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Rule2023-13981

Small Business Investment Company Investment Diversification and Growth

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Published

July 18, 2023

Effective

August 17, 2023

Issuing agencies

Small Business Administration

Abstract

On October 19, 2022, the U.S. Small Business Administration ("SBA" or "Agency") published a notice of proposed rulemaking ("NPRM" or "proposed rule") 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. The proposed rule introduced an additional type of SBIC ("Accrual SBICs") to increase program investment diversification and patient capital financing for Small Businesses, modernize rules to lower financial barriers to program participation, and incorporate the statutory requirements of the Spurring Business in Communities Act of 2017, which was enacted on December 19, 2018. This final rule implements proposed regulatory changes as modified to address comments SBA received.

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[Federal Register Volume 88, Number 136 (Tuesday, July 18, 2023)]
[Rules and Regulations]
[Pages 45982-46014]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-13981]

[[Page 45981]]

Vol. 88

Tuesday,

No. 136

July 18, 2023

Part II

Small Business Administration

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13 CFR Parts 107 and 121

Small Business Investment Company Investment Diversification and
Growth; Final Rule

Federal Register / Vol. 88 , No. 136 / Tuesday, July 18, 2023 / Rules
and Regulations

[[Page 45982]]

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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: Final rule.

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SUMMARY: On October 19, 2022, the U.S. Small Business Administration
(``SBA'' or ``Agency'') published a notice of proposed rulemaking
(``NPRM'' or ``proposed rule'') 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. The proposed rule introduced an additional type
of SBIC (``Accrual SBICs'') to increase program investment
diversification and patient capital financing for Small Businesses,
modernize rules to lower financial barriers to program participation,
and incorporate the statutory requirements of the Spurring Business in
Communities Act of 2017, which was enacted on December 19, 2018. This
final rule implements proposed regulatory changes as modified to
address comments SBA received.

DATES: This rule is effective August 17, 2023.

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#83eceaeaade5f1ecedf7ece5e5eae0e6c3bfe2a3ebf1e6e5be" 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: Nathan Putnam, Office
of Investment and Innovation, Small Business Administration,
<a href="/cdn-cgi/l/email-protection#355a5c5c1b53475a5b415a53535c5650750954155d47505308" 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 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 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 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 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. 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 instrument's
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 profits. Since over half of these SBICs were not profitable,
less than half of the $2.8 billion in prioritized payments advanced by
SBA were reimbursed by SBICs licensed in the Participating Securities
program. Due to the complexities associated with the statutory
Participating Securities 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 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 two years
of age at first financing. As a result, when the

[[Page 45983]]

``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
percent 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 percent 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. Notice of Proposed Rulemaking

The Small Business Investment Act of 1958, as amended (the ``Act'')
declares to be the policy of the Congress and the purpose of the Act to
improve and stimulate the national economy in general and the small-
business segment thereof. The Act states as the intention of Congress
``financial assistance under this Act, when practicable, priority be
accorded to small business concerns which lease or purchase equipment
and supplies which are produced in the United States'' and ``financial
assistance provided hereunder shall not result in a substantial
increase of unemployment in any area of the country.'' The Act further
authorizes the SBA Administrator ``to prescribe regulations governing
the operations of small business investment companies.''
On October 19, 2022, SBA proposed changes to 13 CFR part 107 (87 FR
63436) 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 rule also
was intended to 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
investing in underserved small businesses. Changes included (1)
implementing a new type of Debenture (``Accrual Debenture'') designed
to align with the cash flows of long-term, equity-oriented funds
(``Accrual SBICs''); (2) revising the existing prohibited investment
requirements under 13 CFR 107.720 that permit SBICs to invest in
relenders or reinvestors under specific circumstances; (3) modernizing
the licensing, operations, and examinations rules to lower costs and
administrative barriers faced by new funds applying to the SBIC
program; (4) implementing a formal licensee ``Watchlist'' process; (5)
implementing a consistent approach to investor and SBA distributions;
(6) implementing some of the modernization improvements it received
through a Federal Register notification (82 FR 38617) and round tables
in 2017; and (7) formally implementing the Spurring Business in
Communities Act, Public Law 115-333.

C. Comments

SBA received 15 comment letters related to the proposed rule or the
SBIC program and two comments that were not related to the proposed
rule or the SBIC program. Those comments that addressed the content of
the proposed rule or were pertinent to the rule are discussed in the
Section-by-Section Analysis below. Some of the comments related to the
SBIC program were not directly within the scope of the rule but are
briefly addressed below.
Comments Related to the SBIC Program But Not Directly Within Scope of
the Proposed Rulemaking
Three comments focused on the timeline of the SBIC licensing
process, a matter addressed in the context of applicants from
Underlicensed States within proposed changes to 13 CFR 107.300. One
comment focused on whether anticipated approval timeframes for
applicants who have successfully raised Private Capital could be
shortened. Two comments focused on how an expedited licensing process
would be valuable and how a clear, defined, expedited timeline could be
critical to increasing underserved fund manager applications. In
response to these comments, SBA intends to move forward with two
courses of action: (1) introduce an expedited subsequent fund licensing
process for eligible applicants while maintaining current risk
management standards and practices (see discussion of Expedited
Subsequent Fund licensing in section II.D. and revisions to 13 CFR
107.305, below), and (2) modify standard operating procedures to
increase transparency in the licensing process and decrease potential
tail-end delays.
One commenter recommended an amendment to 13 CFR 107.501 requiring
SBA to publish in the Federal Register the names of SBICs that were
licensed and the dates on which SBICs were licensed. SBA appreciates
this recommendation and will publish license approvals in the Federal
Register within 30 business days of the end of the month in which the
license was approved by the SBA Administrator.
One commenter encouraged SBA to underscore the importance of
operational capability to the SBIC program by adopting an exclusion
from the management fee offset requirement for fees paid by portfolio
companies to operations teams aligned formally with an SBIC licensee.
SBA agrees that operating partners, venture partners, portfolio
services teams and venture studio models provide valuable technical
assistance and networking for SBIC portfolio concerns. SBA recognizes
the management fee offset (including fees for services provided to
portfolio concerns) is often negotiated between private funds and their
limited partners and will approve the scope and type of services
included or excluded from management fee offsets during the licensing
process. Upon licensure, an SBIC Licensee must adhere to the scope of
the approved management fee plan.
One commenter suggested, in pursuit of increased fund manager
diversity, that SBA create new programs that help Licensees,
particularly new Licensees, increase their chances of success while
gaining valuable experience. SBA agrees with the posture of ``field-
building'' and seeks to do so in this final rule through (a) reducing
regulatory restrictions on investments in reinvestors and (b) the
introduction of the Accrual Debenture, both of which will enable access
to capital to more first-time and emerging fund managers through SBIC
fund-of-funds strategies.
One commenter suggested putting processes in place for SBICs to
collect and share data of entrepreneurs obtaining capital disaggregated
by gender, race, and ethnicity. SBA agrees that transparency into the
demographics, as well as more detailed geographic data, of portfolio
concerns and licensees will enable greater public understanding of the
SBIC program impact. As such, SBA is making modifications to existing
data collections that enable voluntarily reporting of this information
from licensees and their portfolio concerns.
One commenter suggested SBA work more closely with limited partners

[[Page 45984]]

(investors in SBICs) and share SBIC program financial returns
information, as it could help first-time and emerging managers raise
more Private Capital. SBA agrees with this comment. As such, SBA is
considering modifications to the existing Form 468 to consistently
collect industry standard investment performance metrics including
Total Value to Paid-in Capital, Distributed to Paid-in Capital,
Residual Value to Paid-in Capital, and Gross and Net Internal Rate of
Return on a quarterly and annual basis. This will enable SBA to
publicly report on the investment performance of the overall SBIC
portfolio, by vintage year, investment strategy and emerging vs.
established SBIC funds. SBA will not publicly disclose the investment
returns of individual Licensees.
One commenter suggested SBA create a diversity working group which
would include SBA staff, principals of SBIC Licensees, and industry
participants. This working group would support the stated efforts of
SBA to recruit a more diverse set of managers to the SBIC program. SBA
agrees with the substance of this comment and believe that this can be
addressed through the Agency's recently announced Federal Advisory
Committee (the SBA Investment Capital Advisory Committee) established
under the Federal Advisory Committee Act.
One commenter requested SBA consider rule changes now and in the
future that would further encourage the SBIC program to focus on
technology and tech-driven companies which address critical national
priorities, including addressing climate change, strengthening supply
chains, improving health outcomes, and bolstering national security.
SBA agrees with the substance of this comment. The program-wide
diversification rules support prioritization of undercapitalized
industries and technologies, particularly those aligned to seeding,
scaling and transitioning technologies critical to U.S. national
security.
One commenter expressed support for SBA's proposed rule extending
the affiliation exceptions under 13 CFR 121.103(b)(5) to private equity
partnerships organized as a 3(c)(7) funds. The commentator also
referenced a 2015 comment letter concerning 13 CFR 107.720(b) and
suggested further modification to SBA's passive business investment
rule. SBA does not intend to change the passive investment rules.
One commenter supports a rule that lowers barriers and advances
racial equity and asks that the rule consider opportunities to support
emerging managers. SBA agrees with the substance of this comment and is
implementing several program modernizations to support this objective
including removal of ``reinvestment'' restrictions which prohibit
Section 301(c) Licensees from investing in a fund-of-funds capacity in
emerging managers, scaled licensing fees, and reductions in
administrative burdens.
One commenter suggested SBICs licensed under the proposed rule
should be allowed to participate to a limited degree (10-15 percent of
the total invested into a company) in secondary sales--i.e.,
supplementary funding provided at financing for purposes other than
funding the operations of a Small Business. SBA agrees this has become
a standard industry practice. Current regulations do not restrict
partial secondary sales from current investors in future financing
rounds.
One commenter proposed an additional change to the definition of
Leverageable Capital by suggesting a definition change to the sum of
Regulatory Capital, excluding unfunded commitments, and the greater of
$0 or 50 percent times the total of the financed investments made by
the Licensee less the Leverage provided by SBA and Regulatory Capital,
excluding unfunded commitments. SBA appreciates this suggestion and
notes that SBA is revising the definition of Regulatory Capital to be
more explicit regarding how to interpret the exclusion clause. As such,
SBA is revising the exclusion of questionable commitments to clarify
that an unfunded commitment may be questionable due to lack of
enforceable legal agreements under United States law or an issue of
collectability for financial or any other reason, or both. SBA notes
that the unfunded commitment of an investor that has satisfied the
applicable net worth test set forth in the definition of Institutional
Investor will not be of questionable collectability (for financial
reasons) if the Licensee's Limited Partnership Agreement (or other
governing agreement) contains sufficient remedies against defaulting
investor to ensure collection. Furthermore, SBA is revising the
definition of Regulatory Capital to highlight the distinction between
Regulatory Capital and Leverageable Capital--i.e., that Regulatory
Capital which is not in the form of unfunded commitments is
Leverageable Capital.
General Comments About the Rulemaking
One commenter asked why the proposed rule refers to October 1,
2023, several times. SBA is removing the reference to October 1, 2023,
except with respect to implementation of the minimum Annual Charge. One
commenter suggested that SBA follow this comment period with an
``Interim Final Rule'' instead of a final rule. SBA has followed the
Federal rulemaking and comment process. During the 60-day public
comment period, SBA raised awareness for the proposed rule through
events noted on the Federal Register. (See, e.g., 87 FR 68109) The
comments received by SBA are robust and significant relative to
historical rulemaking feedback received on regulations governing the
SBIC program. SBA is confident that the robust engagement from the
public enables the agency to publish and implement a final rule.
One commenter stated that they are supportive of increased
``underserved'' focus. SBA appreciates support for the increased focus
on underserved communities and industries.

