[Federal Register Volume 74, Number 133 (Tuesday, July 14, 2009)]
[Rules and Regulations]
[Pages 33911-33916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-16554]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AF92


Small Business Investment Companies--Leverage Eligibility and 
Portfolio Diversification Requirements

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule.

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SUMMARY: This interim final rule implements certain provisions of the 
American Recovery and Reinvestment Act of 2009 affecting small business

[[Page 33912]]

investment companies (SBICs). These provisions increase the maximum 
amount of SBA leverage available to an SBIC, change the calculation of 
the maximum investment size that an SBIC is permitted to make, and 
simplify the requirement for an SBIC to devote a portion of its 
investment activity to smaller enterprises. SBA is publishing this rule 
as an interim final rule in light of the urgent need to help small 
businesses sustain and survive during this economic downturn.

DATES: Effective Date: This rule is effective July 14, 2009.
    Comment Date: Comments must be received on or before September 14, 
2009.

ADDRESSES: You may submit comments, identified by RIN: 3245-AF92 by any 
of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Mail: Harry Haskins, Acting Associate Administrator for 
Investment, Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416.
    <bullet> Hand Delivery/Courier: Harry Haskins, Acting Associate 
Administrator for Investment, 409 Third Street, SW., Washington, DC 
20416.
    SBA will post all comments on http://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at http://www.regulations.gov, please submit the 
information to Harry Haskins, 409 Third Street, SW, Washington, DC 
20416, or send an e-mail to <a href="/cdn-cgi/l/email-protection#3744555e547744555619505841"><span class="__cf_email__" data-cfemail="7605141f153605141758111900">[email protected]</span></a>. Highlight the information 
that you consider to be CBI and explain why you believe SBA should hold 
this information as confidential. SBA will review the information and 
make the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Investment Division, 
Office of Capital Access, (202) 205-7559 or <a href="/cdn-cgi/l/email-protection#92e1f0fbf1d2e1f0f3bcf5fde4"><span class="__cf_email__" data-cfemail="2f5c4d464c6f5c4d4e01484059">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The American Recovery and Reinvestment Act of 2009 (Recovery Act), 
Public Law 111-05 was enacted on February 17, 2009, to among other 
things, promote economic recovery by preserving and creating jobs, and 
assisting those most impacted by the severe economic conditions facing 
the nation. The U.S. Small Business Administration is one of several 
agencies that are intended to play a role in achieving these goals. The 
SBA received funding and authority through the Recovery Act to modify 
existing loan programs or establish new loan programs to help re-
invigorate small business lending.
    The specific permanent changes to the Small Business Investment 
Company (SBIC) program made by the Recovery Act increase the maximum 
amount of SBA leverage that an SBIC may have outstanding, change the 
limit on the maximum amount that an SBIC can invest in a single company 
and its affiliates, and simplify the requirement for SBICs to invest in 
smaller enterprises.

