirectly) in a transfer of Control not

approved by SBA.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3211

§ 107.1130 Leverage fees payable by

Licensee.

(a) User fee for Debentures and

Participating Securities. You must pay a

user fee to SBA for each issuance of a

Debenture or Participating Security. The

fee is 2 percent of the face amount of the

Leverage issued.

(b) Payment of user fee. If you issue

a Debenture or Participating Security:

(1) To repay or redeem existing

Leverage, you must pay the user fee

before SBA will guarantee or purchase

the new Debenture or Participating

Security.

(2) That is not used to repay or

redeem existing Leverage, SBA will

deduct the user fee from the proceeds

remitted to you, unless you prepaid the

fee under § 107.1210.

(c) Refundability. The user fee is not

refundable under any circumstances.

(d) Other Leverage fees. SBA may

establish a fee structure for services

performed by the CRA. SBA will not

collect any fee for its guarantee of TCs.

§ 107.1140 Licensee’s acceptance of SBA

remedies under §§ 107.1800 through

107.1820.

If you issue Leverage after April 25,

1994, you automatically agree to the

terms and conditions in §§ 107.1800

through 107.1820 as they exist 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.

Maximum Amount of Leverage for

Which a Licensee Is Eligible

§ 107.1150 Maximum amount of Leverage

for a Section 301(c) Licensee.

(a) Maximum amount of Leverage. If

you are a Section 301(c) Licensee, use

the following table to determine the

maximum amount of Leverage you may

have outstanding at any time:

If your Leverageable

Capital is:

Then your maximum

Leverage is:

Not over $15,000,000 300% of

Leverageable Capital.

Over $15,000,000 but

not over

$30,000,000.

$45,000,000 + [200%

of [Leverageable

Capital—

$15,000,000)].

Over $30,000,000 but

not over

$45,000,000.

$75,000,000 + [100%

of [(Leverageable

Capital—

$30,000,000)].

Over $45,000,000 ..... $90,000,000.

(b) Exceptions to maximum Leverage

provisions—(1) Licensees under

Common Control. Two or more

Licensees under Common Control may

have aggregate outstanding Leverage

over $90,000,000 only if SBA gives them

permission to do so. SBA may grant

such permission on a case-by-case basis

only. SBA may impose any terms and

conditions SBA considers appropriate to

minimize its risk of loss in the event of

default.

(2) Licensees with excess Leverage

issued before March 31, 1993. If you had

outstanding Debentures on March 31,

1993 that exceeded 300 percent of your

Leverageable Capital:

(i) You do not have to prepay the

excess amount.

(ii) You may apply for an additional

Debenture guarantee or Participating

Security guarantee if you use the

proceeds solely to pay the amount due

at maturity on a Debenture issued before

March 31, 1993. The new Debenture or

Participating Security must mature on

or before September 30, 2002.

(iii) You must maintain at least 65

percent of your ‘‘Total Funds Available

for Investment’’ in ‘‘Venture Capital

Financings’’ (as defined in § 107.1160(e)

and (f), respectively) until your

outstanding Debentures no longer

exceed 300 percent of your Leverageable

Capital.

(3) Maximum amount of Participating

Securities. See § 107.1170.

§ 107.1160 Maximum amount of Leverage

for a Section 301(d) Licensee.

(a) Maximum amount of subsidized

Leverage. (1) ‘‘Subsidized Leverage’’

means Debentures with a reduced

interest rate and Preferred Securities. If

you are a Section 301(d) Licensee:

(i) The maximum amount of

subsidized Leverage you may have

outstanding at any time is the lesser of

400 percent of your Leverageable

Capital, or $35,000,000. The same limit

applies to a group of Section 301(d)

Licensees under Common Control.

(ii) The maximum amount of

Preferred Securities you may have

outstanding at any time is 200 percent

of your Leverageable Capital.

(2) Certain types and amounts of

subsidized Leverage have special

eligibility requirements (see paragraphs

(c) and (d) of this section).

(b) Maximum amount of total

Leverage. Use § 107.1150(a) and (b)(1) to

determine your maximum amount of

Leverage as if you were a Section 301(c)

Licensee. If the result is more than your

maximum subsidized Leverage, then

this is your maximum total (subsidized

plus non-subsidized) Leverage.

Otherwise, your maximum total

Leverage is the same as your maximum

subsidized Leverage. For Participating

Securities, see § 107.1170.

(c) Special eligibility requirements for

fourth tier of Leverage. A ‘‘fourth tier of

Leverage’’ is any amount of outstanding

Leverage in excess of 300 percent of

your Leverageable Capital.

(1) To qualify for a fourth tier of

Leverage, you must have invested (or

have Commitments to invest) at least 30

percent of your ‘‘Total Funds Available

for Investment’’ in ‘‘Venture Capital

Financings’’ (see the definitions in

paragraphs (e) and (f) of this section).

(2) While you have a fourth tier of

Leverage, you must maintain Venture

Capital Financings (at cost) that equal at

least 30 percent of your Total Funds

Available for Investment.

(d) Special eligibility requirements for

second tier of Preferred Securities. A

‘‘second tier of Preferred Securities’’ is

any amount of outstanding Preferred

Securities in excess of 100 percent of

your Leverageable Capital.

(1) To qualify for a second tier of

Preferred Securities:

(i) If your license was issued after

October 13, 1971, you must have at least

$500,000 of Leverageable Capital.

(ii) You must have invested (or have

Commitments to invest) at least the

same dollar amount in Venture Capital

Financings.

(2) While you have a second tier of

Preferred Securities, you must maintain

at least the same dollar amount of

Venture Capital Financings (at cost).

(e) Definition of ‘‘Total Funds

Available for Investment’’. Total Funds

Available for Investment means the

result obtained from the following

formula:

T = .90 × (CA + LI)

Where:

T = Total funds available for investment

CA = Total current assets

LI = Total Loans and Investment at cost

(as reported on SBA Form 468), net

of current maturities

(f) Definition of ‘‘Venture Capital

Financing’’. Venture Capital Financing

means an investment represented by

common or preferred stock, a limited

partnership interest, or a similar

ownership interest; or by an unsecured

debt instrument that is subordinated by

its terms to all other borrowings of the

issuer.

(1) A debt secured by any agreement

with a third party is not a Venture

Capital Financing, whether or not you

have a security interest in any asset of

the third party or have recourse against

the third party.

(2) A Financing that originally

qualified as a Venture Capital Financing

will continue to qualify (at its original

cost), even if you later must report it on

SBA Form 468 under either Assets

Acquired in Liquidation of Portfolio

Securities or Operating Concerns

Acquired.
3212 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

§ 107.1170 Maximum amount of

Participating Securities for any Licensee.

The maximum amount of

Participating Securities you may have

outstanding at any time is 200 percent

of your Leverageable Capital. If you are

a Section 301(d) Licensee, the maximum

combined amount of Participating

Securities and Preferred Securities you

may have outstanding at any time is 200

percent of your Leverageable Capital.

Conditional Commitments by SBA To

Reserve Leverage for a Licensee

§ 107.1200 SBA’s Leverage commitment to

a Licensee—application procedure, amount,

and term.

(a) General. Under the provisions in

§§ 107.1200 through 107.1240, 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

any Leverage commitment must be at

least $500,000. It must not exceed 100

percent of your Regulatory Capital or

your remaining Leverage eligibility,

whichever is less.

(d) Term of Leverage commitment.

SBA’s Leverage commitment will

automatically lapse at 5:00 P.M. Eastern

Time on August 1 of the next full

Federal fiscal year following issuance of

the commitment.

§ 107.1210 Commitment fees payable by

Licensee.

(a) Commitment fees. As a condition

of SBA’s Leverage commitment, and

before you may draw any Leverage, you

must pay SBA a non-refundable fee of:

(1) 3 percent of the face amount of the

Debentures or Participating Securities

reserved under the commitment; or

(2) 1 percent of the issue price of

Preferred Securities reserved under the

commitment.

(b) Credit for user fee. The 3 percent

commitment fee paid by issuers of

Debentures or Participating Securities

under paragraph (a)(1) of this section

includes the 2 percent user fee required

under § 107.1130. If you pay the

commitment fee, you do not have to pay

the user fee separately.

(c) Automatic cancellation of

commitment. Unless you pay the full

amount of the commitment fee by 5:00

P.M. Eastern Time on the 30th calendar

day following the issuance of SBA’s

Leverage commitment, the commitment

will be automatically canceled.

§ 107.1220 Requirement for Licensee to

file quarterly financial statements.

As long as any part of SBA’s Leverage

commitment is outstanding, you must

give SBA a Financial Statement on SBA

Form 468 (Short Form) as of the close

of each quarter of your fiscal year (other

than your fourth fiscal quarter, which is

covered by your annual filing of Form

468 under § 107.630(a)). You must file

this form within 30 days after the close

of the quarter, or with any request for

a draw that you make within such 30-

day period. You will not be eligible for

a draw if you are not in compliance

with this § 107.1220.

§ 107.1230 Draw-downs by Licensee under

SBA’s Leverage commitment.

(a) Licensee’s authorization of SBA to

purchase or guarantee securities. By

submitting a request for a draw against

SBA’s Leverage commitment, you:

(1) Authorize SBA to purchase your

Preferred Security; or

(2) Authorize SBA, or any agent or

trustee SBA designates, to guaranty your

Debenture or Participating Security and

to sell it with SBA’s guarantee.

(b) Limitations on amount of draw.

For Debentures or Participating

Securities, any draw against SBA’s

Leverage commitment must be at least

$500,000; amounts above $500,000 must

be in multiples of $100,000. You may

issue Preferred Securities in any

amount.

(c) Effect of regulatory violations on

Licensee’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).

(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 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) If your request is submitted within

30 days following the close of your

fiscal quarter, a Financial Statement on

SBA Form 468 (Short Form) prepared as

of the close of that fiscal quarter;

otherwise, a statement certifying that

there has been no material adverse

change in your financial condition since

your last filing of SBA Form 468 (Long

or Short Form).

