Proposed Rule2022-22340
Small Business Investment Company Investment Diversification and Growth
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 19, 2022
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration ("SBA" or "Agency") is proposing to revise the regulations for the Small Business Investment Company ("SBIC") program to significantly reduce barriers to program participation for new SBIC fund managers and funds investing in underserved communities and geographies, capital intensive investments, and technologies critical to national security and economic development. This proposed rule introduces an additional type of SBIC ("Accrual SBICs") to increase program investment diversification and patient capital financing for small businesses and modernize rules to lower financial barriers to program participation. This proposed rule will help SBA implement the Executive Order ("E.O."), Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, by reducing financial and administrative barriers to participate in the SBIC program and modernizing the program's license offerings to align with a more diversified set of private funds investing in underserved small businesses. The proposed rule also incorporates the statutory requirements of the Spurring Business in Communities Act of 2017, which was enacted on December 19, 2018.
Full Text
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[Federal Register Volume 87, Number 201 (Wednesday, October 19, 2022)]
[Proposed Rules]
[Pages 63436-63458]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22340]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 107 and 121
RIN 3245-AH90
Small Business Investment Company Investment Diversification and
Growth
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (``SBA'' or ``Agency'')
is proposing to revise the regulations for the Small Business
Investment Company (``SBIC'') program to significantly reduce barriers
to program participation for new SBIC fund managers and funds investing
in underserved communities and geographies, capital intensive
investments, and technologies critical to national security and
economic development. This proposed rule introduces an additional type
of SBIC (``Accrual SBICs'') to increase program investment
diversification and patient capital financing for small businesses and
modernize rules to lower financial barriers to program participation.
This proposed rule will help SBA implement the Executive Order
(``E.O.''), Advancing Racial Equity and Support for Underserved
Communities Through the Federal Government, by reducing financial and
administrative barriers to participate in the SBIC program and
modernizing the program's license offerings to align with a more
diversified set of private funds investing in underserved small
businesses. The proposed rule also incorporates the statutory
requirements of the Spurring Business in Communities Act of 2017, which
was enacted on December 19, 2018.
DATES: Comments must be received on or before December 19, 2022.
ADDRESSES: You may submit comments, identified by RIN 3245-AH90, by any
of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Mail or Hand Delivery/Courier: Bailey G. DeVries,
Associate Administrator for the Office of Investment and Innovation,
U.S. Small Business Administration, 409 Third Street SW, Washington, DC
20416.
SBA will post all comments on <a href="https://www.regulations.gov">https://www.regulations.gov</a>. If you
wish to submit confidential business information (``CBI''), as defined
in the User Notice at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, please submit the
information to Bailey G. DeVries, Associate Administrator of the Office
of Investment and Innovation, U.S. Small Business Administration, 409
Third Street SW, Washington, DC 20416, or send an email to
<a href="/cdn-cgi/l/email-protection#cea1a7a7e0a8bca1a0baa1a8a8a7adab8ef2afeea6bcaba8f3" http: sba.gov">sba.gov</a>">oii.frontoffice@<a href="http://sba.gov">sba.gov</a></a> with ``RIN 3245-AH90 Proposed Rule'' in the
subject heading. 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 on whether it will publish the information.
FOR FURTHER INFORMATION CONTACT:
Policy: Bailey G. DeVries, Associate Administrator of the Office of
Investment and Innovation, Small Business Administration,
<a href="/cdn-cgi/l/email-protection#aec1c7c780c8dcc1c0dac1c8c8c7cdcbee92cf8ec6dccbc893" http: sba.gov">sba.gov</a>">oii.frontoffice@<a href="http://sba.gov">sba.gov</a></a>, 202-941-6064. This phone number can also be
reached by individuals who are deaf or hard of hearing, or who have
speech disabilities, through the Federal Communications Commission's
TTY-Based Telecommunications Relay Service teletype service at 711.
Regulatory Comments/Federal Register Docket: Louis Cupp, Office of
Investment and Innovation, Small Business Administration,
<a href="/cdn-cgi/l/email-protection#046b6d6d2a62766b6a706b62626d6761443865246c76616239" http: sba.gov">sba.gov</a>">oii.frontoffice@<a href="http://sba.gov">sba.gov</a></a>, 202-699-1746. This phone number can also be
reached by individuals who are deaf or hard of hearing, or who have
speech
[[Page 63437]]
disabilities, through the Federal Communications Commission's TTY-Based
Telecommunications Relay Service teletype service at 711.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Small Business Investment Company Program
The mission of the Small Business Investment Company (SBIC) program
is to enhance small business access to capital by stimulating and
supplementing ``the flow of private equity capital and long-term loan
funds which small-business concerns need for the sound financing of
their business operations and for their growth, expansion, and
modernization, and which are not available in adequate supply.'' SBA
carries out this mission by licensing and monitoring privately owned
and managed investment funds that raise capital from private investors
(``Private Capital'') and issue SBA-guaranteed Debentures
(``Debentures'') to make private long-term equity and debt investments
= into qualifying small businesses.
SBA currently has two types of Debentures available for private
funds that have received an SBIC license: a current pay (or
``Standard'') Debenture and a ``Discount'' Debenture. The vast majority
of licensed SBICs applying for SBA leverage use the Standard Debenture
with a ten-year maturity and interest due and payable on a semi-annual
basis. This structure aligns with the cash flows of a subset of private
fund strategies, including funds with mezzanine, private credit, and
leveraged buyout strategies. The Standard Debenture aligns with these
strategies because private funds utilizing such mezzanine, private
credit, or leveraged buyout strategies typically generate fund-level
cash liquidity within the time period required to meet semi-annual
interest payments. The Discount Debenture is issued at a steep discount
to face value and accrues to face value over five years, at which time
the SBICs must pay current interest; this Debenture is only available
for low and moderate income (LMI) investments and Energy Saving
Qualified Investments (as defined in 13 CFR 107.50). Although SBICs
have invested almost 20% of their investments in LMI areas, as of
December 31, 2021, less than 0.5% of Debentures committed and issued
since Fiscal Year (``FY'') 2000 used the Discount Debenture to make
such investments. (Note: The Federal Government FY is the period of
October 1 through September 30, where the FY is designated by the
calendar year in which the FY ends.) No SBIC has used the Discount
Debenture for Energy Saving Qualified Investments. Market feedback
suggests that the reason SBICs do not utilize the Discount Debenture is
due to the steep discount at issue and the misalignment of the required
interest payments commencing at year five to the typical cash flow
patterns of patient capital investors, such as long-duration private
equity funds. Between FYs 1994 through 2004, SBA was authorized to
issue Participating Securities, which were an SBIC Program instrument
designed to support equity investors. The program ceased due to losses
in that program.
Based on SBA's analysis of SBICs licensed for the legacy
Participating Securities instrument, SBA found widespread evidence that
participating security SBIC losses were largely due to the instruments'
statutorily mandated structural flaws and regulations which enabled
high risk portfolio construction decisions. These issues were further
exacerbated by macro-economic conditions, concentration in early-stage
venture (which, at the time, was an emerging alternative investment
strategy), and pervasive information asymmetry in the venture market in
the early 2000s. One of the major flaws in the participating security
was that SBA advanced interest payments (known as ``prioritized
payments'') on behalf of the Licensee and was only repaid out of the
Licensee's capped profits. Once the Licensee achieved the capped time-
based return, SBA could no longer meaningfully ``participate'' in the
profit distributions of the Licensee. As a result of the cap and the
time dependency, less than half of the $2.8 billion in prioritized
payments advanced by SBA were reimbursed by SBICs licensed in the
participating securities program. Further, statutory complexities
created further unnecessary complexities in the distribution waterfall.
Due to the complexities associated with the statutory distribution
waterfall, computing a single distribution required a significant
amount of time and effort on the part of the Licensee and SBA. For
example, Licensees were required to file hard copies of the computation
documents with the SBA for regulatory monitoring and examination
purposes. These complications increased the workload on SBA to
calculate each distribution, increased fund administration expenses for
the Licensee, and created loopholes whereby Licensees could sequence
profits distributions such that SBA would receive only its capped share
of profits (typically less than 10%). In several cases, private
investors received substantial returns based on early profit
distributions and the SBIC would subsequently incur losses, resulting
in SBA being the only party not fully repaid. Further, Licensees in the
Participating Securities program typically did not have diverse
portfolios and SBA did not consider portfolio diversification at the
fund-of-fund level as a means to mitigate risk, an important
consideration in modern portfolio theory. As a result, about half of
the participating securities financings prior to 2001 were in
computers, information technology, and related professional technical
services. Additionally, almost half of the participating securities
financings prior to 2001 were in companies under 2 years of age at
first financing. As a result, when the ``Dot Com'' bubble financial
downturn arrived in 2000, the SBIC portfolio was not appropriately
diversified for sustained portfolio financial performance.
Between October 1, 2016, and September 30, 2021, SBICs provided
over $29 billion in financings to small businesses. However, only 18%
of Debenture SBIC financings were in the form of patient capital equity
investments, and less than a quarter of SBICs licensed were focused on
equity. Over 75% of all financings of small businesses by Debenture
SBICs included a debt component. During this same timeframe, SBA
licensed 116 SBICs with almost $7.8 billion in initial Private Capital,
and two-thirds of licenses were approved for subsequent funds from
asset management firms that had previously received an SBIC license. As
of December 31, 2021, SBA had 298 operating SBICs across 207 asset
management firms with almost $35 billion in Regulatory Capital and
Debentures, including undrawn commitments.
B. Underserved Focus
SBA is proposing changes to 13 CFR part 107 to reduce barriers to
program participation for new SBIC fund managers and funds investing in
(i) underserved communities and geographies, (ii) capital intensive
investments, and (iii) technologies critical to national security and
economic development. This proposed rule will help SBA implement
Executive Order (``E.O.'') 13985, Advancing Racial Equity and Support
for Underserved Communities Through the Federal Government by reducing
financial and administrative barriers to participation in the SBIC
program and modernizing the program's license offerings to align with a
more diversified set of new funds
[[Page 63438]]
investing in underserved small businesses. SBA notes that newly managed
funds are consistently among top performers based on net total value to
paid-in capital as of June 30, 2019, data from Cambridge Associates,
LLC.
One of the key proposed changes is the implementation of a new type
of Debenture (``Accrual Debenture'') designed to align with the cash
flows of long-term, equity-oriented funds (``Accrual SBICs''). As
evidenced by a December 2020 Fairview Capital study, among private
market funds, the largest opportunity set to invest in a manner that
advances racial and gender equity exists among new equity-oriented
funds. This is even more pronounced in the universe of private venture
equity strategies. Equity-oriented funds currently account for 18% of
SBA leverage and credit/debt-oriented strategies account of ~82% of
capital from Debenture SBICs. In order to promote E.O. 13985, Advancing
Racial Equity and Support for Underserved Communities Through the
Federal Government, it is essential that SBA offer SBICs an opportunity
to issue Debentures capable of aligning with the financial structure of
equity strategies.
To further promote E.O. 13985, SBA is proposing to revise the
existing prohibited investment requirements under Sec. 107.720 that
permit SBICs to invest in relenders or reinvestors under specific
circumstances. As evidenced by consistent and broad industry feedback,
SBA expects this revision should improve the SBIC program's investment
diversification and likely mitigate default risk across the SBIC
program while creating more program entry points for new fund managers.
According to a 2017 Preqin study (Preqin-Special-Report-Private-Equity-
Funds-of-Funds-November-2017), institutional fund-of-funds and similar
pooled primary fund investment structures are almost twice as likely to
invest in first-time funds as other institutional investors.
Furthermore, fund-of-funds and similar pooled investment vehicles,
which diversify investment across underlying funds, can limit
investment performance volatility and protect against downside risk
through benefits of enhanced diversification. It should also be noted
that fund-of-funds and similar pooled vehicles frequently require
additional fees to compensate for the construction, implementation, and
management of the portfolio of primary fund investments. Investors in
such vehicles, as with any investment, must contemplate the net-of-fee
risk/return potential of the investment rather than its gross-of-fee
risk/return potential. The proposed revisions under Sec. 107.720 will
provide greater clarity to the market, and additional capital to
underserved markets, while fostering a more inclusive and equitable
asset management industry, capable of supporting access to capital for
a broader base of small businesses across all corners of the U.S. while
enhancing the diversification of SBA's invested capital and reducing
risk of default or losses to SBA.
SBA is also proposing to modernize the licensing, operations, and
examinations rules to lower cost and administrative barriers faced by
new funds applying to the SBIC program. These proposed changes include
reducing licensing fees for first- and second-time funds, adding an
exception to the conflict-of-interest rules for follow-on financings in
small businesses, reducing regulatory examinations fees for non-
Debenture and smaller funds, and permitting Leveraged funds to access a
qualified line of credit without SBA approval, subject to certain
conditions. SBA is also proposing measures to strengthen SBIC program
investment and operational risk controls to safeguard the program's
ability to operate at zero subsidy across market cycles. These
modernization activities include implementing a formal licensee
``enhanced monitoring'' process and a consistent approach to investor
and SBA distributions to help (a) ensure that Debentures are repaid and
(b) reduce the time to repayment. This proposed rule also includes
several technical corrections and clarifications to increase SBIC
program accessibility for new funds.
C. Spurring Business in Communities Act of 2017 (Pub. L. 115-333)
On December 19, 2018, the Spurring Business in Communities Act,
Public Law 115-333, was enacted. This legislation gives priority in
licensing to SBIC applicants located in under licensed States with
below median financing. In September 2019, SBA issued a notice that
gives priority in licensing to such applicants. This proposed rule
implements Public Law 115-333 and provides an opportunity for the
public to comment.
D. Modernization Improvements
On August 15, 2017 (82 FR 38617), SBA published a request for
information seeking input from the public on SBA regulations that
should be repealed, replaced or modified because they are obsolete,
unnecessary or burdensome. On October 13, 2017 (82 FR 47645), SBA
extended the comment period. SBA received one set of comments regarding
the SBIC program. During 2018, SBA held three roundtables with SBIC
program stakeholders (May 22, July 17, and August 7) to solicit
additional feedback regarding SBIC program regulations. Based on the
feedback from these round tables and subsequent discussions with
industry since that time, SBA is also proposing changes to reduce
burden for SBICs.
II. Section by Section Analysis
A. Section 107.50 Definition of Terms
SBA proposes to add two terms associated with the new Accrual
Debenture discussed in paragraph I.B. of this rule: ``Accrual
Debenture'' and ``Accrual SBIC.'' The Accrual Debenture would mean a
Debenture issued at face value that would accrue interest over its ten-
year term where SBA guarantees all principal and unpaid accrued
interest. As discussed in the preamble, SBA believes that the Standard
Debenture does not align with the cash flows needed for patient capital
strategies solely investing in the equity of small businesses. Although
SBA considered a zero coupon (an instrument issued at a steep discount
from face value that then matures over its term to full value), SBA
believes issuing the leverage at full face value (subtracting only the
2% draw fee) is far more attractive to potential applicants. The
Accrual Debenture would only be available to Accrual SBICs to align
with the types of equity investing they perform. Standard SBICs may
only issue Standard Debentures and Discount Debentures. The proposed
definition also provides that if a Licensee that issued an Accrual
Debenture is unable to pay the principal and accrued interest at its
ten-year maturity, that Licensee may apply for a roll-over Accrual
Debenture which would have a five-year term. Approval would be subject
to SBA credit procedures and statutory limitations. SBA proposes this
to provide a longer horizon for private funds seeking to make longer
term investments that might require more patient capital.
The proposed rule defines an Accrual SBIC as a Section 301(c)
Licensee that will (a) invest at least 75% of its total financings
(based on dollar amount) in Equity Capital Investments (as defined in
Sec. 107.50); (b) will generally own no more than 50% of the small
business concern at initial Financing; and (c) elect at the time of
licensing to issue Accrual Debentures. SBA expects that Accrual SBICs
will most commonly be formed as limited partnerships that are subject
to 13 CFR 107.160. Given SBA's additional risk associated with the
[[Page 63439]]
Accrual Debentures, SBA proposes to limit the Accrual Debenture to
SBICs that focus on Equity Capital Investments. SBA believes that a 75%
equity investment threshold for Accrual SBIC's financings reasonably
describes an equity focus.
SBA is reserving the Accrual Debenture only for those Licensees
that generally will own no more than 50% of a small business concern at
initial Financing. SBA believes that its Standard Debenture fully
supports Licensees performing private credit, mezzanine, and buyout
transactions. While Licensees performing buyout transactions may
perform a high percentage of equity, based on program licensing and
cash flow data, SBA believes its Standard Debenture already supports
these investment strategies.