II. Section by Section Analysis

    Section 107.700--Compliance with size standards in part 121 of this 
chapter as a condition of Assistance. The order of two cross-references 
in this section has been corrected, so that the reader is referred to 
Sec.  121.301(c)(2) for the SBIC program financial size standards and 
to Sec.  121.301(c)(1) for the industry size standards.
    Section 107.710--Requirement to finance Smaller Enterprises. 
Revised paragraph (b) of this section incorporates the Smaller 
Enterprise financing requirement established by the Recovery Act. As a 
condition of receiving leverage, an SBIC must now certify that at least 
25 percent of its aggregate financing dollars will be provided to 
Smaller Enterprises, as defined in Sec.  107.710(a). This provision is 
a simplification of the previous two-part requirement, which set a 
general minimum of 20 percent but also required 100 percent of any 
leverage above $90 million to be invested in Smaller Enterprises.
    In this rule, the Smaller Enterprise financing requirements must be 
satisfied not only when an SBIC applies for a leverage draw, but also 
at the close of each fiscal year; this year-end requirement applies to 
all SBICs, including those with no leverage. The Smaller Enterprise 
financing requirement has applied to both leveraged and non-leveraged 
SBICs since it was first added to the regulations in 1997. The 
financial size standards applicable to the SBIC program are 
considerably higher than those used in other SBA programs, and SBA 
considers it important for all SBICs to focus a portion of their 
investment activity on businesses at the lower end of the permitted 
size range.
    Any SBIC licensed after the Recovery Act date of enactment 
(February 17, 2009), whether leveraged or non-leveraged, must satisfy 
the 25 percent requirement in revised Sec.  107.710(b)(1). An SBIC 
licensed before the date of enactment must satisfy either revised Sec.  
107.710(b)(2) or (b)(3). The applicable paragraph depends on whether or 
not the SBIC has received a leverage commitment from SBA after the date 
of enactment. For an SBIC that has not received a leverage commitment 
after February 17, 2009, paragraph (b)(2) provides that the SBIC must 
have at least 20 percent of its aggregate financing dollars (plus 100 
percent for leverage over $90 million) invested in Smaller Enterprises. 
For an SBIC that has received a new SBA leverage commitment after 
February 17, 2009, paragraph (b)(3) provides that the SBIC may divide 
its investments into two segments; the SBIC must meet the old 20 
percent requirement (plus 100 percent for leverage over $90 million), 
for investments made before the date of the first leverage commitment 
issued after February 17, 2009, but must meet the new 25 percent 
requirement for investments made on or after such date.
    For a non-leveraged SBIC licensed before February 17, 2009, the 
applicable paragraph would be Sec.  107.710(b)(2).
    This rule will eliminate the phase-in requirement under which an 
SBIC must provide at least 10 percent of its investment dollars to 
Smaller Enterprises by the end of its first fiscal year, and at least 
20 percent by the end of each subsequent year. SBA is making this 
change for several reasons. SBA's review of the financing data 
submitted by SBICs indicated that the vast majority of SBICs have 
satisfied the Smaller Enterprise financing requirements with 
considerable room to spare, suggesting that the phase-in period is 
unnecessary. In addition, the Recovery Act does not provide for a 
phase-in.
    Former paragraph Sec.  107.710(d), dealing with requirements 
related to leverage in excess of $90 million, is incorporated into 
revised Sec.  107.710(b)(2) and (b)(3), as explained above.
    Revised paragraph Sec.  107.710(e) contains updated cross-
references to Sec.  107.1120, but no other changes.
    Section 107.740--Portfolio diversification (``overline'' limit). 
SBICs that intend to use SBA leverage are required to diversify their 
portfolios as a way of managing program risk. Diversification is 
accomplished by limiting the maximum amount that an SBIC can invest in 
a single company or group of affiliated companies; SBA regulations 
refer to this maximum investment amount as an SBIC's ``overline'' 
limit. The Recovery Act changed the calculation of the overline limit 
from 20 percent of an SBIC's private capital to 10 percent of the sum 
of private capital and ``the total amount

[[Page 33913]]