(2) 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), 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 Licensee;

(ii) An officer of a corporate general

partner of the Licensee; or

(iii) An individual who is authorized

to act as or for a general partner of the

Licensee.

(3) A statement that the proceeds are

needed to fund one or more particular

Small Businesses. 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)(3) 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 §§ 107.1810 or

107.1820.

§ 107.1240 Funding of Licensee’s draw

request through sale to short-term investor.

(a) Licensee’s authorization of SBA to

arrange sale of securities to short-term

investor. By submitting a request for a

draw of Debenture or Participating

Security 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 or

Participating Security to a short-term

investor;
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3213

(2) The purchase of your security from

the short-term investor, either by you or

on your behalf; and

(3) The pooling of your security with

other securities with the same maturity

date.

(b) Sale of Debentures to a short-term

investor. If SBA sells your Debenture to

a short-term investor:

(1) The sale will be at a discount

based on an interest rate determined

under section 303(b) of the Act (without

any interest rate subsidy), as if the

maturity date of the Debenture were the

next scheduled date for the sale of

Debenture Trust Certificates.

(2) If the actual sale of Trust

Certificates takes place after the

scheduled date, you must pay the shortterm investor daily interest on the

Debenture, at the same rate, from the

scheduled sale date to the actual sale

date. This additional interest is due on

the actual sale date. Failure to pay the

interest constitutes noncompliance with

the terms of your Leverage (see

§§ 107.1810 and 107.1820).

(c) Sale of Participating Securities to

a short-term investor. If SBA sells your

Participating Security to a short-term

investor:

(1) The sale price will be the face

amount.

(2) At the closing of the next

scheduled sale of Participating Security

Trust Certificates, you (or SBA, as

guarantor) must pay the short-term

investor Earned Prioritized Payments at

a rate determined under section 303(b)

of the Act, as if the maturity date of the

Participating Security were the next

scheduled date for the sale of Trust

Certificates.

(d) Licensee’s right to repurchase its

securities before pooling. You may

repurchase your securities from the

short-term investor before they are

pooled. To do so, you must:

(1) Give SBA written notice at least 10

days before the cut-off date for the pool

in which your security is to be included;

and

(2) Pay the face amount of the

Debenture, or the face amount of the

Participating Security plus Earned

Prioritized Payments, to the short-term

investor.

Exchange of Outstanding Debentures

for Participating or Preferred

Securities—Section 301(d) Licensees

§ 107.1350 Exchange by Section 301(d)

Licensee of Debentures for Preferred or

Participating Securities.

(a) Conditions for exchange of

Debentures. A Section 301(d) Licensee

may, in SBA’s discretion, retire an

eligible Debenture through the issuance

of Preferred or Participating Securities.

To do so, you must:

(1) Pay all unpaid accrued interest on

the Debenture, plus any applicable

prepayment penalties, fees, and other

charges.

(2) Comply with all conditions that

apply to the issuance of Preferred or

Participating Securities.

(b) Debentures not eligible for

exchange. You may not retire a

Debenture by issuing Preferred or

Participating Securities if SBA

guaranteed or purchased it on the basis

of funds not included in your

Leverageable Capital. You must repay

such a Debenture at its maturity date,

unless SBA extends it. SBA has

discretion to extend the maturity to a

date not more than 15 years from the

date of issuance if SBA believes the

extension is necessary for orderly

liquidation of the indebtedness.

Preferred Securities Leverage—Section

301(d) Licensees

§ 107.1400 Stock dividends or partnership

distributions on 4 percent Preferred

Securities.

Preferred Securities that SBA

purchases from a Section 301(d)

Licensee may be in the form of either

preferred stock issued at par value or a

preferred limited partnership interest

issued at face value. When you issue

Preferred Securities, you agree to pay

SBA a dividend or partnership

distribution of 4 percent per year, from

the date you issue Preferred Securities

to the date you repay them, both

inclusive. The dividend or partnership

distribution is:

(a) Computed on the par value of the

outstanding stock or the face value of

the outstanding limited partnership

interest.

(b) Cumulative. This means that if you

do not pay the entire dividend or

partnership distribution for a given

fiscal year, the unpaid balance

accumulates as a distribution in arrears.

You do not have to pay interest on

distributions in arrears.

(c) Preferred. This means that you

must pay SBA in full (including

distributions in arrears) before setting

aside or paying any amount to any other

equity holder.

(d) Payable at the discretion of your

Board of Directors or General Partner(s),

except that all distributions in arrears

must be paid in full when you redeem

the Preferred Securities.

§ 107.1410 Requirement to redeem 4

percent Preferred Securities.

You must redeem 4 percent Preferred

Securities not later than 15 years from

the date of issuance. At the redemption

date, you must pay to SBA:

(a) The par value (of preferred stock)

or face value (of a preferred limited

partnership interest); plus

(b) Any unpaid dividends or

partnership distributions accrued to the

redemption date.

§ 107.1420 Articles requirements for 4

percent Preferred Securities issuers.

You may issue 4 percent Preferred

Securities only if your Articles contain

all the provisions in §§ 107.1400 and

107.1410.

§ 107.1430 Redeeming 4 percent Preferred

Securities with proceeds of non-subsidized

Debentures.

If SBA approves, a Section 301(d)

Licensee may use the proceeds of a

Debenture to redeem Preferred

Securities at their mandatory

redemption date, including any accrued

unpaid dividends or partnership

distributions. For this purpose, you may

issue only a non-subsidized Debenture

(see § 107.1100(c)).

§ 107.1440 Three percent preferred stock

issued before November 21, 1989.

Before November 21, 1989, Preferred

Securities were available only in the

form of preferred stock and had a

preferred and cumulative dividend of 3

percent. If you have such preferred

stock outstanding, you must follow

§ 107.1400 (except for § 107.1400(d)),

substituting ‘‘3 percent’’ for ‘‘4 percent’’

throughout.) Dividends on 3 percent

preferred stock are payable at the

discretion of your Board of Directors or

General Partner(s), except that all

dividends in arrears must be paid in full

before any non-SBA investor receives

any distribution. Upon your liquidation,

SBA is entitled to payment of all

dividends in arrears even if you have no

Retained Earnings Available for

Distribution at such time.

§ 107.1450 Optional redemption of

Preferred Securities.

(a) Redemption at par or face value.

A Section 301(d) Licensee may redeem

Preferred Securities at any time,

provided you give SBA at least 30 days

written notice. You may redeem all or

only part of your Preferred Securities,

but the par value or face value of the

securities being redeemed must be at

least $50,000. At the redemption date,

you must pay to SBA:

(1) The par value (of preferred stock)

or face value (of a preferred limited

partnership interest); plus

(2) Any unpaid dividends or

partnership distributions accrued to the

redemption date.
3214 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(b) Repurchase of 3 percent preferred

stock for less than par value. If you

issued 3 percent preferred stock to SBA,

you may ask SBA to sell it back to you

at a price less than its par value. The

terms and conditions of any such

transaction will be as set forth in the

Notice published in the Federal

Register on April 1, 1994 (Copies of this

notice are available from SBA, 409 3rd

Street, S.W., Washington, D.C., 20416).

SBA has sole discretion to:

(1) Approve or disapprove the sale.

(2) Determine the sale price after

considering any factors SBA considers

appropriate.

(3) Determine the form of payment

SBA will accept. SBA is not authorized

to accept the proceeds of a subsidized

Debenture as payment.

Participating Securities Leverage

§ 107.1500 General description of

Participating Securities.

(a) Types of Participating Securities.

Participating Securities are redeemable,

preferred, equity-type securities. SBA

may purchase or guarantee Participating

Securities issued by Licensees in the

form of limited partnership interests,

preferred stock, or debentures with

interest payable only to the extent of

earnings. The structure, terms and

conditions of Participating Securities

are set forth in detail in §§ 107.1500

through 107.1590.

(b) Special eligibility requirements for

Participating Securities. In addition to

the general eligibility requirements for

Leverage under § 107.1120, Participating

Securities issuers must also comply

with special rules on:

(1) Minimum capital (see § 107.220).

(2) Liquidity (see § 107.1505).

(3) Non-SBA borrowing (see

§ 107.570).

(4) Making Equity Capital Investments

in Small Businesses, as follows:

(i) General rule. If you issue

Participating Securities, you must invest

an amount equal to the Original Issue

Price of such securities solely in Equity

Capital Investments.

(ii) Continuing requirement to

maintain Equity Capital Investments.

Unless SBA permits otherwise, once

you have met the initial investment

requirement of this paragraph (b)(4), you

must maintain Equity Capital

Investments with an original cost equal

to or greater than the outstanding

balance of Participating Securities in

your portfolio, measured as of the end

of each fiscal year.

(c) Special features of Participating

Securities—Prioritized Payments,

Adjustments, and Profit Participation.

When you issue Participating Securities,

you agree to make the following

payments:

(1) Prioritized Payments. Depending

upon the type of Participating Security

you issue, Prioritized Payments may be

preferred partnership distributions,

preferred dividends, or interest. Your

obligation to pay Prioritized Payments is

contingent upon your profits as

determined under § 107.1520.

(2) Adjustments to Prioritized

Payments. If you have unpaid

Prioritized Payments, you must

compute Adjustments, which are

additional contingent obligations

determined under § 107.1520. The

conditions for paying Adjustments are

the same as for Prioritized Payments.

(3) SBA Profit Participation. Profit

Participation is an amount payable to

SBA under § 107.1530 in consideration

for SBA’s guarantee of your

Participating Securities.

(d) Distributions by Licensees issuing

Participating Securities. Sections

107.1540 through 107.1580 govern both

required and optional Distributions by

Participating Securities issuers.

Distributions include both profit

distributions and returns of capital, paid

either to SBA or to your non-SBA

investors.

(e) Mandatory redemption of

Participating Securities. You must

redeem Participating Securities at the

redemption date, which is the same as

the maturity date of the Trust

Certificates for the Trust containing

such securities. The redemption date

can never be later than 15 years after the

issue date. You must pay the

Redemption Price plus any unpaid

Earned Prioritized Payments and any

earned Adjustments due under

§ 107.1520.