SBA recognizes that some multi-strategy funds that include venture
and growth equity investments might want more flexibility than will be
afforded by the terms of the Accrual Debenture. One such limitation is
the percentage of equity investment required. Some multi-strategy funds
may want to do a more balanced blend between equity and debt. Another
limitation is a fund's investment strategy which contemplates the
performance of buyout transactions in which the fund would take 50% or
more ownership of a small business concern at initial financing. Still
another limitation is the amount of SBA leverage available to Accrual
SBICs. In order to determine the maximum amount of leverage that
Accrual SBICs may have outstanding, SBA will aggregate the total
principal leverage plus ten years of accrued interest on such principal
to determine the total Accrual Debentures that the Accrual SBIC may
issue. For example, if an Accrual SBIC has $100 million in Regulatory
Capital, the total Accrual Debenture principal they may be approved for
may be only $118 million if the forecast interest would accrue to
approximately $57 million over a ten-year timeframe at a 4% interest
rate, since higher amounts would result in total SBA guaranteeing
outstanding leverage amounts in excess of $175 million. It is not SBA's
intent to discourage such funds from applying if they can make a case
for their business plan as a standard SBIC. SBIC Applicants will be
required to identify whether they intend to use Standard or Discount
Debentures or if they intend to use the Accrual Debenture as an Accrual
SBIC. SBA will evaluate and approve a license as either a standard SBIC
or as an Accrual SBIC.
SBA proposes to revise the definition of ``Associate'' regarding
the status of an entity Institutional Investor based on its ownership
interest in a Partnership. Currently an entity Institutional Investor
whose ownership represents over 33 percent of the Licensee's private
capital is considered an ``Associate''. SBA proposes to change this to
50 percent or more to align with the financing practices of Community
Development Corporations and other institutional investors seeking
patient capital investment funds and first-time funds. Under this
proposal, an entity Institutional Investor, as a limited partner in a
partnership Licensee, will not be considered an Associate solely
because that entity's investment in the Partnership, including
commitments, represents 10 percent or more but less than 50 percent of
the Licensee's Private Capital, provided that such investment also
represents no more than five percent of the entity's net worth.
The proposed rule defines the term ``Annual Charge'' that is
currently defined as ``Charge'' in the current 13 CFR 107.50. SBA
proposes this change because this is typically the term used to refer
to the annual fee associated with SBA-guaranteed Leverage in both its
website and much of its documentation and more appropriately refers to
the recurring payment associated with this Leverage fee. SBA would
maintain the term ``Charge'' in its regulations for backwards
compatibility, but indicate it has the same meaning as ``Annual
Charge''. Currently, the term ``Charge'' is defined as the annual fee
on Leverage issued to or after October 1, 1996. Since there is no
outstanding Leverage issued prior to October 1, 1996, this language
would be removed from the definition. The current definition also
states that the Leverage is subject to the terms and conditions set
forth in Sec. 107.1130(d). This proposed rule adds a reference to
Sec. 107.585. Although current Sec. 107.585 identifies restrictions
regarding reductions in Regulatory Capital (which are typically
performed in conjunction with a distribution to its private investors),
this proposed rule expands Sec. 107.585 to define new distribution
requirements for SBICs issuing leverage. (See Sec. 107.585 later in
this proposed rule.)
SBA proposes amending the definition of ``Control Person'' under
section 107.50 to clarify what constitutes a controlling relationship
over a Limited Partnership Licensee with a government sponsored non-
profit management company relationship. Section 107.50 would be amended
to state that when over 30% of the private capital managed by the
licensee comes from unaffiliated and unassociated entities (outside of
their association as an investor in the Licensee), the management
company of the Licensee is a government sponsored non-profit entity and
the general partners of the licensee are bound by a fiduciary duty to
the investors in the licensee, the management of the licensee can be
determined to be free from outside control.
The term ``Equity Capital Investments'' refers to equity and
equity-like investments, defined in Sec. 107.50 to include common or
preferred stocks, limited partnership interests, certain subordinated
debt, and warrants. SBA recognizes that venture capital and private
equity transactions continue to evolve and is seeking public input for
any suggested changes to ``Equity Capital Investments'' that SBA should
consider.
The proposed rule includes under Sec. 107.50 the terms ``Final
Licensing Fee'' and ``Initial Licensing Fee,'' as these terms have been
defined in Sec. 107.300 and used in Sec. 107.410.
SBA also proposes to define the term ``GAAP'' as ``Generally
Accepted Accounting Principles'' as established by the Financial
Accounting Standards Board (FASB), which refer to financial accounting
and reporting standards for public and private companies and not for
profit organizations in the United States. The U.S. Securities and
Exchange Commission has recognized the financial accounting and
reporting standards of the FASB as ``generally accepted'' under section
108 of the Sarbanes-Oxley Act. SBA is proposing to define this term as
the proposed rule will refer to GAAP in various locations in the
proposed regulations.
SBA proposes to amend the term ``Leverage'' to remove the inclusion
of ``Participating Securities'' and ``Preferred Securities'' which are
no longer available in the SBIC program and no longer outstanding in
operating SBICs. While SBICs with outstanding Participating Securities
Leverage remain in the Office of SBIC Liquidation, those Licensees are
subject to the regulations at the time that Leverage was issued. SBA
also proposes to clarify that Leverage and SBA's guarantee would apply
to both the principal and unpaid accrued interest associated with the
Accrual Debenture. This definition would clarify SBA's guarantee in
relation to the new security and the Leverage maximum restrictions
regarding Accrual Leverage. For example, SBA will not approve Accrual
Debentures for an amount in which the principal balance and ten years
of accrued interest exceed $175 million. This definition also clarifies
the total capital that SBA is guaranteeing at any
[[Page 63440]]
time. For example, if an Accrual SBIC had $20 million principal in
Accrual Debentures that accrued $4 million in interest, SBA's guarantee
would be $24 million, as SBA's guarantee extends to the accrued
interest. SBA would also consider this in its overall commitment
authorization level. SBA is required under statute to guarantee both
principal and interest on outstanding leverage. This proposed rule
requires SBA to estimate the interest rate associated with any Accrual
Debenture commitment in a conservative manner to ensure that the total
capital that SBA guarantees does not exceed its overall authority set
forth in the Small Business Investment Act of 1958, as amended (the
``Act''), or other applicable federal laws. For example, if SBA has a
$5 billion Debenture authorization and has approved $4 billion in
Standard Debentures for regular SBICs, SBA would need to estimate the
interest rate for the Accrual Debentures over the 10-year accrual
period in a manner that safeguards the SBA from exceeding its
authorization ceiling.
SBA is proposing the terms ``Leveraged Licensee'' and ``Non-
leveraged Licensee'' in Sec. 107.50. Current regulations provide
greater flexibility to Licensees that do not have outstanding leverage
and do not intend to issue leverage since SBA has no credit risk. This
proposed rule would provide further benefits and flexibility to such
Licensees. In order to simplify the regulations, Leveraged Licensees
would include any Licensee with outstanding Leverage, Leverage
commitments, Earmarked Assets (which are only associated with Licensees
that issued Participating Securities), and any Licensee that intends to
issue Leverage in the future. The intent of the certification is to
ensure that SBA applies the appropriate scrutiny to any Licensee that
intends to seek SBA Leverage in the future. This regulation is not
intended to prohibit subsequent SBIC funds from seeking Leverage. This
proposed rule also defines Non-leveraged Licensee as a Licensee that
has no outstanding Leverage or Leverage commitment, certifies (in
writing) that such Licensee will not seek Leverage throughout the life
of the fund, and has no Earmarked Assets. For example, if ABC, LP has
outstanding Leverage of $10 million and subsequently (a) fully repays
its outstanding Leverage, (b) has no further Leverage commitments, (c)
has no Earmarked Assets, and (d) certifies that it will not seek any
Leverage in the future, ABC, LP would be considered a Non-leveraged
Licensee, even if the management company of ABC, LP also has a
Leveraged Licensee (ABC II, LP) with outstanding Leverage of $20
million. As another example, if DEF, LP is granted an SBIC License and
certifies to SBA (in writing) that it does not intend to issue
Leverage, SBA would consider DEF, LP to be a Non-leveraged Licensee.
SBA proposes to define the term ``Qualified Line of Credit'', which
would be as defined in the proposed Sec. 107.550(c). (See Section
107.550 under this Part II.)
SBA proposes to modify the term ``Retained Earnings Available for
Distribution'' to include the acronym ``READ'' and to clarify that READ
distributions must be performed in accordance with proposed Sec.
107.585. As discussed in that section, SBA will propose clarifications
to distributions for existing Licensees and new distribution rules for
Licensees licensed on or after October 1, 2023. (See Sec. 107.585
under this Part II.)
SBA proposes to add the terms ``SBIC'' or ``Small Business
Investment Company'' to have the same meaning as Licensee. SBA uses the
terms ``SBIC'' and ``Licensee'' interchangeably throughout the
regulations and in its policies and documents.
SBA proposes to add the term ``SBIC website'' as <a href="http://www.sba.gov/sbics">www.sba.gov/sbics</a>
which is the public website that SBA maintains all information on the
SBIC program, including all standard operating procedures, policies,
SBIC forms, and any reports that SBA publishes from time to time.
Regulations refer to this site throughout the regulations.
This proposed rule adds the terms ``State'' and ``Underlicensed
State'' in Sec. 107.50 to support implementation of Public Law 115-333
which gives priority in Licensing to applicants headquartered in
underlicensed states with below median SBIC financing. The term
``State'' would include all of the fifty States, the Commonwealth of
Puerto Rico, the District of Columbia, and all U.S. territories with
permanent populations (Guam, U.S. Virgin Islands, Northern Mariana
Islands, and American Samoa). The term ``Underlicensed State'' means a
State in which the number of operating licensees per capita is fewer
than the median number for all States. To determine the per capita per
State, SBA would use the most recent resident population from the U.S.
Census as of the date of the calculation. SBA would publish the list of
Underlicensed States periodically on the SBIC website.
SBA is proposing to add the term ``Total Leverage Commitment'' to
have the meaning as defined in proposed Sec. 107.300. As discussed
under that section, SBA proposes to approve the Total Leverage
Commitment at the time of licensing.
SBA proposes to add the term ``Enhanced Monitoring'' as defined in
the proposed Sec. 107.1850. As discussed under that section, SBA is
implementing an Enhanced Monitoring process to better monitor its
SBICs.
SBA proposes to change the term ``Wind-up'' Plan to ``Wind-down''
plan throughout part 107 because SBA believes that it better reflects
the wind-down of a fund at the end of its life cycle.
B. Section 107.150 Management Ownership Diversification Requirements
This regulation identifies the SBIC ownership diversification
requirement under section 302(c) of the Act (also referenced in Part
107 as the ``diversification requirement''). That section requires SBIC
ownership be ``sufficiently diversified from and unaffiliated with the
ownership of the licensee in a manner that ensures independence and
objectivity in the financial management and oversight of the
investments and operations of the licensee.'' To ensure independence
per statute, current Sec. 107.150 paragraph (b) requires that ``no
Person or group of Persons who are Affiliates of one another may own or
control, directly or indirectly, more than 70 percent of your
Regulatory Capital or your Leverageable Capital.'' SBA proposes to
remove the ``indirectly'' requirement to provide greater clarification
as to sources of Regulatory Capital available to an SBIC.
As an exception to the diversification ownership requirement under
Sec. 107.150(b)(1), SBA allows an investor that is a Traditional
Investment Company (a term defined in 13 CFR 107.150(b)(2)) to own and
control more than 70 percent of the Licensee's Regulatory Capital. Such
SBICs are essentially drop-down funds for that Traditional Investment
Company and are structured exclusively to pool capital from more than
one source for the purpose of investing and generate profits. SBA
proposes also to include non-profit entities to also own more than 70
percent of the Licensee's Regulatory Capital to facilitate capital
raising efforts, particularly for first-time funds and funds targeting
investments in underserved geographies and critical technologies.
By meeting the requirements of Sec. 107.150(c)(2), such non-profit
entities would be exempt from requirements under Sec. 107.150(c)(1)
which state that the management of the Licensee must be unaffiliated
from the sources of Regulatory Capital. It should be noted
[[Page 63441]]
that SBA will continue to review and monitor such entities to ensure
that the SBIC is a for-profit vehicle for the non-profit, the
management of the Licensee is bound by a fiduciary duty to investors,
and to ensure such entities do not pose undue investment or operational
risk to SBA.
C. Section 107.210 Minimum Capital Requirements for Licensees
This section identifies minimum private capital requirements for
SBICs. SBA proposes to amend the term ``Wind-up'' to ``Wind-down'' as
previously discussed in paragraph II.A discussing Sec. 107.50. SBA
also proposes to remove all references to ``Participating Securities''
since SBA no longer issues such leverage and any SBICs in SBA's
portfolio that issued such leverage are either in Wind-down or are
monitored by the Office of SBIC Liquidations.
Paragraph (a)(1) requires SBICs (with the exception of Early Stage
SBICs) to have Regulatory Capital of at least $5 million, but provides
an exception for SBA, in its sole discretion and based on a showing
special circumstances and good cause, to license an applicant with only
$3 million if the applicant: (i) meets its licensing standards with the
exception of minimum capital; (ii) has a viable business plan
reasonably projecting profitable operations; and (iii) has a reasonable
timetable for achieving Regulatory Capital of at least $5 million.
Public Law 115-333 specifically allows an applicant licensed under this
exception and located in an Underlicensed State to receive up to 1 tier
of Leverage until the Licensee meets the $5 million minimum Regulatory
Capital requirement. SBA proposes to specify that one example of ``good
cause'' would be the applicant is headquartered in an Underlicensed
State. If licensed, Leveraged Licensees from Underlicensed States would
be eligible for up to 1 tier of Leverage until they raise the $5
million minimum Regulatory Capital requirement.
D. Section 107.300 License Application Form and Fee
This regulation identifies the process and rules regarding applying
for a License and the associated Licensing Fees. SBA proposes to amend
the introductory paragraph to give priority to applicants headquartered
in Underlicensed States with below median SBIC financing dollars, in
accordance with Public Law 115-333. Applicants may have branch offices
in other locations, but the headquarters for the applicant must be in
an Underlicensed State with below median SBIC financing dollars to
receive priority. The proposed regulation provides that SBA will
publish the list of states in a notice on the SBIC website, which was
previously discussed under II.A. of this rule. SBA also proposes that
once priority is established, such applicants will continue to receive
priority throughout the licensing process. For example, if Iowa is
identified as an Underlicensed State with below median financing and an
applicant headquartered in Iowa applies to receive an SBIC license, SBA
would give them priority in licensing. If SBA then published a new list
of states qualifying for licensing priority after the applicant was
given priority, the applicant would continue to have priority in both
phases of the licensing process (initial review and final licensing)
even if Iowa is no longer identified as an Underlicensed State with
below median SBIC financing dollars.
SBA proposes to amend paragraph (b) to identify that SBA will
approve the total leverage commitments for the life of the Licensee at
licensing. SBA believes that similar to private investors, SBA should
approve the entire leverage commitment at licensing, based on the
evaluation criteria set forth in Sec. 107.305 and the maximum leverage
commitment limits set forth in Sec. 107.1150. This change is intended
to (1) reduce the burden associated with separate commitment requests
performed after the fund has been licensed and (2) reduce the
uncertainty with regard to SBA's leverage commitment and consequently
reduce the private capital raise timeframe for a prospective Licensee.
SBA recognizes that Licensees often raise capital after licensing.
However, SBA notes that it is important for Licensees to raise their
capital prior to submitting their Licensing application for Final
Review, as this practice will help SBA better evaluate applicants,
monitor for potential risks, and process applications faster. SBA will
continue to maintain its right to deny any new issuance of Leverage at
draw and other rights and remedies as discussed in part 107, subpart J
in the event of regulatory violations, including capital impairment.
SBA is also seeking to better diversify its leverage portfolio for
maximum impact across underserved sectors as proposed under Sec.
107.320.
