[Code of Federal Regulations]
[Title 13, Volume 1]
[Revised as of January 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 13CFR107]
[Page 33-102]
TITLE 13--BUSINESS CREDIT AND ASSISTANCE
CHAPTER I--SMALL BUSINESS ADMINISTRATION
PART 107_SMALL BUSINESS INVESTMENT COMPANIES
Subpart A_Introduction to Part 107
Sec.
107.20 Legal basis and applicability of this part 107.
107.30 Amendments to Act and regulations.
107.40 How to read this part 107.
Subpart B_Definition of Terms Used in Part 107
107.50 Definition of terms.
Subpart C_Qualifying for an SBIC License
Organizing an SBIC
107.100 Organizing a Section 301(c) Licensee.
107.115 1940 Act and 1980 Act Companies.
107.120 Special rules for a Section 301(d) Licensee owned by another
Licensee.
107.130 Requirement for qualified management.
107.140 SBA approval of initial Management Expenses.
107.150 Management-ownership diversity requirement.
107.160 Special rules for Licensees formed as limited partnerships.
Capitalizing an SBIC
107.200 Adequate capital for Licensees.
107.210 Minimum capital requirements for Licensees.
107.230 Permitted sources of Private Capital for Licensees.
107.240 Limitations on including non-cash capital contributions in
Private Capital.
107.250 Exclusion of stock options issued by Licensee from Management
Expenses.
Applying for an SBIC License
107.300 License application form and fee.
Subpart D_Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
107.400 Changes in ownership of 10 percent or more of Licensee but no
change of Control.
107.410 Changes in Control of Licensee (through change in ownership or
otherwise).
107.420 Prohibition on exercise of ownership or Control rights in
Licensee before SBA approval.
107.430 Notification to SBA of transactions that may change ownership or
Control.
107.440 Standards governing prior SBA approval for a proposed transfer
of Control.
107.450 Notification to SBA of pledge of Licensee's shares.
Restrictions on Common Control or Ownership of Two or More Licensees
107.460 Restrictions on Common Control or ownership of two (or more)
Licensees.
Change in Structure of Licensee
107.470 SBA approval of merger, consolidation, or reorganization of
Licensee.
Transfer of License
107.475 Transfer of license.
Subpart E_Managing the Operations of a Licensee
General Requirements
107.500 Lawful operations under the Act.
107.501 Identification as a Licensee.
107.502 Representations to the public.
107.503 Licensee's adoption of an approved Valuation Policy.
107.504 Equipment and office requirements.
107.505 Facsimile requirement.
107.506 Safeguarding Licensee's assets/Internal controls.
107.507 Violations based on false filings and nonperformance of
agreements with SBA.
107.509 Employment of SBA officials.
Management and Compensation
107.510 SBA approval of Licensee's Investment Adviser/Manager.
107.520 Management Expenses of a Licensee.
Cash Management by a Licensee
107.530 Restrictions on investments of idle funds by leveraged
Licensees.
[[Page 34]]
Borrowing by Licensees From Non-SBA Sources
107.550 Prior approval of secured third-party debt of leveraged
Licensees.
107.560 Subordination of SBA's creditor position.
107.570 Restrictions on third-party debt of issuers of Participating
Securities.
Voluntary Decrease in Licensee's Regulatory Capital
107.585 Voluntary decrease in Licensee's Regulatory Capital.
Requirement To Conduct Active Investment Operations
107.590 Licensee's requirement to maintain active operations.
Subpart F_Recordkeeping, Reporting, and Examination Requirements for
Licensees
Recordkeeping Requirements for Licensees
107.600 General requirement for Licensee to maintain and preserve
records.
107.610 Required certifications for Loans and Investments.
107.620 Requirements to obtain information from Portfolio Concerns.
Reporting Requirements for Licensees
107.630 Requirement for Licensees to file financial statements with SBA
(Form 468).
107.640 Requirement to file Portfolio Financing Reports (SBA Form 1031).
107.650 Requirement to report portfolio valuations to SBA.
107.660 Other items required to be filed by Licensee with SBA.
107.670 Application for exemption from civil penalty for late filing of
reports.
107.680 Reporting changes in Licensee not subject to prior SBA approval.
Examinations of Licensees by SBA for Regulatory Compliance
107.690 Examinations.
107.691 Responsibilities of Licensee during examination.
107.692 Examination fees.
Subpart G_Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
107.700 Compliance with size standards in part 121 of this chapter as a
condition of Assistance.
107.710 Requirement to finance smaller enterprises.
107.720 Small Businesses that may be ineligible for financing.
107.730 Financings which constitute conflicts of interest.
107.740 Portfolio diversification (``overline'' limitation).
107.750 Conditions for financing a change of ownership of a Small
Business.
107.760 How a change in size or activity of a Portfolio Concern affects
the Licensee and the Portfolio Concern.
Structuring Licensee's Financing of Eligible Small Businesses: Types of
Financing
107.800 Financings in the form of Equity Securities.
107.810 Financings in the form of Loans.
107.815 Financings in the form of Debt Securities.
107.820 Financings in the form of guarantees.
107.825 Purchasing securities from an underwriter or other third party.
Structuring Licensee's Financing of an Eligible Small Business: Terms
and Conditions of Financing
107.830 Minimum duration/term of financing.
107.835 Exceptions to minimum duration/term of Financing.
107.840 Maximum term of financing.
107.845 Maximum rate of amortization on Loans and Debt Securities.
107.850 Restrictions on redemption of Equity Securities.
107.855 Interest rate ceiling and limitations on fees charged to small
businesses (``Cost of Money'').
107.860 Financing fees and expense reimbursements a Licensee may receive
from a small business.
107.865 Control of a small business by a Licensee.
107.880 Assets acquired in liquidation of Portfolio securities.
Limitations on Disposition of Assets
107.885 Disposition of assets to Licensee's Associates or to competitors
of Portfolio Concern.
Management Services and Fees
107.900 Management fees for services provided to a Small Business by
Licensee or its Associate.
Subpart H_Non-leveraged Licensees-Exceptions to Regulations
107.1000 Licensees without leverage--exceptions to the regulations.
[[Page 35]]
Subpart I_SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
107.1100 Types of Leverage and application procedures.
107.1120 General eligibility requirements for Leverage.
107.1130 Leverage fees and additional charges payable by Licensee.
107.1140 Licensee's acceptance of SBA remedies under Sec. Sec. 107.1800
through 107.1820.
Maximum Amount of Leverage for Which a Licensee Is Eligible
107.1150 Maximum amount of Leverage for a Section 301(c) Licensee.
107.1160 Maximum amount of Leverage for a Section 301(d) Licensee.
107.1170 Maximum amount of Participating Securities for any Licensee.
Conditional Commitments by SBA To Reserve Leverage for a Licensee
107.1200 SBA's Leverage commitment to a Licensee--application procedure,
amount, and term.
107.1210 Payment of leverage fee upon receipt of commitment.
107.1220 Requirement for Licensee to file quarterly financial
statements.
107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
107.1240 Funding of Licensee's draw request through sale to short-term
investor.
Preferred Securities Leverage--Section 301(d) Licensees
107.1400 Dividends or partnership distributions on 4 percent Preferred
Securities.
107.1410 Requirement to redeem 4 percent Preferred Securities.
107.1420 Articles requirements for 4 percent Preferred Securities.
107.1430 Redeeming 4 percent Preferred Securities with proceeds of non-
subsidized Debentures.
107.1440 Three percent preferred stock issued before November 21, 1989.
107.1450 Optional redemption of Preferred Securities.
Participating Securities Leverage
107.1500 General description of Participating Securities.
107.1505 Liquidity requirements for Licensees issuing Participating
Securities.
107.1510 How a Licensee computes Earmarked Profit (Loss).
107.1520 How a Licensee computes and allocates Prioritized Payments to
SBA.
107.1530 How a Licensee computes SBA's Profit Participation.
107.1540 Distributions by Licensee--Prioritized Payments and
Adjustments.
107.1550 Distributions by Licensee--permitted ``tax Distributions'' to
private investors and SBA.
107.1560 Distributions by Licensee--required Distributions to private
investors and SBA.
107.1570 Distributions by Licensee--optional Distribution to private
investors and SBA.
107.1575 Distributions on other than Payment Dates.
107.1580 Special rules for In-Kind Distributions by Licensees.
107.1585 Exchange of Debentures for Participating Securities.
107.1590 Special rules for companies licensed on or before March 31,
1993.
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
107.1600 SBA authority to issue and guarantee Trust Certificates.
107.1610 Effect of prepayment or early redemption of Leverage on a Trust
Certificate.
107.1620 Functions of agents, including Central Registration Agent,
Selling Agent and Fiscal Agent.
107.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
107.1640 SBA access to records of the CRA, Brokers, Dealers and Pool or
Trust assemblers.
Miscellaneous
107.1700 Transfer by SBA of its interest in Licensee's Leverage
security.
107.1710 SBA authority to collect or compromise its claims.
107.1720 Characteristics of SBA's guarantee.
Subpart J_Licensee's Noncompliance With Terms of Leverage
107.1800 Licensee's agreement to terms and conditions in Sec. Sec.
107.1810 and 107.1820.
107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
107.1820 Conditions affecting issuers of Preferred Securities and/or
Participating Securities.
Computation of Licensee's Capital Impairment
107.1830 Licensee's Capital Impairment--definition and general
requirements.
107.1840 Computation of Licensee's Capital Impairment Percentage.
107.1850 Exceptions to Capital Impairment provisions for Licensees with
outstanding Participating Securities.
[[Page 36]]
Subpart K_Ending Operations as a Licensee
107.1900 Surrender of license.
Subpart L_Miscellaneous
107.1910 Non-waiver of SBA's rights or terms of Leverage security.
107.1920 Licensee's application for exemption from a regulation in this
part 107.
107.1930 Effect of changes in this part 107 on transactions previously
consummated.
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g,
687m, and Pub. L. 106-554, 114 Stat. 2763.
Source: 61 FR 3189, Jan. 31, 1996, unless otherwise noted.
Subpart A_Introduction to Part 107
Sec. 107.20 Legal basis and applicability of this part 107.
(a) The regulations in this part implement Title III of the Small
Business Investment Act of 1958, as amended. All Licensees must comply
with all applicable regulations, accounting guidelines and valuation
guidelines for Licensees.
(b) Provisions of this part which are not mandated by the Act shall
not supersede existing State law. A party claiming that a conflict
exists shall submit an opinion of independent counsel, citing
authorities, for SBA's resolution of the issues involved.
Sec. 107.30 Amendments to Act and regulations.
A Licensee shall be subject to all existing and future provisions of
the Act and parts 107 and 112 of title 13 of the Code of Federal
Regulations.