II. Section by Section Analysis

A. Section 107.50 Definition of Terms

In the proposed rulemaking, SBA proposed adding two terms
associated with the new Accrual Debenture discussed in section I.B. of
this rule: ``Accrual Debenture'' and ``Accrual Small Business
Investment Company (``Accrual SBIC'').'' The Accrual Debenture means a
Debenture issued at face value that accrues 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 primarily investing in the equity of or providing revenue-
based financing to Small Businesses.
One commenter supported the introduction of Accrual Debenture SBICs
and administrative changes to facilitate access for first-time fund
managers. SBA appreciates this support for the Accrual Debenture
financial instrument and administrative changes to facilitate access.
Two commenters supported expansion of the asset classes and
strategies of private funds participating in the SBIC program, yet had
concerns about incorporating ``highly risky, very long-term, early
investments which may span 10-15 years before failure or success are
determined.'' There were additional comments regarding the management
and oversight of taxpayer exposure to potential defaults and losses in
the SBIC Program. One commenter urged SBA to publicly produce the
distribution models displaying how the SBIC program will maintain a
zero-subsidy rate with the addition of an

[[Page 45985]]

alternative debenture instrument to the existing semi-annual interest
payment debenture instrument. SBA appreciates the public's concern for
portfolio risk management and credit risk management processes in a
Federal credit program. Among others, risks in private investing come
in many forms. including illiquidity risk, duration risk, volatility
risk, concentration risk, credit risk, and tail-event risk. Over
several decades, SBA has found that illiquidity risk, duration risk,
and strategy concentration risk correlate with the highest risk of
overall program losses. The Accrual Debenture instrument combined with
the portfolio diversification rules address these three primary risk
considerations through cash flow matching, duration and repayment
management, and guardrails to prevent the overall program from over-
concentrating in more volatile `risk-on' strategies. As with all
private fund investments, proper investment and operational due
diligence and ongoing portfolio monitoring is essential to safeguarding
capital.
Three comments remarked on the control provisions related to
Accrual SBICs. One comment was concerned that by excluding control
equity funds from securing licenses for the Accrual Debenture, SBA will
hamper its ability to achieve the goals of the SBIC program noting that
allowing control equity strategies will reduce the overall risk of the
new Accrual class. Another comment encouraged SBA to include buyout
funds in Accrual SBICs by removing the restriction that they are
required to own less than 50 percent at the time of initial financing.
SBA also received a comment noting that strict requirements may limit
the universe of investible companies and interest from investors and
suggested that SBA further study the potential impact of these
requirements. Finally, two comments raised general concerns around the
provision that Accrual SBIC licensees will generally own no more than
50 percent of the Small Business at initial Financing. SBA agrees with
the recommendation to encourage more private markets flexibility and
dynamism with the adoption of the Accrual Debenture instrument. As
such, SBA is removing both the language in the proposed rule which
restricted ownership of a portfolio concern at the time of initial
Financing to less than 50% and the guidance that at least 75% of
financing by an Accrual SBIC be classified as equity. SBA's objective
with the introduction of the Accrual Debenture is to offer a financial
product aligned to investment strategies with longer duration and
strategies with more episodic distributions to investors. The
introduction of the Accrual Debenture instrument is intended to ensure
that SBA can support the full spectrum and the dynamic nature of
private market investments in Small Businesses. Between the existing
Standard Debenture and the Accrual Debenture instrument, SBA will
increase program flexibility for greater private market participation
resulting in increased benefits to small businesses. One comment stated
that the increase in the oversight that the rule implements would
result in costs to the taxpayer or increased fees. That commenter
further noted that fee changes should consider rising interest rates
and that when capital is drawn incrementally, taxpayer losses
associated with rising inflation and interest rates are reduced. SBA
has taken such factors into account in the program subsidy model which
includes the President's Economic Assumptions. The model forecasts
interest rates based on macro-economic conditions. Interest rates are
set at the time of funding draws which mitigates risk of future
taxpayer losses.
One commenter expressed concerns that the nature of the repayment
terms of the Accrual Debenture could pose the same type of issues that
resulted from the Participating Securities program. SBA performed
extensive analysis and modeling of the historical defaults, repayments,
recoveries and losses across Debenture instruments and the
Participating Securities instrument when preparing the proposed
rulemaking.
The following table summarizes preliminary modeling outputs for
anticipated fiscal year cohort 2024 Accrual SBIC commitments.

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Lifetime defaults Lifetime
SBIC type Fiscal year (% of recoveries (% Net loss rate (%
cohort disbursements) of defaults) of disbursements)
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Accrual................................. 2024 35.78 67.77 11.53
----------------------------------------------------------------------------------------------------------------

SBA assumes a higher default risk profile and net loss rate for
anticipated Accrual Debenture Leverage compared to Standard Debenture
leverage. This assumption is supported by an analysis of third-party
private equity industry data and historical SBIC debenture performance
data. Because accrued interest and leverage is repaid as profit
distributions become available, SBA considered how fund performance
will impact the expected loss rate on Accrual Debentures. SBA therefore
estimated distribution to paid-in capital (DPI) and total value to
paid-in capital (TVPI) assumptions for the Accrual SBIC population
using custom venture capital and private equity benchmarks relevant to
anticipated Accrual SBIC funds. These distributional assumptions are
fed into a cash flow engine to estimate leverage repayments and
defaults for anticipated Accrual SBIC Leverage commitments. SBA
estimates the terminal DPI distribution for Accrual SBIC funds in the
table shown below. The median terminal DPI assumption is just above the
forecasted breakeven point to repay all accrued interest and leverage
(approximately 1.20). SBA forecasts defaults on funds assumed to have a
DPI at debenture maturity below the forecasted breakeven point.

--------------------------------------------------------------------------------------------------------------------------------------------------------
Metric 10th percentile 25th percentile 50th percentile 75th percentile 90th percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
DPI................................................................ 0.26 0.68 1.26 1.98 3.62
--------------------------------------------------------------------------------------------------------------------------------------------------------

After blending forecasted cash flows for anticipated Accrual and
Standard SBIC leverage and factoring in the estimated composition of
debenture leverage by fund type (Accrual vs. Standard), SBA forecasts a
0.00 percent subsidy rate in the debenture program. To maintain a 0.00
percent subsidy rate in the debenture program, SBA estimates an annual
fee charge landing between the annual charge implemented for fiscal
years 2022 and 2023.
Further, SBA has taken several steps to mitigate risk to the
program, such as limiting the leverage available to

[[Page 45986]]

individual Accrual SBICs to one and one quarter tiers of leverage in
relation to their Leverageable Capital and modifying the distribution
waterfall for Accrual Debenture SBICs to ensure that SBA receives
distributions on accrued interest and pro rata on principal with
distributions to the private investors. SBA retains the ability to take
action for regulatory defaults including uncured capital impairment,
which remains vital to protecting U.S. taxpayer dollars.
The Accrual Debenture instrument is based on the successful
features of the existing Debenture instrument with modifications to the
distribution waterfall and timing of interest payments to reduce the
risk of default and losses. The requirement for pro rata distributions
to SBA is specifically designed to avoid the repayment issues that
occurred in the Participating Securities program which included a
flawed time-based return metric that enabled Participating Securities
Licensees to pay a minimum amount to SBA and then forego future
distributions if the SBIC subsequently performed poorly.
After consideration of all public comments, SBA has modified the
final rule to state that the Accrual Debenture will only be available
to Accrual SBICs and Reinvestor SBICs, defined in Sec. 107.720, to
align with the types of long-duration growth investing they primarily
perform. Standard SBICs may only issue Standard Debentures and Discount
Debentures. Approval to operate as an Accrual SBIC or Reinvestor SBIC
is subject to SBA's investment due diligence, credit procedures, and
statutory limitations. The final rule defines an Accrual SBIC as a
Section 301(c) Licensee that elects 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.
These regulations will limit the Accrual Debenture to SBICs that focus
on stimulating and supporting the creation and growth of Small
Businesses.
A limitation of the Accrual Debenture is the amount of SBA leverage
available to Accrual SBICs and Reinvestor SBICs. In order to determine
the maximum amount of leverage that Accrual SBICs and Reinvestor 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 based on the
statutory limitation. For example, if an Accrual SBIC has $100 million
in Regulatory Capital, the total Accrual Debenture principal it 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 four
percent interest rate, since higher amounts would result in SBA
guaranteeing outstanding leverage amounts in excess of $175 million,
the current statutory maximum for Leverage available to a single
Licensee. 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 or Reinvestor SBIC.
SBA proposed modifying the definition of ``Associate'' regarding
the status of an entity Institutional Investor based on its ownership
interest in a Licensee. Currently an entity Institutional Investor
whose ownership represents over 33 percent of the Licensee's Private
Capital is considered an ``Associate''. SBA is revising regulations 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
the 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.
One commenter asked whether the definition of Associate is
applicable to all types of SBICs and expressed reservations around
financing practices misalignment between taxpayer-guaranteed Federal
programs and not-for-profit community development corporations, which
often focus heavily on real estate and affordable housing. SBA
clarifies that the definition of Associate is applicable to all SBICs.
Notwithstanding the focus of any type of potential Licensee, SBA
regulations already restrict financings to certain real estate
businesses. (See 13 CFR 107.720(c)) Moreover, SBA carefully evaluates
the proposed investment strategy of each license applicant to ensure
conformance with SBA regulations.
One commenter raised the potential unintended consequences of
increasing, within the definition of Associate, the threshold
percentage under which an entity Institutional Investor will be
considered an Associate (from 33 percent to 50 percent) including the
risk of giving a single investor nearly full control over governance
matters including future amendments to a licensee's limited partnership
agreement (LPA). The commenter recommended SBA withdraw the amendment
and retain the current 33 percent threshold or, if it is raised, not
increase beyond 35 percent. SBA seeks to increase regulatory
flexibility through this final rule. The increased ownership threshold
is a reflection of this principle. SBA appreciates that investors hold
different governance and investment policy expectations which often
must be agreed to by fund managers in order to receive a funding
commitment. To protect the interests of limited partners in SBICs
licensed prior to a final rule, SBA asserts this rule change only
applies to funds licensed after the rule is implemented. Limited
partners can align with the principals of SBICs on investor
concentration and rights through their limited partnership agreement.
The proposed rule defined the term ``Annual Charge'' that is
currently defined as ``Charge'' under current 13 CFR 107.50. SBA is
implementing this change because this is typically the term used to
refer to the annual fee associated with SBA-guaranteed Leverage in both
SBA's website and much of its documentation, and more appropriately
refers to the recurring payment associated with this Leverage fee. SBA
will 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 on or after October 1, 1996. Since there is no
outstanding Leverage issued prior to October 1, 1996, this language
will 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 final 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 final
rule expands Sec. 107.585 to define new distribution requirements for
Accrual SBICs issuing Leverage. (See Sec. 107.585 later in this final
rule.) The final rule adopts the definition substantially as proposed.
SBA proposed amending the definition of ``Control Person'' under
Sec. 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 is amended to
state that when over 30