SBA proposes to modify its Licensing fees to lower financial
barriers for new funds. Effective October 1, 2022, the Initial
Licensing Fee is $11,500 and the Final Licensing Fee is $40,200 for a
combined Licensing Fee of $51,700. Each year, SBA adjusts these fees
based on the Consumer Price Index. Although larger more established
funds can easily afford these fees, smaller funds and new fund managers
view the fees as prohibitive to SBIC program participation given their
smaller size. Additionally, SBA charges the same fee for applicants
seeking to issue Debentures as those who do not intend to issue
Debentures. SBA is proposing to revise the Initial Licensing Fees based
on its fund sequence (meaning the order of succession of the fund) as
follows:
------------------------------------------------------------------------
Initial
Fund sequence licensing
fee
------------------------------------------------------------------------
Fund I..................................................... $5,000
Fund II.................................................... 10,000
Fund III................................................... 15,000
Fund IV+................................................... 20,000
------------------------------------------------------------------------
SBA will determine the applicant's Fund Sequence based on the
applicant's management team composition and experience as a team,
including the business plan (also known as the strategy) of the fund
provided in Phase I of the application process. For example, if the
management team of applicant DEF I consists primarily of the same team
members of funds ABC I and ABC II, SBA will consider the fund sequence
of DEF I as a Fund III, regardless of the number in the applicant's
name.
SBA proposes to change the Final Licensing Fee as the Final
Licensing Base Fee plus 1.25 basis points multiplied by the Leverage
dollar amount requested by the applicant, where the Final Licensing
Base Fee would be as follows:
------------------------------------------------------------------------
Final
Fund sequence licensing
base fee
------------------------------------------------------------------------
Fund I..................................................... $10,000
Fund II.................................................... 15,000
Fund III................................................... 25,000
Fund IV+................................................... 30,000
------------------------------------------------------------------------
For example, a fourth time fund seeking $175 million in Leverage
would pay a Final Licensing Base Fee of $51,875, computed as $30,000
plus 1.25 basis points (or .0125%) times $175 million.
SBA believes that its Non-leveraged Licensees present less credit
risk to SBA, while accomplishing the SBIC mission of providing equity
and long-term loans to small business concerns. SBA's proposed changes
would effectively lower the combined Licensing Fee for all Non-
leveraged applicants and lower the fees for applicants with less SBA
capital at risk and new funds. Fund managers seeking a 4th or later
fund and seeking leverage
[[Page 63442]]
would pay a higher fee and the fee would scale with the dollar amount
of SBA's capital commitment. SBA notes that SBA's licensing costs are
substantially higher than even the highest proposed combined Licensing
Fee. SBA believes this modernized licensing fee model, which is
designed to make fees commensurate with years of participation in the
SBIC program and the dollar amount of SBA's capital at risk, will
reduce cost barriers for small funds and new funds applying to the SBIC
program.
SBA is also proposing an application resubmission penalty fee of
$10,000 for any applicant that has previously withdrawn or otherwise is
not approved for a license that must be paid in addition to the Initial
and Final Licensing Fees. SBA's proposed licensing fees remain below
SBA's expenses required to process such applications. The intent of the
resubmission fee is to impose a penalty for each time an applicant
resubmits its application to offset the requirement of additional SBA
time and resources. Applicants can request SBA approval to waive the
resubmission penalty fee that SBA may consider on a case-by-case basis.
E. Section 107.305 Evaluation of License Applicants
Current Sec. 107.305 discusses how SBA evaluates an applicant to
the program. Paragraph (a) describes management qualifications. SBA is
proposing to amend paragraph (a) to include two additional management
qualifications. The first is relevant industry operational experience,
which may be combined with investment skill to demonstrate managerial
capacity. The second, if applicable, is the applicant's experience in
managing a regulated business, including but not limited to an SBIC.
Paragraph (b) describes how SBA evaluates an applicant's track record.
SBA is amending paragraph (b) to include two additional performance
qualifications. The first is the inclusion of an applicant's operating
experience, which when combined with an investment team's prior
relevant industry investing experience, is relevant in assessing an
applicant's investment performance. The second addition, when
applicable, is the applicant's past adherence to statutory and
regulatory SBIC program requirements. This addition will be considered
for applicants with past SBIC program experience.
Paragraph (c) describes how SBA evaluates the applicant's
investment strategy. SBA is amending paragraph (c) to clarify that the
applicant's investment strategy is to be contained in its business
plan, as well as to underscore the importance of section 102
``Statement of Policy'' of the Act which describes the public purpose
of the SBIC program.
F. Section 107.320 Leverage Portfolio Diversification
Current Sec. 107.320 discusses how SBA evaluates Early Stage SBICs
and reserves the right for SBA to maintain diversification among Early
Stage SBICs with respect to the year they commence operations and their
geographic location. In light of the fact that SBA used its entire
Leverage authorization in FY 2021, SBA proposes to modify this
regulation to reserve SBA's right to maintain Leverage Portfolio
Diversification in approving Leverage commitments with respect to the
year in which they commenced, the SBIC's geographic location, giving
first priority to Licensees from Underlicensed States with below median
SBIC financing dollars, their asset class and investment strategy.
SBA's intent is to maximize the SBIC program's economic impact to
underserved small business concerns while managing risk through
portfolio diversification. SBA notes that SBA will continue to license
all qualified applicants based on its evaluation criteria and will not
take into consideration any projected shortage or unavailability of
leverage when reviewing and processing SBIC license applications.
G. Section Sec. 107.503 Licensee's Adoption of an Approved Valuation
Policy
This regulation requires Licensees to prepare and maintain a
valuation policy that must be approved by SBA for use in determining
the value of its investments. Current regulations require that
Licensees adopt without change the model valuation policy set forth in
SBA's Valuation Guidelines for SBICs or obtain SBA's prior approval of
an alternative valuation policy. SBA established this requirement to
ensure it could adequately monitor the SBIC portfolio, that valuations
were performed in a reasonable and standard fashion, and to minimize
Leverage losses in order to maintain zero subsidy cost. SBA recognizes
that private equity typically uses valuations performed in accordance
with GAAP and that many SBIC private investors require GAAP. This
causes many SBICs to maintain two sets of valuations. SBA is currently
working to re-evaluate this requirement for Leveraged Licensees. SBA is
requiring both valuations based on SBA Valuation guidelines and those
reported to their private investors in accordance with GAAP to assess
the potential impact. SBA is also working with its valuation contractor
to evaluate what changes to SBA's Valuation Guidelines would be
necessary to make them GAAP compliant and the impact to SBA's
monitoring and risk should SBA adopt GAAP compliant guidelines. SBA is
seeking input from the public on this issue as part of this proposed
rule. However, SBA recognizes that Non-leveraged Licensees pose no
credit risk to SBA. SBA is therefore proposing that Non-leveraged
Licensees (which include both those licensed as Non-leveraged Licensees
and Licensees that fully repay Leverage and seek no further Leverage)
may adopt a Valuation Policy in accordance with GAAP. SBA believes this
will lower the burden associated with current regulations.
Current paragraph (d) requires licensees with outstanding Leverage
or Earmarked assets to value their portfolio twice a year (at the end
of the second quarter and the end of the fiscal year). SBA is proposing
to clarify that this requirement applies to all Leveraged Licensees and
increase reporting from semi-annually to quarterly, commensurate with
the required quarterly reporting of the Form 468.
H. Section Sec. 107.504 Equipment and Office Requirements
This regulation identifies the equipment and office requirements
needed by SBICs to operate within the program. The current regulation
requires a personal computer with a modem and internet access under
paragraph (a) and the need for a facsimile capability under paragraph
(b). SBA received industry comments that this regulation was outdated.
Some SBICs indicated that they bought facsimile machines to ensure they
complied with the requirement. The intent of this regulation is to
ensure that SBICs can properly communicate with SBA, receive official
correspondence, prepare and provide electronic reporting, and apply for
Leverage. The proposed changes would eliminate the modem requirement
under paragraph (a); eliminate the facsimile requirement under
paragraph (b); and modify paragraph (a) to more broadly require that
SBICs must have technology to securely send and receive emails, scan
documents, and prepare and submit electronic information and reports
required by SBA. This language would allow for reasonable changes in
technology without the need to modify regulations. All SBICs already
utilize this technology in their day-to-day operations. This change
should reduce
[[Page 63443]]
costs by eliminating unnecessary equipment.
I. Section 107.550 Prior Approval of Secured Third-Party Debt of
Leveraged Licensees
This regulation requires SBICs to obtain prior SBA approval for
secured third-party debt for Leveraged Licensees.
Section 107.550(a) defines secured third-party debt to include
Temporary Debt, a defined term in Sec. 107.570 that applies only to
SBICs with outstanding Participating Securities. Since there are no
operating SBICs with outstanding Participating Securities, except in
the Office of SBIC Liquidation, SBA proposes to remove Sec. 107.570
and references to Temporary Debt and Participating Securities
throughout this section.
Section 107.550(c) identifies rules associated with secured lines
of credit in existence on April 8, 1994. This proposed rule would
remove that requirement since it is obsolete.
This proposed rule would replace Sec. 107.550(c) with a secured
``Qualified Line of Credit'' which SBICs could utilize without SBA
prior approval. Current Sec. 107.550(b) requires Licensees with
Leverage to obtain SBA approval for any secured third-party debt,
including lines of credit secured by unfunded commitments. Any third-
party debt (secured and unsecured) increases SBA's credit risk because
SBA leverage is generally never senior to the claims of other
creditors: under Sec. 107.560, the first $10 million of SBA leverage
is generally subordinated to other debt of an SBIC, and leverage above
$10 million is pari passu (on equal footing) with other debt.
Nonetheless, SBA recognizes that it is typical practice for investment
funds to use a line of credit to help bridge capital needs for
financings and can generally draw on a line of credit more quickly than
investors pay in capital when called. SBA regularly approves third
party debt for lines of credit as discussed under TechNote 5--Credit
Management Procedures, issued in November 2000 (<a href="http://www.sba.gov/document/technote-5-technote-number-5">www.sba.gov/document/technote-5-technote-number-5</a>). In order to streamline this process,
based on those lines of credit SBA has historically regularly approved,
SBA is proposing a new ``Qualified Line of Credit'' that would be
exempt from mandatory SBA prior approval if it meets certain
requirements regarding the overall size, term, the holder, and the
borrowings under the credit facility as follows:
(1) The line of credit is limited to 20% of total unfunded binding
commitments from Institutional Investors. The 20% of unfunded
commitments was based on the Institutional Limited Partnership
Association's document, ``Subscription Lines of Credit and Alignment of
Interests: Considerations and Best Practices for Limited and General
Partners'' published in June 2017 which recommended the line of credit
be limited to between 15-25% of unfunded commitments. Although this
proposed rule would allow up to 20%, this is a maximum only and limited
partners may further reduce this amount in the SBIC's limited
partnership agreement.
(2) The term of the line of credit does not exceed 12 months. Based
on feedback from industry, SBA understands that most lines of credit
are renewed on an annual basis and generally have a duration of 12
months. In this proposed rule, SBA is proposing a 12-month limitation
on the duration of the line of credit, which may be renewable on an
annual basis if it remains in compliance with this regulation.
(3) The line of credit is held by a federally regulated financial
institution. SBA proposes this requirement, that the lender be
regulated by a federal financial institution regulator (e.g., the FDIC,
OCC, or NCUA) to ensure that the lender is creditworthy, that the
credit terms are reasonable and customary, and that the lender will not
seek unusual remedies in the event of a default.
(4) All borrowings under the line of credit meet certain
conditions: (i) Are only secured by unfunded Regulatory Capital up to
100 percent of the amount of the borrowing and 90 days of interest;
(ii) Are for the purpose of maintaining the SBIC's operating liquidity
or providing funds for a particular Financing of a Small Business;
(iii) Must be fully repaid within 90 days after the date they are
drawn; and (iv) Must be fully paid off for at least 30 consecutive days
during the SBIC's fiscal year so that the outstanding third-party debt
is zero for at least 30 consecutive days. SBA proposes these
requirements to ensure that such debt is unsecured except for the
amount of the borrowing and interest which may only be secured by
unfunded Regulatory Capital, since secured third party debt presents a
higher credit risk to SBA and must be approved by SBA under Sec.
107.550. Further, the third-party debt must be solely for the purpose
of maintaining the SBIC's operating liquidity or providing funds for a
particular financing of a small business. Finally, since such
borrowings are temporary in nature, the line of credit should be repaid
quickly and not continuously refinanced. SBA believes these
requirements are typical or provide greater latitude than for a typical
line of credit and would provide SBICs with access to a standard
industry tool while minimizing SBA's credit risk. SBA is seeking
comments from industry as to whether these requirements present any
issues.
SBA notes that SBIC investors may negotiate more stringent rules
regarding how its SBIC may use a line of credit as part of its limited
partnership agreement. These proposed regulations only present the
minimum standards which SBICs must utilize to avoid requiring SBA prior
approval. For example, the limited partnership agreement may specify
that the line of credit may be no greater than 15 percent of uncalled
private capital. Although the proposed regulations allow for a line of
credit up to the total uncalled private capital, private investors may
establish a lower level.
Since this rule would provide an exemption for most instances of
third-party debt that SBA would likely approve, the proposed rule
eliminates paragraphs (d) and (e) which discuss conditions for SBA
approval and automatic approval. The proposed Qualified Line of Credit
obviates the need for these requirements. Any other third-party debt
would require SBA review to ensure that such line of credit does not
increase the risk to repayment of SBA-guaranteed Leverage.
J. Section 107.570 Restrictions on Third-Party Debt of Issuers of
Participating Securities
This regulation identifies restrictions on third-party debt for
SBICs that issued Participating Securities. As discussed under
paragraph II.J, no operating SBICs have outstanding Participating
Securities and SBA is no longer authorized to provides such Leverage.
SBA proposes to remove this regulation.
K. Section 107.585 Distributions and Reductions in Regulatory Capital
This section is currently titled, ``Voluntary decrease in
Licensee's Regulatory Capital'' and requires Licensees to obtain SBA's
prior written approval to reduce Regulatory Capital by more than two
percent in any fiscal year. Current Sec. 107.1000(b)(2) exempts Non-
Leveraged Licensees from Sec. 107.585 if the decrease does not result
in Regulatory Capital below what is required by the Act and the
regulations and is reported to SBA within 30 days. Typically,
reductions in capital are performed in conjunction with a distribution
that represents a return of capital, to its private investors. SBA
[[Page 63444]]
allows profit distributions, also known as ``Retained Earnings
Available for Distribution'' or ``READ'' without SBA prior approval,
unless the Licensee was licensed as an Early Stage SBIC or if the SBIC
issued Participating Securities.
SBA received comments from private investors that the regulations
were unclear as to when a Licensee could distribute to its investors.
SBA has also had instances in which Leveraged Licensees made ``READ''
distributions, and subsequently wrote down assets that would have
reduced or removed ``READ''. Leveraged Licensees must consider such
write-downs before making such distributions to avoid ``improper''
distributions. SBA is also concerned that Licensees may distribute
profits without repaying Leverage. In particular, equity investors
often have returns that are less consistent than private creditor or
mezzanine funds. SBA has incurred losses in several Licensees that
returned profits to its private investors through early profit
distributions and then wrote down assets later in the fund's life.
SBA is proposing to retitle this regulation to ``Distributions and
Reductions in Regulatory Capital'' and modify the requirements to
address these concerns. SBA proposes to separate distribution
requirements based on three categories of SBICs: (1) Non-Leveraged
Licensees; (2) Leveraged Licensees licensed prior to October 1, 2023,
and Leveraged Licensees wholly owned by Business Development Companies
(``BDCs'') that are not Accrual SBICs; and (3) Leveraged Licensees
licensed on or after October 1, 2023, not wholly owned by BDCs and
Accrual SBICs. The rationale for these categories and the specific
requirements follows.
(1) Non-leveraged Licensees. SBA proposes a separate set of
requirements for Non-leveraged Licensees because they pose no credit
risk to SBA. Proposed rules would allow Non-leveraged Licensees to
distribute to their private investors without SBA prior approval as
long as they retain sufficient Regulatory Capital to meet minimum
capital requirements under Sec. 107.210, unless such amounts are in
accordance with their SBA approved Wind-up Plan. If a Non-leveraged
Licensee does not have an SBA approved Wind-up Plan, they may make
distributions, as long as such Non-leveraged Licensees retain
sufficient Regulatory Capital to meet minimum capital requirements
under 107.210. If a Non-leveraged Licensee has an SBA-approved Wind-
down Plan, their Regulatory Capital can drop below the minimum capital
requirements if such amounts are in accordance with that plan. This
requirement should provide even greater flexibility to Non-leveraged
Licensees. In accordance with current policies, the proposed rule would
clarify that Non-leveraged Licensees must report any reductions in
Regulatory Capital to SBA within 30 days on an updated Capital
Certificate, which is Exhibit K in SBA form 2181.
(2) Leveraged Licensees licensed prior to October 1, 2023, and
Leveraged Licensees wholly owned by BDCs that are not Accrual SBICs.