Sec. 107.40 How to read this part 107.
(a) Center Headings. All references in this part to SBA forms, and
instructions for their preparation, are to the current issue of such
forms. Center headings are descriptive and are used for convenience
only. They have no regulatory effect.
(b) Capitalizing defined terms. Terms defined in Sec. 107.50 are
capitalized in this part 107.
(c) The pronoun ``you'' as used in this part 107 means a Licensee or
license applicant, as appropriate, unless otherwise noted.
Subpart B_Definition of Terms Used in Part 107
Sec. 107.50 Definition of terms.
Accumulated Prioritized Payments has the meaning set forth in Sec.
107.1520.
Act means the Small Business Investment Act of 1958, as amended.
Adjustments has the meaning set forth in Sec. 107.1520.
Affiliate or Affiliates has the meaning set forth in Sec. 121.103
of this chapter.
Articles mean articles of incorporation or charter for a Corporate
Licensee and the partnership agreement or certificate for a Partnership
Licensee.
Assistance or Assisted means Financing of or management services
rendered to a Small Business by a Licensee pursuant to the Act and these
regulations.
Associate of a Licensee means any of the following:
(1)(i) An officer, director, employee or agent of a Corporate
Licensee;
(ii) A Control Person, employee or agent of a Partnership Licensee;
(iii) An Investment Adviser/Manager of any Licensee, including any
Person who contracts with a Control Person of a Partnership Licensee to
be the Investment Adviser/Manager of such Licensee; or
(iv) Any Person regularly serving a Licensee on retainer in the
capacity of attorney at law.
(2) Any Person who owns or controls, or who has entered into an
agreement to own or control, directly or indirectly, at least 10 percent
of any class of stock of a Corporate Licensee or a limited partner's
interest of at least 10 percent of the partnership capital of a
Partnership Licensee. However, a limited partner in a Partnership
Licensee is not considered an Associate if such Person is an entity
Institutional Investor whose investment in the Partnership, including
commitments, represents no more than 33 percent of the partnership
capital of the Licensee and no more than five percent of such Person's
net worth.
[[Page 37]]
(3) Any officer, director, partner (other than a limited partner),
manager, agent, or employee of any Associate described in paragraph (1)
or (2) of this definition.
(4) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, a Licensee.
(5) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, any Person described in
paragraphs (1) and (2) of this definition.
(6) Any Close Relative of any Person described in paragraphs
(1),(2), (4), and (5) of this definition.
(7) Any Secondary Relative of any Person described in paragraphs
(1), (2), (4), and (5) of this definition.
(8) Any concern in which--
(i) Any person described in paragraphs (1) through (6) of this
definition is an officer; general partner, or managing member; or
(ii) Any such Person(s) singly or collectively Control or own,
directly or indirectly, an equity interest of at least 10 percent
(excluding interests that such Person(s) own indirectly through
ownership interests in the Licensee).
(9) Any concern in which any Person(s) described in paragraph (7) of
this definition singly or collectively own (including beneficial
ownership) a majority equity interest, or otherwise have Control. As
used in this paragraph (9), ``collectively'' means together with any
Person(s) described in paragraphs (1) though (7) of this definition.
(10) For the purposes of this definition, if any Associate
relationship described in paragraphs (1) through (7) of this definition
exists at any time within six months before or after the date that a
Licensee provides Financing, then that Associate relationship is
considered to exist on the date of the Financing.
(11) If any Licensee has any ownership interest in another Licensee,
the two Licensees are Associates of each other.
Capital Impairment has the meaning set forth in Sec. 107.1830(c).
Central Registration Agent or CRA means one or more agents appointed
by SBA for the purpose of issuing TCs and performing the functions
enumerated in Sec. 107.1620 and performing similar functions for
Debentures and Participating Securities funded outside the pooling
process.
Charge means an annual fee on Leverage issued on or after October 1,
1996 (except for Leverage issued pursuant to a commitment made by SBA
before October 1, 1996), which is payable to SBA by Licensees, subject
to the terms and conditions set forth in Sec. 107.1130(d).
Close Relative of an individual means:
(1) A current or former spouse;
(2) A father, mother, guardian, brother, sister, son, daughter; or
(3) A father-in-law, mother-in-law, brother-in-law, sister-in-law,
son-in-law, or daughter-in-law.
Combined Capital means the sum of Regulatory Capital and outstanding
Leverage.
Commitment means a written agreement between a Licensee and an
eligible Small Business that obligates the Licensee to provide Financing
(except a guarantee) to that Small Business in a fixed or determinable
sum, by a fixed or determinable future date. In this context the term
``agreement'' means that there has been agreement on the principal
economic terms of the Financing. The agreement may include reasonable
conditions precedent to the Licensee's obligation to fund the
commitment, but these conditions must be outside the Licensee's control.
Common Control means a condition where two or more Persons, either
through ownership, management, contract, or otherwise, are under the
Control of one group or Person. Two or more Licensees are presumed to be
under Common Control if they are Affiliates of each other by reason of
common ownership or common officers, directors, or general partners; or
if they are managed or their investments are significantly directed
either by a common independent investment advisor or managerial
contractor, or by two or more such advisors or contractors that are
Affiliates of each other. This presumption may be rebutted by evidence
satisfactory to SBA.
Control means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
Licensee or other concern, whether through the ownership of
[[Page 38]]
voting securities, by contract, or otherwise.
Control Person means any Person that controls a Licensee, either
directly or through an intervening entity. A Control Person includes:
(1) A general partner of a Partnership Licensee;
(2) Any Person serving as the general partner, officer, director, or
manager (in the case of a limited liability company) of any entity that
controls a Licensee, either directly or through an intervening entity;
(3) Any Person that--
(i) Controls or owns, directly or through an intervening entity, at
least 10 percent of a Partnership Licensee or any entity described in
paragraphs (1) or (2) of this definition; and
(ii) Participates in the investment decisions of the general partner
of such Partnership Licensee;
(4) Any Person that controls or owns, directly or through an
intervening entity, at least 50 percent of a Partnership Licensee or any
entity described in paragraphs (1) or (2) of this definition.
Corporate Licensee. See definition of Licensee in this section.
Cost of Money has the meaning set forth in Sec. 107.855.
Debenture Rate means the interest rate, as published from time to
time in the Federal Register by SBA, for ten year debentures issued by
Licensees and funded through public sales of certificates bearing SBA's
guarantee. User or guarantee fees, if any, paid by a Licensee are not
considered in determining the Debenture Rate.
Debentures means debt obligations issued by Licensees pursuant to
section 303(a) of the Act and held or guaranteed by SBA.
Debt Securities has the meaning set forth in Sec. 107.815.
Disadvantaged Business means a Small Business that is at least 50
percent owned, and controlled and managed, on a day to day basis, by a
person or persons whose participation in the free enterprise system is
hampered because of social or economic disadvantages.
Distributable Securities means equity securities that are determined
by SBA (with the advice of a third party expert in the marketing of
securities) to meet each of the following requirements:
(1) The securities (which may include securities that are salable
pursuant to the provisions of Rule 144 (17 CFR 230.144) under the
Securities Act of 1933, as amended) are salable immediately without
restriction under Federal and state securities laws;
(2) The securities are of a class:
(i) Which is listed and registered on a national securities
exchange, or
(ii) For which quotation information is disseminated in the National
Association of Securities Dealers Automated Quotation System and as to
which transaction reports and last sale data are disseminated pursuant
to Rule 11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities Exchange Act
of 1934, as amended; and
(3) The quantity of such securities to be distributed to SBA can be
sold over a reasonable period of time without having an adverse impact
upon the price of the security.
Distribution means any transfer of cash or non-cash assets to SBA,
its agent or Trustee, or to partners in a Partnership Licensee, or to
shareholders in a Corporate Licensee. Capitalization of Retained
Earnings Available for Distribution constitutes a Distribution to the
Licensee's non-SBA partners or shareholders.
Earmarked Assets has the meaning set forth in Sec. 107.1510(b).
(See also Sec. 107.1590.)
Earmarked Profit (Loss) has the meaning set forth in Sec. 107.1510.
Earned Prioritized Payments has the meaning set forth in Sec.
107.1520.
Equity Capital Investments means investments in a Small Business in
the form of common or preferred stock, limited partnership interests,
options, warrants, or similar equity instruments, including subordinated
debt with equity features if such debt provides only for interest
payments contingent upon and limited to the extent of earnings. Equity
Capital Investments must not require amortization. Equity Capital
Investments may be guaranteed; however, neither Equity Capital
Investments nor such guarantee may be collateralized or otherwise
secured. Investments classified as Debt Securities (see Sec. Sec.
107.800 and
[[Page 39]]
107.815) are not precluded from qualifying as Equity Capital
Investments.
Equity Securities has the meaning set forth in Sec. 107.800.
Financing or Financed means outstanding financial assistance
provided to a Small Business by a Licensee, whether through:
(1) Loans;
(2) Debt Securities;
(3) Equity Securities;
(4) Guarantees; or
(5) Purchases of securities of a Small Business through or from an
underwriter (see Sec. 107.825).
Guaranty Agreement means the contract entered into by SBA which is a
guarantee backed by the full faith and credit of the United States
Government as to timely payment of principal and interest on Debentures
or the Redemption Price of and Prioritized Payments on Participating
Securities and SBA's rights in connection with such guarantee.
Includible Non-Cash Gains means those non-cash gains (as reported on
SBA Form 468) that are realized in the form of Publicly Traded and
Marketable securities or investment grade debt instruments. For purposes
of this definition, investment grade debt instruments means those
instruments that are rated ``BBB'' or ``Baa'', or better, by Standard &
Poor's Corporation or Moody's Investors Service, respectively. Non-rated
debt may be considered to be investment grade if Licensee obtains a
written opinion from an investment banking firm acceptable to SBA
stating that the non-rated debt instrument is equivalent in risk to the
issuer's investment grade debt.
Institutional Investor means:
(1) Entities. Any of the following entities if the entity has a net
worth (exclusive of unfunded commitments from investors) of at least $1
million, or such higher amount as is specified in paragraph (1) of this
definition. (See also Sec. 107.230(b)(4) for limitations on the amount
of an Institutional Investor's commitment that may be included in
Private Capital.)
(i) A State or National bank, trust company, savings bank, or
savings and loan association.
(ii) An insurance company.
(iii) A 1940 Act Investment Company or Business Development Company
(each as defined in the Investment Company Act of 1940, as amended (15
U.S.C. 8a-1 et seq.).
(iv) A holding company of any entity described in paragraph (1)(i),
(ii) or (iii) of this definition.
(v) An employee benefit or pension plan established for the benefit
of employees of the Federal government, any State or political
subdivision of a State, or any agency or instrumentality of such
government unit.