of leverage projected by [the SBIC] in [its] business plan that was 
approved by [SBA] at the time of the grant of the company's license.'' 
Since most SBICs project the use of two tiers of leverage (i.e., 
leverage equal to two times their private capital), this calculation is 
generally equivalent to raising the overline limit to 30 percent of 
private capital. However, for the small number of SBICs that are 
approved for less than two tiers of leverage, the revised overline 
calculation may provide a smaller increase, or no increase, in the 
overline limit.
    In revised Sec.  107.740, paragraph (a) provides, as a general 
rule, that an SBIC's overline limit will be 30 percent of its 
Regulatory Capital, incorporating the assumption that most SBICs will 
be approved to issue two tiers of leverage. Paragraphs (a)(1) through 
(a)(3) retain the same adjustments to Regulatory Capital that are 
present in the current regulations; the purpose of these adjustments is 
to avoid penalizing an SBIC that realizes proceeds on one or more of 
its investments and begins to return capital to its investors.
    Paragraph (b) provides the overline limit for an SBIC that is 
approved for less than two tiers of leverage, either 20 percent of 
Regulatory Capital for one tier or 25 percent of Regulatory Capital for 
1.5 tiers (the rule does not specify percentages for other amounts of 
projected leverage because they are rarely requested, but they can be 
calculated by interpolation if necessary). Under this rule, no existing 
SBIC will have an overline limit below the level permitted by current 
regulations.
    Paragraphs (a) and (b) do not include the language from former 
Sec.  107.740 that permitted an SBIC to exceed its prescribed overline 
limit with SBA's prior written approval. The Recovery Act does allow 
SBA to approve overline exceptions, and it is not SBA's intent to 
eliminate this possibility. However, SBA believes that the vast 
majority of the overline exceptions it has approved in the past would 
fall within the new overline formula established by the Recovery Act. 
SBA expects that exceptions for investments above the new limit will be 
rare. In keeping with that view, if an SBIC seeks to make an investment 
in excess of the amount permitted by revised Sec.  107.740, it must 
request a regulatory exemption under Sec.  107.1920. To obtain a 
regulatory exemption, an SBIC must show that its request is not 
contrary to the purposes of the Small Business Investment Act; that the 
proposed action is fair and equitable; and that the exemption is 
reasonably calculated to advance the best interests of the SBIC 
program. An exemption must be approved in writing by the Associate 
Administrator for Investment.
    Section 107.740 will no longer provide a separate overline limit 
for specialized SBICs, which were licensed until 1996 under section 
301(d) of the Small Business Investment Act. These companies had an 
overline limit of 30 percent of Regulatory Capital under existing 
regulations and will retain that limit under the general rule in 
revised Sec.  107.740(a)(1).
    This section also removes an optional method for an SBIC to 
increase its overline limit by adding net unrealized gains on publicly 
traded and marketable securities to its Regulatory Capital (former 
Sec.  107.740(c)). This provision has been unattractive to SBICs, and 
in fact SBA has strongly advised companies not to use it, because the 
consequences for an SBIC in the event that the publicly traded 
securities drop in value are likely to be extremely serious. SBA is not 
aware of any SBIC that is currently making use of this provision.
    Section 107.800--Financing in the form of Equity Securities. The 
only change in this section is the addition of a cross-reference in 
paragraph (b). The purpose of this revision is to make clear that the 
reference to ``Equity Securities'' in new Sec.  107.1150(c)(1) 
encompasses only those securities that satisfy the requirements 
concerning redemption of Equity Securities in Sec.  107.850.
    Section 107.1120--General eligibility requirements for Leverage. 
Revised paragraph (d) of this section provides for a new certification 
by SBICs under common control seeking to increase their aggregate 
outstanding leverage above $150 million. As explained further in the 
discussion of changes to Sec.  107.1150, the Recovery Act changes now 
permit SBICs under common control to have aggregate outstanding 
leverage of up to $225 million, but only if none of the SBICs has a 
condition of capital impairment. Former Sec.  107.1120(d) contained a 
certification regarding Smaller Enterprise financing with the proceeds 
of leverage over $90 million, which is no longer needed based on the 
changes made in Sec.  107.710.
    New paragraphs (e) and (f) provide for certifications by SBICs 
licensed on or after October 1, 2009, seeking leverage in excess of the 
general limits of $150 million for a single SBIC and $225 million for 
two or more SBICs under common control, pursuant to Sec.  
107.1150(c)(2). As a condition of eligibility for this additional 
leverage, which can be as much as $25 million, the Recovery Act 
requires SBICs to certify that at least 50 percent of their total 
Financing dollars will be invested in companies located in low-income 
geographic areas. For any leverage request that would result in a group 
of SBICs under common control having aggregate outstanding leverage of 
more than $225 million, the certification requirement applies to each 
SBIC in the group, even those that are not themselves requesting 
additional leverage.
    Section 107.1150--Maximum amount of Leverage for a Section 301(c) 
Licensee. The Recovery Act increased the maximum permitted amount of 
outstanding leverage for a single SBIC and for two or more SBICs under 
common control. Revised Sec.  107.1150(a) incorporates the new formula 
for an individual SBIC, which is the lesser of 300 percent of 
Leverageable Capital or $150 million. In accordance with the Recovery 
Act changes, the three leverage brackets and the annual inflation 
adjustment of the leverage ceiling have been eliminated.
    Revised Sec.  107.1150(b) provides the new aggregate leverage 
ceiling of $225 million for two or more SBICs under common control. As 
a condition of eligibility for the $225 million, the Recovery Act 
requires the SBICs under common control to be ``not under capital 
impairment''. In this rule, for any leverage draw that would result in 
a group of SBICs under common control having aggregate outstanding 
leverage of more than $150 million, each SBIC is required to certify 
that it does not have a condition of capital impairment. This provision 
affects only the ability to draw new leverage; it does not affect any 
SBIC's ability to receive a leverage commitment, nor would SBA deem an 
SBIC with leverage already outstanding to be in default solely because 
one of its affiliates becomes impaired.
    Although paragraphs (a) and (b) will provide SBICs with access to 
increased leverage, all leverage commitment and draw approvals remain 
subject to SBA's current credit policies as defined in its standard 
operating procedures. One important aspect of those policies, regarding 
access to a third tier of leverage, is addressed in new introductory 
text that has been added to revised Sec.  107.1150. The major points of 
this paragraph are that an SBIC seeking a third tier must first 
demonstrate consistently profitable financial performance while 
adhering to a relatively low-risk investment strategy; the third tier 
of leverage must be used to continue the SBIC's successful investment 
strategy rather than beginning a new investment strategy; and there 
must be a high degree of certainty regarding the SBIC's ability to 
repay all of its obligations to SBA.