(f) Priority of Participating Securities

in liquidation of Licensee. In the event

of your liquidation, the following are

senior in priority, for all purposes, to all

other equity interests you have issued at

any time:

(1) The Redemption Price of

Participating Securities;

(2) Any Prioritized Payments and

earned Adjustments; and

(3) Any Profit Participation allocated

to SBA under § 107.1530.

§ 107.1505 Liquidity requirements for

Licensees issuing Participating Securities.

If you have outstanding Participating

Securities, you must maintain sufficient

liquidity to avoid a condition of

Liquidity Impairment. Such a condition

will constitute noncompliance with the

terms of your Leverage under

§ 107.1820(e).

(a) Definition of Liquidity Impairment.

A condition of Liquidity Impairment

exists when your Liquidity Ratio, as

determined in paragraph (b) of this

section, is less than 1.20. You are

responsible for calculating whether you

have a condition of Liquidity

Impairment as of the close of your fiscal

year, at the time of application for

Leverage, or at such time as you

contemplate making any Distribution.

(b) Computation of Liquidity Ratio.

Your Liquidity Ratio equals your Total

Current Funds Available (A) divided by

your Total Current Funds Required (B),

as determined in the following table:

CALCULATION OF LIQUIDITY RATIO

Financial account

Amount reported on SBA

Form 468

Weight Weighted

amount

Cash and invested idle funds .................................................................................................................. ........................ × 1.00 ........................

Commitments from investors .................................................................................................................. ........................ × 1.00 ........................

Current maturities .................................................................................................................................... ........................ × 0.50 ........................

Other current assets ................................................................................................................................ ........................ × 1.00 ........................

Publicly Traded and Marketable Securities ............................................................................................ ........................ × 0.65 ........................

Anticipated operating revenue for next 12 months ................................................................................. (1) × 1.00 ........................

Total Current Funds Available ...................................................................................................... ........................ A

Current liabilities ...................................................................................................................................... ........................ × 1.00 ........................

Commitments to Small Businesses ........................................................................................................ ........................ × 0.75 ........................

Anticipated operating expense for next 12 months ................................................................................ (1) × 1.00 ........................

Anticipated interest expense for next 12 months ................................................................................... (1) × 1.00 ........................

Contingent liabilities (guarantees) ........................................................................................................... ........................ × 0.25 ........................
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3215

CALCULATION OF LIQUIDITY RATIO—Continued

Financial account

Amount reported on SBA

Form 468

Weight Weighted

amount

Total Current Funds Required ...................................................................................................... ........................ B

1As determined by Licensee’s management under its business plan.

§ 107.1510 How a Licensee computes

Earmarked Profit (Loss).

Computing your Earmarked Profit

(Loss) is the first step in determining

your obligations to pay Prioritized

Payments and Adjustments under

§ 107.1520 and Profit Participation

under § 107.1530.

(a) Requirement to compute your

Earmarked Profit (Loss). While you have

Participating Securities outstanding or

have Earmarked Assets (as defined in

paragraph (b) of this section), you must

compute your Earmarked Profit (Loss)

for:

(1) Each full fiscal year.

(2) Any interim period (consisting of

one or more fiscal quarters) for which

you want to make a Distribution.

(b) How to determine your Earmarked

Assets. ‘‘Earmarked Assets’’ means all

the Loans and Investments that you

have when you issue Participating

Securities or that you acquire while you

have Participating Securities

outstanding, and any non-cash assets

that you receive in exchange for such

Loans and Investments.

(1) An Earmarked Asset remains

earmarked until you dispose of it, even

if you no longer have any outstanding

Participating Securities.

(2) Investments you make after

redeeming all your Participating

Securities are not Earmarked Assets.

However, if you issue new Participating

Securities, all of your Loans and

Investments again become Earmarked

Assets.

(3) If you were licensed before March

31, 1993, you may be permitted to

exclude Loans and Investments held at

that date from Earmarked Assets under

§ 107.1590.

(c) How to compute your Earmarked

Asset Ratio. You must determine your

Earmarked Asset Ratio each time you

compute Earmarked Profit (Loss). If all

your Loans and Investments are

Earmarked Assets, your Earmarked

Asset Ratio equals 100 percent.

Otherwise, compute your Earmarked

Asset Ratio using the following formula:

EAR = [(EA + P) / (LI + P)] × 100

where:

EAR = Earmarked Asset Ratio

EA = Weighted average Earmarked

Assets (at cost) for the fiscal year or

interim period

P = Weighted average uninvested

proceeds of Participating Securities

for the fiscal year or interim period

LI = Weighted average Loans and

Investments (at cost) for the fiscal

year or interim period

(d) How to compute your Earmarked

Profit (Loss) if Earmarked Asset Ratio is

100 percent. (1) (i) If your Earmarked

Asset Ratio from paragraph (b) of this

section is 100 percent, use the following

formula to compute your Earmarked

Profit (Loss):

EP = NI + IK + EME

where:

EP = Earmarked Profit (Loss)

NI = Net Income (Loss), as reported on

SBA Form 468 except as otherwise

provided in this paragraph (d)(1)

IK = Unrealized Appreciation

(Depreciation) on Earmarked Assets

that you are distributing as an InKind Distribution under § 107.1580

EME = Excess Management Expenses

(ii) For the purpose of determining

Net Income (Loss), user fees and

commitment fees paid to SBA and

partnership syndication costs that you

incur must be capitalized and amortized

on a straight-line basis over five years.

(2) ‘‘Excess Management Expenses’’

are those that exceed the following

limit:

(i) For a full fiscal year, the limit is

the lower of:

(A) 2.5 percent of your weighted

average Combined Capital for the year,

plus $125,000 if Combined Capital is

below $20,000,000; or

(B) Your Management Expenses

approved by SBA.

(ii) For less than a full fiscal year, you

must prorate the annual amounts in

paragraph (d)(2)(i) of this section to

determine the limit.

(e) How to compute your Earmarked

Profit (Loss) if Earmarked Asset Ratio is

less than 100 percent. If your Earmarked

Asset Ratio is less than 100 percent,

compute your Earmarked Profit (Loss) as

follows:

(1) Do the Earmarked Profit (Loss)

computation in paragraph (d) of this

section.

(2) Subtract your net realized gain

(loss) (as reported on SBA Form 468) on

Loans and Investments that are not

Earmarked Assets.

(3) Separate the result from paragraph

(e)(2) of this section into:

(i) Net realized gain (loss) (as reported

on SBA Form 468) on Earmarked Assets

(‘‘EGL’’); and

(ii) The remainder (‘‘R’’).

(4) Your Earmarked Profit (Loss)

equals:

EGL + (R × Earmarked Asset Ratio)

(f) How to compute your cumulative

Earmarked Profit (Loss). Sum your

Earmarked Profit (Loss) for all fiscal

years and for any interim period

following the end of your last fiscal

year. The total is your cumulative

Earmarked Profit (Loss), which you

must use in the Prioritized Payment

computations under § 107.1520.

§ 107.1520 How a Licensee computes and

allocates Prioritized Payments to SBA.

This section tells you how to compute

Prioritized Payments and Adjustments

and determine the amounts you must

pay. To distribute Prioritized Payments,

see § 107.1540.

(a) How to compute Prioritized

Payments and Adjustments. (1)

Prioritized Payments. For a full fiscal

year, the Prioritized Payment on an

outstanding Participating Security

equals the Redemption Price times the

Trust Certificate Rate. For a shorter

period (one or more fiscal quarters), you

must prorate the annual Prioritized

Payment.

(2) Adjustments. Compute

Adjustments using paragraph (f) of this

section.

(b) Licensee’s obligation to pay

Prioritized Payments and Adjustments.

You are obligated to pay Prioritized

Payments and Adjustments only if you

have profit as determined under

paragraph (d) of this section.

(1) Prioritized Payments that you

must pay (or have already paid) because

you have sufficient profit are ‘‘Earned

Prioritized Payments’’.

(2) Prioritized Payments that are not

payable because you lack sufficient

profit are ‘‘Accumulated Prioritized

Payments’’. Treat all Prioritized

Payment as ‘‘Accumulated’’ until they

become ‘‘Earned’’ under this section.

(3) Adjustments are computed under

paragraph (f) of this section and are

‘‘earned’’ according to the same criteria

applied to Prioritized Payments.
3216 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(c) How to keep track of Prioritized

Payments. You must establish three

accounts to record your Accumulated

and Earned Prioritized Payments.

(1) Accumulation Account. The

Accumulation Account is a

memorandum account. Its balance

represents your Accumulated

Prioritized Payments and unearned

Adjustments.

(2) Distribution Account. The

Distribution Account is a liability

account. Its balance represents your

unpaid Earned Prioritized Payments and

earned Adjustments.

(3) Earned Payments Account. The

Earned Payments Account is a

memorandum account. Each time you

add to the Distribution Account balance,

add the same amount to the Earned

Payments Account. Its balance

represents your total (paid and unpaid)

Earned Prioritized Payments and earned

Adjustments.

(d) How to determine your profit for

Prioritized Payment purposes. As of the

end of each fiscal year and any interim

period (one or more fiscal quarters) for

which you want to make a Distribution:

(1) Bring the Accumulation Account

up to date by adding to it all Prioritized

Payments through the end of the fiscal

period.

(2) Determine your cumulative

Earmarked Profit (Loss) under

§ 107.1510(e) and subtract your Earned

Payments Account balance from it. The

result (if greater than zero) is your profit

for the purposes of this section; if zero

or less, you have no profit.

(3) If you have a profit, continue with

paragraph (e) of this section. Otherwise,

continue with paragraph (f) of this

section.

(e) Allocating Prioritized Payments to

the Distribution Account. (1) If you have

a profit under paragraph (d) of this

section, determine the lesser of:

(i) Your profit; or

(ii) The balance in your Accumulation

Account.

(2) Subtract the result in paragraph

(e)(1) of this section from the

Accumulation Account and add it to the

Distribution Account.