[[Page 45987]]

percent 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 partner(s) 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.
One commenter noted it would be helpful to the public if SBA would
(i) provide an example or examples of situations that meet the proposed
definition of ``Control Person'', and (ii) provide additional
information in the rule that explains how changing the definition of
``Control Person'' does not further lessen SBA's control of Licensees,
which exists with the current definition of ``Control Person''. SBA
respectfully notes that it does not exert control over Licensees. SBA
further notes that as set forth in 13 CFR 107.305, appropriate
evaluation and risk mitigation measures including but not limited to:
due diligence, background checks, review of governance documents,
transferee's liability contract and applicant certifications etc. are
in place to ensure that SBA has properly evaluated any persons exerting
control over Licensees.
Another commenter noted licensees or anchor funds that seek
intentional or known future ownership of small businesses appears to be
outside the intention or Statement of Policy by Congress in the Small
Business Investment Act of 1958 for capital supplementation to small
businesses versus control and ownership of small businesses. The SBA
could not substantiate the commenters interpretation based on the Small
Business Investment Act of 1958 and adds that permissive SBIC control
of portfolio concerns for up to seven years is a longstanding principle
of the program. The final rule adopts the definition substantially as
proposed. In the proposed rulemaking, SBA sought public input for any
suggested changes to ``Equity Capital Investments'' that SBA should
consider. One commenter suggested that SBA adopt the definition of
``qualifying investment[s]'' for a venture capital fund from 17 CFR
275.203(l)-1 (Rule 203(l)-1 under the Investment Advisers Act of 1940)
(or a substantially similarly definition). SBA will continue to
maintain its definition of ``equity capital investments.'' The proposed
rule included 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. The final rule adopts the definition
substantially as proposed.
The proposed rule defined 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 defining this term as the final rule
refers to GAAP in various locations in the regulations.
SBA proposed amending 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 is amending the term Leverage 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 will 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 are projected to exceed the
statutory maximum for leverage available to any single licensee
(currently $175 million). This definition also clarifies the total
capital that SBA is guaranteeing at any 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 is required
under statute to guarantee both principal and interest on outstanding
leverage. This final 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 Act or other applicable
Federal laws.
SBA proposed 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 final
rule will 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 Leverage in the future. This regulation is not intended to
prohibit subsequent SBIC funds from seeking Leverage. This final 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.
This final rule adds the proposed terms substantially as proposed.
In the proposed rule, SBA proposed to define the term ``Qualified
Line of Credit'' to describe a form of secured borrowing which would be
available to leveraged licensees under Sec. 107.550(c). Considering
the matter further, SBA decided to use the more descriptive term
``Capital Call Line'' to align with industry terminology and to better
describe what is essentially the same type of borrowing to be permitted
under Sec. 107.550(e). (See section II.I. of this rule.)
SBA proposed changing regulations 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 the proposed Sec. 107.585. This final rule adopts the
modification and clarifies that READ distributions must be performed in
accordance with the revised Sec. 107.585.

[[Page 45988]]

SBA proposed changing regulations 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 also
proposed changing regulations 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 final rule adopts the changes as proposed.
The proposed rule added 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'' will be defined to include all 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 will use the most recent resident population from the U.S.
Census as of the date of the calculation. SBA will publish the list of
Underlicensed States periodically on the SBIC website.
One commenter expressed support of the ``under-licensed state''
concept and suggested expanding the concept to ``under-licensed
region.'' Another commenter requested as an extension of the proposed
change to include Underlicensed States where there are little to no
licenses for minority and women-led SBIC funds. In this final rule, SBA
is implementing regulations in support of the ``Spurring Business Act
of 2017.'' Additionally, SBA has outlined an increased focus on
``underserved'' broadly in this final rule which includes geographies
as well as communities. The final rule adds the terms substantially as
proposed.
SBA proposed to add the term ``Total Leverage Commitment'' to have
the meaning as defined in proposed Sec. 107.300. This final rule adds
the term ``Total Intended Leverage Commitment'' to have the meaning as
defined in revised Sec. 107.300. As discussed under that section, SBA
is changing regulations to approve the Total Intended Leverage
Commitment at the time of licensing.
SBA proposed changing regulations to add the term ``Enhanced
Monitoring'' as defined in the proposed Sec. 107.1850. As discussed
under that section, SBA has replaced ``Enhanced Monitoring'' with
``Watchlist'' and is implementing the Watchlist process in this final
rule (previously outlined under Standard Operating Procedures) to
better monitor SBICs.
SBA proposed changing regulations 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. This final rule adopts the change as proposed.

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(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.'' In the proposed rulemaking, SBA
proposed changing regulations 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
proposed changing regulations 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 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.
Two commenters supported the regulation as proposed. One commenter
suggested allowances for non-profit entities to control more than 70
percent of the Licensee's Regulatory Capital. SBA appreciates the
comment. In terms of extending the allowance beyond that of
``traditional investment companies'', SBA believes, at this time,
consistency with existing practices and regulations is most prudent and
will not extend beyond the 70 percent threshold.
One commenter opposed the proposed modification to the definition
of ``traditional investment company'' to include non-profit entities.
SBA appreciates the comment and seeks to clarify that this modification
to the existing regulations does not permit SBA to license a non-profit
entity as an SBIC. By statute, SBICs must be for-profit entities. The
modification to the regulation permits up to 70 percent of the
regulatory capital contributed to the for-profit SBIC to come from non-
profit management company of a limited partnership SBIC. Non-profit
entities are already permitted as the management company of limited
partnership SBICs. The final rule provides guidance as to the extent of
Regulatory Capital that can be provided by a management company with
non-profit status. After consideration of all public comments, the
final rule adopts the proposed Sec. 107.150 without change.

C. Section 107.210 Minimum Capital Requirements for Licensees

This section identifies minimum Private Capital requirements for
SBICs. In the proposed reulemaking, SBA proposed amending the term
``Wind-up'' to ``Wind-down'' as previously discussed in section II.A.
of this rule discussing Sec. 107.50. SBA also proposed removing 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

[[Page 45989]]

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 proposed changing regulations 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.
One commenter supports the regulations and encourages clarification
and expansion of ``good cause'' to ensure the exception is applied
fairly and not solely based on geography. SBA appreciates the comment
and notes that the ``good cause'' exception is not solely based on
geography. Consistent with existing regulations, ``good cause'' factors
may be applied in a non-exclusive manner based on criteria already
specified in Sec. 107.210. Further, SBA notes that any SBIC licensee
that receives a license under the ``good cause'' exception must satisfy
the requirements of 13 CFR 107.210, including satisfaction of all
licensing standards and requirements except the minimum capital
requirement, as determined solely by SBA, a viable business plan
reasonably projecting profitable operations, and a reasonable timetable
for achieving Regulatory Capital of at least $5,000,000.
One commenter asserted hesitation with the low thresholds
established by statute under the regulation because of the potential
risk to the program from licensing under-capitalized licensees. The
commenter also suggested SBA publish objective, quantifiable standards
for fund sizes, ask Congress for higher ``low limit'', and warned SBA
that using the ``good cause'' exception other than in rare instances
involving a licensee's narrowly tailored circumstances would inject
higher risk into the SBIC program that could trigger unintended
consequences. Finally, the commenter suggested that Licensees should be
allowed to accept ``indirect'' government funds, but this capital
should not be leverageable. Further, it should not be used for
satisfying the private market validation expectations for a license.
SBA seeks to implement the statute as established by Congress. SBICs
can accept government funds to the extent permitted by the Act. During
the licensing process, SBA will continue to employ the concepts such as
external validation and fund size viability when assessing applicants.
One commenter encouraged SBA to allow first-time managers to lower
the Private Capital commitment threshold to between $10 to 15 million,
in an effort to reduce barriers to program participation for first time
and diverse fund managers. SBA shares the value of reducing barriers to
participation for emerging and diverse managers. The expansion of
reinvestor provisions coupled with the introduction of the Accrual
Debenture seeks to enable access to capital to more first-time and
emerging fund managers through targeted fund-of-funds SBIC
relationships. SBA notes that SBICs with at least $5 million (or $3
million for ``good cause'') satisfies minimum capital requirements set
forth in 13 CFR 107.210--however, SBICs must also meet the minimum
adequacy requirements set forth in section 302(a)(3) of the Act. The
final rule adopts the proposed Sec. 107.210 without change.

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 proposed amending
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 section II.A. of this rule. SBA also
proposed changing regulations to ensure 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 proposed amending 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
the time of a debenture commitment funding draw request and to exercise
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 finalized under Sec. 107.320.
SBA proposed modifying 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 proposed to revise the Initial Licensing Fees based on
its fund sequence (meaning the order of succession of the fund) as
follows:

[[Page 45990]]

------------------------------------------------------------------------
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 proposed changing 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 percent) 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 Businesses. SBA's final changes would
effectively lower the combined Licensing Fee for all Non-leveraged
applicants and lower the fees for applicants with less SBA leverage at
risk and new funds. Fund managers seeking a fourth or later fund and
seeking leverage would pay a higher fee, and the fee would scale with
the dollar amount of SBA leverage sought by the Applicant. SBA notes
that SBA's licensing costs are substantially higher than even the
highest final 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
leverage at risk, will reduce cost barriers for small funds and new
funds applying to the SBIC program.
SBA also proposed 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 final 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 outlay 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.
One commenter agreed with the proposed $10,000 application
resubmission fee and encouraged SBA to have written, clear, consistent,
objective, licensing criteria that are published and applied evenly and
consistently across all applicants. Another comment suggested: (1)
lower license fees should be exclusive to ``small'' applicants, (2)
clarifying licensing metrics, (3) expanding the definition of
qualifying experience to include relevant operating or investment
experience. A third comment noted that the proposed regulatory changes
are intended to expand the program and make it easier for applicants in
certain geographical areas, but that this may take place at the expense
of applicants that are otherwise equally qualified. A fourth comment
agrees with the resubmission fee and suggested increased transparency
to the applicant surrounding the application review process and timely
communication from the licensing committee through the process. The
commenter further suggested that if an exam finding during the
application review process is the cause of denial, the applicant should
be given a reasonable amount of time to resolve the finding. SBA agrees
with the concept of reduced fees for first-time SBIC applicants.
Consistent with the items raised by these commenters, SBA will
implement an expedited licensing process for eligible subsequent
license applicants (discussed below) and modernize standard operating
procedures and policies to further reduce administrative, cost and time
burdens on applicants.
Regarding Licensees with multiple SBIC licenses, one commenter
noted opposition to proposed higher fees for licensing and
examinations, noting the relative ease of processing those licenses.
The commenter recommended that SBA include an optional accelerated
license for qualified repeat SBIC managers, which option would be worth
the increased fee. The commenter also recommends that SBA establish an
accelerated licensing process for non-leveraged bank-owned SBICs, as it
would improve the licensing process and justify the proposed fee
increase. Another commenter believes increased fees for subsequent
licenses penalizes funds with an established track record and may deter
SBIC managers from continuing to obtain new licenses. In response to
these comments, SBA will not implement changes to examination fees
which were included in the proposed rule. Furthermore, SBA is
introducing regulatory reforms which will reduce time and cost burdens
associated with licensing for qualifying subsequent funds as a result
of an expedited licensing process. Regulatory reforms to support an
expedited and streamlined licensing process for qualifying subsequent
fund applications are as follows:
Expedited Subsequent Fund Licensing: Management teams that are
already operating one or more licensed SBICs must be in good
operational and regulatory compliance standing with SBA in order to
submit a license application for a subsequent fund. Subsequent fund
license applicants must have at least two full years of operations from
date of licensing of the most recently licensed SBIC (a longer or
shorter operating history may be merited based on track record and
prior performance). The financial performance and portfolio valuations
of the current licensee(s) must demonstrate adequate coverage for any
outstanding SBA Leverage. The current licensee(s) must also be able to
present a clean audit opinion from the SBIC's independent public
accountant, covering the most recent, full year of operations, and no
unresolved regulatory violations for the most recent SBA exam covering
a period ended within 12 months of the request being filed.
SBA will consider a series of factors when determining whether a
subsequent fund applicant has demonstrated a commitment to best
practices within the SBIC program.
Streamlined Application Requirements for Subsequent Fund License
Applicants: Applicants operating an active Licensee, can apply under a
``Short-Form Subsequent Fund MAQ'' application by meeting the following
eligibility criteria:
<bullet> Consistent strategy and fund size--targeted Regulatory
Capital to be raised is <=133% the size of their most recent SBIC fund
(inflation adjustments will be considered). Same asset class and