(vi) An employee benefit or pension plan (as defined in the Employee
Retirement Income Security Act of 1974, as amended (Pub. L. 93-406, 88
Stat. 829), excluding plans established under section 401(k) of the
Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
(vii) A trust, foundation or endowment exempt from Federal income
taxation under the Internal Revenue Code of 1986, as amended.
(viii) A corporation, partnership or other entity with a net worth
(exclusive of unfunded commitments from investors) of more than $10
million.
(ix) A State, a political subdivision of a State, or an agency or
instrumentality of a State or its political subdivision.
(x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors
described in paragraphs (1)(i) through (1)(ix) of this definition, each
of whom must have at least a 10 percent ownership interest in the
entity.
(xi) Any other entity that SBA determines to be an Institutional
Investor.
(2) Individuals. (i) Any of the following individuals if he/she is
also a permanent resident of the United States:
(A) An individual who is an Accredited Investor (as defined in the
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose
commitment to the Licensee is backed by a letter of credit from a State
or National bank acceptable to SBA.
(B) An individual whose personal net worth is at least $2 million
and at least ten times the amount of his or her
[[Page 40]]
commitment to the Licensee. The individual's personal net worth must not
include the value of any equity in his or her most valuable residence.
(C) An individual whose personal net worth (determined in accordance
with paragraph (2)(i)(B) of this definition) is at least $10 million.
(ii) Any individual who is not a permanent resident of the United
States but who otherwise satisfies paragraph (2)(i) of this definition
provided such individual has irrevocably appointed an agent within the
United States for the service of process.
Investment Adviser/Manager means any Person who furnishes advice or
assistance with respect to operations of a Licensee under a written
contract executed in accordance with the provisions of Sec. 107.510.
Lending Institution means a concern that is operating under
regulations of a state or Federal licensing, supervising, or examining
body, or whose shares are publicly traded and listed on a recognized
stock exchange or NASDAQ and which has assets in excess of $500 million;
and which, in either case, holds itself out to the public as engaged in
the making of commercial and industrial loans and whose lending
operations are not for the purpose of financing its own or an
Associates's sales or business operations.
Leverage means financial assistance provided to a Licensee by SBA,
either through the purchase or guaranty of a Licensee's Debentures or
Participating Securities, or the purchase of a Licensee's Preferred
Securities, and any other SBA financial assistance evidenced by a
security of the Licensee.
Leverageable Capital means Regulatory Capital, excluding unfunded
commitments.
Licensee means either a corporation (Corporate Licensee), or a
limited partnership organized pursuant to Sec. 107.160 (Partnership
Licensee), to which a license has been granted pursuant to the Act. For
certain purposes, the Entity General Partner of a Partnership Licensee
is treated as if it were a Licensee (see Sec. 107.160(b)(2)).
LMI Enterprise means:
(1) A Small Business that has at least 50% of its employees or
tangible assets located in LMI Zone(s) or in which at least 35% of the
full-time employees have primary residences in LMI Zone(s), in either
case determined as of the time of application for SBIC financing; or
(2) A Small Business that does not meet the requirements of
paragraph (1) of this definition as of the time of application for SBIC
financing but that certifies at such time that it intends to meet the
requirements within 180 days after the closing of the SBIC financing. A
Small Business qualifying under this paragraph (2) will no longer be an
LMI Enterprise as of the 180th day after the closing of the SBIC
financing unless, on or before such date, at least 50% of its employees
or tangible assets are located in LMI Zones or at least 35% of its full-
time employees have primary residences in LMI Zones.
LMI Investment means a financing of an LMI Enterprise, made after
September 30, 1999, in the form of equity securities or debt securities
that are junior to all existing or future secured borrowings of the
business. The debt securities may be guaranteed and may be secured by
the assets of the LMI Enterprise, but the guarantee may not be
collateralized or otherwise secured.
LMI Zone means any area located within a HUBZone (as defined in 13
CFR 126.103), an Urban Empowerment Zone or Urban Enterprise Community
(as designated by the Secretary of the Department of Housing and Urban
Development), a Rural Empowerment Zone or Rural Enterprise Community (as
designated by the Secretary of the Department of Agriculture), an area
of Low Income or Moderate Income (as recognized by the Federal Financial
Institutions Examination Council), or a county with Persistent Poverty
(as classified by the Economic Research Service of the Department of
Agriculture).
Loan has the meaning set forth in Sec. 107.810.
Loans and Investments means Portfolio Securities, Assets Acquired in
Liquidation of Portfolio Securities, Operating Concerns Acquired, and
Notes and Other Securities Received, as set forth in the Statement of
Financial Position of SBA Form 468.
Management Expenses has the meaning set forth in Sec. 107.520.
[[Page 41]]
1940 Act Company means a Licensee which is registered under the
Investment Company Act of 1940.
1980 Act Company means a Licensee which is registered under the
Small Business Investment Incentive Act of 1980.
Original Issue Price means the price paid by the purchaser for
securities at the time of issuance.
Participating Securities means preferred stock, preferred limited
partnership interests, or similar instruments issued by Licensees,
including debentures having interest payable only to the extent of
earnings, all of which are subject to the terms set forth in Sec. Sec.
107.1500 through 107.1590 and section 303(g) of the Act.
Partnership Licensee. See definition of Licensee in this section.
Payment Date means, for a Participating Securities issuer, each
February 1, May 1, August 1, and November 1 during the term of a
Participating Security.
Person means a natural person or legal entity.
Pool means an aggregation of SBA guaranteed Debentures or SBA
guaranteed Participating Securities approved by SBA.
Portfolio means the securities representing a Licensee's total
outstanding Financing of Small Businesses. It does not include idle
funds or assets acquired in liquidation of Portfolio securities.
Portfolio Concern means a Small Business Assisted by a Licensee.
Preferred Securities means nonvoting preferred stock or nonvoting
limited partnership interests issued to SBA prior to October 1, 1996, by
a Section 301(d) Licensee. Such securities were issued at par value in
the case of preferred stock, or at face value in the case of preferred
limited partnership interests.
Prioritized Payments has the meaning set forth in Sec. 107.1520.
Private Capital has the meaning set forth in Sec. 107.230.
Profit Participation has the meaning set forth in Sec.
107.1500(c)(3).
Publicly Traded and Marketable means securities that are salable
without restriction or that are salable within 12 months pursuant to
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by
the holder thereof (or in the case of an In-kind Distribution by the
distributee thereof), and are of a class which is traded on a regulated
stock exchange, or is listed in the Automated Quotation System of the
National Association of Securities Dealers (NASDAQ), or has, at a
minimum, at least two market makers as defined in the relevant sections
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et
seq.), and in all cases the quantity of which can be sold over a
reasonable period of time without having an adverse impact upon the
price of the stock.
Qualified Non-private Funds has the meaning set forth in Sec.
107.230.
Redemption Price means the amount required to be paid by the issuer,
or successor to the issuer, of Preferred or Participating Securities to
repurchase such securities from the holder. The Redemption Price shall
be the Original Issue Price less any prepayments or prior redemptions.
Regulatory Capital means:
(1) General. Regulatory Capital means Private Capital, excluding
non-cash assets contributed to a Licensee or a license applicant, and
non-cash assets purchased by a license applicant, unless such assets
have been converted to cash or have been approved by SBA for inclusion
in Regulatory Capital. For purposes of this definition, sales of
contributed non-cash assets with recourse or borrowing against such
assets shall not constitute a conversion to cash.
(2) Exclusion of questionable commitments. An investor's commitment
to a Licensee is excluded from Regulatory Capital if SBA determines that
the collectibility of the commitment is questionable.
Retained Earnings Available for Distribution means Undistributed Net
Realized Earnings less any Unrealized Depreciation on Loans and
Investments (as reported on SBA Form 468), and represents the amount
that a Licensee may distribute to investors (including SBA) as a profit
Distribution, or transfer to Private Capital.
SBA means the Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
[[Page 42]]
Secondary Relative of an individual means:
(1) A grandparent, grandchild, or any other ancestor or lineal
descendent who is not a Close Relative;
(2) An uncle, aunt, nephew, niece, or first cousin; or
(3) A spouse of any person described in paragraph (1) or (2) of this
definition.
Section 301(c) Licensee has the meaning set forth in Sec. 107.100.
Section 301(d) Licensee means a company licensed prior to October 1,
1996 under section 301(d) of the Act as in effect on the date of
licensing, that may provide Assistance only to Disadvantaged Businesses.
A Section 301(d) Licensee may be organized as a for-profit corporation,
as a non-profit corporation, or as a limited partnership.
Short-term Financing means Financing with a term of less than one
year in accordance with the regulations.
SIC Manual means the latest issue of the Standard Industrial
Classification Manual, prepared by the Office of Management and Budget,
and available from the U.S. Government Printing Office, Superintendent
of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-7954.
Small Business means a small business concern as defined in section
103(5) of the Act (including its Affiliates), which for purposes of size
eligibility, meets the applicable criteria set forth in part 121 of this
chapter.
Smaller Enterprise has the meaning set forth in Sec. 107.710.
Start-up Financing means an Equity Capital Investment in a Small
Business that--
(1) Has not had sales exceeding $3,000,000 or positive cash flow
from operations in any of its last three full fiscal years; and
(2) Was not formed to acquire any existing business, unless the
acquired business satisfies paragraphs (1) and (2) of this definition.
Temporary Debt has the meaning set forth in Sec. 107.570.
Trust means the legal entity created for the purpose of holding
guaranteed Debentures or Participating Securities and the guaranty
agreement related thereto, receiving, holding and making any related
payments, and accounting for such payments.
Trust Certificate Rate means a fixed rate determined by the
Secretary of the Treasury at the time Participating Securities or
Debentures are pooled, taking into consideration the current average
market yield on outstanding marketable obligations of the United States
with maturities comparable to the maturities of the Trust Certificates
being guaranteed by SBA, adjusted to the nearest one-eighth of one
percent.
Trust Certificates (TCs) means certificates issued by SBA, its agent
or Trustee and representing ownership of all or a fractional part of a
Trust or Pool of Debentures or Participating Securities.
Trustee means the trustee or trustees of a Trust.
Undistributed Net Realized Earnings means Undistributed Realized
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
Unrealized Appreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, exceeds the cost basis thereof.
Unrealized Depreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, is below the cost basis thereof.
Unrealized Gain (Loss) on Securities Held means the sum of the
Unrealized Appreciation and Unrealized Depreciation on all of a
Licensee's Loans and Investments, less estimated future income tax
expense or estimated realizable future income tax benefit, as
appropriate.
Venture Capital Financing has the meaning set forth in Sec.
107.1160.
Wind-up Plan has the meaning set forth in Sec. 107.590.