(f) How to compute Adjustments. You

must compute your Adjustments as of

the end of each fiscal year.

(1) Adjustments based on

Accumulation Account balance. If you

have any balance in your Accumulation

Account, determine your average

Accumulation Account balance for the

fiscal year and multiply it by the

average of the Trust Certificate Rates for

all the Participating Securities poolings

during such year.

(2) Adjustments based on Distribution

Account balance. If you have any

balance in your Distribution Account

after giving effect to any Distribution

that will be made on the first or second

Payment Date following your fiscal year

end, do the computations in paragraph

(f)(1) of this section, substituting

‘‘Distribution Account’’ for

‘‘Accumulation Account’’.

(3) Add the amounts computed in this

paragraph (f) to your Accumulation

Account balance.

(g) Licensee’s obligation to pay

Prioritized Payments after redeeming

Participating Securities. This paragraph

(g) applies if you have redeemed all

your Participating Securities, but you

still hold Earmarked Assets and still

have a balance in your Accumulation

Account.

(1) You must continue to perform all

the procedures in this § 107.1520 as of

the end of each fiscal quarter. You must

distribute any Earned Prioritized

Payments and earned Adjustments in

accordance with § 107.1540.

(2) After you dispose of all your

Earmarked Assets and make any

required Distributions in accordance

with § 107.1540, your obligation to pay

any remaining Accumulated Prioritized

Payments and unearned Adjustments

will be extinguished.

§ 107.1530 How a Licensee computes

SBA’s Profit Participation.

This section tells you how to compute

SBA’s Profit Participation. Profit

Participation is included in the

Distributions you make to SBA under

§§ 107.1550 and 107.1560.

(a) How to compute Profit

Participation. Profit Participation equals

your ‘‘Base’’ times your ‘‘Profit

Participation Rate’’ (if the Base is zero

or less, you do not owe SBA Profit

Participation). Compute the Base using

paragraph (c) of this section and the

Profit Participation Rate using

paragraphs (d) through (g) of this

section. You must compute your

Earmarked Profit (Loss) under

§ 107.1510 and your Prioritized

Payments and Adjustments under

§ 107.1520 before you can compute

Profit Participation.

(b) How to keep track of Profit

Participation. You must establish a

Profit Participation Account to record

your computations under this section

and payments under §§ 107.1550 and

107.1560. Its balance represents your

unpaid Profit Participation.

(c) How to compute the Base. As of

the end of each fiscal year and any yearto-date interim period (one or more

fiscal quarters) for which you want to

make a Distribution, compute your Base

using the following formula:

B = EP ¥ PPA ¥ UL

where:

B = Base

EP = Earmarked Profit (Loss) for the

period from § 107.1510

PPA = Prioritized Payments from

§ 107.1520(a)(1) and Adjustments (if

applicable) from § 107.1520(f)

UL = ‘‘Unused Loss’’ as determined in

this paragraph (c).

(1) If you have never computed a Base

before, or if the Base as of the end of

your last fiscal year (your ‘‘Previous

Base’’) was zero or greater, your Unused

Loss is zero with the following

exception: If, at the end of your last

fiscal year, you computed a negative

result under paragraph (h)(3) of this

section, your Unused Loss equals that

negative result.

(2) If your Previous Base was less than

zero, your Unused Loss equals your

Previous Base.

(d) How to compute the Profit

Participation Rate. You must determine

your Profit Participation Rate each time

you compute a Base that is greater than

zero. Compute the Rate by following the

steps in paragraphs (e) through (g) of

this section.

(e) Compute the ‘‘PLC ratio’’. (1)

General rule. The ‘‘PLC ratio’’ is the

highest ratio of outstanding

Participating Securities to Leverageable

Capital that you have ever attained.

(2) Exception. You may reduce the

ratio computed under paragraph (e)(1)

of this section if you have increased

your Leverageable Capital above its

highest previous level. The increase

must have taken place at least 120 days

before the date as of which your Base is

computed. In addition, the increase

must have been expressly provided for

in a plan of operations submitted to and

approved by SBA in writing, or must be

the result of the takedown of

commitments or the conversion of noncash assets that were included in your

Private Capital. To reduce your PLC

ratio:

(i) Determine the increase in your

Leverageable Capital over its highest

previous level.

(ii) Find your highest previous ratio of

Participating Securities to Leverageable

Capital. If you have attained your

highest ratio more than once, with

different numerators and denominators,

choose the ratio with the highest

numerator.

(iii) Add the increase in Leverageable

Capital to the denominator of the ratio

chosen in paragraph (e)(2)(ii)of this

section, and divide the numerator by the

revised denominator. The result is your

new PLC ratio.

(3) Once you compute a PLC ratio

under either paragraph (e)(1) or (e)(2)of
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3217

this section, do not recompute it unless

there has been a change in your

outstanding Participating Securities or

your Leverageable Capital.

(4) Example.

Participating

Securities

(A)

Leverageable

Capital (B) A/B PLC Ratio

End of period 1 ............................................................................................................... 1,000 1,000 1.00 1.00

End of period 2 ............................................................................................................... 1,500 1,000 1.50 1.50

End of period 3 ............................................................................................................... 1,200 900 1.33 1.50

End of period 4 ............................................................................................................... 750 500 1.50 1.50

End of period 5 ............................................................................................................... 750 1,500 0.50 1.00

Explanation of PLC Ratio calculation following increase in Leverageable Capital:

Step 1: Increase in Leverageable Capital over highest previous level=1,500 ¥1,000=500.

Step 2: Highest previous ratio of Participating Securities to Leverageable Capital=1.50 (attained two times, at end of periods 2 and 4).

Step 3: Highest numerator associated with highest ratio=1,500 (at end of period 2); associated denominator=1,000.

Step 4: Add the increase in Leverageable Capital (from step 1) to the denominator (from step 3): 500+1,000=1,500.

Step 5: Divide the numerator (from step 3) by the revised denominator (from step 4): 1,500/1,500=1.00.

(f) Compute the Profit Participation

Rate (before indexing). Compute the

Profit Participation Rate (before

indexing) using the table in this

paragraph (f). Then go to paragraph (g)

of this section to determine whether to

index the Profit Participation Rate.

If your PLC

ratio is:

Then your Profit Participation

Rate is:

1 or less ..... 9%×PLC Ratio.

More than 1 9%+[3%×(PLC ratio-1)].

(g) Indexing the Profit Participation

Rate. The Profit Participation Rate is

indexed, up or down, to the yield-tomaturity on Treasury bonds with a

remaining term of ten (10) years (the

‘‘Treasury Rate’’). You must perform the

indexing procedures in this paragraph

(g) unless the Treasury Rate was exactly

8 percent on every date that you issued

Participating Securities.

(1) Licensees that have issued

Participating Securities on only one

occasion. Determine the Treasury Rate

for the date you issued your

Participating Security. Adjust the Profit

Participation Rate from paragraph (f) of

this section by the percentage difference

between the Treasury Rate and 8

percent. For example, assume that you

issued Participating Securities when the

Treasury Rate was 10 percent. The

percentage difference between 10

percent and 8 percent is 25 percent. If

you had a PLC ratio of 1, the Profit

Participation Rate before indexing

would be 9 percent. You would increase

this rate by 25 percent, giving you a

Profit Participation Rate of 11.25

percent.

(2) Licensees that have issued

Participating Securities on more than

one occasion. Determine the Treasury

Rate for each of the dates you issued

Participating Securities.

(i) Compute an average of all such

Treasury Rates, weighted to reflect the

dollar amount of each issuance

(ignoring any redemptions) and the

number of days from the date of each

issuance to the date as of which you are

computing the Profit Participation Rate.

Example to paragraph (g)(2)(i) of this

section. If you issued $10 million of

Participating Securities on the 60th day

of Fiscal Year 1 when the Treasury Rate

was 8 percent, and another $15 million

on the 100th day of Fiscal Year 3 when

the Treasury Rate was 10 percent, then

the weighted average Treasury Rate

computed as of the end of Fiscal Year

3 would be 8.55 percent. [Days elapsed

since first issuance of Participating

Securities = 1,035; days elapsed since

second issuance of Participating

Securities = 265; weighted amount of

first issuance = $10,000,000 × 1,035/

1,035 = $10,000,000; weighted amount

of second issuance = $15,000,000 × 265/

1035 = $3,840,579; weighted average

amount of Participating Securities

issued = $10,000,000 + $3,840,579 =

$13,840,579; weighted average Treasury

= {(.08 × $10,000,000) + (.10 ×

$3,840,579)} / $13,840,579 = 8.55%]

(ii) Adjust the Profit Participation

Rate from paragraph (f) of this section

by the percentage difference between

the weighted average Treasury Rate and

8 percent. In the example given in

paragraph (g)(2)(i) of this section, if the

PLC ratio were equal to 2, the Profit

Participation Rate for the fiscal year

would be 12.83 percent. [{((.0855 × .08)

¥ .08) + 1} × .12 × 100 = 12.83%]

(h) Computing SBA’s Profit

Participation. If the Base from paragraph

(c) of this section is greater than zero,

you must compute SBA’s Profit

Participation as follows:

(1) Multiply the Base by the Profit

Participation Rate to determine the

Profit Participation for the fiscal year or

year-to-date interim period.

(2) If your last Profit Participation

computation was for an interim period

during the same fiscal year and used a

higher Profit Participation Rate than that

used in paragraph (h)(1) of this section,

multiply the Base for that period by the

Profit Participation Rate used in

paragraph (h)(1) of this section.

(3) Reduce the Profit Participation

from paragraph (h)(1) of this section by

any amounts of Profit Participation that

you distributed or reserve for

distribution to SBA, or its designated

agent or Trustee, for any previous

interim period during the fiscal year, or

by the amount you computed in

paragraph (h)(2) of this section,

whichever is less. If the result is less

than zero, SBA’s Profit Participation is

zero. If you obtain a negative result as

of the end of your fiscal year, you must

add it to your Unused Loss the next

time you compute your Base under

paragraph (c)(1) of this section.