[[Page 45991]]

investment strategy as most recent license.
<bullet> Clean Regulatory History--no major findings, significant
``other matters'' or unresolved ``other matters'' related to licensees
managed by the principals of applicant in the previous ten years.
<bullet> Consistent LP-general partnership (GP) Dynamics--no new
limited partner will represent >=33% of the Private Capital of the
licensee upon reaching final close at target fund size or hard cap. The
two largest investors in terms of committed capital have verbally
committed to invest in the new fund pending receipt of license. The
most recent Limited Partnership Agreement of the active Licensee and
all Side Letters will have no substantive changes for the applicant
fund.
<bullet> Investment Performance Stability--the most recent licensee
net distributions to paid-in capital (DPI) and net total value to paid-
in capital (TVPI) are at or above median vintage year and strategy
performance benchmarks for the prior three quarters. The principals of
the applicant are not managing a licensee in default or with high
Capital Impairment (CIP).
<bullet> Consistent or Reduced Leverage Management--the applicant
is requesting a leverage to Private Capital ratio <= the current or
most recent SBIC licensee at target fund size or hard cap.
<bullet> Firm stability--subject to SBA's determination, no
material changes to the broader firm, to include resignations,
terminations, or retirements by members of the General Partnership,
investment committee, broader investment team, or key finance and
operations personnel that have a material adverse impact on the
stability of the SBIC.
<bullet> Promotions from within--demonstration of a commercially
reasonable effort of promoting internal investment team talent from
within the firm/organization sponsoring the license.
<bullet> Inclusive equity--demonstration of a commercially
reasonable effort of the appropriate/increased sharing of carry and/or
management company economics with promoted talent or distribution of
equitable or increasingly equitable economics among the partnership.
<bullet> Federal Bureau of Investigation (FBI) Criminal and
Internal Revenue Service (IRS) Background Check No Findings--the
sponsoring entity and all principals of the Licensee do not have an FBI
criminal record and do not have IRS violations from the date of their
most recent SBIC fund licensure.
<bullet> No Outstanding or Unresolved Material Litigation Matters--
no outstanding or unresolved litigation matters involving allegations
of dishonesty, fraud, or breach of fiduciary duty or otherwise
requiring a report under Sec. 107.660(c) or (d) as to a prior
Licensee, the prospective Applicant's general partner, or any other
person who was required by SBA to complete a personal history statement
in connection with the license application.
<bullet> No Outstanding Tax Liens--on the principals applying to
manage the licensee, on the most recent or active licensee, and on the
sponsoring entity of the licensee.
Should an applicant fulfill and formally attest to meeting all of
the above eligibility criteria, the applicant can submit a streamlined
``Short-Form Subsequent Fund MAQ''.
All named principals of the applicant will be subject to FBI
criminal and IRS background checks as well as reference checks.
Applicants with minimal and non-material changes to the active or most
recent licensee LPA and any Side Letters, will be designated for
expedited processing.
Regarding capital at licensure, one commenter welcomes the change
to the licensing application fee but requested further clarity on the
fee structure. One commenter had concerns regarding fund-raising
challenges faced by first-time applicants fundraising at time of
application. The commenter suggested SBA approve a specific maximum
ratio of Leverage to Regulatory capital for the Licensee. Further, the
commenter suggested that SBA implement a specific upper limit of
Regulatory Capital that would be leverageable at the approved ratio.
Another commenter expressed concern that the revised regulations could
limit sources of capital and leverage, noting that SBICs could
potentially be subject to upfront fees on unutilized leverage within
the investment period. A third commenter noted capital flow into the
program could be negatively impacted by licensing revisions,
effectively eliminating post-license capital raise campaigns and
requiring greater commitments up front from capital investors/limited
partners. And finally, a fourth commenter recommended amending the
proposal to continue to allow leverage commitments on capital raised
post-licensing. The commenter noted concerns that the current proposal
may negatively impact capital flow, limiting fund size, capacity to
finance small businesses, and negatively impacting investors. In
response, SBA clarifies that SBA Leverage commitments, up to the dollar
amount indicated in the letter of intent to commit, must equal the
ratio of SBA-to-private capital commitments indicated in that letter.
Such SBA commitments be extended following Closings occurring within 12
months of licensing. These requests will be filled automatically,
contingent upon the licensee certifying no material adverse changes
(MACs) have occurred since licensing. This is intended to streamline
and expedite the commitment request process. SBA further seeks to
clarify language to distinguish between a `Total Intended Leverage
Commitment' letter of intent indicating a specific intended commitment
dollar amount at Green Light and ratio of SBA leverage to Private
Capital from SBA available upon licensing. Additionally, SBA seeks to
further clarify the difference between the `Total Intended Leverage
Commitment' and `commitment requests' made toward the amount indicated
in the letter of intent to commit.
SBA seeks to clarify that SBA's commitment dollar amount will be
limited such that leverage principal and projected interest must be
less than or equal to the statutory cap on individual Licensee
leverage, currently $175 million, for a Licensee issuing Accrual
Debentures or leverage principal less than or equal to the statutory
leverage cap for a Licensee issuing Standard Debentures. For both
debenture instruments, Total Intended Leverage Commitment dollar
amounts made to the applicant represents leverage principal. SBA
defines the term ``Total Intended Leverage Commitment'' to mean the
dollar amount or ratio of SBA Leverage Commitments to Private Capital
that SBA will approve conditional upon closing the applicant's stated
Private Capital target and conditional upon maintaining acceptable
capital impairment (CIP) levels and regulatory compliance during the
life of the license. SBA will provide the `Total Intended Leverage
Commitment' to the applicant in the Green Light Letter. The Total
Intended Leverage Commitment dollar amount will be made final within 12
months of licensure or upon the Licensee's final closing, whichever
occurs first. Licensees issuing Accrual Debentures shall not be
permitted to make distributions within 12 months of Licensure.
Finally, it should be noted that SBA is amenable to and expects
that most applicants will have multiple fund closings. It is acceptable
to SBA for an applicant to have a fund closing and begin making
investments prior to Licensing. However, the applicant bears the burden
of assuming any risk should a license not be approved. One

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commenter identified that SBIC program administrative and operating
costs are not covered by subsidy, noting that in 2017, less than 40
percent of SBA's administrative costs were offset by fees, leaving the
taxpayer to bear the costs. The commenter stated that SBA should seek
ways to reduce taxpayer costs associated with SBIC program expenses.
The table below displays the cost to administer the SBIC program.
It includes direct costs from the operating budget, including
contracts; compensation and benefits; Agency-wide costs, such as rent
and telecommunications; and indirect costs.

------------------------------------------------------------------------
FY 2020 actual FY 2021 actual FY 2022 actual
------------------------------------------------------------------------
$24,254,000 $21,492,000 $28,211,000
------------------------------------------------------------------------

In FY2022, the return-on-investment (ROI) of taxpayer dollars as
measured by the ratio of FY2022 financings to U.S. small businesses
relative to program cost was 28,003 percent or $7.9 billion divided by
$28,211,000. The same $28,211,000 resulted in 129,098 U.S. small
business jobs created and sustained and enabled the program to operate
with the necessary risk management and oversight practices and
procedures to provide Federal funding to SBICs at zero subsidy to U.S.
taxpayers. The final rule includes an expedited and streamlined
licensing process for qualifying subsequent fund applications and SBA
is finalizing Sec. 107.300 substantially as proposed.

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.
Two commenters encouraged SBA to continue making the licensing
process more transparent and inclusive, noting current criteria
limiting the potential pool of qualified managers. SBA is updating
standard operating procedures and policies to reduce the burden of the
licensing process on applicants and to improve transparency in the
licensing process.
One commenter requested, in addition to relevant industry
operational experience, inclusion of financial portfolio management
experience in adjacent areas such as relevant experience in lending and
early-stage equity investments. SBA agrees that relevant investment
experience in adjacent areas is a valid consideration in the licensing
process. SBA considers the totality of experience of the principals of
the applicant during the licensing process. As the proposed rule is
consistent with these principles, SBA is finalizing Sec. 107.305
substantially as proposed.

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 proposed modifying 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 Businesses 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.
One commenter believes 13 CFR 107.320 should remain unchanged,
noting the SBIC Debenture program doesn't currently exhibit outsized
losses due to a lack of portfolio diversification. The same commentor
also expressed concern that the proposed rule could result in SBA
having too great discretion in selecting program participants. The
purpose of portfolio diversification is to ensure that SBA successfully
meets the mission and intent of the SBIC program (as established by
Congress) while mitigating overall SBIC program concentration risk in
strategies which could present higher repayment risk and volatility
risk and thus compromise the program's zero subsidy status. Ensuring
SBA has discretion to mitigate program concentration in risk assets to
mitigate against the potential for taxpayer losses is in line with best
practice portfolio risk management approaches of public and private
institutional investment programs.
One commenter stated that by prioritizing the approval of leverage
commitments based on geographical characteristics, it may prolong the
process for Licensees that are not headquartered in these areas. The
final rule balances shifting licensing timelines with mitigating
program risk. Through the introduction of expedited licensing for
eligible subsequent funds and updates to standard operating procedures,
SBA will improve licensing and leverage commitment timelines across the
program, thus mitigating any risk of prolonged leverage commitment
processes for Licensees. SBA is finalizing Sec. 107.320 substantially
as proposed.

G. Section 107.501 Identification

This regulation identifies requirements related acknowledgment of a
Licensee as ``a Federal licensee under the Small Business Investment
Act of 1958, as amended.''

[[Page 45993]]

One commenter recommended an amendment to 13 CFR 107.501 requiring
SBA to publish in the Federal Register the names of SBICs that were
licensed and the dates on which SBICs were licensed. Based on this
comment, SBA is finalizing Sec. 107.501 to include a requirement for
SBA to publish license approvals in the Federal Register within 30
business days of the end of the month in which the license was approved
by the SBA Administrator.

H. Section 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
sought input from the public on this issue as part of this rulemaking.
However, SBA recognizes that Non-leveraged Licensees pose no credit
risk to SBA. In the proposed rule, SBA proposed 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 proposed 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.
One commenter agreed with the revision as written.
One commenter gave feedback including (1) the Form 468 is not
accommodating of GAAP reporting, (2) that SBICWeb requires a redesign,
(3) new reporting requirements can put undue burden on analysts, (4)
reporting is cumbersome, (5) by changing accounting principles, it
would be difficult to compare year over year results, (6) unlevered
SBICs could be at a disadvantage with respect to determining when to
make READ. With respect to the first five items, SBA is updating its
technology, data collection, and filing processes to accommodate new
reporting requirements and reduce the reporting burden on managers and
SBA analysts. Further, SBA notes that if the valuations are not
changing significantly, the level of effort to update the reporting is
limited. If valuations do change significantly, this does increase the
level of effort required in updating the reporting, however SBA
believes that sufficient program oversight of this federally regulated
financial institution necessitates this level of effort and unlevered
SBICs are not positioned to be disadvantaged. After consideration of
all comments, SBA is finalizing Sec. 107.503 substantially as
proposed.

I. Section 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 costs by eliminating unnecessary equipment.
One commenter concurred with the changes as written. SBA is
finalizing Sec. 107.504 substantially as proposed.