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 62
FR 11759, Mar. 13, 1997; 63 FR 5865, Feb. 5, 1998; 64 FR 52645, Sept.
30, 1999; 64 FR 70995, Dec. 20, 1999; 69 FR 8098, Feb. 23, 2004]
[[Page 43]]
Subpart C_Qualifying for an SBIC License
Organizing an SBIC
Sec. 107.100 Organizing a Section 301(c) Licensee.
Section 301(c) Licensee means a company licensed under section
301(c) of the Act. It may be organized as a for-profit corporation or as
a limited partnership created in accordance with the special rules of
Sec. 107.160.
Sec. 107.115 1940 Act and 1980 Act Companies.
A 1940 Act or 1980 Act Company is eligible to apply for an SBIC
license, and an existing Licensee is eligible to apply for SBA's
approval to convert to a 1940 Act or 1980 Act Company. In either case,
the 1940 Act or 1980 Act Company may elect to be taxed as a regulated
investment company under section 851 of the Internal Revenue Code of
1986, as amended (26 U.S.C. 851). However, a Licensee making such
election may make Distributions only as permitted under the applicable
sections of this part (see the definition of Retained Earnings Available
for Distribution, Sec. 107.585, and Sec. Sec. 107.1540 through
107.1580).
Sec. 107.120 Special rules for a Section 301(d) Licensee owned by
another Licensee.
With SBA's prior written approval, a Section 301(d) Licensee may
operate as the subsidiary of one or more Licensees (participant
Licensees), subject to the following:
(a) Each participant Licensee must own at least 20 percent of the
voting securities of the Section 301(d) Licensee.
(b) A participant Licensee must treat its entire capital
contribution to the subsidiary as a reduction of its Leverageable
Capital. The participant Licensee's remaining Leverageable Capital must
be sufficient to support its outstanding Leverage.
(c) A participant Licensee may not transfer its Leverage to a
subsidiary Section 301(d) Licensee.
[63 FR 5865, Feb. 5, 1998]
Sec. 107.130 Requirement for qualified management.
When applying for a license, you must show, to the satisfaction of
SBA, that your current or proposed management is qualified and has the
knowledge, experience, and capability necessary for investing in the
types of businesses contemplated by the Act, these regulations and your
business plan. You must designate at least one individual as the
official responsible for contact with SBA.
Sec. 107.140 SBA approval of initial Management Expenses.
If you plan to obtain Leverage, you must have your Management
Expenses approved by SBA at the time of licensing. (See Sec. 107.520
for the definition of Management Expenses.)
Sec. 107.150 Management-ownership diversity requirement.
(a) Diversity requirement. You must satisfy the requirements in
paragraphs (b), (c) and (d) of this section:
(1) In order to obtain an SBIC license (unless you do not plan to
obtain Leverage),
(2) If at the time you were licensed you did not plan to obtain
Leverage, but you now wish to be eligible for Leverage, or
(3) If SBA so requires as a condition of approval of your transfer
of Control under Sec. 107.440.
(b) Percentage ownership requirement. (1) Except as provided in
paragraph (b)(2) of this section, 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.
(2) Exception. An investor that is a traditional investment company,
as determined by SBA, may own and control more than 70 percent of your
Regulatory Capital and your Leverageable Capital. For purposes of this
section, a traditional investment company must be a professionally
managed firm organized exclusively to pool capital from more than one
source for the purpose of investing in businesses that are expected to
generate substantial returns to the firm's investors. In determining
[[Page 44]]
whether a firm is a traditional investment company for purposes of this
section, SBA will also consider:
(i) Whether the managers of the firm are unrelated to and
unaffiliated with the investors in the firm;
(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;
(iii) Whether the firm benefits from the use of the SBIC only
through the financial performance of the SBIC; and
(iv) Other related factors.
(c) Non-affiliation requirement--(1) General rule. At least 30
percent of your Regulatory Capital and Leverageable Capital must be
owned and controlled by three Persons unaffiliated with your management
and unaffiliated with each other, and whose investments are significant
in dollar and percentage terms as determined by SBA. Such Persons must
not be your Associates (except for their status as your shareholders,
limited partners, or members) and must not Control, be Controlled by, or
be under Common Control with any of your Associates. A single
``acceptable'' Institutional Investor may be substituted for two or
three of the three Persons who are otherwise required under this
paragraph. The following Institutional Investors are ``acceptable'' for
this purpose:
(i) Entities whose overall activities are regulated and periodically
examined by state, Federal or other governmental authorities
satisfactory to SBA;
(ii) Entities listed on the New York Stock Exchange;
(iii) Entities that are publicly-traded and that meet both the
minimum numerical listing standards and the corporate governance listing
standards of the New York Stock Exchange;
(iv) Public or private employee pension funds;
(v) Trusts, foundations, or endowments, but only if exempt from
Federal income taxation; and
(vi) Other Institutional Investors satisfactory to SBA.
(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.
(d) Voting requirement. (1) Except as provided in paragraph (d)(2)
of this section, the investors required for you to satisfy diversity may
not delegate their voting rights to any Person who is your Associate, or
who Controls, is Controlled by, or is under Common Control with any of
your Associates, without prior SBA approval.
(2) Exception. Paragraph (d)(1) of this section does not apply to
investors in publicly-traded Licensees, to proxies given to vote in
accordance with specific instructions for single specified meetings, or
to any delegation of voting rights to a Person who is neither a
diversity investor in the Licensee nor affiliated with management of the
Licensee.
(e) Requirement to maintain diversity. If you were required to have
management-ownership diversity at any time, you must maintain such
diversity while you have outstanding Leverage or Earmarked Assets. To
maintain management-ownership diversity, you may continue to satisfy the
diversity requirement as in effect at the time it was first applicable
to you or you may satisfy the management-ownership diversity requirement
as currently in effect. If, at any time, you no longer have the required
management-ownership diversity, you must:
(1) Notify SBA within 10 days; and
(2) Re-establish diversity within six months. For the consequences
of failure to re-establish diversity, see Sec. Sec. 107.1810(g) and
107.1820(f).
[65 FR 71055, Nov. 29, 2000]
Sec. 107.160 Special rules for Licensees formed as limited
partnerships.
A limited partnership organized under State law solely for the
purpose of performing the functions and conducting the activities
contemplated under the Act may apply for a license under section 301(c)
or section 301 (d) of the Act (``Partnership Licensee'').
(a) Number of Licensee's General Partners. If you are a Partnership
Licensee,
[[Page 45]]
you must have as your general partner(s) at least two individuals, or at
least one corporation, partnership, or limited liability company (LLC),
or any combination of individuals, corporations, partnerships, or LLCs.
(b) Entity General Partner of Licensee. A general partner which is a
corporation, limited liability company or partnership (an ``Entity
General Partner'') shall be organized under state law solely for the
purpose of serving as the general partner of one or more Licensees.
(1) SBA must approve any person who will serve as an officer,
director, manager, or general partner of the Entity General Partner.
This provision must be stated in an Entity General Partner's Certificate
of Incorporation, member agreement, Limited Partnership Agreement or
other similar governing instrument which must, in each case, accompany
the license application.
(2) An Entity General Partner is subject to the same examination and
reporting requirements as a Licensee under section 310(b) of the Act.
The restrictions and obligations imposed upon a Licensee by Sec. Sec.
107.1800 through 107.1820, and 107.30, 107.410 through 107.450, 107.470,
107.475, 107.500, 107.510, 107.585, 107.600, 107.680, 107.690 through
107.692, 107.865, and 107.1910 apply also to an Entity General Partner
of a Licensee.
(3) The general partner(s) of your Entity General Partner(s) will be
considered your general partner.
(4) If your Entity General Partner is a limited partnership, its
limited partners may be considered your Control Person(s) if they meet
the definition for Control Person in Sec. 107.50.
(5) If your Entity General Partner is a limited partnership, it is
subject to paragraph (a) of this section.
(c) Other requirements for Partnership Licensees. If you are a
Partnership Licensee:
(1) You must have a minimum duration of ten years or two years
following the maturity of your last-maturing Leverage security,
whichever is longer. After 10 years, if all Leverage has been repaid or
redeemed and all amounts due SBA, its agent, or Trustee have been paid,
the Partnership Licensee may be terminated by a vote of your partners.
(For purposes of this provision SBA is not considered a partner.);
(2) None of your general partner(s) may be removed or replaced by
your limited partners without prior written approval of SBA;
(3) Any transferee of, or successor in interest to, your general
partner shall have only the rights and liabilities of a limited partner
pending SBA's written approval of such transfer or succession; and
(4) You must incorporate all the provisions in this paragraph (c) in
your Limited Partnership Agreement.
(d) Obligations of a Control Person. All Control Persons are bound
by the disciplinary provisions of sections 313 and 314 of the Act and by
the conflict-of-interest rules under section 312 of the Act. The term
Licensee, as used in Sec. Sec. 107.30, 107.460, and 107.680 includes
all of the Licensee's Control Persons. The term Licensee as used in
Sec. 107.670 includes only the Licensee's general partner(s). The
conditions specified in Sec. Sec. 107.1800 through 107.1820 and Sec.
107.1910 apply to all general partners.
(e) Liability of general partner for partnership debts to SBA.
Subject to section 314 of the Act, your general partner is not liable
solely by reason of its status as a general partner for repayment of any
Leverage or debts you owe to SBA unless SBA, in the exercise of
reasonable investment prudence, and with regard to your financial
soundness, determines otherwise prior to the purchase or guaranty of
your Leverage.
(f) Reorganization of Licensee. A corporate Licensee wishing to
reorganize as a Partnership Licensee, or a Partnership Licensee wishing
to reorganize as a Corporate Licensee, may apply to SBA for approval
under Sec. 107.470.
(g) Special Leverage requirement. Before your first issuance of
Leverage, you must furnish SBA with evidence that you qualify as a
partnership for tax purposes, either by a ruling from the Internal
Revenue Service, or by an opinion of counsel.
Capitalizing an SBIC
Sec. 107.200 Adequate capital for Licensees.
You must meet the requirements of this Sec. 107.200 to qualify for
a license, to
[[Page 46]]
continue as a Licensee, and to receive Leverage.
(a) You must have enough Regulatory Capital to provide reasonable
assurance that:
(1) You will operate soundly and profitably over the long term; and
(2) You will be able to operate actively in accordance with your
Articles and within the context of your business plan, as approved by
SBA.
(b) In SBA's sole discretion, you must be economically viable,
taking into consideration actual and anticipated income and losses on
your Loans and Investments, and the experience and qualifications of
your owners and managers.
Sec. 107.210 Minimum capital requirements for Licensees.