SBA recognizes that existing licensees and current applicants to the
program expect to be able to distribute READ based on current
regulations. SBA also recognizes that SBICs wholly owned by BDCs
(``BDC-SBICs'') must distribute profits to their investors. SBA
proposes that SBICs licensed prior to October 1, 2023, and BDC-SBICs
should remain under the current rules with some clarifications, as long
as they are not Accrual SBICs. Since Accrual SBICs perform at least 75%
in equity, which has the highest variance in returns, SBA proposes that
any Accrual SBIC be excluded from this category. For SBICs licensed
prior to October 1, 2023, and BDC-SBICs, SBA proposes substantively the
same requirements as in the current regulations except to clearly
identify that such SBICs may distribute READ only after considering any
material adverse changes to its portfolio. In accordance with current
policies, the proposed rule would clarify that these Licensees must
report any reductions in Regulatory Capital to SBA within 30 days on an
updated Capital Certificate.
(3) Leveraged Licensees licensed on or after October 1, 2023, and
not wholly owned by a BDC and Accrual SBICs. SBA proposes for these
SBICs a distribution waterfall that repays SBA the principal balance on
outstanding Leverage on at least a pro rata basis with private
investors. SBICs must repay Leverage at its ten-year maturity and may
prepay Leverage at any time. SBA proposes the following waterfall:
a. Payment of Annual Charges and accrued interest associated with
Leverage. (Interest will be paid to the bond holders based on the
Leverage terms.)
b. Calculate SBA's share based on the ratio of Total Leverage
Commitments and Initial Regulatory Capital established as follows: SBA
Share = Total Distributions x [Total Leverage Commitment/(Total
Leverage Commitment + Initial Regulatory Capital)].
c. Repay SBA Leverage to bond holders in an amount no less than
SBA's Share to the extent of outstanding Leverage. If SBA's share is
more than the outstanding Leverage held by the Licensee and the
Licensee has unfunded Leverage Commitments, the Licensee must submit a
Leverage Commitment cancellation equal to SBA's share minus the SBA
Leverage redemptions. The rationale for this cancellation requirement
is to minimize the risk that the SBIC will distribute significant
profits to its private investors, then issue additional SBA leverage
that results in losses, leaving SBA with losses after the private
investors made significant profits.
d. Distribute to private investors the remaining amount.
e. Report the distribution to SBA. You must report the distribution
and calculations to SBA on your Form 468 submission(s).
If permitted under a Licensee's partnership agreement, a Licensee
may choose to reserve capital or reinvest all or a portion of it
instead of distributing to the SBA and investors. In this circumstance,
a Licensee would decrease the amount to its investors so that the
private investors receive no more on a pro rata basis as the repayment
of SBA Leverage and interest due. SBA is only concerned that private
investors have at least the same risk for loss as SBA.
L. Section 107.590 Licensee's Requirement To Maintain Active Operations
This regulation identifies requirements for Licensees to maintain
active operations and submit a Wind-up Plan when they decide they are
no longer making any new investments. SBA proposes to change the name
to ``Wind-down Plan'' as discussed under II.A.
M. Section 107.620 Requirements To Obtain Information From Portfolio
Concerns
This regulation specifies the threshold of information requested by
SBICs from Portfolio Concerns. The SBA proposes to amend specified
information collections for Financings after the effective date of the
rule to provide certain optional demographic information on Portfolio
Concerns. The SBA is amending information collections to enhance
reporting accuracy and consistency around the small business
demographic impact of the SBIC program.
N. Section 107.630 Requirement for Licensees To File Financial
Statements With SBA (Form 468)
This regulation identifies requirements associated with Licensee's
[[Page 63445]]
financial statements on Form 468. Paragraph (a) requires the annual
Form 468 to be submitted on or before the last day of the third month
following the end of the fiscal year, except for information in
paragraph (e). This is not consistent with Sec. 107.650 which requires
portfolio valuations which are submitted on the Form 468 within 90 days
following the end of the fiscal year. Current Sec. 107.630 also does
not have a paragraph (e). SBA believes the entire Form 468 should be
due at the same time. SBA therefore proposes to make the annual Form
468 due date consistent with Sec. 107.650.
Paragraph (d) requires certain economic information regarding each
Licensee's portfolio companies, so that SBA can assess the program's
economic impact. SBA proposes adding information to help SBA determine
net jobs created and total jobs created or retained, including
identifying the number of jobs added due to a business acquisition
versus growth in the business.
SBA is also proposing to add fund management contact information
and optional demographic information. SBA is seeking to collect
management contact information in order to improve its customer
relationship management and to better assess relationships between its
Licensees. Demographic information regarding fund management is
requested for reporting purposes only and on a voluntary basis.
O. Section 107.640 Requirement To File Portfolio Financing Reports (SBA
Form 1031)
This regulation currently requires Licensees to submit a Portfolio
Financing Report on SBA Form 1031 within 30 days of the closing date of
the Financing. In response to comments received as part of its
modernization improvement efforts (see I.D), SBA is proposing to make
this a quarterly submission in which the Licensee must report the
financing within 30 calendar days of the calendar year quarter
following the closing date of the Financing. For example, if a Licensee
closes a financing on February 10, 2023, the Licensee will need to
submit the related Form 1031 no later than April 30, 2023. If the
Licensee is identified as requiring Enhanced Monitoring, as proposed
under Sec. 107.1850, SBA may require more frequent reporting.
P. Section 107.650 Requirement To Report Portfolio Valuations to SBA
This regulation currently requires Licensees to report portfolio
valuations within 90 days of the end of the Licensee's fiscal year and
quarterly valuations 30 days following the close of each quarter. SBA
proposes to clarify that only Leveraged Licensees are required to
report for quarterly reporting periods. All Licensees must report at
least annually. In response to comments received as part of its
modernization improvement efforts (see I.D), SBA proposes to expand the
timeframe for quarterly valuations, including material adverse changes,
to 45 calendar days following the close of each quarter. This is
intended to give Licensees additional time to prepare reports.
Q. Section 107.660 Other Items Required To Be Filed by Licensee With
SBA
This regulation identifies other items required by the Licensee.
Paragraph (a) requires the Licensee to provide to SBA a copy of any
report it gives to its private investors. Although the Licensee is
required under current regulations to provide to SBA report they
provide to their private investors, SBA proposes to specify valuation
data items to improve clarity. SBA also proposes to specify that
Licensees should submit to SBA any report it gives to its private
investors no later than 30 days after the date these sent the report to
its private investors. This requirement is intended to keep SBA aware
of any important communications regarding the licensee in a timely
fashion.
R. Section 107.692 Examination Fees
This regulation identifies how SBA calculates examination fees.
Currently under paragraph (b), SBA charges a Minimum Base Fee + .024%
of assets at cost up, not to exceed a Maximum Base Fee. SBA adjusts the
Minimum Base Fee and the Maximum Base Fee annually. Although current
regulations give Non-leveraged Licensees a lower Maximum Base Fee, this
formula does not fully address the risk and additional monitoring
required associated with Leveraged Licensees. SBA proposes to change
and streamline this formula to $10,000 + .035% of their Total Leverage
Commitment established at Licensing (see paragraph II.D.). By
establishing the examination fee up front, SBA believes this will
reduce uncertainty in cashflows. Because SBICs licensed prior to this
proposed rule may not have a Total Leverage Commitment, SBA proposes
that the formula for existing licensees be $10,000 + .035% of their
outstanding Leverage plus SBA's undrawn commitment amount. Since this
proposed formula would give all Non-leveraged licensees a flat rate of
$10,000 and SBA incurs more costs based on the assets of the Licensee,
SBA proposes that any Non-leveraged Licensee with over $50 million in
assets at cost pay an additional $20,000. Although SBA recognizes that
a Leveraged Licensee with over $50 million in assets at cost and $30
million in leverage commitments would only pay $20,500 in exam fees
versus $30,000 for a Non-leveraged Licensee, SBA is nevertheless
proposing this additional fee for larger Non-leveraged Licensees with
over $50 million in assets based on the infrequency of requests for
less than one tier of leverage.
S. Section 107.720 Small Businesses That May Be Ineligible for
Financing
This regulation identifies small businesses in which Licensees may
not invest. Paragraph (a) restricts Licensees from making investments
into relenders or reinvestors as defined under paragraph (a)(1).
Paragraph (a)(2) currently gives an exception for Venture Capital
Financings to relenders or reinvestors that qualify as Disadvantaged
Businesses unless the Disadvantaged Business is a bank or savings and
loans not insured by agencies of the Federal Government and
agricultural credit companies. SBA is proposing to modify this
exception to equity investments in ``underserved'' relenders or
reinvestors that make financings solely to Small Business Concerns that
a Licensee may directly finance under part 107. SBA believes expanding
this provision will significantly help improve its footprint to
underserved communities. By more broadly defining ``underserved,'' SBA
can more quickly adapt to the changing markets by clarifying what
constitutes ``underserved'' through policy notices and increase its
economic impact to underserved communities. While Disadvantaged
Business would continue to be considered underserved, rural and low-
and-moderate-income areas, as well as businesses owned by women or
veterans may also be applicable to this group. To ensure that capital
continues to be directed to SBIC's mission, SBA also proposes to
restrict relender and reinvestor investments to those that existing
SBICs could finance. This proposal also helps SBA grow its emerging
fund manager pipeline.
T. Section 107.730 Financings Which Constitute Conflicts of Interest
Current Sec. 107.730 prohibits Licensees from transactions that
constitute conflicts of interest, as required by the Act. Paragraph (a)
provides a general rule that Licensees may not self-deal to the
prejudice of a Small Business, the Licensee, its shareholders or
partners, or SBA, and must obtain prior written exemptions for
transactions that may
[[Page 63446]]
constitute a conflict of interest and specifies certain transactions in
paragraphs (a)(1) through (5) that would constitute a conflict of
interest. Paragraph (a)(1) identifies (as one specific prohibition) a
Financing to a Licensee's Associate, as defined in Sec. 107.50, unless
the Small Business being financed is only an Associate because another
the Licensee's Associate investment fund holds a 10% or greater
interest in the Small Business, the Associate investment fund
previously invested in the Small Business at the same time and on the
same terms and conditions, and the Associate investment fund is
providing a follow-on financing to the Small Business at the same time
and on the same terms and conditions as the Licensee.
Based on market feedback and an analysis of conflict-of-interest
approval requests from Licensees, the current safe harbor provisions
for follow-on financings to small business portfolio companies are
resulting in delays providing capital to small businesses. This
potentially hurts the small businesses and increases the burden on
Licensees and SBA. SBA proposes introducing a safe harbor for financing
a portfolio concern by an Associate when an outside third-party
participates in the equity financing of the Licensee's portfolio
concern.
Paragraph (d) identifies that Financings with Associates also
constitutes a conflict of interest requiring SBA prior approval but
provides exceptions under paragraph (d)(3). Paragraph (d)((3)(iii)
identifies exceptions for SBICs with outstanding Participating
Securities. Since no operating Licensees remain in SBA's portfolio, SBA
proposes to remove this exception. Paragraph (d)(3)(iv) identifies
exceptions involving Non-leveraged Licensees. SBA proposes to revise
this exception to incorporate the new Non-leveraged Licensee term and
simplify this regulation.
U. Section 107.830 Minimum Duration/Term of Financing
Paragraph (c)(2) discusses ``prepayments'' and states: ``You
[Licensee] must permit voluntary prepayment of Loans and Debt
Securities by the Small Business. 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 (c)(3) of this section.
SBA is considering whether it should make changes to Sec.
107.830(c)(2) regarding prepayment restrictions for Loans and Debt
Securities. Currently, any restriction on the ability of a small
business to prepay (other than the imposition of a reasonable
prepayment penalty) requires SBA's prior written approval. Recently,
SBA has become concerned that certain terms in unitranche or multi-
lender transactions that require voluntary prepayments to be
distributed on a pro rata basis to all lenders in a transaction could
be considered a prepayment restriction. Generally, SBA does not view a
financing term that requires a portfolio concern to make prepayment
distributions on a pro rata basis to all lenders in a transaction to be
considered a prepayment restriction. To ensure that there is a
consistent understanding of the appropriate treatment of such
provisions, SBA is soliciting comments from the public on whether Sec.
107.830(c)(2) should be modified to clarify pro rata distributions of
prepayments in unitranche or multi-lender transactions (Loan and Debt
Securities) do not require SBA's prior written approval.
Furthermore, SBA is considering providing safe harbor from pre-
payment restrictions for SAFEs and convertible notes.
V. Section 107.865 Control of a Small Business by a Licensee
This regulation identifies limitations on the ability a Licensee to
take ``Control'' as defined in Section 107.50, over a Small Business.
In general, the regulations permit Licensees to take Control for up to
7 years. Although buyout funds often take control of a small business
at first Financing, SBA believes that Accrual SBICs should limit
ownership at first Financing to less than 50%. SBA is proposing to add
this restriction to Accrual SBICs to ensure that such SBICs are
performing growth and venture capital Financings and not buyout
transactions. SBA recognizes that after financing a Portfolio Concern,
the Licensee may need to own a higher percentage of the Small Business
Concern to help protect its initial investment. SBA is proposing this
restriction only at the initial Financing. SBA proposes that the less-
than-50% ownership requirement restriction at Initial Financing would
not apply to Financings of a re-lender or re-investor performed under
Sec. 107.720(a)(2). SBA recognizes that the relender/reinvestor may be
a private equity or venture capital fund that is underserved based on
the ownership and management or its geographic location. Regardless, if
a Licensee is one of the first investors into the fund, serving as the
anchor investor, initially it may own more than 50% of the fund. SBA
does not want to discourage this practice, since such anchor investors
have been cited as playing an important role in establishing Impact
Funds that may be directed to critical underserved areas and attracting
other investors into the fund. (See Harvard Business School: ``Anchors
Aweigh: Analysis of Anchor Limited Partner Investors in Impact
Investment Funds'', by Shawn Cole, T. Robert Zochowski, Fanele
Mashwama, and Heather McPherson, 2020. Final-Anchors-Aweigh.pdf
(<a href="http://hbs.edu">hbs.edu</a>)). SBA is seeking public comment.
W. Section 107.1000 Non-Leveraged Licensees--Exceptions to the
Regulations
This regulation identifies exceptions to the regulations for
Licensees without Leverage. SBA proposes to incorporate the term Non-
leveraged Licensee as proposed in II.A.
X. Section 107.1120 General Eligibility Requirements for Leverage
This regulation identifies general requirements to be eligible for
Leverage. Paragraph (c) references Sec. 107.210 concerning minimum
private capital requirements. SBA proposes to amend paragraph (c) to
incorporate Public Law 115-133 by adding an exception to the $5 million
minimum Regulatory Capital requirement if the SBIC was licensed because
they are headquartered in an Underlicensed State. As identified in
Sec. 107.1150, such Licensees will be limited to Leverage up to 100%
of Regulatory Capital until they raise $5 million in Regulatory
Capital.
Y. Section 107.1130 Leverage Fees and Annual Charges
This regulation identifies the fees and charges associated with SBA
guaranteed Leverage. Currently the title identifies Annual Charges as
``additional charges''. SBA proposes to change the title to clarify
that the additional charge refer to the Annal Charge as discussed in
Sec. 107.50.
Paragraph (d)(1) discusses the Annual Charge required for
Debentures, noting that it only applies to Debentures issued on or
after October 1, 1996, and that it does not apply to Leverage issued
prior to that date. Since all Debentures outstanding were issued on or
after October 1, 1996, SBA proposes to remove this language.
SBA further proposes to set the minimum Annual Charge to 0.5% or 50
basis points. The fiscally responsible administration of the program
requires a minimum Annual Charge on outstanding leverage be established
to address the long-term variances in
[[Page 63447]]
losses. The historical losses vary greatly as a result of national
economic health and private equity and venture fund vintage year
performance. As a consequence, SBA experiences many years in which
there are zero or minimal SBIC transfers to liquidation status and a
few years in which there are numerous failures with resulting losses to
SBA.
The change will protect the government from significant losses,
increase the prospects of preserving a zero or negative subsidy cost
across program cohorts, enhance the long-term ability of SBA to provide
guarantees to SBICs, license more applicants, and indirectly provide
greater patient capital to qualifying small businesses.
Z. Section 107.1150 Maximum Amount of Leverage
Current Sec. 107.1150 identifies the maximum amount of a Leverage
for a section 301(c) Licensee. SBA approves Leverage commitments for
those Licensees that were licensed under the now repealed Section
301(d) for Specialized SBICs. SBA proposes to correct the language to
apply to all Leveraged Licensees.
Paragraph (a) sets forth the maximum Leverage for an ``Individual
Licensee.'' SBA proposes to clarify that per the proposed definition of
``Leverage,'' the maximum Leverage includes both the principal and
accrued interest associated with the Accrual Debenture. SBA also
proposes to add that if a Licensee is headquartered in an Underlicensed
State and has less than $5 million in Regulatory Capital, they are
limited to one tier of Leverage.