[[Page 33914]]

    This section eliminates former Sec.  107.1150(b)(2), which 
contained special rules for certain SBICs with leverage issued before 
March 31, 1993. As all of the subject leverage has matured, this 
provision is no longer needed.
    New paragraph (c) implements two provisions, one included in the 
Recovery Act and another that was previously enacted, that may provide 
additional leverage eligibility to SBICs that make investments in low-
income geographic areas. The definition of ``low-income geographic 
area'' was developed in connection with SBA's New Markets Venture 
Capital (NMVC) program and can be found in the NMVC regulations, Sec.  
108.50.
    Paragraph (c)(1) adjusts the leverage eligibility formula in Sec.  
107.1150(a) by subtracting from an SBIC's outstanding leverage the cost 
basis of investments that the SBIC has made in the Equity Securities 
(as defined in Sec.  107.800(b)) of Smaller Enterprises. The amount 
that can be subtracted is limited to 50 percent of the SBIC's 
Leverageable Capital.
    Paragraph (c)(2) implements a provision of the Recovery Act that 
will be available only to new SBICs licensed on or after October 1, 
2009. Paragraph (c)(2) makes a maximum of $175 million available to an 
individual SBIC and $250 million available to a group of SBICs under 
common control, compared with the respective general ceilings of $150 
million and $225 million. To be eligible for the additional Leverage, 
an individual SBIC must show, at the time of its draw request, that at 
least half of the total dollar amount it has invested to date was 
provided to Small Businesses in low-income geographic areas; 
furthermore, it must certify that at least half of the total dollar 
amount it will invest in the future will be provided to Small 
Businesses in low-income geographic areas. If the SBIC making the 
leverage request is under common control with any other SBICs, and the 
requested draw would result in the group having aggregate outstanding 
leverage above $225 million, then each SBIC in the group must meet the 
same two requirements.
    An SBIC licensed on or after October 1, 2009 can seek leverage 
under either paragraph (c)(1) or (c)(2), but the Small Business 
Investment Act does not provide for the two paragraphs to be used 
together. The SBIC can obtain additional leverage under paragraph 
(c)(1) as an exception to paragraph (a), but not to paragraph (b) or 
paragraph (c)(2). Alternatively, additional Leverage can be obtained 
under paragraph (c)(2) by an individual SBIC as an exception to 
paragraph (a), or by a group of SBICs under common control as an 
exception to paragraph (b), but in neither case as an exception to 
paragraph (c)(1).
    Section 107.1160--Maximum amount of Leverage for a Section 301(d) 
Licensee. The only change in this section is an updated cross-reference 
in Sec.  107.1160(b), reflecting the revisions to Sec.  107.1150 made 
by this rule.
    Section 107.1810--Events of default and SBA's remedies for 
Licensee's noncompliance with terms of Debentures. Revised Sec.  
107.1810(f)(9) deletes a cross-reference to former Sec.  
107.1150(b)(2), which has been removed by this rule.