(a) Companies licensed on or after October 1, 1996. A company
licensed on or after October 1, 1996 must have Leverageable Capital of
at least $2,500,000 and must meet the applicable minimum Regulatory
Capital requirement:
(1) Licensees other than Participating Securities issuers. A
Licensee that does not wish to be eligible to apply for Participating
Securities must have Regulatory Capital of at least $5,000,000. As an
exception to this general rule, SBA in its sole discretion and based on
a showing of special circumstances and good cause may license an
applicant with Regulatory Capital of at least $3,000,000, but only if
the applicant:
(i) Has satisfied all licensing standards and requirements except
the minimum capital requirement, as determined solely by SBA;
(ii) Has a viable business plan reasonably projecting profitable
operations; and
(iii) Has a reasonable timetable for achieving Regulatory Capital of
at least $5,000,000.
(2) Participating Securities issuers. A Licensee that wishes to be
eligible to apply for Participating Securities must have Regulatory
Capital of at least $10,000,000, unless it demonstrates to SBA's
satisfaction that it can be financially viable over the long term with a
lower amount. Under no circumstances can the Licensee have Regulatory
Capital of less than $5,000,000.
(b) Companies licensed before October 1, 1996. A company licensed
before October 1, 1996 must meet the minimum capital requirements
applicable to such company, as required by the regulations in effect on
September 30, 1996. See Sec. 107.1120(c)(2) for Leverage eligibility
requirements.
[63 FR 5866, Feb. 5, 1998]
Sec. 107.230 Permitted sources of Private Capital for Licensees.
Private Capital means the contributed capital of a Licensee, plus
unfunded binding commitments by Institutional Investors (including
commitments evidenced by a promissory note) to contribute capital to a
Licensee.
(a) Contributed capital. For purposes of this section, contributed
capital means the paid-in capital and paid-in surplus of a Corporate
Licensee, or the partners' contributed capital of a Partnership
Licensee, in either case subject to the limitations in paragraph (b) of
this section.
(b) Exclusions from Private Capital. Private Capital does not
include:
(1) Funds borrowed by a Licensee from any source.
(2) Funds obtained through the issuance of Leverage.
(3) Funds obtained directly or indirectly from any Federal, State,
or local government agency or instrumentality, except for:
(i) Funds invested by a public pension fund;
(ii) Funds obtained from the business revenues (excluding any
governmental appropriation) of any federally chartered or government-
sponsored corporation established before October 1, 1987, to the extent
that such revenues are reflected in the retained earnings of the
corporation; and
(iii) ``Qualified Non-private Funds'' as defined in paragraph (d) of
this section.
(4) Any portion of a commitment from an Institutional Investor with
a net worth of less than $10 million that exceeds 10 percent of such
Institutional Investor's net worth and is not backed by a letter of
credit from a State or National bank acceptable to SBA.
(c) Non-cash capital contributions. Capital contributions in a form
other than
[[Page 47]]
cash are subject to the limitations in Sec. 107.240.
(d) Qualified Non-private Funds. Private Capital includes
``Qualified Non-private Funds'' as defined in this paragraph (d);
however, investors of Qualified Non-private Funds must not control,
directly or indirectly, a Licensee's management, or its board of
directors or general partner(s). Qualified Non-private Funds are:
(1) Funds directly or indirectly invested in any Licensee on or
before August 16, 1982 by any Federal agency except SBA, under a statute
explicitly mandating the inclusion of such funds in ``Private Capital'';
(2) Funds directly or indirectly invested in any Licensee by any
Federal agency under a statute that is enacted after September 4, 1992,
explicitly mandating the inclusion of such funds in ``Private Capital'';
(3) Funds invested in any Licensee or license applicant by one or
more State or local government entities (including any guarantee
extended by such entities) in an aggregate amount that does not exceed
33 percent of Regulatory Capital; and
(4) Funds invested in or committed in writing to any Section 301(d)
Licensee prior to October 1, 1996, from the following sources:
(i) A State financing agency, or similar agency or instrumentality,
if the funds invested are derived from such agency's net income and not
from appropriated State or local funds; and
(ii) Grants made by a state or local government agency or
instrumentality into a nonprofit corporation or institution exercising
discretionary authority with respect to such funds, if SBA determines
that such funds have taken on a private character and the nonprofit
corporation or institution is not a mere conduit.
(e) You may not accept any capital contribution made with funds
borrowed by a Person seeking to own an equity interest (whether direct
or indirect, beneficial or of record) of at least 10 percent of your
Private Capital. This exclusion does not apply if:
(1) Such Person's net worth is at least twice the amount borrowed;
or
(2) SBA gives its prior written approval of the capital
contribution.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999]
Sec. 107.240 Limitations on including non-cash capital contributions
in Private Capital.
Non-cash capital contributions to a Licensee or license applicant
are included in Private Capital only if they fall into one of the
following categories:
(a) Direct obligations of, or obligations guaranteed as to principal
and interest by, the United States.
(b) Services rendered or to be rendered to you, priced at no more
than their fair market value.
(c) Tangible assets used in your operations, priced at no more than
their fair market value.
(d) Shares in a Disadvantaged Business received by a subsidiary
Section 301(d) Licensee from its parent Licensee, valued at the lower of
cost or fair value.
(e) Other non-cash assets approved by SBA.
Sec. 107.250 Exclusion of stock options issued by Licensee from
Management Expenses.
Stock options issued by any Licensee, including a 1940 or 1980 Act
Company, are not considered compensation and therefore do not count as
part of a Licensee's Management Expenses.
Applying for an SBIC License
Sec. 107.300 License application form and fee.
The license application must be submitted on SBA Form 415 together
with a processing fee computed as follows:
(a) All license applicants will pay a base fee of $10,000.
(b) All applicants who will be Partnership Licensees will pay an
additional $5,000 fee, for a total of $15,000.
(c) All applicants who will be issuing Participating Securities will
pay an additional $5,000 fee, for a total of $15,000, or a total fee of
$20,000 if they also intend to be Partnership Licensees.
[[Page 48]]
Subpart D_Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
Sec. 107.400 Changes in ownership of 10 percent or more of Licensee
but no change of Control.
(a) Prior approval requirements. You must obtain SBA's prior written
approval for any proposed transfer or issuance of ownership interests
that results in the ownership (beneficial or of record) by any Person,
or group of Persons acting in concert, of at least 10 percent of any
class of your stock or partnership capital.
(b) Fee. A processing fee of $200 must accompany each such request
for approval of a change of ownership.
Sec. 107.410 Changes in Control of Licensee (through change in
ownership or otherwise).
(a) Prior approval requirements. You must obtain SBA's prior written
approval for any proposed transaction or event that results in Control
by any Person(s) not previously approved by SBA.
(b) Fee. A processing fee of $10,000 must accompany any application
for approval of one or more transactions or events that will result in a
transfer of Control.
Sec. 107.420 Prohibition on exercise of ownership or Control rights in
Licensee before SBA approval.
Without prior written SBA approval, no change of ownership or
Control may take effect and no officer, director, employee or other
Person acting on your behalf shall:
(a) Register on your books any transfer of ownership interest to the
proposed new owner(s);
(b) Permit the proposed new owner(s) to exercise voting rights with
respect to such ownership interest (including directly or indirectly
procuring or voting any proxy, consent or authorization as to such
voting rights at any shareholders' or partnership meeting);
(c) Permit the proposed new owner(s) to participate in any manner in
the conduct of your affairs (including exercising control over your
books, records, funds or other assets; participating directly or
indirectly in any disposition thereof; or serving as an officer,
director, partner, employee or agent); or
(d) Allow ownership or Control to pass to another Person.
Sec. 107.430 Notification to SBA of transactions that may change
ownership or Control.
You must promptly notify SBA as soon as you have knowledge of
transactions or events that may result in a transfer of Control or
ownership of at least 10 percent of your capital. If there is any doubt
as to whether a particular transaction or event will result in such a
change, report the facts to SBA.
Sec. 107.440 Standards governing prior SBA approval for a proposed
transfer of Control.
SBA approval is contingent upon full disclosure of the real parties
in interest, the source of funds for the new owners' interest, and other
data requested by SBA. As a condition of approving a proposed transfer
of control, SBA may:
(a) Require an increase in your Regulatory Capital;
(b) Require the new owners or the transferee's Control Person(s) to
assume, in writing, personal liability for your Leverage, effective only
in the event of their direct or indirect participation in any transfer
of Control not approved by SBA; or
(c) Require compliance with any other conditions set by SBA,
including compliance with the requirements for minimum capital and
management-ownership diversity as in effect at such time for new license
applicants.
[61 FR 3189, Jan. 31, 1996]
Sec. 107.450 Notification to SBA of pledge of Licensee's shares.
(a) You must notify SBA in writing, within 30 calendar days, of the
terms of any transaction in which:
(1) Any Person, or group of Persons acting in concert, pledges
shares of your stock (or equivalent ownership interests) as collateral
for indebtedness; and
(2) The shares pledged are at least 10 percent of your Regulatory
Capital.
[[Page 49]]
(b) If the transaction creates a change of ownership or Control, you
must comply with Sec. 107.400 or Sec. 107.410, as appropriate.
Restrictions on Common Control or Ownership of Two or More Licensees
Sec. 107.460 Restrictions on Common Control or ownership of two (or
more) Licensees.
(a) General rule. Without SBA's prior written approval, you must not
have an officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) who is
also:
(1) An officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) of another
Licensee; or
(2) An officer or director of any Person that directly or indirectly
controls, or is controlled by, or is under Common Control with, another
Licensee.
(b) Exceptions to general rule. This Sec. 107.460 does not apply
to:
(1) Common officers, directors, managers, or owners of a Section
301(c) Licensee and its Section 301(d) subsidiary; or
(2) Common officers, directors, managers, Control Persons, or owners
of two (or more) Licensees which have no Leverage.
Change in Structure of Licensee
Sec. 107.470 SBA approval of merger, consolidation, or reorganization
of Licensee.
(a) Prior approval requirements. You may not merge, consolidate,
change form of organization (corporation or partnership) or reorganize
without SBA's prior written approval. Any such merger or consolidation
will be subject to Sec. 107.440.
(b) Fee. A processing fee of $5,000 must accompany any application
for approval of a change in your form of organization (from corporation
to partnership or partnership to corporation).
Transfer of License
Sec. 107.475 Transfer of license.
You may not transfer your license in any manner without SBA's prior
written approval.
Subpart E_Managing the Operations of a Licensee
General Requirements
Sec. 107.500 Lawful operations under the Act.
You must engage only in the activities contemplated by the Act and
in no other activities.
Sec. 107.501 Identification as a Licensee.
You must display your SBIC license in a prominent location. You must
also have a listed telephone number. Before collecting an application
fee or extending Financing to a Small Business, you must obtain a
written statement from the concern acknowledging its awareness that you
are ``a Federal licensee under the Small Business Investment Act of
1958, as amended.''