J. 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 proposed removing Sec. 107.570 and
references to Temporary Debt and Participating Securities in Sec.
107.550.
Section 107.550(c) identifies rules associated with secured lines
of credit in existence on April 8, 1994. SBA proposed to remove that
requirement since it is obsolete.
SBA proposed replacing Sec. 107.550(c) with a secured ``Qualified
Line of Credit'' which SBICs could utilize without SBA prior approval.
One commenter recommended clarifying the language in this section, and
one commenter stated that the proposed terms will increase the
administrative burden on Licensees as they would need to call capital
more often. SBA agrees that the language required clarification and the
terms should be more aligned to industry standard practices.
Consequently, SBA is rescinding the proposed changes to Sec.
107.550(c) and replacing it with this simplified update to the existing
regulations by defining a ``Capital Call Line''.
Since the final rule provides an exemption from SBA approval for
Capital Call Lines that SBA would likely have otherwise approved, the
final rule eliminates paragraph (e) which discusses automatic 30-day
approval for secured third-party debt. With the replacement of
``Qualified Line of Credit'' with ``Capital Call Line'', SBA is
finalizing Sec. 107.550 substantially as proposed.

[[Page 45994]]

K. 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 section
II.L. of this rule, no operating SBICs have outstanding Participating
Securities and SBA is no longer authorized to provides such Leverage.
SBA proposed to remove this regulation.
SBA received no comments on this section. This final rule adopts
the proposed removal of Sec. 107.570.

L. 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
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 existing
regulations (prior to the proposed rule) 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 Accrual 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.
In the proposed rulemaking, SBA proposed to retitle this regulation
to ``Distributions and Reductions in Regulatory Capital'' and modify
the requirements to address these concerns. Three commenters raised
that a change to the distribution waterfall of the Traditional
Debenture. The SBA has considered this feedback and intends to apply
the new pro rata distribution waterfall exclusively to the Accrual
Debenture instrument and to institute a more flexible repayment
timeframe to align with existing debenture pre-payment processes. Based
on public comment, in issuing the final rule, SBA will not apply the
modified distribution waterfall to Standard Debenture Licensees. This
final rule thus separates distribution requirements based on three
categories of SBICs: (1) Non-leveraged Licensees; (2) Standard
Debenture SBICs; and (3) Accrual SBICs and Reinvestor SBICs. The
rationale for these categories and the specific requirements follows.
(1) Non-leveraged Licensees. SBA is setting a separate set of
requirements for Non-leveraged Licensees because they pose no credit
risk to SBA. Final 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 Sec. 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 final
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) Standard Debenture SBICs. SBA recognizes that existing
licensees and current applicants to the program expect to be able to
distribute READ based on current regulations. Standard Debenture SBICs
will remain under the current rules.
(3) Accrual SBICs and Reinvestor SBICs. SBA is requiring, in the
regulations 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. Accrual SBICs and Reinvestor SBICs must
repay Leverage at its ten-year maturity and may prepay Leverage at any
time. SBA is requiring 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 SBA Total Intended
Leverage Commitment and Total Private Capital Commitments, inclusive of
Qualified Non-Private Funds, determined within 12 months of Licensure
established as follows: SBA Share = Total Distributions x [Total
Intended Leverage Commitment/(Total Intended Leverage Commitment +
Total Private Capital Commitments)].
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 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 SBA and investors. In this circumstance, a
Licensee would decrease the amount distributed 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 bear at least the same risk for loss as SBA.
One commenter provided the following feedback: (a) tax
distributions due to ordinary income must flow to limited partners for
tax liabilities; (b) Debenture securities must be paid in full, which
could limit SBIC ability to repay Debentures in full and provide
sufficient distributions to limited partners to pay taxes; (c)
potential unintended consequence of outcome of ``trapping'' cash in
SBIC. SBA clarifies that Accrual SBICs are not prohibited from tax
distributions in this final rule and encourages SBICs to consider

[[Page 45995]]

smaller distributions that can be repaid in full. SBA underscores that
the intent of the changes is to reduce the risk to the taxpayer by
ensuring that debentures backed by an SBA guarantee are repaid.
One commenter concurred with SBICs being allowed to make
distributions without prior SBA approval and with SBA proposing that
future material adverse changes be taken into consideration for
leveraged funds licensed before October 1, 2023. The same commenter
raised that the proposed waterfall also does not differentiate between
READ and return of capital proceeds, which would result in the
repayment of leverage being misaligned with what may be laid out in a
Licensee's wind down plan. As stated above, SBA has not included
changes to the waterfall or READ requirements for Standard Debentures
and is finalizing Sec. 107.585 with the modified distribution
requirements based on three categories of SBICs: (1) Non-leveraged
Licensees; (2) Standard Debenture SBICs; and (3) Accrual SBICs and
Reinvestor SBICs.

M. 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 proposed implementing
regulations to change the name to ``Wind-down Plan'' as discussed under
section II.A. of this rule.
SBA received no comments on this section. This final rule adopts
the proposed Sec. 107.590 without change.

N. Section 107.620 Requirements To Obtain Information From Portfolio
Concerns

This regulation specifies the threshold of information requested by
SBICs from Portfolio Concerns. In the proposed rulemaking, SBA proposed
implementing regulations 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.
One commenter expressed concern that including voluntary reporting
of demographic data could be viewed as mandatory by licensees and their
portfolio companies and could be costly, while another commenter
expressed concern that making this voluntary may discourage Licensees
from providing it. SBA notes that voluntary reporting of demographic
information balances flexibility for program participants with
providing SBA and taxpayers with adequate transparency into the
community impact of the SBIC program overall, in accordance with the
President's Executive Order (``E.O.'') 13985, Advancing Racial Equity
and Support for Underserved Communities Through the Federal Government.
Additionally, SBA notes that such information is collected post-
licensing and is not a component of the SBIC licensing process. This
final rule adopts the proposed Sec. 107.620 without change.

O. Section 107.630 Requirement for Licensees To File Financial
Statements With SBA (Form 468)

This regulation identifies requirements associated with Licensee's
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
that portfolio valuations be 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. Therefore, in the proposed rulemaking, SBA
proposed implementing regulations 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 proposed implementing regulations 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 also proposed 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.
Two commenters agreed with the proposal as written. One commentor
asked whether the Form 468 could be filed on a Monday if the deadline
falls on a weekend. Form 468 instructions will now provide the
following procedural accommodation: when a deadline falls on a weekend
the form can be filed on the next day which is not a Saturday, a
Sunday, or a Federal holiday.
One commentor agreed that SBA can improve its oversight of SBICs
through timely reporting requirements. SBA appreciates the support for
timely reporting. This final rule adopts the proposed Sec. 107.630
substantially without change.

P. 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. To reduce the burden on Licensees, SBA proposed 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 meeting the Watchlist criteria, as finalized
under Sec. 107.1850, SBA may require more frequent reporting.
One commenter noted that new deadlines might have a negative impact
on Bank limited partners with regard to federally required reporting
and examination obligations and might elongate the time it takes SBIC
licensees to report to SBA. Another commenter opposed quarterly
submissions within 30 calendar days of quarter following closing or
financing, noting generating a quarter's worth of Form 1031s would be
burdensome. In response, SBA will allow for Form 1031s within 30 days
of quarter end. To mitigate concerns around the burden of the reporting
requirement when SBICs have a large number of 1031 filings due at one
time, SBA permits Form 1031s for portfolio company financings to be
disaggregated and submitted on a more frequent basis. The option to
submit a single Form 1031 within 30 days of quarter end rather than
within 30 days of financing is intended to reduce the administrative
filing burden on SBICs. Bank limited partners are encouraged to
establish reporting expectations with SBICs through their limited
partnership agreements. SBA's intent is to provide additional
regulatory flexibility, when and where possible, with respect to 1031
filings. SBA agrees with

[[Page 45996]]

commenters who were supportive of changes that allow more time for
SBICs to make timely submissions, and therefore SBA is issuing the
final rule as set forth in 13 CFR 107.740.

Q. 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
proposed implementing regulations to clarify that only Leveraged
Licensees are required to report for quarterly reporting periods. All
Licensees must report at least annually. SBA proposed implementing
regulations 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.
One commenter stated they do not believe the benefits of reporting
changes outweigh the costs unless SBA reports and publicly releases in
a timely manner aggregate program data and analysis. As part of the
final rule, SBA is modernizing data collection and reporting processes
which will enable the timely reporting of existing program economic and
operational performance measures and the introduction of new metrics
related to the investment performance of the program. Quarterly
reporting will be limited to a ``short form'' version of the Form 468
to reduce the reporting burden while enabling transparency into program
investment performance and improved monitoring.
One commenter asked for clarification as to whether SBA will
continue to allow data collections and metrics regarding net jobs
created and total jobs created and retained to be provided on a quarter
lag after year end, as the data may not be readily available within 90
days of an SBICs fiscal year end. SBA confirms that the 90-day lag is
intended to represent a one quarter lag after fiscal year end. This
final rule adopts the proposed Sec. 107.650 without change.

R. 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 proposed implementing
regulations to specify valuation data items to improve clarity. SBA
also proposed implementing regulations to specify that Licensees should
submit to SBA any report it gives to its private investors no later
than 30 days after the date on which such SBIC sent any report to its
private investors. This requirement is intended to keep SBA aware of
any important communications regarding the licensee in a timely
fashion.
Regarding submission of the reports provided to the private
investors, one commenter noted it would be helpful for SBA to specify
the types of reports they are looking for and their purpose. SBA
specifies that quarterly and annual financial reports and fund
investment performance reports are examples of reports frequently
delivered to private investors with the intended purpose of providing
transparency into portfolio holdings and investment returns. This final
rule adopts the proposed Sec. 107.660 without change.

S. 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 for Leveraged Licensees. SBA proposed to change and streamline
this formula to $10,000 + .035% of their Total Leverage Commitment
established at Licensing (see section II.D. of this rule). By
establishing the examination fee up front, SBA believes this will
reduce uncertainty in cashflows. Because SBICs licensed prior to the
proposed rule may not have a Total Leverage Commitment, SBA proposed
that the formula for existing licensees be $10,000 + .035% of their
outstanding Leverage plus SBA's undrawn commitment amount. Since the
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 proposed 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 nevertheless proposed
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. Two commenters opposed the proposed fee changes.
Regarding Licensees with multiple SBIC licensed funds or ``repeat
licensees'', one commenter noted opposition to proposed higher fees for
examinations for repeat licensees. One commenter requested that SBA
annually publish the top-ten most common exam findings so SBICs can
proactively remedy their own practices. SBA appreciates these comments
and will not be moving forward with modifications to Examination fees.
One commentor encouraged SBA to consider enhancing its credit
standard to require examinations within an 18-month time period for all
SBICs with SBA-guaranteed leverage. SBA appreciates the comment and, as
stated prior in response to broader comments regarding licensing and
examination fees, SBA withdraws the proposed changes to Sec. 107.692
and will not be moving forward with modifications to Examination
frequency because it believes that the incremental risk mitigation
would be minimal and would not warrant the additional resources
required.