III. Justification for Publication as Interim Final Rule

    In general, before issuing a final rule, SBA publishes the rule for 
public comment in accordance with the Administrative Procedure Act 
(APA), 5 U.S.C. 553. The APA provides an exception from the general 
rule where the agency finds good cause to omit public participation. 5 
U.S.C. 553(c)(3)(B). The good cause requirement is satisfied when prior 
public participation can be shown to be impracticable, unnecessary, or 
contrary to the public interest. Under such circumstances, an agency 
may publish an interim final rule without soliciting public comment.
    In enacting the good cause exception to standard rulemaking 
procedures, Congress recognized that emergency situations arise where 
an agency must issue a rule without public participation. The current 
turmoil in the financial markets is having a negative impact on the 
availability of financing for small businesses. There is an urgent need 
to assist viable small businesses that are experiencing financial 
hardships due to the current economic environment. Many SBICs have 
reported to SBA that cash flow lending by banks has been sharply 
reduced and that they are experiencing a surge in demand for assistance 
from small businesses that are unable to obtain financing from other 
sources. Without SBIC financing, these businesses must curtail 
expansion plans, postpone acquisitions or transfers of ownership, or 
forgo modernization of plant and equipment, thereby reducing their 
ability to contribute to the nation's economic recovery.
    SBA finds that good cause exists to publish this rule as an interim 
final rule in light of the urgent need to help small businesses sustain 
and survive during this economic downturn. Advance solicitation of 
comments for this rulemaking would be impracticable, contrary to the 
public interest, and would harm those small businesses that need 
immediate access to capital.
    Although this rule is being published as an interim final rule, 
comments are solicited from interested members of the public. These 
comments must be submitted on or before September 14, 2009. The SBA 
will consider these comments and the need for making any amendments as 
a result of these comments.

IV. Justification for Immediate Effective Date

    The APA requires that ``publication or service of a substantive 
rule shall be made not less than 30 days before its effective date, 
except * * * as otherwise provided by the agency for good cause found 
and published with the rule.'' 5 U.S.C. 553(d)(3).
    The purpose of this provision is to provide interested and affected 
members of the public sufficient time to adjust their behavior before 
the rule takes effect. In the case of this rulemaking, however, there 
should be no need for any member of the public, including any SBIC, to 
make any changes in order to prepare for the rule taking effect. This 
rule implements changes to the SBIC program in order to enable SBICs to 
continue to finance small businesses at a crucial time. In light of the 
current economic downturn and the sharp reduction in commercial 
lending, a delay in providing SBIC financing will, in many cases, have 
a direct impact on the survivability of many small businesses, making 
it necessary to implement this rule immediately.
    SBA finds that that there is good cause for making this rule 
effective immediately instead of observing the 30-day period between 
publication and effective date. Delaying implementation of the rule 
would have a serious adverse impact on the nation's small businesses.