Sec. 107.502 Representations to the public.
You may not represent or imply to anyone that the SBA, the U.S.
Government or any of its agencies or officers has approved any ownership
interests you have issued or obligations you have incurred. Be certain
to include a statement to this effect in any solicitation to investors.
Example: You may not represent or imply that ``SBA stands behind the
Licensee'' or that ``Your capital is safe because SBA's experts review
proposed investments to make sure they are safe for the Licensee.''
Sec. 107.503 Licensee's adoption of an approved valuation policy.
(a) Valuation guidelines. You must prepare, document and report the
valuations of your Loans and Investments in accordance with the
Valuation Guidelines for SBICs issued by SBA. These guidelines may be
obtained from SBA's Investment Division.
[[Page 50]]
(b) SBA approval of valuation policy. You must have a written
valuation policy approved by SBA for use in determining the value of
your Loans and Investments. You must either:
(1) Adopt without change the model valuation policy set forth in
section III of the Valuation Guidelines for SBICs; or
(2) Obtain SBA's prior written approval of an alternative valuation
policy.
(c) Responsibility for valuations. Your board of directors or
general partner(s) will be solely responsible for adopting your
valuation policy and for using it to prepare valuations of your Loans
and Investments for submission to SBA. If SBA reasonably believes that
your valuations, individually or in the aggregate, are materially
misstated, it reserves the right to require you to engage, at your
expense, an independent third party, acceptable to SBA, to substantiate
the valuations.
(d) Frequency of valuations. (1) If you have outstanding Leverage or
Earmarked Assets, you must value your Loans and Investments at the end
of the second quarter of your fiscal year, and at the end of your fiscal
year.
(2) Otherwise, you must value your Loans and Investments only at
your fiscal year end.
(3) On a case-by-case basis, SBA may require you to perform
valuations more frequently.
(4) You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
(e) Review of valuations by independent public accountant. (1) For
valuations performed as of the end of your fiscal year, your independent
public accountant must review your valuation procedures and the
implementation of such procedures, including adequacy of documentation.
(2) The independent public accountant's report on your audited
annual financial statements (SBA Form 468) must include a statement that
your valuations were prepared in accordance with your approved valuation
policy established in accordance with section 310(d)(2) of the Act.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]
Sec. 107.504 Equipment and office requirements.
(a) Computer capability. You must have a personal computer with a
modem, and be able to use this equipment to prepare reports (using SBA-
provided software) and transmit them to SBA. In addition, by March 31,
2000, you must have access to the Internet and the capability to send
and receive electronic mail via the Internet.
(b) Facsimile capability. You must be able to receive facsimile
messages 24 hours per day at your primary office.
(c) Accessible office. You must maintain an office that is
convenient to the public and is open for business during normal working
hours.
[64 FR 70995, Dec. 20, 1999]
Sec. 107.505 Facsimile requirement.
You must be able to receive fax messages 24 hours per day at your
primary office.
Sec. 107.506 Safeguarding Licensee's assets/Internal controls.
You must adopt a plan to safeguard your assets and monitor the
reliability of your financial data, personnel, Portfolio, funds and
equipment. You must provide your bank and custodian with a certified
copy of your resolution or other formal document describing your control
procedures.
Sec. 107.507 Violations based on false filings and nonperformance of
agreements with SBA.
The following shall constitute a violation of this part:
(a) Nonperformance. Nonperformance of any of the requirements of any
Debenture, Participating Security or Preferred Security, or of any
written agreement with SBA.
(b) False statement. In any document submitted to SBA:
(1) Any false statement knowingly made; or
(2) Any misrepresentation of a material fact; or
(3) Any failure to state a material fact. A material fact is any
fact which is necessary to make a statement not misleading in light of
the circumstances under which the statement was made.
[[Page 51]]
Sec. 107.509 Employment of SBA officials.
Without SBA's prior written approval, for a period of two years
after the date of your most recent issuance of Leverage (or the receipt
of any SBA Assistance as defined in part 105 of this chapter), you are
not permitted to employ, offer employment to, or retain for professional
services, any person who:
(a) Served as an officer, attorney, agent, or employee of SBA on or
within one year before such date; and
(b) As such, occupied a position or engaged in activities which, in
SBA's determination, involved discretion with respect to the granting of
Assistance under the Act.
Management and Compensation
Sec. 107.510 SBA approval of Licensee's Investment Adviser/Manager.
You may employ an Investment Adviser/Manager who will be subject to
the supervision of your board of directors or general partner. If you
have Leverage or plan to seek Leverage, you must obtain SBA's prior
written approval of the management contract. SBA's approval of an
Investment Adviser/Manager for one Licensee does not indicate approval
of that manager for any other Licensee.
(a) Management contract. The contract must:
(1) Specify the services the Investment Adviser/Manager will render
to you and to the Small Businesses in your Portfolio; and
(2) Indicate the basis for computing Management Expenses.
(b) Material change to approved management contract. If there is a
material change, both you and SBA must approve such change in advance.
If you are uncertain if the change is material, submit the proposed
revision to SBA.
Sec. 107.520 Management Expenses of a Licensee.
SBA must approve any increases in your Management Expenses if you
have outstanding Leverage or Earmarked Assets.
(a) Definition of Management Expenses. Management Expenses include:
(1) Salaries;
(2) Office expenses;
(3) Travel;
(4) Business development;
(5) Office and equipment rental;
(6) Bookkeeping; and
(7) Expenses related to developing, investigating and monitoring
investments.
(b) Management Expenses do not include services provided by
specialized outside consultants, outside lawyers and independent public
accountants, if they perform services not generally performed by a
venture capital company.
(c) If your Management Expenses have not already been approved by
SBA, you must submit such expenses for approval with your SBA Form 468
for your first fiscal year ending after January 31, 1996.
Cash Management by a Licensee
Sec. 107.530 Restrictions on investments of idle funds by leveraged
Licensees.
(a) Applicability of this section. This Sec. 107.530 applies if you
have outstanding Leverage or if you have applied for Leverage.
(b) Permitted investments of idle funds. Funds not invested in Small
Businesses must be maintained in:
(1) Direct obligations of, or obligations guaranteed as to principal
and interest by, the United States, which mature within 15 months from
the date of the investment; or
(2) Repurchase agreements with federally insured institutions, with
a maturity of seven days or less. The securities underlying the
repurchase agreements must be direct obligations of, or obligations
guaranteed as to principal and interest by, the United States. The
securities must be maintained in a custodial account at a federally
insured institution; or
(3) Certificates of deposit with a maturity of one year or less,
issued by a federally insured institution; or
(4) A deposit account in a federally insured institution, subject to
a withdrawal restriction of one year or less; or
(5) A checking account in a federally insured institution; or
(6) A reasonable petty cash fund.
(c) Deposit of funds in excess of the insured amount. (1) You are
permitted to
[[Page 52]]
deposit funds in a federally insured institution in excess of the
institution's insured amount, but only if the institution is ``well
capitalized'' in accordance with the definition set forth in regulations
of the Federal Deposit Insurance Corporation, as amended (12 CFR
325.103).
(2) Exception: You may make a temporary deposit (not to exceed 30
days) in excess of the insured amount, in a transfer account established
to facilitate the receipt and disbursement of funds or to hold funds
necessary to honor Commitments issued.
(d) Deposit of funds in Associate institution. A deposit in, or a
repurchase agreement with, a federally insured institution that is your
Associate is not considered a Financing of such Associate under Sec.
107.730, provided the terms of such deposit or repurchase agreement are
no less favorable than those available to the general public.
Borrowing by Licensees From Non-SBA Sources
Sec. 107.550 Prior approval of secured third-party debt of leveraged
Licensees.
(a) Definition. In this Sec. 107.550, ``secured third-party debt''
means any non-SBA debt secured by any of your assets, including secured
guarantees and other contingent obligations that you voluntarily assume,
secured lines of credit, and secured Temporary Debt of a Licensee with
outstanding Participating Securities.
(b) General rule. If you have outstanding Leverage, you must get
SBA's written approval before you incur any secured third-party debt or
refinance any debt with secured third-party debt, including any renewal
of a secured line of credit, increase in the maximum amount available
under a secured line of credit, or expansion of the scope of a security
interest or lien. For purposes of this paragraph (b), ``expansion of the
scope of a security interest or lien'' does not include the substitution
of one asset or group of assets for another, provided the asset values
(as reported on your most recent annual Form 468) are comparable.
(c) Additional rule for secured lines of credit in existence on
April 8, 1994. If you have outstanding Leverage and you have a secured
line of credit that was created on or before April 8, 1994, you must
receive SBA's written approval of the line before you increase the
amounts outstanding thereunder.
(d) Conditions for SBA approval. As a condition of granting its
approval under this Sec. 107.550, SBA may impose such restrictions or
limitations as it deems appropriate, taking into account your historical
performance, current financial position, proposed terms of the secured
debt and amount of aggregate debt you will have outstanding (including
Leverage). SBA will not favorably consider any requests for approval
which include a blanket lien on all your assets, or a security interest
in your investor commitments in excess of 125 percent of the proposed
borrowing.
(e) Thirty day approval. Unless SBA notifies you otherwise within 30
days after it receives your request, you may consider your request
automatically approved if:
(1) You are in regulatory compliance;
(2) The security interest in your assets is limited to either those
assets being acquired with the borrowed funds or an asset coverage ratio
of no more than 2:1;
(3) Your Leverage does not exceed 150 percent of your Leverageable
Capital; and
(4) Your request is for approval of a secured line of credit that
would not cause your total outstanding borrowings (not including
Leverage) to exceed 50 percent of your Leverageable Capital.
Sec. 107.560 Subordination of SBA's creditor position.
(a) Debentures purchased or guaranteed on or before July 1, 1991.
Under the terms of any Debenture purchased or guaranteed by SBA on or
before July 1, 1991, SBA's unsecured claims against you, as a Debenture-
holder or as subrogee, are subordinated in favor of all your other
creditors, except to the extent that such claims may be subject to
equitable subordination in SBA's favor.
(b) Debentures purchased or guaranteed after July 1, 1991, including
refinancings of Debentures previously purchased or guaranteed. (1) Under
the terms of any
[[Page 53]]
Debenture purchased or guaranteed by SBA after July 1, 1991, SBA's
unsecured claims against you, as a Debenture-holder or as subrogee, are
subordinated only in favor of non-Associate lenders; and, to the extent
that your indebtedness to such lenders exceeds the lesser of $10,000,000
or 200 percent of your Regulatory Capital (determined as of the date
your Debentures were purchased or guaranteed), SBA's unsecured claims
enjoy parity with those of other unsecured creditors, except with
respect to indebtedness created on or before July 1, 1991.