(i) Allocation of Profit Participation.

Before any Distribution and in any case

within 120 days following the end of

your fiscal year, you must add the

amount of Profit Participation computed

under this § 107.1530 to the Profit

Participation Account. You must reserve

funds equal to this amount for

distribution to SBA, or its designated

agent or Trustee; you may not reinvest

these funds or use them for any other

purpose.

§ 107.1540 Distributions by Licensee—

Prioritized Payments and Adjustments.

After you compute Prioritized

Payments and Adjustments under

§ 107.1520, you must distribute them in

accordance with this § 107.1540.

(a) Requirement to distribute

Prioritized Payments and Adjustments.

This paragraph (a) applies only if you

satisfy the liquidity requirement in

§ 107.1505. All Distributions under this

paragraph (a) go to SBA or its

designated agent or trustee.

(1) You must distribute the balance in

your Distribution Account from

§ 107.1520 annually on the first or

second Payment Date following your

fiscal year end, and on any date when

you are making any other Distribution.
3218 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(2) You may distribute all or part of

the balance in your Distribution

Account on any Payment Date

regardless of whether you are making

any other Distribution on that date.

(b) Additional requirement for

Licensees with undistributed Prioritized

Payments. This paragraph (b) applies if

you do not distribute the full amount in

your Distribution Account by the

second Payment Date following the end

of your fiscal year. At the end of each

fiscal quarter, until you reduce the

balance in your Distribution Account to

zero, you must:

(1) Do all the steps in § 107.1520; and

(2) Distribute the balance in your

Distribution Account on the next

Payment Date following the end of your

fiscal quarter, provided you satisfy the

liquidity requirement in § 107.1505.

§ 107.1550 Distributions by Licensee—

permitted ‘‘tax Distributions’’ to private

investors and SBA.

If you have outstanding Participating

Securities or Earmarked Assets, and you

are a limited partnership, ‘‘S

Corporation’’, or equivalent passthrough entity for tax purposes, you

may make an annual ‘‘tax Distribution’’

to your investors, whether or not they

have an actual tax liability. SBA

receives a share of any tax Distribution

you make. This section tells you when

you may make a ‘‘tax Distribution’’ and

how to compute it.

(a) Conditions for making a tax

Distribution. You may make a tax

Distribution only if:

(1) You have paid all your Prioritized

Payments and Adjustments, so that the

balance in both your Distribution

Account and your Accumulation

Account is zero (see § 107.1520).

(2) You satisfy the liquidity

requirement in § 107.1505.

(3) The tax Distribution does not

exceed your Retained Earnings

Available for Distribution.

(4) The tax Distribution does not

exceed the Maximum Tax Liability from

paragraph (b) of this section.

(b) How to compute the Maximum

Tax Liability. (1) Compute your

Maximum Tax Liability for a full fiscal

year only. Use the following formula:

M = (TOI x HRO) + (TCG x HRC)

where:

M = Maximum Tax Liability.

TOI = Total ordinary income (less ordinary

deductions) allocated to your partners or

shareholders for Federal income tax

purposes.

HRO = The highest combined marginal

Federal and State income tax rates for

corporations or individuals (whichever

is higher), on ordinary income.

TCG = Total capital gains allocated to your

partners or shareholders for Federal

income tax purposes.

HRC = The highest combined marginal

Federal and State income tax rates for

corporations or individuals (whichever

is higher), on capital gains.

(2) For purposes of this paragraph (b),

the ‘‘State income tax’’ is that of the

State where your principal place of

business is located.

(c) SBA’s share of the tax Distribution.

(1) SBA’s percentage share of the tax

Distribution is equal to the Profit

Participation Rate computed under

§ 107.1530.

(2) SBA may direct you to pay its

share of the tax Distribution to its

designated agent or Trustee.

(3) SBA will apply its share of the tax

Distribution to the Profit Participation

you owe SBA under § 107.1530.

(d) Paying a tax Distribution. You may

make a tax Distribution only on the first

or second Payment Date following the

end of your fiscal year or, if your fiscal

year end is December 31, during the

period beginning March 1 and ending

April 15.

§ 107.1560 Distributions by Licensee—

required Distributions to private investors

and SBA.

You must make Distributions under

this § 107.1560 if you have outstanding

Participating Securities or Earmarked

Assets and you satisfy the conditions in

paragraph (a) of this section.

Distributions under this section are

determined as of the end of each fiscal

year.

(a) Conditions for making

Distributions. Distributions under this

section are subject to the following

conditions:

(1) You must have paid all your

Prioritized Payments and Adjustments,

so that the balance in both your

Distribution Account and your

Accumulation Account is zero (see

§§ 107.1520 and 107.1540).

(2) You must have made any

permitted tax Distribution that you

choose to make under § 107.1550.

(3) You must satisfy the liquidity

requirement in § 107.1505.

(4) The amount you distribute under

this section must not exceed your

Retained Earnings Available for

Distribution.

(b) Total amount you must distribute.

Unless SBA permits otherwise, the total

amount you must distribute equals the

result (if greater than zero) of the

following computation:

(1) Your Retained Earnings Available

for Distribution as of the end of your

fiscal year; minus

(2) All previous Distributions under

this § 107.1560 that were applied as

redemptions or repayments of Leverage;

plus

(3) All previous Distributions under

§ 107.1570(b) that reduced your

Retained Earnings Available for

Distribution.

(c) When you must make

Distributions. You must make the

required Distributions on either the first

or second Payment Date following the

end of your fiscal year.

(d) Effect of Distributions on Retained

Earnings Available for Distribution.

Distributions under this § 107.1560 have

the following effect on your Retained

Earnings Available for Distribution:

(1) All Distributions to private

investors reduce Retained Earnings

Available for Distribution.

(2) Distributions to SBA, or its

designated agent or Trustee, reduce

Retained Earnings Available for

Distribution if they are applied as

payments of Profit Participation or

distributions on Preferred Securities

(see paragraph (g) of this section).

(3) Distributions to SBA, or its

designated agent or Trustee, do not

reduce Retained Earnings Available for

Distribution if they are applied as a

repayment or redemption of Leverage

(see paragraph (g) of this section).

(e) SBA’s share of the total

Distribution. Use the following table to

determine the percentage share of the

total Distribution (from paragraph (b) of

this section) that goes to SBA (or its

designated agent or Trustee):

SBA’S PERCENTAGE SHARE OF TOTAL

DISTRIBUTION

If your ratio of Leverage to Leverageable

Capital as of the fiscal

year end is:

Then SBA’s percentage share of the Distribution is:

Over 200% ................ [Leverage / (Leverage

+ Leverageable

Capital)] × 100.

Over 100% but not

over 200%.

50%.

100% or less ............. Profit Participation

Rate from

§ 107.1530.

(f) Exceptions to the Distribution

requirement. (1) With SBA’s prior

written approval, you may withhold

from distribution reasonable reserves

necessary to protect your investments or

relative position in Loans and

Investments and to meet contingent

liabilities.

(i) If you submit a written request for

SBA approval, you may consider it

approved unless SBA notifies you

otherwise within 30 days from receipt.

(ii) Reserves that you withhold from

distribution may not be used to make
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3219

investments in additional portfolio

companies.

(iii) Withholding of reserves under

this paragraph (f)(1) is not a ‘‘payment

failure’’ in violation of § 107.1820(e)(6).

(2) SBA may restrict Distributions

under this § 107.1560 if SBA determines

that the value of your assets is

materially overstated. SBA must give

you notice of such a determination in

advance of your proposed Distribution.

(g) How SBA will apply your

Distributions. Your Distributions to SBA

(or its designated agent or Trustee)

under this § 107.1560 will be applied in

the following order:

(1) First, to Profit Participation;

(2) Second, to the extent there remain

any Retained Earnings Available for

Distribution, to distributions on

Preferred Securities;

(3) Third, as a redemption of

Participating Securities in order of

issue;

(4) Fourth, as a redemption of

Preferred Securities; and

(5) Fifth, as the repayment of

principal of any outstanding

Debentures, with such repayment to be

made into escrow on terms and

conditions SBA determines.

§ 107.1570 Distributions by Licensee—

optional Distribution to private investors

and SBA.

If you have outstanding Participating

Securities or Earmarked Assets, you

may make two types of optional

Distributions under this § 107.1570:

quarterly Distributions determined the

same way as the required annual

Distributions in § 107.1560, and

Distributions allocated between SBA

and your private investors in proportion

to the capital contributions of each.

(a) Quarterly Distributions subject to

conditions in § 107.1560. (1) You may

make Distributions under this paragraph

(a) as of the end of any fiscal quarter,

giving SBA (or its designated agent or

Trustee) a percentage share determined

under § 107.1560(e).

(2) Such Distributions are subject to

all the provisions in § 107.1560(a)(1),

(a)(3), (a)(4), (d), (f)(2), and (g).

(3) You may make such Distributions

only on the next Payment Date

following the end of your fiscal quarter.

(4) The total amount of such

Distributions may not exceed the result

of the following computation:

(i) Your Retained Earnings Available

for Distribution as of the end of your

fiscal quarter; minus

(ii) All previous Distributions under

this paragraph (a) or § 107.1560 that

were applied as redemptions or

repayments of Leverage; plus

(iii) All previous Distributions under

paragraph (b) of this section that

reduced your Retained Earnings

Available for Distribution.

(b) Other optional Distributions. On

any Payment Date, you may make

additional Distributions to your private

investors and to SBA (or its designated

agent or Trustee) under this paragraph

(b).

(1) Conditions for making

Distribution. You may make a

Distribution under this paragraph (b)

only if:

(i) You have distributed all Earned

Prioritized Payments and earned

Adjustments, so that the balance in your

Distribution Account is zero (see

§ 107.1520).

(ii) You have distributed all Profit

Participation computed under

§ 107.1530 and made all required

Distributions under § 107.1560.

(iii) You satisfy the liquidity

requirement in § 107.1505 or obtain

SBA’s prior written approval of the

Distribution.

(iv) You do not have a condition of

Capital Impairment.