Compliance With Executive Orders 12866, 12988, 13175 and 13132, the 
Paperwork Reduction Act (44 U.S.C., Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866
    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a significant regulatory action for purposes of 
Executive Order 12866.
Executive Order 12988
    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce

[[Page 33915]]

burden. The action does not have preemptive effect and portions of this 
rule are effective February 17, 2009 to coincide with the effective 
date of the Recovery Act.
Executive Order 13132
    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive Order. As 
such it does not warrant the preparation of a Federalism Assessment.
Paperwork Reduction Act
    The SBA has determined that this interim final rule does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C. Chapter 35.
Regulatory Flexibility Act
    Because this rule is an interim final rule, there is no requirement 
for SBA to prepare a Regulatory Flexibility Act (RFA) analysis. The RFA 
requires administrative agencies to consider the effect of their 
actions on small entities, small non-profit businesses, and small local 
governments. Pursuant to the RFA, when an agency issues a rule, the 
agency must prepare analysis that describes whether the impact of the 
rule will have a significant economic impact on a substantial number of 
small entities. However, the RFA requires such analysis only where 
notice and comment rulemaking is required.

List of Subjects in 13 CFR Part 107

    Investment companies, Reporting and recordkeeping requirements.

0
For the reasons stated in the preamble, SBA amends 13 CFR part 107 as 
follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

0
1. The authority citation for part 107 is revised to read as follows:

    Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g, 
687m, and Pub. L. 106-554, 114 Stat. 2763; and Pub. L. 111-5, 123 
Stat. 115.


0
2. Revise the second sentence of Sec.  107.700 to read as follows:


Sec.  107.700  Compliance with size standards in part 121 of this 
chapter as a condition of Assistance.

    * * * To determine whether an applicant is a Small Business, you 
may use either the financial size standards in Sec.  121.301(c)(2) of 
this chapter or the industry standard covering the industry in which 
the applicant is primarily engaged, as set forth in Sec.  121.301(c)(1) 
of this chapter.

0
3. Amend Sec.  107.710 by revising paragraph (b), removing paragraph 
(d), redesignating paragraphs (e) and (f) as (d) and (e), and revising 
the second sentence of redesignated paragraph (e) to read as follows:


Sec.  107.710  Requirement to finance Smaller Enterprises.

* * * * *
    (b) Smaller Enterprise Financings. At the close or each of your 
fiscal years, and at the time of any application to draw Leverage, you 
must satisfy the Smaller Enterprise financing requirement in this 
paragraph (b) that applies to you.
    (1) If you were licensed after February 17, 2009, at least 25 
percent (in dollars) of your Financings must have been invested in 
Smaller Enterprises.
    (2) If you were licensed on or before February 17, 2009, and you 
have received no SBA Leverage commitment issued after February 17, 
2009, at least 20 percent (in dollars) of your Financings, excluding 
Financings made in whole or in part with Leverage in excess of $90 
million, must have been invested in Smaller Enterprises. In addition, 
100 percent of all Financings made in whole or in part with Leverage in 
excess of $90 million (including aggregate Leverage over $90 million 
issued by two or more Licensees under Common Control) must have been 
invested in Smaller Enterprises.
    (3) If you were licensed on or before February 17, 2009, and you 
have received an SBA Leverage commitment after February 17, 2009:
    (i) For all Financings made after the date of the first Leverage 
commitment issued after February 17, 2009, at least 25 percent (in 
dollars) of your Financings must have been invested in Smaller 
Enterprises, and
    (ii) For all Financings made before February 17, 2009, at least 20 
percent (in dollars) of your Financings, excluding Financings made in 
whole or in part with Leverage in excess of $90 million, must have been 
invested in Smaller Enterprises. In addition, 100 percent of all 
Financings made in whole or in part with Leverage in excess of $90 
million (including aggregate Leverage over $90 million issued by two or 
more Licensees under Common Control) must have been invested in Smaller 
Enterprises.
* * * * *
    (e) Non-compliance with this section. * * * However, you will not 
be eligible for additional Leverage until you reach the required 
percentage (see Sec.  107.1120(c) and (g)).

0
4. Revise Sec.  107.740 to read as follows:


Sec.  107.740  Portfolio diversification (``overline'' limitation).