(2) In order to induce others to lend you money after your Debenture
has been purchased or guaranteed, SBA may agree in writing on a case-by-
case basis to subordinate its unsecured claims, on such terms as it may
determine, in favor of one or more of your Associates, or in favor of
other lenders in excess of the amounts mentioned in paragraph (b)(1) of
this section.
(3) SBA reserves the authority to refuse to subordinate its claims
if it determines, at the time you request your Debenture be purchased or
guaranteed, that the exercise of reasonable investment prudence and your
financial condition warrant such refusal.
Sec. 107.570 Restrictions on third-party debt of issuers of
Participating Securities.
(a) General. Temporary Debt is the only debt (other than Leverage)
that you are permitted to incur if you have applied to issue
Participating Securities or if you have outstanding Participating
Securities. For additional rules governing secured Temporary Debt, see
Sec. 107.550.
(b) Definition of Temporary Debt. Temporary Debt means your short-
term borrowings if:
(1) Such borrowings are for the purpose of maintaining your
operating liquidity or providing funds for a particular Financing of a
Small Business;
(2) The funds are borrowed from a regulated financial institution or
a regulated credit company (or, if approved by SBA on a case-by-case
basis, from non-regulated lenders including shareholders or partners);
(3) Your total outstanding borrowings (not including Leverage) do
not exceed 50 percent of your Leverageable Capital; and
(4) All such borrowings are fully paid off for at least 30
consecutive days during your fiscal year so that you have no outstanding
third-party debt for 30 days.
Voluntary Decrease in Licensee's Regulatory Capital
Sec. 107.585 Voluntary decrease in Licensee's Regulatory Capital.
You must obtain SBA's prior written approval to reduce your
Regulatory Capital by more than two percent in any fiscal year, unless
otherwise permitted under Sec. Sec. 107.1560 and 107.1570. At all
times, you must retain sufficient Regulatory Capital to meet the minimum
capital requirements in the Act and Sec. 107.210, and sufficient
Leverageable Capital to avoid having excess Leverage in violation of
section 303 of the Act and Sec. Sec. 107.1150 through 107.1170.
Requirement To Conduct Active Investment Operations
Sec. 107.590 Licensee's requirement to maintain active operations.
(a) Activity test. You must conduct active operations, as determined
under this Sec. 107.590, as a condition of your license. You will be
considered active if:
(1) During the eighteen months preceding your most recent fiscal
year end, you made Financings totaling at least 20 percent of your
Regulatory Capital; or
(2) Your idle funds did not exceed 20 percent of your total assets
(at cost) at your most recent fiscal year end.
(b) Permitted exceptions to activity requirements. You are
considered active if your failure to meet the requirements in paragraph
(a) of this section is the result of one or more of the following
factors:
(1) Your excess idle funds are the result of the receipt, within the
previous nine months, of realized gains, repayments, additional capital
contributions, or Leverage.
(2) It is necessary for you to maintain excess idle funds to conduct
your operations because:
[[Page 54]]
(i) Your unfunded commitments from investors are no more than 20
percent of your Regulatory Capital; and
(ii) You cannot receive additional Leverage, solely because SBA has
insufficient funds available.
(3) You have not made sufficient Financings because of a lack of
available funds, evidenced by Loans and Investments (at cost) equal to
at least 90 percent of your Combined Capital as of your most recent
fiscal year end.
(4) You have not made sufficient Financings solely because SBA has
restricted your ability to make investments.
(c) Applicability of activity requirements. The activity
requirements in paragraph (a) of this section do not apply if you have
filed a ``Wind-up Plan'' approved by SBA. ``Wind-up Plan'' means a plan
that you prepare when you decide that you will no longer make any
Financings other than follow-on investments, and that you update
annually when you file your SBA Form 468. The plan must contain your
best estimates of the following:
(1) The remaining number of years you expect to operate.
(2) For each of your Loans and Investments, the expected liquidation
date and anticipated proceeds.
(3) The timing of your repayment of obligations to SBA.
(4) The timing and amount of any planned reductions in your
Management Expenses.
(d) Phase-in of activity requirements--(1) General rule. You must
meet the activity requirements in this Sec. 107.590 as of the end of
your first full fiscal year beginning after January 31, 1996. Until
then, you will be considered active if you meet the activity
requirements in effect on January 30, 1996.
(2) Rule for new Licensees. If you received your license after
January 31, 1996, or if you received your license less than eighteen
months before the fiscal year end determined under paragraph (d)(1) of
this section, you must meet the activity requirements in this Sec.
107.590 as of the end of your second full fiscal year beginning after
the date you received your license.
Subpart F_Recordkeeping, Reporting, and Examination Requirements for
Licensees
Recordkeeping Requirements for Licensees
Sec. 107.600 General requirement for Licensee to maintain and preserve
records.
(a) Maintaining your accounting records. You must establish and
maintain your accounting records using SBA's standard chart of accounts
for Licensees, unless SBA approves otherwise.
(b) Location of records. You must keep the following records at your
principal place of business or, in the case of paragraph (b)(3) of this
section, at the branch office that is primarily responsible for the
transaction:
(1) All your accounting and other financial records;
(2) All minutes of meetings of directors, stockholders, executive
committees, partners, or other officials; and
(3) All documents and supporting materials related to your business
transactions, except for any items held by a custodian under a written
agreement between you and a Portfolio Concern or non-SBA lender, or any
securities held in a safe deposit box, or by a licensed securities
broker in an amount not exceeding the broker's per-account insurance
coverage.
(c) Preservation of records. You must retain all the records that
are the basis for your financial reports. Such records must be preserved
for the periods specified in this paragraph (c), and must remain
accessible for the first two years of the preservation period.
(1) You must preserve for at least 15 years or, in the case of a
Partnership Licensee, at least two years beyond the date of liquidation:
(i) All your accounting ledgers and journals, and any other records
of assets, asset valuations, liabilities, equity, income, and expenses.
(ii) Your Articles, bylaws, minute books, and license application.
(iii) All documents evidencing ownership of the Licensee including
ownership ledgers, and ownership transfer registers.
[[Page 55]]
(2) You must preserve for at least six years all supporting
documentation (such as vouchers, bank statements, or canceled checks)
for the records listed in paragraph (b)(1) of this section.
(3) After final disposition of any item in your Portfolio, you must
preserve for at least six years:
(i) Financing applications and Financing instruments.
(ii) All loan, participation, and escrow agreements.
(iii) Size status declarations (SBA Form 480) and Financing
Eligibility Statements (SBA Form 1941).
(iv) Any capital stock certificates and warrants of the Portfolio
Concern that you did not surrender or exercise.
(v) All other documents and supporting material relating to the
Portfolio Concern, including correspondence.
(4) You may substitute a microfilm or computer-scanned or generated
copy for the original of any record covered by this paragraph (c).
Sec. 107.610 Required certifications for Loans and Investments.
For each of your Loans and Investments, you must have the documents
listed in this section. You must keep these documents in your files and
make them available to SBA upon request.
(a) SBA Form 480, the Size Status Declaration, executed both by you
and by the concern you are financing. By executing this document, both
parties certify that the concern is a Small Business. For securities
purchased from an underwriter in a public offering, you may substitute a
prospectus showing that the concern is a Small Business.
(b) SBA Form 652, a certification by the concern you are financing
that it will not illegally discriminate (see part 112 of this chapter).
(c) SBA Form 1941 (for Section 301(d) Licensees only), executed both
by you and by the concern you are financing. By executing this document,
both parties certify that the concern is a Disadvantaged Business.
(d) A certification by the concern you are financing of the intended
use of the proceeds. For securities purchased from an underwriter in a
public offering, you may substitute a prospectus indicating the intended
use of proceeds.
(e) For each LMI Investment:
(1) A certification by the concern, dated as of the date of
application for SBIC financing, as to the basis for its qualification as
an LMI Enterprise,
(2) If the concern qualifies as an LMI Enterprise as defined in
paragraph (2) of the definition of LMI Enterprise in Sec. 107.50, an
additional certification dated no later than the date 180 days after the
closing of the LMI Investment, as to the location of the concern's
employees or tangible assets or the principal residences of its full-
time employees as of the date of such certification, and
(3) Certification(s) by the SBIC, made contemporaneously with the
certification(s) of the concern, that the concern qualifies as an LMI
Enterprise as of the date(s) of the concern's certification(s) and the
basis for such qualification.
[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999]
Sec. 107.620 Requirements to obtain information from Portfolio
Concerns.
All the information required by this section is subject to the
requirements of Sec. 107.600 and must be in English.
(a) Information for initial Financing decision. Before extending any
Financing, you must require the applicant to submit such financial
statements, plans of operation (including intended use of financing
proceeds), cash flow analyses and projections as are necessary to
support your investment decision. The information submitted must be
consistent with the size and type of the business and the amount of the
proposed Financing.
(b) Updated financial information. (1) The terms of each Financing
must require the Portfolio Concern to provide, at least annually,
sufficient financial information to enable you to perform the following
required procedures:
(i) Evaluate the financial condition of the Portfolio Concern for
the purpose of valuing your investment;
(ii) Determine the continued eligibility of the Portfolio Concern;
and
(iii) Verify the use of Financing proceeds.
[[Page 56]]
(2) The information submitted to you must be certified by the
president, chief executive officer, treasurer, chief financial officer,
general partner, or proprietor of the Portfolio Concern.
(3) For financial and valuation purposes, you may accept a complete
copy of the Federal income tax return filed by the Portfolio Concern (or
its proprietor) in lieu of financial statements, but only if appropriate
for the size and type of the business involved.
(4) The requirements in this paragraph (b) do not apply when you
acquire securities from an underwriter in a public offering (see Sec.
107.825). In that case, you must keep copies of all reports furnished by
the Portfolio Concern to the holders of its securities.
(c) Information required for examination purposes. You must obtain
any information requested by SBA's examiners for the purpose of
verifying the certifications made by a Portfolio Concern under Sec.
107.610. In this regard, your Financing documents must contain
provisions requiring the Portfolio Concern to give you and/or SBA's
examiners access to its books and records for such purpose.
Reporting Requirements for Licensees
Sec. 107.630 Requirement for Licensees to file financial statements
with SBA (Form 468).
(a) Annual filing of Form 468. For each fiscal year, you must submit
to SBA financial statements and supplementary information prepared on
SBA Form 468. You must file Form 468 on or before the last day of the
third month following the end of your fiscal year, except for the
information required under paragraph (e) of this section, which must be
filed on or before the last day of the fifth month following the end of
your fiscal year.
(1) Audit of Form 468. The annual Form 468 must be audited by an
independent public accountant acceptable to SBA.