Paragraph (b) sets the maximum Leverage for multiple licensees
under Common Control, as defined under Sec. 107.50. SBA proposes to
clarify that similar to the requirements for an ``Individual
Licensee,'' the interest associated with the Accrual Debenture will be
used to calculate the maximum Leverage across all Licensees under
Common Control.
AA. Section 107.1220 Requirement for Licensee To File Quarterly
Financial Statements
This regulation currently requires SBICs with outstanding Leverage
commitments to submit quarterly Form 468s within 30 days after the
close of each quarter. SBA proposes to clarify that this requirement
pertains to all Leveraged Licensees and to allow 45 days after each
quarter, commensurate with portfolio valuation due dates as proposed
under Sec. 107.503 and Sec. 107.650.
BB. Section 107.1830 Licensee's Capital Impairment--Definition and
General Requirements
This regulation currently requires Leveraged Licensees to calculate
their capital impairment percentage (``CIP''), identifies the maximum
CIP allowable, and requires them to report to SBA if they have a
condition of capital impairment. Paragraph (a) currently identifies
that this section only applies to leverage issued on or after April 25,
1994, and identifies alternate requirements for Leverage issued prior
to that date. Since all Leverage currently held by operating SBICs was
issued after April 25, 1994, SBA is removing obsolete language in this
paragraph. Section 107.1850 applies to all Leveraged Licensees with
outstanding Leverage.
Paragraph (e) requires Licensees to calculate their CIP and notify
SBA if they have a condition of capital impairment. Paragraph (f) gives
SBA the right to redetermine the CIP at any time. SBA is proposing to
change this requirement such that SBA will calculate the Licensee's CIP
each quarter and notify the SBIC if they are capitally impaired. Since
SBA is calculating the CIP, SBA also proposes to remove paragraph (f).
CC. Section 107.1840 Computation of Licensee's Capital Impairment
Percentage
This regulation defines how to compute a Licensee's CIP. Since SBA
is proposing to calculate the CIP and notify Licensees if they have a
condition of Capital Impairment, SBA proposes to make related changes
to this regulation.
DD. Section 107.1845 Determination of Capital Impairment Percentage for
Early Stage SBICs
This regulation defines how to compute an Early Stage SBIC's CIP.
Since SBA is proposing to calculate the CIP and notify Licensees if
they have a condition of Capital Impairment, SBA proposes to make
related changes to this regulation.
EE. Section 107.1850 Enhanced Monitoring
For more than twenty years, Licensee Leverage default rates have
averaged less than 16%. While this is a relatively small percentage of
Licensees, these Licensees introduce risk to the sustainability of the
SBIC program and SBA. In an effort to proactively identify and manage
risk, SBA proposes to introduce Enhanced Monitoring. A Licensee can be
added to Enhanced Monitoring status for a series of actions, bottom
quartile performance relative to the Licensee's stated benchmark for
more than four consecutive quarters, or reporting failures defined in
SBIC program policies and procedures. While on Enhanced Monitoring
status, the Licensee will be required to file Form 1031 on a more
frequent basis, and upon request, conduct portfolio review meetings
with the SBA. The Licensee will be notified of their Enhanced
Monitoring status upon determination. Once the events that warranted
Enhanced Monitoring are addressed to SBA's satisfaction, Licensees will
be notified that they are removed from Enhanced Monitoring. A series of
performance metrics will be reviewed collectively to assess a holistic
picture of performance. Of those metrics, TVPI or DPI metrics in the
bottom quartile for four consecutive quarters relative to the
Licensee's primary benchmark for the applicable vintage year can result
in a Licensee being added to the Enhanced Monitoring status.
FF. Section 121.103 Small Business Size Regulations: How does SBA
determine affiliation?
In 13 CFR part 121, SBA sets forth size standards and defines a
business's size to include the size of the affiliates of the business,
subject to certain exceptions. One of these exceptions, Sec.
121.103(b)(5)(vi), applies only to financial, management, and
assistance under the Act and is intended to exclude Traditional
Investment Companies from affiliation coverage. The term Traditional
Investment Companies generally includes issuers that would be
``investment companies,'' as defined under the Investment Company Act
of 1940 (the ``1940 Act''). It also includes all 3(c)(1) private funds
``not registered under the 1940 Act because they are beneficially owned
by less than 100 persons, if the company's sales literature or
organizational documents indicate that its principal purpose is
investment in securities rather than the operation of commercial
enterprises.'' This exception to the SBA affiliation requirement was
provided to allow SBIC Financings with other private equity, private
credit, and venture capital funds since co-investment and syndication
between such funds is typical and increases the amount of private
capital available for small businesses. Under its modernization and
improvement efforts (see I.D.), SBA received comments suggesting that
this exception be expanded to include private funds that are exempt
from registration requirements under 3(c)(7) of the 1940 Act. SBA's
regulations and determinations are not determinative as
[[Page 63448]]
to whether a licensed Traditional Investment Company must comply with
the 1940 Act. SBA invites public comment.
III. Compliance With Executive Orders 12866, 12988, 13132, 13563, and
13175, the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the
Regulatory Flexibility Act (5 U.S.C. 601-612)
A. Executive Order 12866
The Office of Management and Budget has determined that this
proposed rule constitutes a ``significant regulatory action'' under
Executive Order 12866. SBA has drafted a Regulatory Impact Analysis for
the public's information below. SBA requests comments on the data and
methods used to estimate the impact of this regulatory action. Each
section begins with a core question.
1. Regulatory Objective of the Proposal
Is there a need for this regulatory action?
This proposed rule is intended to reduce barriers to program
participation for funds investing in (i) underserved communities and
geographies, (ii) capital intensive investments, and (iii) technologies
critical to national security and economic development. In this
proposed rule, SBA would introduce an additional type of SBICs
(``Accrual'' SBICs) to increase program investment diversification and
patient capital financing for small businesses and modernize rules to
lower financial barriers to program participation. The new Accrual
Debenture allows more flexibility in financing to increase
participation of SBICs capable of addressing identified capital access
gaps and vulnerability in the U.S. small business segment.
Additionally, this proposed rule introduces a Qualified Line of Credit
that does not require SBA approval while enabling greater access to a
capital call line to fund commitments. The aforementioned benefits and
attractiveness of the proposed Accrual Debenture will also reduce some
of the previously perceived disadvantages to being an SBIC, as opposed
to the non-SBIC private market. The proposed revisions to Sec. 107.720
should improve the SBIC program's investment diversification and create
more program entry points for new fund managers. This proposed rule
also reduces barriers by revising reporting requirements that may allow
increased use of valuation policies that are consistent with GAAP. This
proposed rule will help SBA implement Executive Order (``E.O.'') 13985,
Advancing Racial Equity and Support for Underserved Communities Through
the Federal Government by reducing financial and time barriers to
participate in the SBIC program and modernizing the program's license
offerings to align with a more diversified set of funds investing in
underserved small businesses. The proposed rule would also incorporate
the statutory requirements under Public Law 115-333, titled ``Spurring
Business in Communities Act of 2017'', enacted on December 19, 2018.
The Agency believes it is necessary to reduce barriers to
participation and diversify its patient capital and long-term loan
program for long-term program stability and mission effectiveness. This
will simultaneously diversify the sources and types of financing
available to underserved small businesses and small businesses
manufacturing products and technologies critical to national security
and U.S. economic competitiveness. The Agency also believes that to be
effective in delivery, it needs to streamline and reduce regulatory
burdens to facilitate robust participation in its patient capital and
long-term loan program which are responsible for enabling access to
capital for underserved U.S. small businesses across the country.
By offering an alternative to a semi-annual interest payment
Debenture structure for all SBIC licensees not taking a control-
position in small businesses, and to licensees with over 75% of capital
earmarked for long-term equity investment in small businesses to help
them grow and scale, SBA strives to increase equity funding available
to underserved small business owners and unlock equity as a source of
funding for many small business owners while still maintaining an
expected zero subsidy cost in the program. This alternative structure
accommodates a longer horizon for investments in small businesses that
might require more patient capital. SBA has confidence this goal will
be achieved while continuing to maintain a zero-subsidy based on
extensive analysis of the performance of private funds over the last 20
years from Pitchbook and as supported by the 2021 Knight Diversity of
Asset Manager Research Series \1\ which found that, ``diverse-owned
firms have low levels of representation across each asset class;
however, they exhibit returns that are not significantly different than
non-diverse-owned firms.'' SBA is revising its Debenture and license
regulations in response to continuing requests by SBA's participating
SBIC licensees and the public. SBA believes that revising its Debenture
and license regulations will result in expansion of access to capital
for those who cannot obtain adequate patient capital from traditional
sources of funding, while decreasing time and cost associated with
applying for an SBIC license. Greater access to capital is bolstered by
the revisions enabling SBA to offer a debenture with terms and
regulations aligned to the cash flows of a broader base of private
funds as well as a reduction in cost burden to apply for and
participate in the SBIC Program.
---------------------------------------------------------------------------
\1\ Knight Diversity of Asset Managers Research Series:
Industry--Knight Foundation.
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2. Benefits and Costs of the Rule
What are the potential benefits and costs of this regulatory action?
SBA does not anticipate significant additional costs or impact on
the subsidy to operate the SBIC program under these proposed
regulations. Since the SBA has existing authority to license and
provide funding to equity-oriented and debt-oriented private funds,
there is no request for additional funding.
Currently SBICs distribute about $1.5 billion or more per year in
profit distributions to Limited Partners. SBA's regulations permit
SBICs to distribute profits to Limited Partners without any
corresponding repayment of SBA Leverage. SBA is proposing that SBICs
first pay all accrued interest and annual charges, then repay its
Leverage on a pro rata basis (in step) with its Limited Partners. Based
on analysis of average cash flows regarding private funds, our
expectation is that this will improve the likelihood that SBA will be
repaid on the same schedule as Limited Partners regardless of the
investment strategy of the SBIC fund. SBA invites public comment.
Under these proposed regulations, the SBA anticipates SBIC program
administrative costs to decline over time due to streamlining of
regulatory filing and reduction in duplicative data reporting across
multiple filings. Furthermore, the proposed regulations include changes
which reduce bureaucratic processes, such as approving the SBIC's total
commitment at licensing, reducing SBA approvals for certain conflicts
of interest by creating additional safe harbors, and approving GAAP
compliant valuations for Non-leveraged licensees. SBA believes such
changes will help SBA improve its response times and enable personnel
to focus on customer relationships and monitoring its funds. In
revising the SBIC Debenture offering into two categories of Debentures,
``Debenture'' and ``Accrual Debenture'' available to eligible SBIC
licensees under 13 CFR 107.50, SBA anticipates de minimis impact on the
subsidy for the SBIC
[[Page 63449]]
program. Currently, as part of its licensing process, SBA reviews
approximately 70 license requests annually and declines 10 to 15
percent, or 8 to 10 requests, due to poor performance, negative
diligence and/or regulatory conflict issues. These 70 applications
represent the total annual license applications for non-levered and
Debenture SBICs combined. Two-thirds of these applications are
submitted by entities with existing SBIC licensees requesting a license
for a subsequent licensed SBIC fund. The approximate total number of
licenses approved annually in the SBIC program is 25. Additionally,
federally regulated private equity funds must comply with the
requirements from relevant Federal regulating entities. Private equity
funds must also abide by the terms of their investor agreements, such
as a limited partnership agreement, and fulfill their fiduciary
obligation to their investors. Because of these requirements, the SBA
anticipates these licensed SBIC funds will continue making investment
decisions based on their fiduciary responsibility and terms of their
investor agreements which limits risk to the SBA. Regulated SBIC
licensees must comply with the business plan and investor agreements
submitted to SBA while operating an SBIC license. Licensees will
benefit by no longer being required to submit 1031 financing reports
within 30-days of financing pursuant to Sec. 107.640, instead filing
at the end of each quarter, unless the licensee is subject to Enhanced
Monitoring, as previously mentioned. This will reduce paperwork and the
reporting burden on SBIC licensees. As a result of this revision, SBA
expects a decrease in the time for small businesses to access capital
at critical moments which will in turn help more small businesses grow
and scale. Furthermore, this will decrease SBA's administrative costs.
SBA does not anticipate significant additional costs or impact on
the subsidy to operate the SBIC program under the proposed regulations
at 13 CFR 107.50 regarding the accrual license and accrual Debenture.
One Debenture structure limits accessibility to SBA's patient equity
and long-term private loan program, with an outsized impact on
underserved small business owners who may struggle to access
traditional sources of capital. SBA anticipates that providing clear
and streamlined regulatory guidance, regulatory fees aligned with the
size and scale of SBIC applicants and licensees, and a second Debenture
structure to capital access gaps will result in an increase in the
number of and diversity of participating SBIC licensees and will result
in more underserved small business owners obtaining access to patient
equity capital or long-term loans and invites public comment on this
matter.
3. Alternatives
What alternatives have been considered?
SBA considered eliminating additional regulatory burdens, such as
shifting entirely to FASB GAAP-compliant valuation reports and
determined that the proposed rules strike the right balance in
responsibly streamlining regulations without substantially increasing
the risk of waste, fraud, or abuse of the programs or otherwise
threatening the integrity of the SBIC program or taxpayer dollars.
Possible alternatives included eliminating more regulatory burdens, but
such a course would require more time for SBA to consider the impact of
these eliminations. After considering feedback from stakeholders, SBA
qualitatively determined that benefits of a timely issuance of a rule
with the included regulatory relief and measures to implement Executive
Order 13985 outweighed the benefits of a delay to give the agency more
time to consider further eliminations of regulatory burdens. Regarding
Debenture instrument structure and license type, SBA has implemented
several variations of its SBIC Debentures to increase program alignment
and accessibility for new patient capital funds in the past as
discussed above, and SBA has determined from these past experiences the
simplest rules proposed herein were the least burdensome.
B. 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 burden. The action does not
have preemptive effect or retroactive effect.
C. Executive Order 13132
This proposed 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.
D. Executive Order 13175
This proposed rule does not have tribal implications under
Executive Order 13175, Consultation and Coordination with Indian Tribal
Governments, because it would not have a substantial direct effect on
one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
E. Executive Order 13563
1. Did the agency use the best available techniques to quantify
anticipated present and future costs when responding to E.O. 12866
(e.g., identifying changing future compliance costs that might result
from technological innovation or anticipated behavioral changes)?
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, are
included above in the Regulatory Impact Analysis under Executive Order
12866.
2. Public participation: Did the agency: (a) Afford the public a
meaningful opportunity to comment through the internet on any proposed
regulation, with a comment period that should generally consist of not
less than 60 days; (b) provide for an ``open exchange'' of information
among Government officials, experts, stakeholders, and the public; (c)
provide timely online access to the rulemaking docket on
<a href="http://Regulations.gov">Regulations.gov</a>; and (d) seek the views of those who are likely to be
affected by rulemaking, even before issuing a notice of proposed
rulemaking?
The proposed rule will have a 60-day comment period and will be
posted on <a href="http://www.regulations.gov">www.regulations.gov</a> to allow the public to comment
meaningfully on its provisions.
F. Paperwork Reduction Act, 44 U.S.C., Ch. 35
SBA has determined that this proposed rule would impose additional
reporting and recordkeeping requirements under the Paperwork Reduction
Act. Generally, this rule proposes changes to two information
collections used in the SBIC program: (1) SBA Form 468 ``SBIC Financial
Reports'' to include GAAP financial performance metrics, the number of
jobs sustained and created, and voluntary demographic information at
the SBIC management level; and, (2) SBA Form 1031 ``Portfolio Financing
Report'' to decrease the current frequency of
[[Page 63450]]
reporting on a per-financing basis as-of the date of a financing's
close to quarterly reporting of all SBIC financings within a given
quarter, no less than 30 days after the calendar year quarter-end.
The title, summary description of the information collection, and
the proposed changes to SBA Form 468 and SBA Form 1031 are discussed
below with an estimate of the revised annual burden. Included in the
estimates are time for reviewing instructions, searching existing data
sources, gathering and maintaining the data needed, and completing and
reviewing each collection of information.
Title: Portfolio Financing Report, SBA Form 468 (OMB Control Number
3245-0063).
Description of Respondents: Small Business Investment Companies.
Estimated Number of Respondents: 406.
Estimated Annual Responses: 1,002.
Estimated Annual Hour Burden: 24,708.