    (a) General rule. This Sec.  107.740 applies if you have 
outstanding Leverage or intend to issue Leverage in the future. Unless 
SBA approved your license application based upon a plan to issue less 
than two tiers of Leverage, you may provide Financing or a Commitment 
to a Small Business if the resulting amount of your aggregate 
Financings and Commitments to such Small Business and its Affiliates 
does not exceed 30 percent of the sum of:
    (1) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (2) Any Distribution(s) you made under Sec.  107.1570(b), during 
the five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital; plus
    (3) Any Distribution(s) you made under Sec.  107.585, during the 
five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital by no more than two percent or which 
SBA approves for inclusion in the sum determined in this paragraph (a).
    (b) Lower overline limit. If SBA approved your license application 
based upon a plan to issue less than two tiers of Leverage, the 
applicable percentage of the amount computed in paragraphs (a)(1) 
though (a)(3) of this section will be:
    (1) 20 percent if the plan contemplates one tier of Leverage.
    (2) 25 percent if the plan contemplates 1.5 tiers of Leverage.
    (c) Outstanding Financings. For the purposes of paragraphs (a) and 
(b) of this section, you must measure each outstanding Financing at its 
original cost (including any amount of the Financing that was 
previously written off).

0
5. Amend Sec.  107.800 by revising the second sentence of paragraph (b) 
to read as follows:


Sec.  107.800  Financings in the form of Equity Securities.

* * * * *
    (b) Definition. * * * If the Financing agreement contains debt-type 
acceleration provisions or includes redemption provisions, other than 
those permitted under Sec.  107.850, the security will be considered a 
Debt Security for

[[Page 33916]]

purposes of Sec.  107.855 and Sec.  107.1150(c)(1).

0
6. Amend Sec.  107.1120 by revising paragraph (d), redesignating 
paragraphs (e) through (h) as (g) through (j), and adding new 
paragraphs (e) and (f), to read as follows:


Sec.  107.1120  General eligibility requirements for Leverage.

* * * * *
    (d) For any Leverage draw that would cause you and any other 
Licensees under Common Control to have aggregate outstanding Leverage 
in excess of $150 million, certify that none of the Licensees has a 
condition of Capital Impairment. See also Sec.  107.1150(b).
    (e) For any Leverage request pursuant to Sec.  107.1150(c)(2)(i), 
certify that at least 50 percent (in dollars) of your Financings made 
on or after the date of such request will be invested in Small 
Businesses located in low-income geographic areas.
    (f) For any Leverage request pursuant to Sec.  107.1150(c)(2)(ii), 
certify at least 50 percent (in dollars) of the Financings made by each 
Licensee under Common Control on or after the date of such request will 
be invested in Small Businesses located in low-income geographic areas.
* * * * *

0
7. Revise Sec.  107.1150 to read as follows:


Sec.  107.1150  Maximum amount of Leverage for a Section 301(c) 
Licensee.