T. 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). In the
existing regulation, 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 loan not insured by agencies of the Federal Government or
agricultural credit companies. In the proposed rule, SBA proposed
modifying the exception to permit Licensees to make equity investments
in certain underserved relenders or reinvestors that make financings
solely to Small Business Concerns that a Licensee may directly finance
under part 107. Based on the comments discussed below, SBA is now
modifying this exception to permit reinvestors which are Accrual SBICs
(i.e., ``Reinvestor SBICs'') to make equity investments in certain
underserved reinvestors that, in turn, make financings solely to Small
Businesses which meet the Act size standards (set forth in 13 CFR
107.700 and 121.301(c)(2)) or the Small Business Act alternative size
standards (set forth in 13 CFR 121.301(c)(1)) with at least 50 percent
of employees in the United States, at the time of investment. SBA

[[Page 45997]]

believes expanding this provision will significantly help expand the
SBIC program's footprint in underserved communities. By more broadly
defining ``underserved,'' SBA can maintain flexibility and agility to
align with evolving market conditions by clarifying what constitutes
``underserved'' through policy notices in order to increase its
economic impact to underserved communities. While Disadvantaged
Business will continue to be considered underserved, rural and low-and-
moderate-income areas may also be applicable to this group. To ensure
that capital continues to be directed to SBA's mission, SBA also is
implementing regulations to limit reinvestor financing to those that
existing SBICs could generally finance. This limitation is designed to
help SBA grow a national emerging fund manager pipeline focused on
supporting the financing needs of U.S. small businesses.
Two commenters noted that the definition of ``underserved'' could
be further clarified. However, another commenter was supportive of
leaving ``underserved'' not fully defined and proposed including clear
safe harbors for SBICs serving rural, low-income areas, and veteran-
owned businesses. SBA notes that a broad interpretation of underserved,
consistent with the text of Executive Order 13985, ``Advancing Racial
Equity and Support for Underserved Communities,'' and a requirement to
provide a justification in the applicant's business plan as to how a
particular geographic, industry or market segment is underserved and
how the investment strategy and approach addresses this underserved
part of the market. A safe harbor will not be required as SBA will
approve the business plan prior to the licensee making investments.
Investments are to be made in accordance with the approved business
plan.
Two commenters recommended that SBA revise the language to ensure
that SBICs are not precluded from making investments in Minority
Depository Institutions (MDIs). SBA appreciates the suggested comment.
SBA notes that Licensees are permitted to make investments in certain
types of relenders and reinvestors which, for Section 301(d) Licensees,
which may include Minority Depository Institutions that qualify as
Disadvantaged Businesses. Section 301(c) Licensees are permitted to
make investments in reinvestors under the Act.
One commenter suggested SBA define Fund-of-Funds as Reinvestor
SBICs in regulations and standard operating procedures. SBA appreciates
and agrees with the comment and will define Reinvestor SBIC. SBA will
also clarify that there is no restriction on the type of capital that
can be invested by a Reinvestor SBIC.
Two commenters suggested that the requirements limiting investments
in re-investors to only those who have complied with SBA cost of money
and conflict of interest regulations could mean that not many qualified
fund-of-funds managers will be able to access the program. One
commenter suggested SBA clarify which specific rules it intended to
capture and that all restrictions on existing SBICs be applied to the
ultimate recipients of the capital. One commenter believes it would be
necessary to permit potential reinvestor SBIC funds-of-funds to invest
all of their capital into underserved underlying funds. In addition,
the underlying funds in which an SBIC is investing pursuant to the
exception should not be controlled by the SBICs or the SBIC's
management. They should also be allowed to provide capital to non-
levered SBICs but not to SBICs with any type of leverage. Another
commenter expressed concern around permitting Fund-of-Funds to invest
only their Regulatory Capital into underlying re-lenders and re-
investors.
SBA appreciates suggested revisions to permitted investments by the
underlying funds of the Reinvestor SBICs and has revised this final
rule to define and clarify that Reinvestor SBICs can make Equity
Capital Investments in underserved non-SBA leveraged limited
partnerships, SBIC or non-SBIC licensed, that finance businesses that
meet SBA's small business size standards, are owned and controlled by
U.S. citizens and/or entities headquartered in the United States, and
have at least 50 percent of employees based in the United States at the
time of investment.
In terms of ``cost of money'', SBA notes that Sec. 107.855 defines
``Cost of Money'' to mean ``the interest and other consideration that
you receive from a Small Business.'' Subject to lower ceilings
prescribed by local law, the Cost of Money to the Small Business must
not exceed the ceiling determined under Sec. 107.855 introductory text
and (a). In connection with this requirement, SBA notes that this
section applies to all Loans and Debt Securities.
Regarding conflicts of interest, given the nature of private
markets, SBA anticipates Reinvestor SBICs are likely to invest in the
portfolio concerns of underlying funds. Consistent with the safe
harbors to conflicts of interest being implemented in this rule, SBA's
prior written approval is not required in connection with such co-
investments if a third-party investor unaffiliated and unassociated
with the Reinvestor SBIC and the underlying fund investor is
contributing Equity Capital Investments to the portfolio concern
alongside the Reinvestor SBIC investing directly into the portfolio
concern held by the underlying fund. At least one substantial third-
party investor unaffiliated and unassociated with the Reinvestor SBIC
must be investing on the same terms as the Reinvestor SBIC.
One commenter noted a lack of clarity around monitoring and
reporting of reinvestors. SBA clarifies that Reinvestor SBICs will be
expected to submit reporting of all underlying portfolio concern
holdings including information regarding the limited partnership
investor in the portfolio concern, name of the concern, industry, size
and type of investment, most recent valuation, tax identification
number, industry, location and number of employees at time of initial
investment. Such reporting will be provided as an exhibit to the Form
468 for Reinvestor SBICs.
One commenter expressed concern that expanding opportunities for
reinvestors will confuse investors who consider the SBIC program. SBA
appreciates the concern. With more diversification of asset classes and
alternative investments strategies included in the SBIC Program,
investors should consider each prospective SBIC fund investment's risks
and benefits on a case-by-case basis before investing.
Finally, one commenter encouraged SBA to consult with Congressional
Committees to clarify whether these changes require new authorities
granted by Congress. SBA notes that section 310(c) states that each
small business investment company shall be examined at least every two
years in such detail so as to determine whether or not it has engaged
in relending. Permitting Reinvestor SBICs as Section 301(c) Licensees
is consistent with the Act and aligns with the stated policy set forth
in the SBIC Act of stimulating and supplementing the flow or 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 has included clarification around Reinvestor SBICs and is
finalizing Sec. 107.720 substantially as proposed.

U. Section 107.730 Financings Which Constitute Conflicts of Interest

Current Sec. 107.730 prohibits Licensees from transactions that
constitute

[[Page 45998]]

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
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 ten percent 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 proposed implementing regulations to include 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 Financings with Associates that also
constitute conflicts 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
is implementing regulations to remove this exception. Paragraph
(d)(3)(iv) identifies exceptions involving Non-leveraged Licensees. SBA
is implementing regulations to revise this exception to incorporate the
new Non-leveraged Licensee term and simplify this regulation.
One commenter agreed with the regulation as proposed. This final
rule adopts the proposed Sec. 107.730 substantially as set forth in
the proposed rule.

V. 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 considered in the proposed rulemaking process whether it should
make changes to Sec. 107.830(c)(2) regarding prepayment restrictions
for Loans and Debt Securities to remove the requirement for SBA's prior
written approval regarding any restriction on the ability of a small
business to prepay (other than the imposition of a reasonable
prepayment penalty). SBA had 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 a prepayment restriction.
One commenter supported the regulation as proposed with two
suggestions: a) support a clarifying statement within Sec.
107.830(c)(2) that ``[r]equirements to apply prepayments pro rata among
a group of lenders that is pari passu in rights to payment will not be
deemed to constitute a restriction on prepayments hereunder'' and b)
adding to 13 CFR 107.830(c) a safe harbor for a reasonable restriction
on the minimum increments in which partial prepayments can be made by
small businesses. SBA supports the proposed suggestions and, in
response, added in the final rule a clarifying statement within Sec.
107.830(c)(2) that ``[r]equirements to apply prepayments pro rata among
a group of lenders that is pari passu in rights to payment will not be
deemed to constitute a restriction on prepayments hereunder'' and added
to 13 CFR 107.830(c) a safe harbor for a reasonable restriction on the
minimum increments in which partial prepayments can be made by small
businesses.
One commenter indicated that small businesses should not be
discouraged from making prepayments. SBA agrees that the small business
must be the first consideration and does not seek to discourage
prepayment for small businesses. However, in order to encourage funds
to participate in the SBIC program and provide such capital, SBA must
consider reasonable market terms for such securities that balances
these objectives. SBA incorporated the proposed clarification into
Sec. 107.830(c)(2) and is finalizing the proposed Sec. 107.830
substantially as proposed.

W. 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 Sec. 107.50, over a Small Business. In
general, the regulations permit Licensees to take Control for up to
seven years. In the proposed rule, SBA proposed that Accrual SBICs
should limit ownership at first Financing to less than 50 percent.
One commenter was concerned that the seven-year control provision
is insufficient to enable SBICs to repay leverage in a timely manner.
This provision has been in place for several years. As stated in 13 CFR
107.865(d), with SBA's prior written approval an SBIC Licensee may
retain Control of a Small Business for such additional period as may be
reasonably necessary to complete divestiture of Control or to ensure
the financial stability of the portfolio company. SBA seeks to maintain
alignment with SBIC licensees and welcomes discussing situations on a
case-by-case basis.
In response to public comment, this final rule rescinds the
proposed requirement that Accrual SBICs own less than 50 percent of
small business concerns at initial financing in an effort to encourage
the inclusion of long-term buy-and-build strategies. Proposed changes
to Sec. 107.865 are not adopted.

X. Section 107.1000 Non-leveraged Licensees--Exceptions to this Part

This regulation identifies exceptions to the regulations for
Licensees without Leverage. SBA is implementing regulations to
incorporate the term Non-leveraged Licensee as discussed in section
II.A. of this rule. There were no comments on this section. This final
rule adopts the proposed Sec. 107.1000 without substantial change.

Y. 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 proposed to amend paragraph (c) to
incorporate Pub. L. 115-133 by adding an exception to the

[[Page 45999]]

$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 percent of Regulatory Capital until they raise $5
million in Regulatory Capital.
One commenter believes benefits associated with Underlicensed
States should be limited to those both headquartered in an
Underlicensed State and deploying capital to portfolio concerns
headquartered in that State. With respect to licensing priority, the
Act defines an Underlicensed State as a State in which the number of
licensees per capita is less than the median number of licensees per
capita for all States--further, the Act provides first priority for
SBIC applicants in Underlicensed States with below median financing.
Additionally, Pub. L. 115-333 permits Licensees. Changing this language
would be inconsistent with statute. This final rule adopts the proposed
Sec. 107.1120 without change.

Z. 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 proposed changing the title to clarify that
the additional charge refers 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 proposed implementing regulations to remove
this language.
SBA further proposed implementing regulations to set the minimum
Annual Charge to 0.4 percent or 40 basis points which would be achieved
over a number of years. The fiscally responsible administration of the
program requires a minimum Annual Charge on outstanding leverage be
established to address the long-term variances in 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.
Two commentors expressed concerns that the 50 basis points (bps)
minimum annual charge poses a significant cost to licensees. The
average annual charge over the last twenty years is 57 bps. SBA
appreciates these concerns, and in response will reduce the minimum
annual charge floor to 40 bps and phase in the floor over time for a
smooth transition:

[cir] FY24--10 bps
[cir] FY25--20 bps
[cir] FY26--25 bps
[cir] FY27--30 bps
[cir] FY28--35 bps
[cir] FY 29--40 bps (capped floor)

One commenter recommends SBA use a different subsidy model to set
Leverage fees and Annual Charges. The SBA appreciates the suggestion
and will continue to work with the White House Office of Management and
Budgets (OMB) to ensure the subsidy model remains robust and aligned to
the requirements of the Federal Credit Reform Act of 1990. It is the
objective of SBA to operate the SBIC program at a zero-subsidy rate
while achieving the mission and intent of Congress in establishing the
program in 1958. SBA has integrated the phased-in annual charge floor
schedule into the final regulation and is finalizing Sec. 107.1130.