(v) The Distribution does not reduce

your Regulatory Capital (excluding

commitments from Institutional

Investors) below the minimum required

under § 107.210, unless SBA approves

the reduction as part of a plan of

liquidation.

(vi) The Distribution does not cause

you to have excess Leverage contrary to

section 303 of the Act.

(2) SBA’s share of Distribution. (i) If

your Capital Impairment Percentage

under § 107.1840 is zero, SBA’s

percentage share of any Distribution

under this paragraph (b) equals:

[Leverage/(Leverage + Leverageable

Capital)] × 100

In this formula, use Leverage and

Leverageable Capital as of the date of the

Distribution, after giving effect to any

Distribution under § 107.1560 and paragraph

(a) of this section.

(ii) If your Capital Impairment

Percentage under § 107.1840 is greater

than zero, you must modify the formula

in paragraph (b)(2)(i) of this section by

replacing Leverageable Capital with:

Leverageable Capital × (100% ¥ CIP)

where ‘‘CIP’’ is your Capital Impairment

Percentage or 100 percent, whichever is less.

(3) How SBA will apply Distributions.

Any amounts you distribute to SBA, or

its designated agent or Trustee, under

this paragraph (b) will be applied as a

repayment or redemption of Leverage in

the order set forth in § 107.1560 (g)(3)

through (g)(5).

(4) Effect of Distributions on Retained

Earnings Available for Distribution. Any

amounts you distribute to non-SBA

investors under this paragraph (b) must

reduce your Retained Earnings

Available for Distribution to zero before

reducing your Private Capital.

(5) Permitted exception to § 107.585.

You may make any Distribution

permitted by this paragraph (b), even if

the result is a reduction in your

Regulatory Capital that would otherwise

be prohibited under § 107.585.

§ 107.1580 Special rules for In-Kind

Distributions by Licensees.

(a) In-Kind Distributions while

Licensee has outstanding Participating

Securities. A Distribution under

§§ 107.1560 or 107.1570 may consist of

securities (an ‘‘In-Kind Distribution’’).

Such a Distribution must satisfy the

conditions in this paragraph (a).

(1) You may distribute only securities

that are Publicly Traded and Marketable

at the time of the Distribution.

(2) You must distribute each security

pro-rata to all investors and to SBA or

its designated agent or Trustee, based on

the amounts that each party would

receive if the Distribution were in cash.

(3) You must impute a gain (loss) on

each security being distributed as if it

were being sold, using the value of the

security as of the declaration date of the

Distribution (if you are a Corporate

Licensee) or the distribution date (if you

are a Partnership Licensee).

(4) You must deposit SBA’s share of

the securities being distributed with the

CRA, who will select a Disposition

Agent (a person who is knowledgeable

about and proficient in the marketing of

thinly traded securities). As an

alternative, if you agree, SBA may direct

you to dispose of its share. In this case,

you must promptly remit the proceeds

to SBA.

(b) In-Kind Distributions after

Licensee has redeemed all Participating

Securities. This paragraph (b) applies

from the time you redeem all your

Participating Securities until you

dispose of all your Earmarked Assets.

(1) You may make an In-Kind

Distribution of an Earmarked Asset only

if you pay SBA the lower of:

(i) An amount equal to the Unrealized

Appreciation on the asset; or

(ii) The full amount of your

Accumulated Prioritized Payments and

unpaid Adjustments.

(2) You must obtain SBA’s prior

written approval of any In-Kind

Distribution of an Earmarked Asset that

is not Publicly Traded and Marketable,

specifically including approval of the

valuation of the asset.

§ 107.1590 Special rules for companies

licensed on or before March 31, 1993.

This section applies to companies

licensed on or before March 31, 1993
3220 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

that apply to issue Participating

Securities.

(a) Election to exclude pre-existing

portfolio. You may choose to exclude all

(but not a portion) of your Loans and

Investments as of March 31, 1993, from

classification as Earmarked Assets if:

(1) The proceeds of your first issuance

of Participating Securities are not used

to refinance outstanding Debentures (see

paragraph (c) of this section). SBA will

consider payment or prepayment of any

outstanding Debenture to be a

refinancing unless you demonstrate to

SBA’s satisfaction that you can pay the

Debenture principal without relying on

the proceeds of the Participating

Securities.

(2) SBA, in its sole discretion,

approves the exclusion.

(b) Treatment of pre-existing portfolio

if not excluded. If you do not choose to

exclude your Loans and Investments as

of March 31, 1993, they will be

Earmarked Assets for all purposes.

(c) Refinancing Debentures with

Participating Securities. SBA may

permit you to use the proceeds of a

Participating Security to pay the

principal amount due on an outstanding

Debenture if:

(1) You have outstanding Equity

Capital Investments (at cost) equal to the

amount of the Debentures being

refinanced.

(2) You have not elected to exclude

Loans and Investments from Earmarked

Assets under paragraph (a) of this

section.

(d) Requirements for Licensee’s first

issuance of Participating Securities.

When you apply for your first issuance

of Participating Securities, you must

comply with the following:

(1) For each of your Loans and

Investments, you must submit:

(i) The most recent annual report (or

fiscal year-end financial statements) and

the most recent interim financial

statements of the Small Business; and

(ii) Your valuation reports on the

Small Business, prepared as of the end

of each of your last three fiscal years. If

you have applied for Participating

Securities on the basis of interim

financial statements, you must also

submit a valuation report as of your

interim financial statement date.

(2) If you have negative Undistributed

Net Realized Earnings and/or a net

Unrealized Loss on Securities Held,

SBA may require you to undergo a

quasi-reorganization in accordance with

generally accepted accounting

principles.

(3) If your financial statements

accompanying the Participating

Securities application are for an interim

period, you must have your SBAapproved independent public

accountant perform a limited-scope

audit of the statements. For purposes of

this paragraph (d)(3), ‘‘limited scope

audit’’ means auditing procedures

sufficient to enable the independent

public accountant to express an opinion

on the Statement of Financial Position

and the accompanying Schedule of

Loans and Investments.

Funding Leverage by Use of SBAGuaranteed Trust Certificates (‘‘TCs’’)

§ 107.1600 SBA authority to issue and

guarantee Trust Certificates.

(a) Authorization. Sections 321 (a)

and (b) of the Act authorize SBA or its

CRA to issue TCs, and SBA to guarantee

the timely payment of the principal and

interest thereon. Any guarantee by SBA

of such TC is limited to the principal

and interest due on the Debentures or

the Redemption Price of and Prioritized

Payments on Participating Securities 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) Periodic exercise of authority. SBA

will issue guarantees of Debentures and

Participating Securities under section

303 and of TCs under section 321 of the

Act at three month intervals, or at

shorter intervals, taking into account the

amount and number of such guarantees

or TCs.

(c) 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 or

Participating Securities, aggregations of

Debentures or Participating Securities,

or Pools or Trusts of Debentures or

Participating Securities.

(d) Pass-through provisions. TCs shall

provide for a pass-through to their

holders of all amounts of principal and

interest paid on the Debentures, or the

Redemption Price of and Prioritized

Payments on the Participating

Securities, in the Pool or Trust against

which they are issued.

(e) 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.

§ 107.1610 Effect of prepayment or early

redemption of Leverage on a Trust

Certificate.

(a) The rights, if any, of a Licensee to

prepay any Debenture or make early

redemption of any Participating

Security are established by the terms of

such securities, 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.

SBA’s rights to redeem, at any time, any

Participating Security without premium

are established by the terms of the

Guaranty Agreement relating to the

Participating Security.

(c) Any prepayment of a Debenture or

early redemption of a Participating

Security pursuant to the terms of the

Guaranty Agreement relating to such

securities, shall reduce the SBA

guarantee of timely payment of

principal and interest on a TC in

proportion to the amount of principal or

Redemption Price that such prepaid

Debenture or redeemed Participating

Security 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 and

Prioritized Payments on Participating

Securities shall accrue only through the

date of such voluntary prepayment or

SBA payment, as the case may be.

(f) In the event that all Debentures or

Participating Securities 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 Licensee

pursuant to the terms of the Debenture.

§ 107.1620 Functions of agents, including

Central Registration Agent, Selling Agent

and Fiscal Agent.

(a) Agents. SBA will appoint or cause

to be appointed agent(s) to perform

functions necessary to market and

service Debentures, Participating

Securities, or TCs pursuant to this part.

(1) Selling Agent. As a condition of

guaranteeing a Debenture or
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3221

Participating Security, SBA shall cause

each Licensee to appoint a Selling Agent

to perform functions which include, but

are not limited to:

(i) Selecting qualified entities to

become pool or Trust assemblers

(‘‘Poolers’’).

(ii) Receiving guaranteed Debentures

and Participating Securities as well as

negotiating the terms and conditions of

periodic offerings of Debentures and/or

TCs with Poolers on behalf of Licensees.

(iii) Directing and coordinating

periodic sales of Debentures and

Participating Securities and/or TCs.

(iv) Arranging for the production of

the Offering Circular, 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 or Participating

Securities.

(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

or Participating Securities:

(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 Licensees;

(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 or redemption of

Participating Securities;

(vi) Hold, safeguard, and release all

Debentures and Participating Securities

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 and Participating

Securities, 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. The function of locating

purchasers, and negotiating and closing

the sale of Debentures, Participating

Securities and TCs, may be performed

either by SBA or an agent appointed by

SBA. Nothing in the regulations in this

part shall be interpreted to prevent the

CRA from acting as SBA’s agent for this

purpose.

§ 107.1630 SBA regulation of Brokers and

Dealers and disclosure to purchasers of

Leverage or Trust Certificates.

(a) Disclosure to purchasers. Prior to

any sale of a Debenture, Participating

Security, or TC, SBA shall require the

seller, or the broker or dealer as agent

for the seller, to disclose to the

purchaser, in a form prescribed or

approved by SBA, specified information

on the terms, conditions, and yield of

such instrument.

(b) 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 (d) of this

section) and shall provide a fidelity

bond or insurance in such amount as

SBA may require.