Summary: To obtain the information needed to carry out its
oversight responsibilities under the Small Business Investment Act of
1958 (the ``Act''), SBA requires SBICs to submit financial statements
and supplementary information on SBA Form 468. SBA uses this
information to monitor SBIC financial condition and regulatory
compliance, for credit analysis when considering SBIC leverage
applications, and to evaluate financial risk and economic impact for
individual SBICs and the program as a whole.
Section 310(d)(1)(C)(i) of the Act requires SBICs to submit audited
financial statements to SBA at least annually. SBA regulations at 13
CFR 107.630 requires the use of SBA Form 468 when submitting the
financial statements and supporting documentation. The information
collected is used to determine the creditworthiness of an SBIC when
considering its leverage application and to monitor its financial
condition after assistance is provided. The information is also used to
evaluate an SBIC's compliance with certain regulations, such as the
activity requirements in 13 CFR 107.590 and the portfolio
diversification requirements in 13 CFR 107.740.
To date, SBA's Form 468 reporting requirements have been tailored
to satisfy SBA's specific regulatory and credit risk analytical
requirements using SBA's guidelines on accounting principles and
valuations. Many SBIC investors request GAAP financial information from
SBICs, and SBA understands that all or substantially all SBICs
currently prepare data under GAAP principles in addition to under SBA's
accounting and valuation guidelines applicable to the SBA Form 468.
Therefore, SBA anticipates the addition of GAAP financials in general
to have a de minimis impact on calculating burden, as this information
would be readily available to SBICs as part of the normal course of
business.
Specifically, SBA will be requesting from SBICs on SBA Form 468 the
following metrics that SBICs already calculate using GAAP-audited
financial data for reports to their private investors: (1) Net Total
Value to Paid In Capital (TVPI)--the total distributions, including
both cash and distributed securities (valued as of the distribution
date) plus the net asset value of a private fund's portfolio net of
carried interest and expenses, divided by the capital that has been
paid in by investors; (2) Net Distributions to Paid In Capital (DPI)--
total distributions, including both cash and distributed securities
(valued as of distribution date), a private fund has returned to
investors net of fund expenses and carried interest, divided by the
amount of money investors have paid into the fund; (3) Multiple on
Invested Capital (MOIC)--the total gross realized and unrealized value
generated by a private fund's portfolio, divided by the total amount of
capital invested into the portfolio concerns by the fund; and, (4) Net
Internal Rate of Return (IRR)--the rate at which the private investor
cashflows and the unrealized net asset value minus any fund expenses
and carried interest are discounted so that the net present value of
cashflows equals zero.
Similarly, under this proposed rule, SBA seeks to obtain GAAP
financial data related to valuations in SBA Form 468 supplemental
valuation reports, which are currently requested semiannually. Under
this proposed rule, the reporting frequency would increase from
semiannually to quarterly to supplement the valuations data SBICs must
already report on SBA Form 468 Short Form for quarterly reporting. Many
SBIC investors request portfolio company valuations from SBICs using
GAAP principles, and SBA understands that all or substantially all
SBICs currently prepare such data under GAAP principles in addition to
under SBA's valuation guidelines applicable to the SBA Form 468.
Therefore, SBA anticipates the addition of GAAP financials in general
to have minimal impact on calculating increase to burden, as this
information should already be available to SBICs as part of the normal
course of business.
Additionally, this proposed rule would add three new reporting
requirements to the SBA Form 468. First, SBA will request the number of
jobs sustained and the number of new jobs created per each portfolio
company. Currently SBA request the number of employees per financing on
SBA Form 1031 with updates per follow-on financings. Under this
proposed rule, SBA seeks to ask for the number of jobs at the time of
initial financing (i.e., jobs sustained) with annual updates of new
jobs created (or lost) to obtain numbers of net new jobs created as a
result of SBIC financings. Second, under this proposed rule, SBA seeks
to request annual management contact and optional demographic
information at the SBIC management level. SBA seeks the mandatory
updates to management contact information in order to maintain and
improve customer relationship between Licensees and SBA Operations
Analysts. SBA seeks the voluntary information for reporting purposes to
assess the current SBIC program as related to efforts undertaken in
this proposed rule to promote reducing barriers to program
participation for new funds and promoting the diversification of SBIC
investments. Third, SBA proposed to require Leveraged SBICs licensed on
or after October 1, 2023, to provide a distribution waterfall that
repays SBA the principal balance on outstanding Leverage on at least a
pro rata basis with private investors. In order to provide consistency
on the distribution calculations, SBA seeks to collect the information
in a new ``Distribution Schedule'' from Leveraged SBICs licensed on or
after October 1, 2023. These new reporting requirements to the SBA Form
468 seek information that SBICs would have readily available under the
normal course of business and therefore should have a de minimis impact
on burden per SBIC.
The current annual burden for SBA Form 468 is estimated at 24,708
hours. Based on the current size of the SBIC program, SBA estimates the
new reporting requirements to increase the annual hourly burden by
1,950 hours for a total estimated annual burden of 26,658 hours.
Title: Portfolio Financing Report, SBA Form 1031 (OMB Control
Number 3245-0078).
Description of Respondents: Small Business Investment Companies.
Estimated Number of Respondents: 316.
Estimated Annual Responses: 2,695.
Estimated Annual Hour Burden: 728.
Summary: To obtain the information needed to carry out its program
[[Page 63451]]
evaluation and oversight responsibilities, SBA requires SBICs to
provide information on SBA Form 1031 each time financing is extended to
a small business concern. SBA uses this information to evaluate how
SBICs fill market financing gaps and contribute to economic growth and
monitor the regulatory compliance of individual SBIC. Currently, SBA
regulations require all SBICs to submit a Portfolio Financing Report
using SBA Form 1031 for each financing that an SBIC provides to a Small
Business Concern within 30 days after closing an investment. Under this
proposed rule, the reporting deadline for SBICs (except those subject
to Enhanced Monitoring) would change to 30 days after the end of the
calendar year quarter (March, June, September, and December) following
the closing date of a financing that an SBIC provides to a Small
Business Concern, rather than 30 days after the date of each financing.
Therefore, there would be no change to the annual burden estimated at
728 hours.
In addition to the reporting and recordkeeping changes proposed
under this rule, in an effort to ease burden, remove redundant or no
longer necessary data elements, and improve overall SBIC customer
experience, SBA will be submitting for OMB review and approval
revisions to both information collections. SBA invites comments on: (1)
whether the proposed changes to the SBA Form 468 and SBA Form 1031
adequately provide information for the assessment of SBIC program
performance, including whether the information will have practical
utility; (2) the accuracy of SBA's estimate of the burden of the
proposed collections of information; (3) ways to enhance the quality,
utility, and clarity of the information to be collected; and, (4) ways
to minimize the burden of the collection of information on respondents,
including through the use of automated collection techniques, when
appropriate, and other forms of information technology.
Please send comments by the closing date for comment for this
proposed rule to the address set forth above in the ADDRESSES section
and to Desk Officer for the Small Business Administration, Office of
Management and Budget, New Executive Office Building, Room 10202,
Washington, DC 20503.
G. Regulatory Flexibility Act, 5 U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires
administrative agencies to consider the effect of their actions on
small businesses, small organizations, and small governmental
jurisdictions. According to the Regulatory Flexibility Act (RFA), 5
U.S.C. 601, when an agency issues a rulemaking, it must prepare a
regulatory flexibility analysis to address the impact of the rule on
small entities. However, section 605 of the RFA allows an agency to
certify a rule, in lieu of preparing an analysis, if the rulemaking is
not expected to have a significant economic impact on a substantial
number of small entities.
This proposed rule likely will not impact a substantial number of
small entities relative to the population of existing private market
funds and private market asset management companies. Based on U.S.
capital inflows to private markets funds, SBIC Licensees represent only
about 1.4% of approximately 21,000 U.S. private equity, credit and
venture funds launched in the last calendar year.\2\ This rulemaking
will likely affect only a limited population of these entities,
specifically a limited population of existing and potential SBIC
Licensees. Small entities affected by this proposed rule are a unique
class comprised of SBIC Licensees. As of March 31, 2022, 294 SBIC
Licensees were in operation.\3\ SBA estimated that approximately 98
percent of these Licensees were small businesses based on NAICS
subsector code 523 (Securities, Commodity Contracts, and Other
Financial Investments and Related Activities) with annual receipts less
than $41.5 million. Of these 294 SBICs, 57 were Non-Leveraged
Licensees. The proposed rule distinguishes between Leveraged and Non-
Leveraged Licensees in applicability of some of its changes and other
proposed changes apply to all SBICs.
---------------------------------------------------------------------------
\2\ Data from Pitchbook May 31, 2022 and includes all U.S.
private equity, credit and venture funds launched in the last
calendar year. This includes large and small businesses. Please note
that the non-SBIC inflows and asset management companies will be
understated by an estimated 15-20% due to smaller firms not
reporting publicly. As a result, the percentage of inflows and asset
management companies in the industry that hold SBIC licenses are
likely even smaller than reported in statements above.
\3\ Small Business Investment Company (SBIC) Program Overview
Report for the Quarter Ending March 31, 2022 (<a href="http://sba.gov">sba.gov</a>).
---------------------------------------------------------------------------
The proposed rule applies to all SBICs, 98 percent of which SBA
estimates are small businesses. SBA estimates that the proposed rule
may affect all of these small businesses. If SBICs are considered as a
separate category from the other entities operating in the private
equity, credit, and venture funds sector, then the rule does affect a
substantial number of small businesses. However, the estimated burden
of this proposed rule, detailed below, of a maximum of approximately
$823 per SBIC before consideration of the offsetting cost savings of
this proposed rule, would likely not constitute a significant economic
impact on these small businesses, even where the significance threshold
is as low as one percent of revenue impacted.
The proposed rule increases the frequency of filing Form 468 from
semiannually to quarterly and requests more information on Form 468.
SBA does not expect that these changes related to Form 468 will impose
a significant burden because much of the required information is kept
in the normal course of business. SBA also notes that the changes
related to Form 468 are offset by reductions in other recordkeeping and
compliance costs. The first proposed offset is the facilitation of non-
leveraged SBICs' use of valuation policies that meet GAAP, which
decreases costs of reporting, recordkeeping, and compliance. The
proposed rule's second offset is the ``Qualified Line of Credit'' that
provides an exemption from the SBA prior approval requirement for some
lines of credit, thus reducing those SBICs' compliance costs.
Importantly, this proposed rulemaking does not directly impact
small businesses receiving investments, nor any investors or small
banks participating in the SBIC Licensee. This proposed rulemaking
regulates the relevant SBIC Licensees. The courts have held that the
RFA does not require a regulatory flexibility analysis for entities not
directly regulated by the agency's proposed rulemaking. Thus, SBA is
not required to conduct a reflexibility flexibility analysis on
potential downstream benefits or costs to those entities.
Even so, this proposed rulemaking also does not have a significant
economic impact on those small entities directly regulated under this
rulemaking. SBA expects the changes in this proposed rule to increase
program participation, access to capital, and diversity of investment
strategies. The proposed rule does not impose significant new
compliance requirements to SBIC program participants. The proposed rule
introduces some measures to strengthen risk controls that may impose
some reporting and compliance requirements to some program
participants. However, these reporting and compliance requirements
comprise nominal changes to frequency and content, particularly
compared to existing industry standards apart from the SBIC program.
The
[[Page 63452]]
current annual burden for SBA Form 468 is estimated at 24,708 hours.
Based on the current size of the SBIC program, SBA estimates the new
reporting requirements to increase the annual hourly burden by 1,950
hours for a total estimated annual burden of 26,658 hours. The current
annual burden for SBA Form 1031 is estimated at 728 hours and because
the deadline for reporting would only change to the quarter after the
date of financing, rather than 30 days after the date of each
financing, there would be no change.
This proposed rule also defines a new class of Debentures, called
accrual Debentures, that align with cash flows of equity-focused
strategies. SBA expects benefits to program participants from this
ability to align cash flows but is not able to quantify these benefits.
While SBA is unable to quantify the benefits and costs from these
various changes, it reasonably expects these changes to not have
significant impacts to the small entities that are program
participants.
Based on the foregoing, the Administrator of the SBA hereby
certifies that this rulemaking will not have a significant economic
impact on a substantial number of small entities. The SBA invites
comments from the public on this certification.
List of Subjects
13 CFR Part 107
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 121
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
Accordingly, for the reasons stated in the preamble, SBA proposes
to amend 13 CFR parts 107 and 121 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. 662, 681-687, 687b-h, 687k-m.
0
2. Amend Sec. 107.50 by:
0
a. Adding in alphabetical order the definitions of ``Accrual
Debenture'', ``Accrual Small Business Investment Company (``Accrual
SBIC'')'', and ``Annual Charge'';
0
b. Revising paragraph (2) of the definition of ``Associate'', the
definition of ``Charge'', and paragraph (3)(i) of the definition of
``Control Person'';
0
c. Adding in alphabetical order the definitions of ``Enhanced
Monitoring'', ``Final Licensing Fee'', ``GAAP'', and ``Initial
Licensing Fee'';
0
d. Revising the definition of ``Leverage'';
0
e. Adding in alphabetical order the definitions of ``Leveraged
Licensee'', ``Non-Leveraged Licensee'', and ``Qualified Line of
Credit'';
0
f. Revising the definition of ``Retained Earnings Available for
Distribution'';
0
g. Adding in alphabetical order the definitions of ``SBIC'', ``SBIC
website'', ``State'', ``Total Leverage Commitment'', ``Underlicensed
State'', and ``Wind-down Plan''; and
0
h. Removing the definition of ``Wind-up Plan''.
The additions and revisions read as follows:
Sec. 107.50 Definition of terms.
Accrual Debenture means a Debenture issued at face value and
accrues interest over its ten-year term of which SBA guarantees both
the principal and unpaid accrued interest. Licensees that issue an
Accrual Debenture which remains due at its ten-year maturity may apply
to SBA for a roll-over five-year Accrual Debenture which has a five-
year term.
Accrual Small Business Investment Company (``Accrual SBIC'') means
a Section 301(c) Partnership Licensee, licensed under Sec. 107.300
that performs or will perform at least 75% of its total financings in
Equity Capital Investments in small businesses and elects at the time
of licensing to issue Accrual Debentures.
* * * * *
Annual Charge means an annual fee on Leverage which is payable to
SBA by Licensees, subject to the terms and conditions set forth in
Sec. Sec. 107.585 and 107.1130(d).
* * * * *
Associate * * *
(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 Partnership Licensee. However, an entity Institutional Investor, as a
limited partner in a Partnership Licensee, is not considered an
Associate solely because such Person's investment in the Partnership,
including commitments, represents 10 percent or more but less than 50
percent of the Licensee's partnership capital, provided that such
investment also represents no more than five percent of such Person's
net worth.
* * * * *
Charge has the same meaning as Annual Charge.
* * * * *
Control Person * * *
(3) * * *
(i) Controls or owns, directly or through an intervening entity, at
least 30 percent of a Partnership Licensee or any entity described in
paragraphs (1) or (2) of this definition; and
* * * * *
Enhanced Monitoring has the meaning set forth in Sec. 107.1850.
* * * * *
Final Licensing Fee has the meaning set forth in Sec. 107.300.
* * * * *
GAAP means Generally Accepted Accounting Principles as established
by the Financial Accounting Standards Board (FASB) and refers to
established financial accounting and reporting standards for public and
private companies and not-for-profit organizations.
* * * * *
Initial Licensing Fee has the meaning set forth in Sec. 107.300.
* * * * *
Leverage means financial assistance provided to a Licensee by SBA,
either through the purchase or guaranty of a Licensee's Debentures, and
any other SBA financial assistance evidenced by a security of the
Licensee. For the Accrual Debenture, Leverage includes principal and
accrued unpaid interest.
* * * * *
Leveraged Licensee means a Licensee which has outstanding Leverage,
Leverage commitments, or intends to issue Leverage in the future.
* * * * *
Non-leveraged Licensee means a Licensee which has no outstanding
Leverage or Leverage commitment, no earmarked assets, and certifies to
SBA (in writing) that it will not seek Leverage in the future.
* * * * *
Qualified Line of Credit has the meaning as set forth in Sec.
107.550(c).
* * * * *
Retained Earnings Available for Distribution (READ) 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) in
accordance with Sec. 107.585 as a profit Distribution, or transfer to
Private Capital.
* * * * *
SBIC means Small Business Investment Company and has the same
[[Page 63453]]
meaning as ``Licensee'' as set forth in this section.
SBIC website means the website maintained by SBA at <a href="http://www.sba.gov/sbic">www.sba.gov/sbic</a>, which contains information on the SBIC program, including
notices, policies, procedures, and forms pertaining to the program.