AA. 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 proposed implementing regulations to
correct the language to apply to all Leveraged Licensees.
Paragraph (a) sets forth the maximum Leverage for an ``Individual
Licensee.'' SBA proposed implementing regulations to clarify that per
the revised definition of ``Leverage,'' the maximum Leverage includes
both the principal and accrued interest associated with the Accrual
Debenture. SBA also proposed implementing regulations to add that if a
Licensee is headquartered in an Underlicensed State and has less than
$5 million in Regulatory Capital, it is 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 is
implementing regulations 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.
One commenter suggested increasing maximum leveraged capital
provided. SBA notes that increasing the maximum amount of leverage
available to Licensees is not within the authority of the rulemaking
and will require an act of Congress. This final rule adopts the
proposed Sec. 107.1150 without change.

BB. 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 proposed implementing regulations to clarify
that this requirement pertains to all Leveraged Licensees and to allow
45 days after the close of each quarter, commensurate with portfolio
valuation due dates as finalized under Sec. Sec. 107.503 and 107.650.
There were no comments on this section. This final rule adopts the
proposed Sec. 107.1220 without change.

CC. 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 proposed 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 is implementing regulations to
remove paragraph (f).

[[Page 46000]]

Two commenters suggested SBA considering public disclosure of
Capital Impairment (CIP) results. SBA notes that the Form 468 updates
include automatic calculations of both the CIP and leverage coverage
ratios. SBA is concerned that public disclosure of CIP ratios (based on
SBA's valuation policy which can result in significantly lower
valuations than FASB GAAP) might cause unintended harm and violate
statutory restrictions on disclosure of SBIC licensee data. SBA is
updating theForm 468 which will enable transparency into the overall
aggregated SBIC program portfolio investment performance and aggregated
SBIC licensed funds' investment performance by strategy and vintage
year for the public. SBA believes such industry standard metrics will
provide value to the public and, in particular, current and prospective
investors in SBIC licensed funds. This final rule adopts the proposed
Sec. 107.1830 without change.

DD. Section 107.1840 Computation of Licensee's Capital Impairment
Percentage

This regulation defines how to compute a Licensee's CIP. Since SBA
proposed to calculate the CIP and notify Licensees if they have a
condition of Capital Impairment, SBA proposed implementing regulations
to make related changes to this regulation.
One commenter concurred with the changes as written. This final
rule adopts the proposed Sec. 107.1840 without change.

EE. 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 proposed to calculate the CIP and notify Licensees if they
have a condition of Capital Impairment, SBA proposed implementing
regulations to make related changes to this regulation.
SBA received no comments on the proposed regulation. This final
rule adopts the proposed Sec. 107.1845 without change.

FF. Section 107.1850 Watchlist

For more than twenty years, Licensee Leverage default rates have
averaged less than 16 percent. While this is a relatively small
percentage of Licensees, these Licensees introduce risk to the
sustainability of the SBIC program and to SBA. In an effort to
proactively identify and manage risk, SBA is implementing regulations
to introduce a Watchlist (previously referred to as Enhanced Monitoring
in the proposed rule). A Licensee can be added to the Watchlist for a
series of actions, including but not limited to, 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 the Watchlist, the Licensee
will be required to file Form 1031 on a more frequent basis, and upon
request, conduct portfolio review meetings with SBA. The Licensee will
be notified when added to the Watchlist upon determination. Once the
events that warranted Watchlist status are addressed to SBA's
satisfaction, Licensees will be notified that they are removed from the
Watchlist. 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
Watchlist.
Two commenters disagree with the proposed regulation and believes
it should be withdrawn in favor of using existing oversight tools. One
commentor also posed suggestions of how to limit watchlist status and
suggested giving SBICs early warning and allow challenges in the event
that SBA does decide to include watchlist status in the final rule. SBA
responds that maintaining the Watchlist does not result in additional
enforcement actions and the objective of the proposal is to formalize
existing `watchlist' practices which have existed in SBIC Program
Standard Operating Procedures for several years. The goal of the
Watchlist is to identify SBICs for which there is potential for concern
prior to their reaching violation or default and then increase
communication with the licensee to remain aligned on potential steps to
ensure sound operations of the licensee to mitigate the risk of a
potential default. In that respect, SBA believes that the concept of
the Watchlist aligns with the commentor's expressed goal of providing
SBICs with `early warning'. To increase understanding and clarify as to
what SBA is proposing in this section, SBA is renaming `enhanced
monitoring' to `watchlist' consistent with industry best practices and
longstanding SBA SBIC Program Standard Operating Procedure guidance.
One commenter disagreed with putting the bottom quartile of SBICs
on the Watchlist. SBA clarifies multiple factors and considerations
will be assessed as part of the Watchlist process and incorporated
these factors and considerations into 13 CFR 107.1850. SBA also
clarifies that the bottom quartile of SBICs will not be put on the
Watchlist, rather the SBICs that fall in the bottom quartile of the
applicable vintage year and investment strategy industry benchmarks,
not bottom quartile among the universe of SBIC licensees, will be
identified as part of the broader watchlist process.
One commenter requested clarification around the consequences of a
fund being on Watchlist status for a prolonged period, and whether SBA
is taking other factors into consideration when looking at the bottom
quartile, such as capital impairment, operating plan, and the source of
the performance issues. SBA clarifies that identification for watchlist
does not result in enforcement action. The consequence of a licensee
being identified for the Watchlist is increased communication with SBA
to ensure alignment of objectives and mitigate the risk of potential
future enforcement action.
One commenter suggested SBA should require examinations within an
18-month time period for leveraged Licensees. While SBA sets a goal to
examine Leveraged Licensees within an 18-month period, the SBIC is not
considered at fault if SBA needs to extend the examination date due to
resource issues. SBA does prioritize exams based on credit risk among
other factors. SBA updated the regulation to reflect the considerations
raised by the commenter related to enforcement and SBAhas replaced
``enhanced monitoring'' with ``watchlist.'' The final rule adopts Sec.
107.1850 substantially as proposed.

GG. 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 which includes funds exempt from registration
under the 1940 Act from affiliation coverage. As noted above, the term
Traditional Investment Companies, generally includes non-profits, in
the capacity as the management company of a for-profit fund, and
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) and 3(c)(7) private funds not registered under the 1940 Act.
This

[[Page 46001]]

exception to 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. It should be noted that SBA's regulations and
determinations are not determinative as to whether a licensed
Traditional Investment Company must comply with the 1940 Act.
One commenter supports expanding the size standard exception to
include ``qualified purchasers'' because it would conform to the SEC's
definition of ``private fund'' that includes both 3(c)(1) and 3(c)(7)
funds and offer material relief and clarity to SBICs in applying the
SBA size standards when investing in sponsored transactions. The SBA
appreciates this support for expanding the size standard exception.
One commenter questioned whether SBA would be able to determine
affiliate relationship because 3(c)(7) funds do not have traditional
SEC registration or disclosure requirements. SBA responds that these
funds are similar to private funds under 3(c)(1) of the 1940 Act which
are also exempt from registration except that (i) 3(c)(7) funds are not
limited in beneficial owners and (ii) all investors in a 3(c)(7) fund
must be qualified purchasers. SBA also notes that since 1996, the
regulations have excepted from affiliation coverage 3(c)(1) funds
(which are also exempt from registration) and this exception from
affiliation coverage has never posed risk to the program. SBICs often
invest with others, thereby increasing the amount of capital to these
underserved businesses. SBA notes that removing such funds from the
exceptions to affiliation coverage would greatly reduce the ability for
SBICs to provided needed financings to Small Businesses, which is core
to the mission of the program.
SBA received one comment seeking clarification as to the
applicability of Sec. 121.103(b), Exceptions to affiliation coverage,
for Accrual SBICs. SBA confirms that the Agency has historically
interpreted 13 CFR 121.103(b)(1) to mean that a Small Business that is
owned, in whole or in substantial part, by a Licensee will remain
unaffiliated from the Licensee, and confirms that the exception set
forth in 13 CFR 121.103(b)(1) applies to Accrual SBICs. SBA is
finalizing the proposed Section Sec. 121.103 substantially as
proposed.

HH. Severability

One comment recommended that SBA include in this rule an express
provision addressing the effect of a judicial declaration of invalidity
as to any section or portion of this rule or part 107. The question of
severability addresses whether a judicial finding of a provision's
invalidity should extend to other provisions or applications or whether
it should be limited to the invalid provision or application, leaving
in effect the remainder of the rule. Like the entirety of part 107,
this rule seeks to implement, to the maximum extent possible, the
stated congressional purpose of the Act itself--i.e., ``to improve and
stimulate the national economy in general and the small-business
segment thereof in particular by establishing a program to stimulate
and supplement 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.'' See 15
U.S.C. 661. Although this rule includes numerous enhancements to the
SBIC program, most of the individual sections added or modified in this
rule, like those which remain in part 107 from prior rulemakings, may
operate independently in service of the stated congressional purposes
and the objectives set forth above for this rule.
Accordingly, in the event that any portion or application of the
rule is declared invalid, SBA intends that the various other provisions
and applications of part 107, including those added or modified in this
rule, be severable from the unlawful portion, unless such declaration
of invalidity renders another section or provision meaningless or
deprives that other section or provision of its functionality.
Moreover, such collateral invalidity is intended only to the extent
required by logic or loss of functionality. Section 107.25 is therefore
drafted to express and implement SBA's intent relative to severability
within part 107. For example, if a court were to find unlawful this
rule's establishment of the Accrual SBIC--a Section 301(c) Licensee
which is authorized to issue Accrual Debentures--such finding would
have no effect upon this rule's definition of unrelated terms (Sec.
107.50), its changes to the management-ownership diversification
requirements (Sec. 107.150), its changes to licensee fees (Sec.
107.300), its provisions for expedited review of subsequent fund
applicants (Sec. 107.305), or various other provisions which in no way
are dependent upon the Accrual SBIC or the Accrual Debenture. Such
finding would, however, deprive the ``Reinvestor SBIC'' concept of its
functionality, since a Reinvestor SBIC is indeed a type of Accrual SBIC
(i.e., one which at the time of licensing is authorized to issue
Accrual debentures in the execution of a specific investment strategy),
and where such a related provision could not ``function sensibly
without the stricken provision,'' the invalidity of that related
provision would be required as well, cf. Belmont Mun. Light Dep't v.
FERC, 38 F.4th 173, 187-88 (D.C. Cir. 2022), though only in such
circumstances. The foregoing is merely an example and does not express
an intent that any other provision be considered non-severable. SBA
reiterates that where any provision of this part is declared invalid,
any collateral invalidity is intended to the least extent necessary, in
order to advance program objectives to the maximum extent possible.

III. Compliance With Executive Orders 12866, 12988, 13132, 13563,
13175, and 14094 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 rule
constitutes a ``significant regulatory action'' under Executive Order
12866, as amended by Executive Order 14094. SBA has drafted a
Regulatory Impact Analysis for the public's information below. Each
section begins with a core question.
1. Regulatory Objective of the Proposal
Is there a need for this regulatory action?
This final 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 final
rule, SBA is introducing additional types of SBICs (``Accrual'' SBICs
and ``Reinvestor'' 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 final rule introduces a ``Capital Call
Line,'' a form of credit line that does not

[[Page 46002]]

require SBA approval. The aforementioned benefits and attractiveness of
the Accrual Debenture will also reduce some of the previously perceived
disadvantages to being an SBIC, as opposed to the non-SBIC private
market. The revisions to 13 CFR 107.720 should improve the SBIC
program's investment diversification and create more program entry
points for new fund managers. This final rule also reduces barriers by
revising reporting requirements that may allow increased use of
valuation policies that are consistent with GAAP. This 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 final rule would also incorporate the statutory
requirements under Pub. L. 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 investing in small
businesses to help them grow and scale, SBA strives to increase equity
and growth capital available to underserved small business owners and
unlock equity and equity-like loan financing as sources 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 Foundation, ``Diversity of Asset Managers Research
Series: Industry,'' December 7, 2021.
---------------------------------------------------------------------------

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 final regulations.
Since 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 Accrual
SBICs and Reinvestor SBICs 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, SBA expects 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 Accrual SBIC or Reinvestor SBIC fund.
Under these final regulations, 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 final regulations include changes
which reduce bureaucratic processes, such as approving the SBIC's Total
Intended Leverage 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, ``Standard 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 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, 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 SBA. Regulated
SBIC licensees must comply with the business plan and investor
agreements approved by 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
the Watchlist, 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 required for small businesses to
access capital at critical moments, which will in turn help more small
businesses grow and scale. Furthermore, these changes will decrease
SBA's administrative costs.