(c) Suspension and/or termination of

Broker or Dealer. SBA shall exclude

from the sale and all other dealings in

Debentures, Participating Securities 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, such

broker or dealer will be suspended by

SBA 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

market for Debentures, Participating

Securities or TCs may be terminated.

(4) If such broker or dealer has failed

to make full disclosure of the

information required by SBA in

paragraph (a) of this section, such

broker’s or dealer’s participation in the

market for Debentures, Participating

Securities or TCs may be terminated.

(d) Termination/suspension

proceedings. A broker’s or dealer’s

participation in the market for

Debentures, Participating Securities 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)(4) 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.

§ 107.1640 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,

Participating Securities 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

§ 107.1700 Transfer by SBA of its interest

in Licensee’s Leverage security.

Upon such conditions and for such

consideration as it deems reasonable,

SBA may sell, assign, transfer, or

otherwise dispose of any Preferred

Security, Debenture, Participating

Security, or other security held by or on

behalf of SBA in connection with

Leverage. Upon notice by SBA, Licensee

will make all payments of principal,

dividends, interest, Prioritized

Payments, and redemptions as shall be

directed by SBA. Licensee will be liable

for all damage or loss which SBA may

sustain by reason of such disposal, up

to the amount of Licensee’s liability

under such security, plus court costs

and reasonable attorney’s fees incurred

by SBA.

§ 107.1710 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 Preferred or

Participating Securities or obligations

held or guaranteed by SBA, and all legal

or equitable rights accruing to SBA.
3222 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

Subpart J—Licensee’s Noncompliance

With Terms of Leverage

§ 107.1800 Licensee’s agreement to terms

and conditions in §§ 107.1810 and 107.1820.

Any Licensee that violates the terms

and conditions of its Leverage is subject

to SBA remedies. The terms, conditions

and remedies in § 107.1810 apply to

outstanding Debentures issued after

April 25, 1994. The terms, conditions

and remedies in § 107.1820 apply to

outstanding Preferred Securities and

Participating Securities issued after

April 25, 1994, or if you have

Earmarked Assets in your portfolio.

§ 107.1810 Events of default and SBA’s

remedies for Licensee’s noncompliance

with terms of Debentures.

(a) Applicability of this section. This

§ 107.1810 applies to Debentures issued

after April 25, 1994. By issuing such

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. Debentures issued before

April 25, 1994 continue to be governed

by the remedies in effect at the time of

their issuance.

(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 311(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 which 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 § 107.730.

(4) Willful non-compliance. You

willfully violate one or more of the

substantive provisions of the Act,

specifically including but not limited to

the provisions summarized in section

310(c) of the Act, or any substantive

regulation promulgated under the Act.

(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 which results in

another occurrence of the same event of

default.

(6) Transfer of Control. You violate

§ 107.475 and/or willfully violate

§ 107.410, and as a result of such

violation you undergo a transfer of

Control.

(7) Non-cooperation under

§ 107.1810(h). 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 311(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

§ 107.520.

(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

§ 107.585;

(ii) Payments from Retained Earnings

Available for Distribution based on

either the shareholders’ pro-rata

interests or the provisions for profit

distributions in your partnership

agreement, as appropriate; and

(iii) Distributions by Participating

Securities issuers as permitted under

§§ 107.1540 through 107.1580.

(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 §§ 107.585 and

107.1560 through 107.1580.

(5) Capital Impairment. You have a

condition of Capital Impairment as

determined under § 107.1830.

(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 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,

specifically including but not limited to

the provisions summarized in section

310(c) of the Act, or any substantive

regulation promulgated under the Act.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3223

(9) Failure to maintain investment

ratio. You fail to maintain the

investment ratio for Leverage in excess

of 300 percent of Leverageable Capital

(see §§ 107.1150(b)(2) and 107.1160(c)),

if applicable to you, as of the end of

each fiscal year. In determining whether

you have maintained the ratio, SBA will

disregard any prepayment, sale, or

disposition of Venture Capital

Financing, any increase in Leverageable

Capital, and any receipt of additional

Leverage, within 120 days prior to the

end of your fiscal year.

(10) Failure to maintain diversity. You

fail to maintain diversity between

management and ownership as required

by § 107.150, if applicable to you.

(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 311(c) of the Act.

(2) SBA may invoke the remedies in

paragraph (g)(1) 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

any Licensee issuing Debentures after

April 25, 1994 must include the

following provisions as a condition to

the purchase or guarantee by SBA of

such 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 your consent to SBA’s

exercise of such right:

(1) With respect to a Corporate

Licensee, 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

Licensee, upon written notice, to require

you to remove the person(s) responsible

for such occurrence and/or to remove

the general partner of Licensee, which

general partner shall then be replaced in

accordance with Licensee’s Articles by

a new general partner approved by SBA;

and/or

(3) With respect to either a Corporate

or Partnership Licensee, to obtain the

appointment of SBA or its designee as

your receiver under section 311(c) of the

Act for the purpose of continuing your

operations. The appointment of a

receiver to liquidate a Licensee is not

within such consent, but is governed

instead by the relevant provisions of the

Act.

§ 107.1820 Conditions affecting issuers of

Preferred Securities and/or Participating

Securities.

(a) Applicability of this section. This

section applies if you have Preferred

Securities issued after April 25, 1994, or

if you issue Participating Securities or

have Earmarked Assets in your

portfolio. Your Articles must include

the provisions of this § 107.1820 as a

condition to SBA’s purchase of

Preferred Securities or guarantee of

Participating Securities and for as long

as you own Earmarked Assets. Preferred

Securities issued before April 25, 1994

continue to be governed by the remedies

in effect at the time of their issuance.

(b) Removal Conditions. Upon the

occurrence (as determined by SBA) of

any of the following conditions

(‘‘Removal Conditions’’), SBA may avail

itself of one or more of the remedies in

paragraph (d) of this section:

(1) Insolvency or extreme Capital

Impairment. You become equitably or

legally insolvent, or have a Capital

Impairment Percentage of 100 percent or

more (‘‘extreme Capital Impairment’’)

and have not cured such Capital

Impairment within the time limits set by

SBA in writing. In this regard:

(i) You are not considered to have a

condition of extreme Capital

Impairment during the first eight years

following your first issuance of

Participating Securities.

(ii) This paragraph (b)(1) does not give

you an additional opportunity to cure if

you have already had an opportunity to

cure your Capital Impairment under

paragraph (e)(3) of this section.

(2) Voluntary assignment. You make a

voluntary assignment for the benefit of

creditors.

(3) Bankruptcy. You 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.

(4) Transfer of Control. You violate

§ 107.475 and/or willfully violate

§ 107.410, and such violation results in

a transfer of Control.

(5) Fraud. You commit a fraudulent

act which causes serious detriment to

SBA’s position as a guarantor or

investor.

(6) Fraudulent transfers. You make

any transfer or incur any obligation that

is fraudulent under the terms of 11 USC

548.

(c) Contingent Removal Conditions.

Upon the occurrence (as determined by

SBA) of any of the following conditions

(‘‘Contingent Removal Conditions’’),

SBA may avail itself of one or more of

the remedies in paragraph (d) of this

section, but only if you fail to remove

the person(s) SBA identifies as

responsible for such occurrence and/or

cure such occurrence to SBA’s

satisfaction within a time period

determined by SBA (but not less than 15

days):

(1) Willful conflicts of interest. You

willfully violate § 107.730.

(2) Willful or repeated

noncompliance. You willfully or

repeatedly violate one or more of the

substantive provisions of the Act,

specifically including but not limited to

the provisions summarized in section

310(c) of the Act, or any substantive

regulation promulgated under the Act.

(3) Failure to comply with restrictions

under paragraph f) of this section. You

fail to comply with the restrictions

imposed by SBA under paragraph (f) of

this section.

(d) SBA remedies for Removal

Conditions and Contingent Removal

Conditions. Upon the occurrence (as

determined by SBA) of any Removal

Condition, or any Contingent Removal

Condition accompanied by your failure

to act as set forth in paragraph (c) of this

section, SBA has the following rights,

and you consent to SBA’s exercise of

any or all of such rights:

(1) With respect to a Corporate

Licensee, 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

as is sufficient to constitute a majority

of your board of directors; or
3224 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(2) With respect to a Partnership

Licensee, upon written notice, to require

you to remove the person(s) responsible

for such occurrence and/or to remove

your general partner, who shall then be

replaced in accordance with your

Articles by a new general partner

approved by SBA; and/or

(3) With respect to either a Corporate

or Partnership Licensee, to the

appointment of SBA or its designee as

your receiver under section 311(c) of the

Act for the purpose of continuing your

operations. The appointment of a

receiver to liquidate a Licensee is not

within such consent, but is governed

instead by the relevant provisions of the

Act.

(e) Restricted Operations Conditions.

Upon the occurrence (as determined by

SBA) of any of the following conditions

(‘‘Restricted Operations Conditions’’),

SBA may avail itself of any of the

remedies in paragraph (f) of this section.

(1) Removal Conditions or Contingent

Removal Conditions. Any condition

occurs which is listed in paragraphs (b)

or (c) of this section.

(2) Failure to maintain Regulatory

Capital. You fail to maintain the

minimum Regulatory Capital required

by this part.

(3) Capital or Liquidity Impairment.

You have a condition of Capital

Impairment as determined under

§ 107.1830 or, if applicable, a condition

of Liquidity Impairment as determined

under § 107.1505, and you fail to cure

the impairment within time limits set by

SBA in writing.

(4) Improper Distributions. You make

any Distribution to your shareholders or

partners other than those permitted by

§§ 107.585 and 107.1560 through

107.1580.

(5) Excessive Management Expenses.

Without the prior written consent of

SBA, you incur Management Expenses

in excess of those permitted under

§ 107.520.

(6) Failure to make payment. You fail

to pay any amounts due under Preferred

Securities or required by §§ 107.1500

through 107.1590, unless otherwise

permitted by SBA.