    A Section 301(c) Licensee may have maximum outstanding Leverage as 
set forth in paragraphs (a) through (c) of this section. In general, 
SBA will approve Leverage commitment requests in excess of 200 percent 
of Regulatory Capital and draw requests in excess of 200 percent of 
Leverageable Capital only after a Licensee has demonstrated consistent, 
sustainable profitability based on a conservative investment strategy 
that limits downside risk. Any such Leverage request must be supported 
by an up-to-date business plan that reflects continuation of the 
Licensee's successful investment strategy and demonstrates the 
Licensee's ability to pay all SBA obligations in accordance with their 
terms.
    (a) Individual Licensee. Subject to SBA's credit policies, if you 
are a Section 301(c) Licensee, the maximum amount of Leverage you may 
have outstanding at any time is the lesser of:
    (1) 300 percent of your Leverageable Capital, or
    (2) $150 million.
    (b) Multiple Licensees under Common Control. Subject to SBA's 
credit policies, two or more Licenses under Common Control may have 
maximum aggregate outstanding Leverage of $225 million. However, for 
any Leverage draw(s) by one or more such Licensees that would cause the 
aggregate outstanding Leverage to exceed $150 million, each of the 
Licensees under Common Control must certify that it does not have a 
condition of Capital Impairment. See also Sec.  107.1120(d).
    (c) Additional Leverage based on investment in low-income 
geographic areas. Subject to SBA's credit policies, you may have 
outstanding Leverage in excess of the amounts permitted by paragraphs 
(a) and (b) of this section in accordance with this paragraph (c). If 
you were licensed before October 1, 2009, you may seek additional 
Leverage under paragraph (c)(1) only. If you were licensed on or after 
October 1, 2009, you may seek additional Leverage under paragraph 
(c)(1) or paragraph (c)(2), but not both. In this paragraph (c), ``low-
income geographic areas'' are as defined in Sec.  108.50 of this 
chapter.
    (1) Investment in Smaller Enterprises located in low-income 
geographic areas. To determine whether you may request a draw that 
would cause you to have outstanding Leverage in excess of the amount 
determined under paragraph (a) of this section:
    (i) Determine the cost basis, as reported on your most recent 
filing of SBA Form 468, of any investments in the Equity Securities of 
a Smaller Enterprise located in a low-income geographic area.
    (ii) Calculate the amount that equals 50 percent of your 
Leverageable Capital.
    (iii) Subtract from your outstanding Leverage the lesser of 
(c)(1)(i) or (c)(1)(ii).
    (iv) If the amount calculated in paragraph (c)(1)(iii) is less than 
the maximum leverage determined under paragraph (a) of this section, 
the difference between the two amounts equals your additional Leverage 
availability.
    (2) Investment in Small Businesses located in low-income geographic 
areas. This paragraph (c)(2) applies only to Licensees licensed on or 
after October 1, 2009. You may substitute a maximum Leverage amount of 
$175,000,000 for the $150,000,000 set forth in paragraph (a)(2) of this 
section, and a maximum Leverage amount of $250,000,000 for the 
$225,000,000 set forth in paragraph (b) of this section, if you satisfy 
the following conditions:
    (i) At least 50 percent (in dollars) of your Financings preceding 
the date of such request must have been invested in Small Businesses 
located in low-income geographic areas. In addition, you must certify 
that at least 50 percent (in dollars) of your Financings on or after 
the date of such request will be invested in Small Businesses located 
in low-income geographic areas.
    (ii) If you are requesting a draw that would cause you and any 
other Licensees under Common Control to have aggregate outstanding 
Leverage in excess of $225,000,000, at least 50 percent (in dollars) of 
the Financings made by each Licensee under Common Control preceding the 
date of such request must have been invested in Small Businesses 
located in low-income geographic areas. In addition, each such Licensee 
must certify that at least 50 percent (in dollars) of its Financings on 
or after the date of such request will be invested in Small Businesses 
located in low-income geographic areas.

0
8. Amend Sec.  107.1160 by revising the first sentence of paragraph (b) 
to read as follows:


Sec.  107.1160  Maximum amount of Leverage for a Section 301(d) 
Licensee.

* * * * *
    (b) Maximum amount of total Leverage. Use Sec.  107.1150 to 
determine your maximum amount of Leverage as if you were a Section 
301(c) Licensee. * * *
* * * * *

0
9. Amend Sec.  107.1810 by revising the first sentence of paragraph 
(f)(9) to read as follows:


Sec.  107.1810  Events of default and SBA's remedies for Licensee's 
noncompliance with terms of Debenture.

* * * * *
    (f) Events of default with opportunity to cure. * * *
    (9) Failure to maintain investment ratios. You fail to maintain the 
investment ratio for Leverage in excess of 300 percent of Leverageable 
Capital (see Sec.  107.1160(c)), if applicable to you, as of the end of 
each fiscal year. * * *
* * * * *

    Dated: July 8, 2009.
Karen G. Mills,
Administrator.
[FR Doc. E9-16554 Filed 7-9-09; 11:15 am]
BILLING CODE 8025-01-P


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