* * * * *
State means one of the United States, the Commonwealth of Puerto
Rico, the District of Columbia, Guam, the United States Virgin Islands,
the Northern Mariana Islands, and American Samoa.
* * * * *
Total Leverage Commitment has the meaning set forth in Sec.
107.300.
* * * * *
Underlicensed State means a State in which the number of operating
licensees per capita is less than the median number of operating
licensees per capita for all States, where the per capita per State is
based on the most recent resident population published by the U.S.
Census as of the date of the calculation. SBA publishes a notice with
the current list of Underlicensed States on the SBIC website.
* * * * *
Wind-down Plan has the meaning set forth in Sec. 107.590.
0
3. Amend Sec. 107.150 by revising the paragraph (a) heading,
paragraphs (b)(1) and (2), the second sentence of paragraph (c)(1), and
paragraph (c)(2) to read as follows.
Sec. 107.150 Management-ownership diversification requirement.
(a) Diversification requirement. (Also referenced in this part as
the ``diversity requirement.'') * * *
(b) * * *
(1) General rule. Except as provided in paragraph (b)(2) of this
section, no Person or group of Persons who are Affiliates of one
another may own, directly or indirectly, more than 70 percent of your
Regulatory Capital or your Leverageable Capital.
(2) Exception. An investor that is a Traditional Investment
Company, as determined by SBA, may own and control more than 70 percent
of your Regulatory Capital and your Leverageable Capital. For purposes
of this section, a Traditional Investment Company must be either a non-
profit entity or a professionally managed firm. Such entity must be
organized exclusively to pool capital from multiple sources for the
purpose of investing in businesses that are expected to generate
substantial returns to the firm's investors. Such sources must provide,
in SBA's sole discretion, sufficient ownership diversification, in
terms of number of owners and concentration of ownership. In
determining whether a firm is a Traditional Investment Company for
purposes of this section, SBA will also consider:
(i) The degree to which the managers of the firm are unrelated to
and unaffiliated with the investors in the firm or non-profit entity.
(ii) Whether the managers of the firm are authorized and motivated
to make investments that, in their independent judgment, are likely to
produce significant returns to all investors in the firm or non-profit
entity.
(iii) Whether the firm or non-profit entity benefits from the use
of the SBIC only through the financial performance of the SBIC.
(iv) Other related factors.
(c) * * *
(1) * * * Such Persons must not be your Associates (except for
their status as your shareholders, limited partners, or members). * * *
(2) Look-through for Traditional Investment Company investors. SBA,
in its sole discretion, may consider the requirement in paragraph
(c)(1) of this section to be satisfied if at least 30 percent of your
Regulatory Capital and Leverageable Capital is owned and controlled
indirectly, through a Traditional Investment Company, by Persons
unaffiliated with your management.
* * * * *
0
4. Amend Sec. 107.210 by:
0
a. Removing the phrase ``Wind-Up Plan'' in paragraph (a) introductory
text and adding in its place the phrase ``Wind-down Plan'';
0
b. Revising paragraph (a)(1) introductory text;
0
c. Removing paragraph (a)(2); and
0
d. Redesignating paragraph (a)(3) as paragraph (a)(2).
The revision reads as follows:
Sec. 107.210 Minimum capital requirements for Licensees.
(a) * * *
(1) Licensees other than Early Stage SBICs. Except for Early Stage
SBICs, a Licensee must have Regulatory Capital of at least $5,000,000.
As an exception to this general rule, SBA in its sole discretion and
based on a showing of special circumstances and good cause, which
includes applicants that are headquartered in an Underlicensed State,
may license an applicant with Regulatory Capital of at least
$3,000,000, but only if the applicant:
* * * * *
0
5. Revise Sec. 107.300 to read as follows:
Sec. 107.300 License application form and fee.
SBA evaluates license applicants, giving first priority to
applicants headquartered in Underlicensed States with below median SBIC
Financing dollars per state, as determined by SBA and published
periodically in a notice on the SBIC website. Once priority is
established, such applicants will continue to receive priority
throughout the licensing process. SBA reviews and processes
applications in two review phases (initial review and final licensing),
as follows:
(a) Initial review. Except as provided in this paragraph, SBIC
applicants must submit a Management Assessment Questionnaire (``MAQ'')
consisting of SBA Form 2181 and Part I of SBA Form 2182 and the Initial
Licensing Fee, as defined in paragraph (c) of this section. An
applicant under Common Control with one or more Licensees must submit a
written request to SBA, and the Initial Licensing Fee, to be considered
for a license and is exempt from the requirement in this paragraph to
submit a MAQ unless otherwise determined by SBA in SBA's discretion.
(b) Final licensing. An applicant may proceed to the final
licensing phase only if notified in writing by SBA that it may do so.
Following receipt of such notice, in order to proceed to the final
licensing phase, the applicant must submit a complete license
application, including SBA Forms 2181, 2182, and 2183 which are
available on the SBIC website, within the timeframe identified by SBA
and the Final Licensing Fee, as defined in paragraph (c) of this
section. If you are seeking to be licensed as a Leveraged Licensee and
SBA approves your License, SBA will also approve your Total Leverage
Commitment, which means the total Leverage commitments available to you
for the life of your SBIC, subject to the provisions of Sec. Sec.
107.320 and 107.1150.
(c) Licensing Fees. SBIC Initial and Final Licensing Fees are non-
refundable fees determined as set forth below in paragraphs (c)(1) and
(c)(2).
(1) Initial Licensing Fee. The Initial Licensing Fee is based on
the applicant's fund sequence, where the fund sequence means the order
of succession of private equity or private credit funds for the same
fund management team and same strategy. SBA will determine the
applicant's fund sequence based on the management team's composition
and experience as a team. The Initial Licensing Fees are as follows:
[[Page 63454]]
Table 1 to Paragraph (c)(1)
------------------------------------------------------------------------
Initial
Fund sequence licensing fee
------------------------------------------------------------------------
Fund I.................................................. $5,000
Fund II................................................. 10,000
Fund III................................................ 15,000
Fund IV+................................................ 20,000
------------------------------------------------------------------------
Example 1 to paragraph (c)(1): If the management team members of
applicant DEF I consists primarily of the same team members of fund ABC
II and ABC II represented the second fund for those team members, SBA
will consider the fund sequence of DEF I as a Fund III, regardless of
the number in the applicant's name.
(2) Final Licensing Fee. The Final Licensing Fee is calculated as
the Final Licensing Base Fee plus 1.25 basis points multiplied by the
Leverage dollar amount requested by the applicant, where the Final
Licensing Base Fee is based on the applicant's Fund Sequence as
follows:
Table 1 to Paragraph (c)(2)
------------------------------------------------------------------------
Final
Fund sequence licensing base
fee
------------------------------------------------------------------------
Fund I.................................................. $10,000
Fund II................................................. 15,000
Fund III................................................ 25,000
Fund IV+................................................ 30,000
------------------------------------------------------------------------
(3) Resubmission Penalty Fee. The Resubmission Penalty Fee means a
$10,000 penalty fee assessed to an applicant that has previously
withdrawn or is otherwise not approved for a license that must be paid
in addition to the Initial and Final Licensing Fees at the time the
applicant resubmits its application.
(4) Inflation adjustments. SBA annually adjusts the Initial
Licensing Fee, Final Licensing Base Fee, and Resubmission Penalty Fee
using the Inflation Adjustment and will publish notification prior to
such adjustment in the Federal Register identifying the amount of the
fees.
0
6. Amend Sec. 107.305 by revising paragraphs (a), (b), and (c) to read
as follows:
Sec. 107.305 Evaluation of license applicants.
* * * * *
(a) Management qualifications, including demonstrated investment
skills and experience as a principal investor, or a combination of
investment skill and relevant industry operational experience; business
reputation; adherence to legal and ethical standards; record of active
involvement in making and monitoring investments and assisting
portfolio companies; managing a regulated business, if applicable;
successful history of working as a team; and experience in developing
appropriate processes for evaluating investments and implementing best
practices for investment firms.
(b) Performance of proposed investment team's prior relevant
industry investments as well as any supporting operating experience,
including investment returns measured both in percentage terms and in
comparison to appropriate industry benchmarks; the extent to which
investments have been realized as a result of sales, repayments, or
other exit mechanisms; evidence of previous investment or operational
experience contributing to U.S. domestic job creation and, when
applicable, demonstrated past adherence to statutory and regulatory
SBIC program requirements.
(c) Applicant's proposed investment strategy as presented in its
business plan, including adherence to the Statement of Policy as stated
in Section 102 of the Act, clarity of objectives; strength of
management's rationale for pursuing the selected strategy; compliance
with this part 107 and applicable provisions of part 121 of this
chapter; fit with management's skills and experience; and the
availability of sufficient resources to carry out the proposed
strategy.
* * * * *
0
7. Revise Sec. 107.320 to read as follows:
Sec. 107.320 Leverage Portfolio Diversification.
SBA reserves the right to maintain diversification in approving
Total Leverage Commitments for Leveraged Licensees with respect to:
(a) The year in which they commence operations;
(b) The geographic location (giving first priority to applicants
from Underlicensed States with below median SBIC Financing dollars per
state); and
(c) The asset class and investment strategy.
0
8. Amend Sec. 107.503 by:
0
a. Revising the last sentence of paragraph (a);
0
b. Adding a second sentence in paragraph (b)(2); and
0
c. Revising paragraphs (d)(1) and (4).
The revisions and addition read as follows:
Sec. 107.503 Licensee's adoption of an approved valuation policy.
(a) * * * These guidelines may be obtained from the SBIC website.
(b) * * *
(2) * * * If you are or applying to be a Non-leveraged Licensee,
SBA will generally approve a valuation policy that meets GAAP.
* * * * *
(d) * * *
(1) If you are a Leveraged Licensee, you must value your Loans and
Investments at the end of each quarter of your fiscal year, and at the
end of your fiscal year.
* * * * *
(4) You must report material adverse changes in valuations at least
quarterly, within forty-five days following the close of the quarter.
* * * * *
0
9. Revise Sec. 107.504 to read as follows:
Sec. 107.504 Equipment and office requirements.
(a) Technology. You must have access to technology to securely send
and receive emails, scan documents, and prepare and submit electronic
information and reports required by SBA.
(b) Accessible office. You must maintain an office that is open to
the public during normal working hours.
0
10. Revise Sec. 107.550 to read as follows:
Sec. 107.550 Prior approval of secured third-party debt of Leveraged
Licensees.
(a) Definition. In this section, ``secured third-party debt'' means
any non-SBA debt secured by any of your assets, including secured
guarantees and other contingent obligations that you voluntarily
assume, and secured lines of credit.
(b) General rule. If you are a Leveraged Licensee, you must get
SBA's written approval before you incur any secured third-party debt or
refinance any debt with secured third-party debt, including any renewal
of a secured line of credit, increase in the maximum amount available
under a secured line of credit, or expansion of the scope of a security
interest or lien. For purposes of this paragraph (b), ``expansion of
the scope of a security interest or lien'' does not include the
substitution of one asset or group of assets for another, provided the
asset values (as reported on your most recent annual Form 468) are
comparable.
(c) Qualified Line of Credit. Without obtaining SBA's prior written
approval, a Leveraged Licensee may have, incur, or refinance third
party debt that meets all of the following conditions:
(1) The third-party debt is a line of credit with maximum
availability limited to 20% of total unfunded
[[Page 63455]]
binding commitments from Institutional Investors.
(2) The term of the line of credit does not exceed 12 months, but
may be renewable, provided that each renewal does not exceed 12 months
and you remain in compliance with the conditions of this section.
(3) The line of credit is held by a Federally regulated financial
institution.
(4) All borrowings under the line of credit:
(i) Are only secured by unfunded Regulatory Capital up to 100
percent of the amount of the borrowing and 90 days of interest;
(ii) Are for the purpose of maintaining your operating liquidity or
providing funds for a particular Financing of a Small Business;
(iii) Must be fully repaid within 90 days after the date they are
drawn; and
(iv) Must be fully paid off for at least 30 consecutive days during
your fiscal year so that you have no outstanding third-party debt for
at least 30 consecutive days.
Sec. 107.570 [Removed and Reserved]
0
11. Remove and reserve Sec. 107.570.
0
12. Revise the undesignated center heading directly preceding Sec.
107.585 and revise Sec. 107.585 to read as follows:
Distributions and Reductions in Regulatory Capital
Sec. 107.585 Distributions and Reductions in Regulatory Capital.
(a) Non-Leveraged Licensees. If you are a Non-leveraged Licensee,
you may make distributions to your private investors without SBA prior
approval. At all times, you must retain sufficient Regulatory Capital
to meet the minimum capital requirements in the Act and in Sec.
107.210, unless such amounts are in accordance with your SBA approved
Wind-Down Plan (see Sec. 107.590). You must report any reductions of
Regulatory Capital to SBA within 30 days via an updated Capital
Certificate, Exhibit K in SBA Form 2183 (see Sec. 107.300).
(b) Leveraged Licensees licensed prior to October 1, 2023, and
Leveraged Licensees wholly owned by Business Development Companies that
are not Accrual SBICs. If you are a Leveraged Licensee and an Early
Stage SBIC, you are subject to the distributions identified in Sec.
107.1180. If you are either a Leveraged Licensee wholly owned by a
Business Development Company or a Leveraged Licensee licensed prior to
October 1, 2023, and are not an Accrual SBIC, you may distribute READ
to your private investors without SBA approval only after considering
any material adverse changes to your portfolio. You must obtain SBA's
prior written approval to reduce your Regulatory Capital by more than
two percent in any fiscal year. In seeking SBA's prior written
approval, you must disclose any material adverse changes or certify
that you have no material adverse changes and provide an updated Wind-
down Plan. You must retain sufficient Regulatory Capital to meet the
minimum capital requirements of Sec. 107.210 and sufficient
Leverageable Capital to avoid having excess Leverage in violation of
section 303 of the Act and Sec. 107.1150. You must report any
reductions of Regulatory Capital to SBA within 30 days via an updated
Capital Certificate, Exhibit K in SBA Form 2183 (see Sec. 107.300).
(c) Leveraged Licensees not wholly owned by a Business Development
Company licensed on or after October 1, 2023, and Accrual SBICs. If you
are a Leveraged Licensee licensed after October 1, 2023, or an Accrual
SBIC, unless you receive prior approval from the SBA for the purposes
of covering a tax distribution you may only distribute as follows:
(1) Payment of Annual Charges and Accrued Interest. Prior to any
distribution to your private investors, you must pay any Annual Charges
owed to SBA and all accrued interest on your outstanding Leverage.
(2) Calculate SBA's share of Distribution. You must make payments
to SBA on a pro rata basis with any distributions to your private
investors based on your Total Leverage Commitment relative to your
Initial Regulatory Capital calculated as follows: SBA's Share = Total
Distributions x [Total Leverage Commitment/(Total Leverage Commitment +
Initial Regulatory Capital)] where:
(i) Total Distributions means the total amount of distributions you
intend to make after paying accrued interest and Annual Charges.
(ii) Total Leverage Commitment is as defined in Sec. 107.300.
(iii) Initial Regulatory Capital means the Regulatory Capital
established at Licensing (see Sec. 107.300).
(3) Apply SBA Share. You must repay SBA Leverage in an amount no
less than SBA's Share to the extent of outstanding Leverage and report
the SBA calculation to SBA. If SBA's Share is greater than outstanding
Leverage and you have unfunded Leverage Commitments, you must submit a
Leverage Commitment cancellation equal to SBA's Share minus the SBA
Leverage redemption up to the unfunded Leverage Commitments.
(4) Distribute to Private Investors. After repaying accrued
interest, Annual Charges, and Leverage calculated as SBA's Share, you
may distribute READ to your private investors without SBA approval only
after considering any adverse changes to your portfolio. You must
obtain SBA's prior written approval to reduce your Regulatory Capital
by more than two percent in any fiscal year. In seeking SBA's prior
written approval, you must disclose any material adverse changes or
certify that you have no material adverse changes and provide an
updated Wind-down Plan. You must retain sufficient Regulatory Capital
to meet the minimum capital requirements of Sec. 107.210 and
sufficient Leverageable Capital to avoid having excess Leverage in
violation of section 303 of the Act and Sec. 107.1150. You must report
any reductions of Regulatory Capital to SBA within 30 days.
(5) Report distribution to SBA. You must report to SBA the
distribution, the calculations, and the amounts distributed to each
party as part of your annual and quarterly Form 468 (see Sec. Sec.
107.630 and 107.1220).
Example 1 to [Sec. 107.585(c)]: Your Total Leverage Commitments is
$50 million, and your Initial Regulatory Capital is $25 million. You
currently have $25 million in outstanding Leverage, $25 million in
unfunded Leverage Commitments, and $15 million in Leverageable Capital.