(7) Noncompliance. Except as

otherwise provided for in paragraphs

(c)(1) and (c)(2) of this section, SBA

determines that you have failed to

comply with one or more of the

substantive provisions of the Act,

specifically including but not limited to

the provisions summarized in section

310(c) of the Act, or any substantive

regulation promulgated under the Act.

(8) Failure to maintain diversity. You

fail to maintain diversity between

management and ownership as required

by § 107.150, if applicable to you.

(9) Failure to maintain investment

ratios. You fail to maintain the

investment ratios or amounts required

for Participating Securities

(§ 107.1500(b)(4)) or Leverage in excess

of 300 percent of Leverageable Capital

(§ 107.1160(c)) or Preferred Securities in

excess of 100 percent of Leverageable

Capital (§ 107.1160(d)), if applicable to

you, as of the end of each fiscal year. In

determining whether you have

maintained the ratios or amounts, SBA

will disregard any prepayment, sale, or

disposition of Equity Capital

Investments or Venture Capital

Financings, as appropriate, any increase

in Leverageable Capital, and any receipt

of additional Leverage, within 120 days

prior to the end of your fiscal year.

(10) Nonperformance. You violate or

fail to perform one or more of the terms

and conditions of any Participating

Security or Preferred Security or of any

agreement with or condition imposed by

SBA in its administration of the Act and

the regulations promulgated thereunder.

(11) Noncooperation under paragraph

(g) of this section. You fail to take

appropriate steps, satisfactory to SBA, to

accomplish such action as SBA may

have required under paragraph (g) of

this section.

(f) SBA remedies for Restricted

Operations Conditions. Upon the

occurrence of any Restricted Operations

Condition, and until such condition(s)

are cured to SBA’s satisfaction within a

time period determined by SBA (but not

less than 15 days), upon written notice

SBA shall have the following rights, and

you consent to SBA’s exercise of any or

all of such rights:

(1) To prohibit you from making any

additional investments except for

investments under legally binding

commitments you entered into before

such notice and, subject to SBA’s prior

written approval, investments that are

necessary to protect your investments;

(2) Until all Leverage is redeemed and

amounts due are paid, to prohibit

Distributions by you to any party other

than SBA, its agent or Trustee;

(3) To require all your commitments

from investors to be funded at the

earliest time(s) permitted in accordance

with your Articles; and

(4) To review and re-determine your

approved Management Expenses.

(g) 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

thereunder, SBA, after written

notification to you and until such

condition is cured to SBA’s satisfaction,

will deny you additional Leverage and/

or require you to take such actions as

SBA may determine to be appropriate

under the circumstances.

Computation of Licensee’s Capital

Impairment

§ 107.1830 Licensee’s Capital

Impairment—definition and general

requirements.

(a) Applicability of this section. This

§ 107.1830 applies to you if you have

any outstanding Leverage issued on or

after April 25, 1994. If you only have

outstanding Leverage issued before

April 25, 1994, you must comply with

paragraphs (e) and (f) of this section and

the Capital Impairment regulations in

this part in effect when you issued your

Leverage.

(b) 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 §§ 107.1810(g) and

107.1820(f).

(c) Definition of Capital Impairment

condition. You have a condition of

Capital Impairment if your Capital

Impairment Percentage, as computed in

§ 107.1840, exceeds:

(1) For Section 301(d) Licensees, 75

percent.

(2) For Section 301(c) Licensees, the

appropriate percentage from the

following table:
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3225

MAXIMUM PERMITTED CAPITAL IMPAIRMENT PERCENTAGES FOR SECTION 301(C) LICENSEES

If the percentage of equity capital investments (at

cost) in your portfolio is: And your ratio of outstanding leverage to leverageable capital is

Then your

maximum

permitted

capital impairment

percentage

is

67% ........................................................................... 100% or less .................................................................................................... 70

Over 100% but not over 200% ........................................................................ 60

Over 200% ....................................................................................................... 50

At least 40% but under 67% ..................................... 100% or less .................................................................................................... 55

Over 100% but not over 200% ........................................................................ 50

Over 200% ....................................................................................................... 40

Under 40% ................................................................ 100% or less .................................................................................................... 45

Over 100% but not over 200% ........................................................................ 40

Over 200% ....................................................................................................... 35

(d) Phase-in of maximum permitted

Capital Impairment Percentages for

Section 301(c) Licensees. If you are a

Section 301(c) Licensee, regardless of

your maximum permitted Capital

Impairment Percentage under paragraph

(c) of this section, you will not have a

condition of Capital Impairment if:

(1) Your Capital Impairment

Percentage does not exceed 50 percent;

and

(2) You have not reached your first

fiscal year end occurring after April 25,

1995.

(e) 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.

(f) SBA’s right to determine Licensee’s

Capital Impairment condition. SBA may

make its own determination of your

Capital Impairment condition at any

time.

§ 107.1840 Computation of Licensee’s

Capital Impairment Percentage.

(a) General. This section contains the

procedures you must use to determine

your Capital Impairment Percentage if

you have outstanding Leverage issued

after April 25, 1994. You must compare

your Capital Impairment Percentage to

the maximum permitted under

§ 107.1830(c) 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

§ 107.1840. 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.

(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 1 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 following table:

ADJUSTED UNREALIZED GAIN BEFORE ESTIMATED TAX EFFECTS

If And Then adjusted unrealized gain

before taxes is

Class 1 Appreciation ≤ Net Appreciation ... Class 1 Appreciation + + Class 2 Appreciation ≤ Net Appreciation.(80% × Class 1 Appreciation) + (50% × Class 2 Appreciation).

Class 1 Appreciation ≤ Net Appreciation ... Class 1 Appreciation + Class 2 Appreciation > Net Appreciation.(80% × Class 1 Appreciation) + [(50% × (Net Appreciation ¥ Class 1 Appreciation)].

Class 1 Appreciation > Net Appreciation ... ................................................................... 80% × Net Appreciation.
3226 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

(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.

§ 107.1850 Exceptions to Capital

Impairment provisions for Licensees with

outstanding Participating Securities.

The provisions in this § 107.1850

apply only if at least two-thirds of your

outstanding Leverage consists of

Participating Securities, and at least

two-thirds of your Loans and

Investments (at cost) consist of Equity

Capital Investments.

(a) Forbearance period for

Participating Securities issuers. During

the first forty-eight (48) months

following your first issuance of

Participating Securities, you will not

have a condition of Capital Impairment

if your Capital Impairment Percentage is

below 85 percent.

(b) Extended forbearance period for

early stage investors. If at least twothirds of your Loans and Investments (at

cost) are in Start-Up Financings, the

forbearance period in paragraph (a) of

this section is extended to 60 months.

(c) Forbearance based on actions by

Licensee. The provisions of this

paragraph (c) apply only during the fifth

and sixth years following your first

issuance of Participating Securities. If

your Capital Impairment Percentage, as

determined either by you or by SBA,

exceeds the maximum permitted under

§ 107.1830(c) but is below 85 percent,

you will not have a condition of Capital

Impairment if you do either of the

following within thirty (30) days of such

determination:

(1) Increase your Regulatory Capital

by a cash contribution placed in an

escrow account or other account

satisfactory to SBA, for its benefit. The

contribution must equal, during the fifth

year, 15 percent of your outstanding

Leverage or, during the sixth year, 30

percent.

(2) Provide a guarantee, satisfactory to

SBA and for its benefit, for the amount

of the cash contribution required in

paragraph (c)(1) of this section. SBA

will credit any escrowed funds or

guarantee received in the fifth year

toward the requirements for the sixth

year.

(d) Conditions for forbearance under

paragraph (c) of this section. (1) You

cannot count any funds placed in an

escrow or other account under

paragraph (c) of this section as

Leverageable Capital.

(2) Any fee and/or any claim to

repayment by the party making the

capital contribution or by the guarantor

must be deferred and subordinate to all

outstanding Leverage plus any unpaid

Earned Prioritized Payments and earned

Adjustments.

(3) If there is an acceleration or

mandatory redemption under

§ 107.1810 or § 107.1820, any funds in

the escrow account and/or any

guarantee received under paragraph (c)

of this section will be applied toward

repaying any amounts due SBA.

(4) If you reduce your Capital

Impairment Percentage to zero, SBA

will release and return any escrowed

funds and/or any guarantee received

under paragraph (c) of this section.

Subpart K—Ending Operations as a

Licensee

§ 107.1900 Surrender of license.

You may not surrender your license

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 Licensee.

Subpart L—Miscellaneous

§ 107.1910 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 §§ 107.1810 or 107.1820 does

not constitute a waiver of any

succeeding breach of such term or

provision or condition.

§ 107.1920 Licensee’s application for

exemption from a regulation in part 107.

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.

Your application must be accompanied

by supporting evidence which

demonstrates to SBA’s satisfaction that:

(a) The proposed action is fair and

equitable; and

(b) The exemption requested is

reasonably calculated to advance the

best interests of the SBIC program in a

manner consonant with the policy

objectives of the Act and the regulations

in this part.

§ 107.1930 Effect of changes in this part

107 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.

Dated: January 22, 1996.

John T. Spotila,

Acting Administrator.

[FR Doc. 96–1351 Filed 1–30–96; 8:45 am]

BILLING CODE 8025–01–P

13 CFR Parts 108, 116, 120, 122, 131

Business Loan Programs

AGENCY: Small Business Administration

(SBA).

ACTION: Final rule.

SUMMARY: SBA has completed an

extensive review of all of its regulations,

and it has decided to eliminate some

regulations and consolidate, clarify, and

simplify the remainder. This final rule

consolidates five current CFR parts into

one Part to be known as Part 120. This

surviving Part 120 covers virtually all

policies and regulations, other than size

standards, applicable to SBA’s business

(non-disaster) loan programs. Almost all

provisions have been reworded,

renumbered, and relocated. There are a

few new or revised policies. Several

sections have been deleted. However,

most of the revisions merely streamline

and clarify the regulations and do not

represent substantive change.

DATES: This rule is effective March 1,

1996. This rule applies with respect to

all applications for financial assistance

filed on or after March 1, 1996.