[[Page 46003]]

SBA does not anticipate significant additional costs or impact on
the subsidy to operate the SBIC program under the final 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.
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 this final rule strikes the appropriate balance between
responsibly streamlining regulations without 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 additional time for SBA to consider the impact of
these eliminations. After considering feedback from stakeholders during
the public comment period of the notice of proposed rulemaking, 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
that the simplest rules finalized 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 final 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 final 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 final
rulemaking?

F. Paperwork Reduction Act, 44 U.S.C., Ch. 35

SBA has determined that this final rule would impose additional
reporting and recordkeeping requirements under the Paperwork Reduction
Act. Generally, this rule is implementing regulations 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 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

[[Page 46004]]

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 final 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 final 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 final 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 final
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 final 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 final rule to
promote reducing barriers to program participation for new funds and
promoting the diversification of SBIC investments. In order to provide
consistency on the distribution calculations, SBA seeks to collect the
information in a new ``Distribution Schedule'' from Accrual SBICs.
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
evaluation and oversight responsibilities, SBA requires SBICs to
provide information on SBA Form 1031 each time financing is extended to
a Small Business. 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
within 30 days after closing an investment. Under this final rule, the
reporting deadline for SBICs (except those subject to the Watchlist)
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, rather than 30
days after the date of each financing. Therefore, there would be no
change to the annual burden estimated at 728 hours.

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 RFA, 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 final 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. This rulemaking
will affect only a limited population of existing and potential SBIC
Licensees. Small entities affected by this final rule are a unique
class comprised of SBIC Licensees. As of March 31, 2022, 294 SBIC
Licensees were in operation.\2\ SBA estimated that approximately 98
percent of these Licensees were small businesses based on North
American Industry Classification System (NAICS) subsector

[[Page 46005]]

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
final rule distinguishes between Leveraged and Non-leveraged Licensees
in applicability of some of its changes and other changes apply to all
SBICs.
---------------------------------------------------------------------------

\2\ Small Business Investment Company (SBIC) Program Overview
Report for the Quarter Ending March 31, 2022 (<a href="http://sba.gov">sba.gov</a>).
---------------------------------------------------------------------------

The final rule applies to all SBICs, 98 percent of which SBA
estimates are small businesses. SBA estimates that the final 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 final rule, detailed below, of a maximum of approximately $823
per SBIC before consideration of the offsetting cost savings of this
final 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 final 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 offset is the facilitation of non-leveraged
SBICs' use of valuation policies that meet GAAP, which decreases costs
of reporting, recordkeeping, and compliance. The final rule's second
offset is the ``Capital Call Line'' that provides an exception from
SBA's prior approval requirement for some lines of credit, thus
reducing those SBICs' compliance costs.
Importantly, this final rule does not directly impact Small
Businesses receiving investments, nor any investors or small banks
participating in the SBIC Licensee. This final rule 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 final rulemaking. Thus, SBA is not required
to conduct a reflexibility flexibility analysis on potential downstream
benefits or costs to those entities.
Even so, this final rulemaking also does not have a significant
economic impact on those small entities directly regulated under this
final rule. SBA expects the changes in this final rule to increase
program participation, access to capital, and diversity of investment
strategies. The final rule does not impose significant new compliance
requirements to SBIC program participants. The final 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 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 per small entity
SBIC 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 final 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 economic impact on small
entities from these various changes, it reasonably expects these
changes to not have significant impacts to the small entities that are
program participants due to Congress authorizing a $1,000,000,000
increase to the program commitment ceiling in FY2022.
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 in 13 CFR Parts 107 and 121

Investment companies, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.

Accordingly, for the reasons stated in the preamble, SBA amends 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. Add Sec. 107.25 to read as follows:

Sec. 107.25 Severability.

Any provision of this part held to be invalid or unenforceable as
applied to any person, entity, or circumstance shall be construed so as
to continue to give the maximum effect to such provision as permitted
by law, including as applied to persons or entities not similarly
situated or to dissimilar circumstances, unless such holding is that
the provision of this part is invalid and unenforceable in all
circumstances, in which event the provision shall be severable from the
remainder of this part and shall not affect the remainder thereof.

0
3. 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;''
0
c. Adding in alphabetical order the definition of ``Capital Call
Line;''
0
d. Revising the definition of ``Charge'' and paragraphs (3)(i) and (ii)
of the definition of ``Control Person;''
0
e. Adding in alphabetical order the definitions of ``Final Licensing
Fee,'' ``GAAP'', and ``Initial Licensing Fee;''
0
f. Revising the definition of ``Leverage;''
0
g. Adding in alphabetical order the definitions of ``Leveraged
Licensee'' and ``Non-leveraged Licensee;''
0
h. Revising the definition of ``Regulatory Capital;''
0
i. Adding in alphabetical order the definition of ``Reinvestor SBIC;''
0
j. Revising the definition of ``Retained Earnings Available for
Distribution;''
0
k. Adding in alphabetical order the definitions of ``Revenue-Based
Financing and Revenue-Based Loan'', ``SBIC,'' ``SBIC website,''
``State,'' ``Total Intended Leverage Commitment,'' ``Total Private
Capital Commitment,'' ``Underlicensed State,'' ``Watchlist,'' and
``Wind-down Plan;'' and
0
l. 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 that
accrues interest over its ten-year term, as to which instrument SBA
guarantees both the principal and unpaid accrued interest.
Accrual Small Business Investment Company (``Accrual SBIC'') means
a Section 301(c) Partnership Licensee,

[[Page 46006]]

licensed under Sec. 107.300 and approved by SBA to issue Accrual
Debentures. Accrual SBICs shall be limited to a maximum of one and one
quarter tiers of Leverage.
* * * * *
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 and such limited partner also has no role in the management
of the subject Licensee, with no right to control or approve any matter
(other than such entity's vote as a limited partner) involving the
Licensee.
* * * * *
Capital Call Line has the meaning set forth in Sec. 107.550(c).
* * * * *
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
paragraph (1) or (2) of this definition; and
(ii) Participates in the investment decisions of the general
partner of such Partnership Licensee; provided that, if at least 30% of
Regulatory Capital is unaffiliated and unassociated with management of
the Licensee, the management company of the Licensee is a government
sponsored non-profit entity, the general partners of the Licensee are
bound by a fiduciary duty to the investors in the Licensee, and such
members of the general partner may not be hired or removed directly or
indirectly by such government sponsor, the management of the Licensee
will be deemed to be free from any outside Control; and
* * * * *
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.
* * * * *
Regulatory Capital means:
(1) General. Regulatory Capital means Private Capital, excluding
non-cash assets contributed to a Licensee or a license applicant and
non-cash assets purchased by a license applicant, unless such assets
have been converted to cash or have been approved by SBA for inclusion
in Regulatory Capital. For purposes of this definition, sales of
contributed non-cash assets with recourse or borrowing against such
assets shall not constitute a conversion to cash. Regulatory Capital
becomes Leverageable Capital when it is paid in.
(2) Exclusion of questionable commitments. An investor's commitment
to a Licensee is excluded from Regulatory Capital if SBA determines
that there is a lack of enforceable legal agreements under United
States law or there is an issue of collectability for financial or any
other reason, provided, however, that the unfunded commitment of an
investor that has satisfied the applicable net worth test set forth in
the definition of Institutional Investor will not be of questionable
collectability (for financial reasons) if the Licensee's limited
partnership agreement (or other governing agreement) contains
sufficient provisions to ensure collectability.
Reinvestor SBIC has the meaning set forth in Sec. 107.720(a)(2).
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.
Revenue-Based Financing and Revenue-Based Loan have the meaning set
forth in Sec. 107.810.
* * * * *
SBIC means Small Business Investment Company and has the same
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 Intended Leverage Commitment means the dollar amount or ratio
of SBA Leverage commitments to Private Capital commitments. The final
Total Intended Leverage Commitment dollar amount applied in the Accrual
Debenture SBA Share calculation will be finalized no later than 12
months after licensure or upon the Licensee's final close, whichever
occurs first.
Total Private Capital 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.
* * * * *
Watchlist has the meaning set forth in Sec. 107.1850.
Wind-down Plan has the meaning set forth in Sec. 107.590.

[[Page 46007]]

0
4. Amend Sec. 107.150 by:
0
a. Revising the section heading;
0
b. In paragraph (a), revising the heading and adding a parenthetical
sentence at the beginning of the introductory text; and
0
c. Revising paragraphs (b)(1) and (2), the second sentence of paragraph
(c)(1), and paragraph (c)(2).
The revisions and addition 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 more than 70% of a Licensee's
Regulatory Capital and Leverageable Capital. A Traditional Investment
Company may also serve as the management company of an SBIC owning and
control more than 70 percent of the Licensee's Regulatory Capital and
Leverageable Capital. A non-profit entity which is a Traditional
Investment Company may only serve as the management company of a
Licensee and, unlike other Traditional Investment Companies, is limited
to no more than 70% of the Licensee's Regulatory and Leverageable
Capital. A Licensee must be a for-profit entity. 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 serving as the
management company of a for-profit SBIC benefits from the use of the
SBIC 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
5. 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);
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 the general rule in this paragraph (a)(1), 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
6. 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 (a), SBIC
applicants must submit a Management Assessment Questionnaire (``MAQ'')
c 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 (a) to submit a MAQ, unless otherwise determined by SBA in
SBA's discretion. Eligible ``Expedited Subsequent Funds'' as described
in Sec. 107.305(e) are permitted to submit a streamlined ``Short-
Form'' Subsequent Fund MAQ.
(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 with all required appendices, 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 Intended Leverage Commitment amount and ratio as defined in Sec.
107.50 based on the target fund size stated in the MAQ, 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. A
Licensee is permitted to hold multiple fund closings within and for up
to 12 months of receiving a License to reach the target fund size. SBA
will then determine the final Total Intended Leverage Commitment which
is either the dollar amount or ratio to targeted Private Capital
provided at the Green Light. SBA will determine the Total Private
Capital Commitment (defined as the total Private Capital committed to a
Licensee within 12 months after licensure or upon the Licensee's final
closing, whichever occurs first) amount for the Accrual Debenture SBA
Share calculation.
(c) Licensing Fees. SBIC Initial and Final Licensing Fees are non-
refundable fees determined as set forth in paragraphs (c)(1) and (2) of
this section.
(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:

Table 1 to Paragraph (c)(1)
------------------------------------------------------------------------
Initial
Fund sequence licensing fee
------------------------------------------------------------------------
Fund I.................................................. $5,000
Fund II................................................. 10,000

[[Page 46008]]

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 2 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
7. Amend Sec. 107.305 by:
0
a. Revising paragraphs (a), (b), and (c);
0
b. Adding a heading to paragraph (d); and
0
c. Adding paragraph (e).
The revisions and additions read as follows:

Sec. 107.305 Evaluation of license applicants.

* * * * *
(a) Management qualifications. 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) Demonstrated investment acumen. 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) Strategy and fit. 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 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. As determined by SBA, a Licensee may not materially deviate
from the proposed investment strategy after three years of Licensure.
(d) Structure and ec

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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.