You owe $1 million in accrued interest and Annual Charges. You have $61
million to distribute.
Step 1: Payment of Annual Charges and Accrued Interest. You would
first pay the $1 million in accrued interest and Annual Charges.
Step 2: Calculate SBA's Share of Distribution. SBA's share is
calculated as $60 million x [$50 million/($50 million + $25 million)] =
$40 million.
Step 3: Apply SBA Share. You would repay $25 million in outstanding
Leverage and cancel $15 million of your outstanding Leverage
Commitments.
Step 4: Distribute to Private Investors. You would distribute $35
million to Private Investors.
Step 5: Report Distribution to SBA. You would then report the
distribution to SBA, detailing the amounts and calculations from each
of the above steps.
Sec. 107.590 [Amended]
0
13. Amend Sec. 107.590(c) by removing the phrase ``Wind-up Plan''
wherever it appears and adding in its place the phrase ``Wind-down
Plan''.
0
14. Amend Sec. 107.620 by redesignating paragraphs (b)(2) through (4)
as paragraphs (b)(3) through (5), respectively, and adding a new
paragraph (b)(2) to read as follows:
[[Page 63456]]
Sec. 107.620 Requirements to obtain information from Portfolio
Concerns.
* * * * *
(b) * * *
(2) Demographic information on the portfolio concern's ownership is
requested for reporting purposes only and is on a voluntary basis.
* * * * *
0
15. Amend Sec. 107.630 by revising the last sentence of paragraph (a)
introductory text, revising paragraph (d), and adding paragraph (e) to
read as follows:
Sec. 107.630 Requirement for Licensees to file financial statements
with SBA (Form 468).
(a) * * * You must file Form 468 within 90 calendar days of the end
of your fiscal year.
* * * * *
(d) 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
net jobs created and total 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.
(e) Fund management contact and optional demographic information.
The Licensee shall provide and update management contact information.
Demographic information is requested for reporting purposes only and on
a voluntary basis.
0
16. Revise Sec. 107.640 to read as follows:
Sec. 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
calendar days of the end of the calendar year quarter (March, June,
September, and December) following the closing date of the Financing.
If you are on the Watchlist, SBA may require more frequent reporting
(see Sec. 107.1850).
0
17. Revise Sec. 107.650 to read as follows:
Sec. 107.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 107.503. You must report such valuations to SBA
within 90 calendar days of the end of the fiscal year in the case of
annual valuations, and if you are a Leveraged Licensee within 45
calendar days following the close of other reporting periods. You must
report material adverse changes in valuations at least quarterly,
within 45 calendar days following the close of the quarter.
0
18. Amend Sec. 107.660 by revising paragraph (a) to read as follows:
Sec. 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, quarterly or
annual valuation data, fund management demographic information, letter,
or other publication concerning your financial operations or those of
any Portfolio Concern no later than 30 calendar days after you submit
the report to your private investors.
* * * * *
0
19. Amend Sec. 107.692 by revising paragraphs (b)(1) and (2) to read
as follows:
Sec. 107.692 Examination fees.
* * * * *
(b) * * *
(1) The Base Fee is calculated as $10,000 plus 0.035% of Total
Leverage Commitments (see Sec. 107.300), rounded to the nearest
dollar, with two exceptions:
(i) Non-leveraged Licensees with assets over $50 million at cost
will be charged an additional $20,000; and
(ii) Leveraged Licensees licensed prior to [DATE 60 DAYS AFTER DATE
OF FINAL RULE PUBLICATION IN THE FEDERAL REGISTER] will have a Base Fee
calculated as $10,000 + .035% multiplied by (outstanding Leverage + SBA
undrawn Leverage commitments).
(2) SBA annually adjusts the Base Fee using the Inflation
Adjustment and will publish notification prior to such adjustment in
the Federal Register identifying the amount of the fees.
* * * * *
0
20. Amend Sec. 107.720 by revising paragraph (a)(2) to read as
follows:
Sec. 107.720 Small Businesses that may be ineligible for financing.
(a) * * *
(2) Exception. You may provide Equity Securities to underserved
relenders or reinvestors (except banks or savings and loans not insured
by agencies of the Federal Government, and agricultural credit
companies) that make financings solely to Small Business Concerns that
a Licensee may directly finance under this part. 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.
* * * * *
0
21. Amend Sec. 107.730 by revising paragraphs (a)(1) and (d)(3)(iii)
and removing paragraph (d)(3)(iv).
The revisions read as follows:
Sec. 107.730 Financings which constitute conflicts of interest.
(a) * * *
(1) Provide Financing to any of your Associates, except for when
the Small Business that receives the Financing is your Associate,
pursuant to paragraph (8)(ii) of the definition of ``Associate'' in
Sec. 107.50, only because an investment fund that is your Associate
holds a 10% or greater equity interest in the Small Business and either
of the following conditions is met:
(i) You and the Associate investment fund previously invested in
the Small Business at the same time and on the same terms and
conditions; and you and the Associate investment fund are providing
follow-on financing to the Small Business at the same time, on the same
terms and conditions, and in the same proportionate dollar amounts as
your respective investments in the previous round(s) of financing.
Example 1 to paragraph (a)(1)(i): If you invested $2 million and
your Associate invested $1 million in the previous round, your
respective follow-on investments would be in the same 2:1 ratio.
(ii) An independent third party is investing in the Small Business
at the same time, on the same terms and conditions as you, and
represents a significant portion of the Financing.
* * * * *
(d) * * *
(3) * * *
(iii) You are a Non-leveraged Licensee, and your Associate either
is not a Licensee or is a Non-leveraged Licensee.
* * * * *
0
22. Amend Sec. 107.865 by revising the first sentence of paragraph (a)
and by adding paragraph (f) to read as follows:
Sec. 107.865 Control of a Small Business by a Licensee.
(a) * * * You, or you and your Associates (in the latter case, the
``Investor Group''), may exercise Control over a Small Business for
purposes connected to your investment, through ownership of voting
securities, management agreements, voting trusts, majority
representation on the board of directors, or otherwise, except as
identified under paragraph (f) of this section. * * *
* * * * *
(f) Financings for Accrual SBICs. Accrual SBICs may not own more
than 50% of a Small Business at initial
[[Page 63457]]
Financing, unless the Financing is an Equity Capital Investment in a
re-lender or re-investor pursuant to Sec. 107.720(a)(2).
0
23. Amend Sec. 107.1000 by revising the section heading and
introductory text to read as follows:
Sec. 107.1000 Non-leveraged Licensees--exceptions to the
regulations.
The regulatory exceptions in this section apply to Non-leveraged
Licensees.
* * * * *
0
24. Amend Sec. 107.1120 by revising paragraph (c)(1) to read as
follows:
Sec. 107.1120 General eligibility requirements for Leverage.
* * * * *
(c) * * *
(1) If you were licensed after September 30, 1996, under the
exception in Sec. 107.210(a)(1), you will not be eligible for Leverage
until you have Regulatory Capital of at least $5,000,000, unless you
were licensed because you are headquartered in an Underlicensed State.
* * * * *
0
25. Amend Sec. 107.1130 by revising the section heading and paragraph
(d)(1) to read as follows:
Sec. 107.1130 Leverage fees and Annual Charges.
* * * * *
(d) * * *
(1) Debentures. You must pay to SBA an Annual Charge, not to exceed
1.38 percent per annum, on the outstanding amount of your Debentures,
payable under the same terms and conditions as the interest on the
Debentures. For Leverage issued pursuant to Leverage Commitments
approved on or after October 1, 2023, the Annual Charge, established
and published annually, shall not be less than 0.50 percent per annum.
* * * * *
0
26. Amend Sec. 107.1150 by:
0
a. Revising the section heading;
0
b. Removing the phrase ``Section 301(c) Licensee'' in the introductory
text and adding in its place the phrase ``Leveraged Licensee''; and
0
c. Revising paragraphs (a) and (b).
The revisions read as follows:
Sec. 107.1150 Maximum amount of Leverage.
* * * * *
(a) Individual Licensee. Subject to SBA's credit policies, if you
are a Leveraged Licensee and not an Accrual SBIC, the maximum amount of
Leverage you may have outstanding at any time is the Individual
Maximum. If you are an Accrual SBIC, the maximum amount of Leverage and
accrued interest you may have outstanding at any time is the Individual
Maximum. The Individual Maximum means the lesser of
(1) 300 percent of your Leverageable Capital;
(2) 100 percent of your Leverageable Capital if you have less than
$5 Million in Regulatory Capital and you were Licensed because you are
headquartered in an Underlicensed State; or
(3) $175 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 $350 million. For any Accrual
SBIC under Common Control, the aggregate accrued interest associated
with Accrual Debentures will be included in determining whether this
maximum has been exceeded. However, for any Leverage draw(s) by one or
more such Licensees that would cause the aggregate outstanding Leverage
to exceed the Individual Maximum, 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).
Example 1 to paragraph (b): If a fund manager has both a regular
Leveraged Licensee with $250 million in outstanding Leverage and an
Accrual SBIC with $50 million in Accrual Debentures that could accrue
interest of $25 million at maturity, SBA will apply the principal from
the regular Leverage plus the $50 million from the Accrual Debenture
plus the $25 million in potential accrued interest for a combined total
of $325 million.
* * * * *
0
27. Revise Sec. 107.1220 to read as follows:
Sec. 107.1220 Requirement for Licensee to file quarterly financial
statements.
Leveraged Licensees must submit to SBA a Financial Statement on SBA
Form 468 (Short Form) as of the close of each quarter of your fiscal
year (other than the fourth quarter, which is covered by your annual
filing of Form 468 under Sec. 107.630(a)). You must file this form
within 45 days after the close of the quarter. You will not be eligible
for a draw if you are not in compliance with this Sec. 107.1220.
Sec. 107.1540 [Amended]
0
28. Amend Sec. 107.1540 by removing paragraphs (a) and (b).
0
29. Revise the subpart J heading to read as follows:
Subpart J--Licensee's Noncompliance
* * * * *
0
30. Amend Sec. 107.1830 by revising paragraph (e) to read as follows:
Sec. 107.1830 Licensee's Capital Impairment--definition and general
requirements.
* * * * *
(e) Quarterly computation requirement and procedure. SBA will
determine whether you have a condition of Capital Impairment as of the
end of each fiscal quarter. If SBA finds you capitally impaired, they
will notify you.
* * * * *
0
31. Amend Sec. 107.1840 by revising paragraph (a), paragraph (b)
introductory text, paragraph (c) subject heading, paragraph (c)(1), and
paragraph (d)(6) to read as follows:
Sec. 107.1840 Computation of Licensee's Capital Impairment
Percentage.
(a) General. This section contains the procedures SBA will use to
determine your Capital Impairment Percentage. SBA will compare your
Capital Impairment Percentage to the maximum permitted under Sec.
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 SBA
will not have to perform any more procedures in this Sec. 107.1840.
Otherwise, SBA will continue with paragraph (c) of this section. You
satisfy the test if the following amounts are both zero or greater:
* * * * *
(c) How to compute Capital Impairment Percentage. (1) If you have
an Unrealized Gain on Securities Held, SBA will compute your Adjusted
Unrealized Gain using paragraph (d) of this section. If you have an
Unrealized Loss on Securities Held, SBA will continue with paragraph
(c)(2) of this section.
* * * * *
(d) * * *
(6) If any securities that are the source of either Class 1 or
Class 2 Appreciation are pledged or encumbered in any way, SBA will
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.
0
32. Amend Sec. 107.1845 by revising paragraph (a) introductory text to
read as follows:
Sec. 107.1845 Determination of Capital Impairment Percentage for
Early Stage SBICs.
* * * * *
[[Page 63458]]
(a) To determine your Class 2 Appreciation under Sec.
107.1840(d)(3), SBA will use the following provisions instead of Sec.
107.1840(d)(3)(iii):
* * * * *
0
33. Revise Sec. 107.1850 to read as follows:
Sec. 107.1850 Enhanced Monitoring.
Under certain circumstances, SBA may place Licensees on Enhanced
Monitoring. ``Enhanced Monitoring'' means that SBA has determined,
based on certain triggers discussed in this section, a Licensee
requires a heightened level of reporting and monitoring.
(a) Enhanced Monitoring triggers. SBA may place you on Enhanced
Monitoring for any of the following:
(1) You perform an investment that is a direct violation of your
fund's stated investment policy as identified in its limited
partnership agreement (LPA) or as presented to SBA in its License
Application under Sec. 107.300.
(2) The key person clause in your LPA is invoked, due to a change
in personnel of management team members identified as key persons.
(3) You or your General Partner has been named as a party in
litigation proceedings.
(4) You have violated a material provision in your LPA or any Side
Letter.
(5) You rank in the bottom quartile for your primary benchmark and
vintage year after 3 years based on the private investor's Total Value
to Paid-In capital (TVPI), where TVPI is calculated as (cumulative
distributions to private investors plus net asset value minus expenses
and carried interest)/cumulative private investor paid in capital,
where net asset value is based on GAAP valuations.
(6) Your Leverage Coverage Ratio (LCR) falls below 1.25, where LCR
is calculated as (unfunded Regulatory Capital commitments plus net
asset value minus outstanding Leverage)/outstanding Leverage.
(7) You default on your interest payment and fail to pay within 30
days of the date it is due. (Note: This event represents an event of
default under Sec. 107.1810(f) for which SBA maintains its rights
under Sec. 107.1810(g) if the Licensee does not cure within 15 days.).
(b) Requirements for Licensees on Enhanced Monitoring. If SBA
places you on Enhanced Monitoring, you will be required to comply with
any or all of the following:
(1) You must submit Portfolio Company Financing Reports (SBA Form
1031s), required under Sec. 107.640, within 30 calendar days of the
financing date.
(2) You must participate in monthly portfolio reviews with SBA.
(3) You must file quarterly valuation reports on specific or all of
your portfolio company holdings, as requested by SBA.
(4) You must submit a letter formally requesting whether you may
submit a request for a subsequent fund if you are currently on Enhanced
Monitoring or have managed any Licensee on Enhanced Monitoring within
the last 12 months. If you have already submitted a request or are
otherwise in the Licensing process (see Sec. 107.300), SBA may suspend
processing your request until it is satisfied that its concerns are
resolved or disapprove your request for a subsequent fund. SBA
maintains the right to deny approval of any request to submit a
subsequent fund request or any subsequent fund request submitted under
Sec. 107.300.
(c) Removal from Enhanced Monitoring. SBA will remove you from
Enhanced Monitoring if the event that triggered your addition to
Enhanced Monitoring (see paragraph a in this section) is resolved to
SBA's satisfaction. Accordingly, SBA may require any or all of the
following resolutions:
(1) Successful completion of a portfolio review to confirm
compliance of your adherence to your investment policy.
(2) SBA's written approval of your key person resolution.
(3) SBA's written acknowledgement of pending litigation.
(4) SBA's written consent to the resolution of the LPA or side
letter violation.
(5) Two quarters of performance above bottom quartile based on the
TVPI, as calculated under paragraph (a) of this section.
(6) Two quarters of consistent reporting of your LCR, as calculated
under paragraph a, exceeding 1.25.
(7) You are current on your Leverage interest payments.
(d) Enhanced Monitoring Communications--(1) Notification to
Licensee. If you trigger any of the events under paragraph a, SBA will
notify you in writing that you have been placed on Enhanced Monitoring,
identify the event(s) which triggered your placement on Enhanced
Monitoring status, the actions you must take as noted under paragraph
b, and the remedies as identified under paragraph (c) of this section.
(2) Enhanced Monitoring Status Disclosure. SBA will not disclose
your Enhanced Monitoring status publicly.
(3) Removal from Enhanced Monitoring Status Notification. SBA will
provide you with written notice after SBA determines that you have
completed all remedies identified in your notification letter after it
is satisfied you complied with the requirements of paragraph (c) of
this section.
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
34. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, and
694a(9); Pub. L. 116-136, Section 1114.
0
35. Amend Sec. 121.103 by revising paragraph (b)(5)(vi) to read as
follows:
Sec. 121.103 How does SBA determine affiliation?
* * * * *
(b) * * *
(5) * * *
(vi) Entities determined by SBA to be Traditional Investment
Companies under 13 CFR 107.150(b)(2) and private funds exempt from
registration under the 1940 Act under section 3(c)(7) or 3(c)(1) of the
1940 Act.
* * * * *
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2022-22340 Filed 10-18-22; 8:45 am]
BILLING CODE 8026-09-P
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</html>Indexed from Federal Register on October 19, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.