(2) Insurance requirement for public accountant. Unless SBA approves
otherwise, your independent public accountant must carry at least
$1,000,000 of Errors and Omissions insurance, or be self-insured and
have a net worth of at least $1,000,000.
(b) Interim filings of Form 468. When requested by SBA, you must
file interim reports on Form 468. SBA may require you to file the entire
form or only certain statements and schedules. You must file such
reports on or before the last day of the month following the end of the
reporting period. If you have an outstanding Leverage commitment from
SBA, see the filing requirements in Sec. 107.1220.
(c) Standards for preparation of Form 468. You must prepare SBA Form
468 in accordance with SBA's Accounting Standards and Financial
Reporting Requirements for Small Business Investment Companies.
(d) Where to file Form 468. Submit all filings of Form 468 to the
Investment Division of SBA.
(e) Reporting of economic impact information on Form 468. Your
annual filing of SBA Form 468 must include an assessment of the economic
impact of each Financing, specifying the full-time equivalent jobs
created or retained, and the impact of the Financing on the revenues and
profits of the business and on taxes paid by the business and its
employees.
Sec. 107.640 Requirement to file Portfolio Financing Reports (SBA Form
1031).
For each Financing of a Small Business (excluding guarantees), you
must submit a Portfolio Financing Report on SBA Form 1031 within 30 days
of the closing date.
Sec. 107.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 107.503. You must report such valuations to SBA
within 90 days of the end of the fiscal year in the case of annual
valuations, and within 30 days following the close of other reporting
periods. You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
Sec. 107.660 Other items required to be filed by Licensee with SBA.
(a) Reports to owners. You must give SBA a copy of any report you
furnish
[[Page 57]]
to your investors, including any prospectus, letter, or other
publication concerning your financial operations or those of any
Portfolio Concern.
(b) Documents filed with SEC. You must give SBA a copy of any
report, application or document you file with the Securities and
Exchange Commission.
(c) Litigation reports. When you become a party to litigation or
other proceedings, you must give SBA a report within 30 days that
describes the proceedings and identifies the other parties involved and
your relationship to them.
(1) The proceedings covered by this paragraph (c) include any action
by you, or by your security holder(s) in a personal or derivative
capacity, against an officer, director, Investment Adviser or other
Associate of yours for alleged breach of official duty.
(2) SBA may require you to submit copies of the pleadings and other
documents SBA may specify.
(3) Where proceedings have been terminated by settlement or final
judgment, you must promptly advise SBA of the terms.
(4) This paragraph (c) does not apply to collection actions or
proceedings to enforce your ordinary creditors' rights.
(d) Notification of criminal charges. If any officer, director, or
general partner of the Licensee, or any other person who was required by
SBA to complete a personal history statement in connection with your
license, is charged with or convicted of any criminal offense other than
a misdemeanor involving a minor motor vehicle violation, you must report
the incident to SBA within 5 calendar days. Such report must fully
describe the facts which pertain to the incident.
(e) Other reports. You must file any other reports that SBA may
require by written directive.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]
Sec. 107.670 Application for exemption from civil penalty for late
filing of reports.
(a) If it is impracticable to submit any required report within the
time allowed, you may apply for an extension. The request for an
extension must:
(1) Be filed before the reporting deadline;
(2) Certify to an extraordinary occurrence, not within your control,
that makes timely filing of the report impracticable; and
(3) Be accompanied by written evidence of such occurrence, where
appropriate.
(b) Upon receipt of your request, SBA may exempt you from the civil
penalty provision of section 315(a) of the Act, in such manner and under
such conditions as SBA determines.
Sec. 107.680 Reporting changes in Licensee not subject to prior SBA
approval.
(a) Changes to be reported for post approval. (1) This section
applies to any changes in your Articles, ownership, capitalization,
management, operating area, or investment policies that do not require
SBA's prior approval. You must report such changes to SBA within 30 days
for post approval. A processing fee of $200 must accompany each request
for post approval of new officers, directors, or Control Persons.
(2) Exception for non-leveraged Licensees. If you do not have
outstanding Leverage or Earmarked Assets, you are not required to obtain
post approval of new directors or new officers other than your chief
operating officer; however, you must notify SBA of the new directors or
officers within 30 days.
(b) Approval by SBA. You may consider any change submitted under
this section Sec. 107.680 to be approved unless SBA notifies you to the
contrary within 90 days after receiving it. SBA's approval is contingent
upon your full disclosure of all relevant facts and is subject to any
conditions SBA may prescribe.
Examinations of Licensees by SBA for Regulatory Compliance
Sec. 107.690 Examinations.
SBA will examine all Licensees for the purpose of evaluating
regulatory compliance.
[[Page 58]]
Sec. 107.691 Responsibilities of Licensee during examination.
You must make all books, records and other pertinent documents and
materials available for the examination, including any information
required by the examiner under Sec. 107.620(c). In addition, the
agreement between you and the independent public accountant performing
your audit must provide that any information in the accountant's working
papers be made available to SBA upon request.
Sec. 107.692 Examination fees.
(a) General. SBA will assess fees for examinations in accordance
with this Sec. 107.692. Unless SBA determines otherwise on a case by
case basis, SBA will not assess fees for special examinations to obtain
specific information.
(b) Base fee. A base fee will be assessed based on your total assets
(at cost) as of the date of your latest certified financial statement or
a more recent interim statement requested by and submitted to SBA in
connection with the examination. The base fee table is as follows:
----------------------------------------------------------------------------------------------------------------
Total assets of licensee Base fee Plus, percent of assets
----------------------------------------------------------------------------------------------------------------
$0 to $1,500,000.................... $3,500 +0%
$1,500,001 to $5,000,000............ 3,700 +.065% of the amount over $1,500,000
$5,000,001 to $10,000,000........... 6,000 +.02% of the amount over $5,000,000
$10,000,001 to $15,000,000.......... 7,000 +.01% of the amount over $10,000,000
$15,000,001 to $25,000,000.......... 7,700 +.015% of the amount over $15,000,000
$25,000,001 to $50,000,000.......... 9,200 +.015% of the amount over $25,000,000
$50,000,001 to $60,000,000.......... 13,000 +.01% of the amount over $50,000,000
$60,000,001 and above............... 14,000 +0%
----------------------------------------------------------------------------------------------------------------
(c) Adjustments to base fee. Your base fee, as determined by the
table in paragraph (b) of this section, will be adjusted (increased or
decreased) based on the following criteria:
(1) If you have no outstanding regulatory violations at the time of
the commencement of the examination and SBA did not identify any
violations as a result of the most recent prior examination, you will
receive a 15% discount on your base fee;
(2) If you were fully responsive to the letter of notification of
examination (that is, you provided all requested documents and
information within the time period stipulated in the notification letter
in a complete and accurate manner, and you prepared and had available
all information requested by the examiner for on-site review), you will
receive a 10% discount on your base fee;
(3) If you are organized as a partnership or limited liability
company, you will pay an additional charge equal to 5% of your base fee;
(4) If you are a Licensee authorized to issue Participating
Securities, you will pay an additional charge equal to 10% of your base
fee; and
(5) If you maintain your records/files in multiple locations (as
permitted under Sec. 107.600(b)), you will pay an additional charge
equal to 10% of your base fee.
(d) Fee discounts and additions table. The following table
summarizes the discounts and additions noted in paragraph (c) of this
section:
----------------------------------------------------------------------------------------------------------------
Amount of Amount of
discount--% Addition--%
Examination fee discounts of base Examination fee additions of base
examination examination
fee fee
----------------------------------------------------------------------------------------------------------------
No prior violations........................... 15 Partnership or limited liability 5
company.
Responsiveness................................ 10 Participating Security Licensee....... 10
........... Records/files at multiple locations... 10
----------------------------------------------------------------------------------------------------------------
[[Page 59]]
(e) Delay fee. If, in the judgement of SBA, the time required to
complete your examination is delayed due to your lack of cooperation or
the condition of your records, SBA may assess an additional fee of up to
$500 per day.
[62 FR 23338, Apr. 30, 1997]
Subpart G_Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
Sec. 107.700 Compliance with size standards in part 121 of this
chapter as a condition of Assistance.
You are permitted to provide financial assistance and management
services only to a Small Business. To determine whether an applicant is
a Small Business, you may use either the financial size standards in
Sec. 121.301(c)(1) of this chapter or the industry standard covering
the industry in which the applicant is primarily engaged, as set forth
in Sec. 121.301(c)(2) of this chapter.
Sec. 107.710 Requirement to finance smaller enterprises.
Your Portfolio must include Financings to Smaller Enterprises.
(a) Definition of Smaller Enterprise. A Smaller Enterprise means any
small business concern that:
(1) Both together with its Affiliates, and by itself, meets the size
standard of Sec. 121.201 of this chapter at the time of Financing for
the industry in which it is then primarily engaged; or
(2) Together with its affiliates has a net worth of not more than $6
million and average net income after Federal income taxes (excluding any
carry-over losses) for the preceding two years no greater than $2
million. If the applicant is not required by law to pay Federal income
taxes at the enterprise level, but is required to pass income through to
its shareholders, partners, beneficiaries, or other equitable owners,
the applicant's ``net income after Federal income taxes'' will be its
net income reduced by an amount computed as follows:
(i) If the applicant is not required by law to pay State (and local,
if any) income taxes at the enterprise level, multiply its net income by
the marginal State income tax rate (or by the combined State and local
income tax rates, as applicable) that would have applied if it were a
taxable corporation.
(ii) Multiply the applicant's net income, less any deduction for
State and local income taxes calculated under paragraph (a)(2)(i) of
this section, by the marginal Federal income tax rate that would have
applied if the applicant were a taxable corporation.
(iii) Add the results obtained in paragraphs (a)(2)(i) and
(a)(2)(ii) of this section.
(b) Smaller Enterprise Financings--(1) General rule. At the close of
each of your fiscal years, for all Financings you extended since April
25, 1994, excluding Financings made in whole or in part with Leverage in
excess of $90,000,000, at least 20 percent (in total dollars) must have
been invested in Smaller Enterprises. If you were licensed after April
25, 1994, the 20 percent requirement applies to the Financings you
extended since you were licensed, excluding Financings made in whole or
in part with Leverage in excess of $90,000,000, plus any pre-licensing
investments approved by SBA for inclusion in your Regulatory Capital.
For purposes of this paragraph (b)(1), Leverage in excess of $90,000,000
includes aggregate Leverage over $90,000,000 issued by two or more
Licensees under Common Control. See also paragraph (d) of this section.
(2) Phase-in for new Licensees At the close of your first full
fiscal year after licensing, at least 10 percent of the total dollar
amount of the Financings you extended, including any pre-licensing
investments approved by SBA for inclusion in your Regulatory Capital,
must have been invested in Smaller Enterprises. At the close of each
fiscal year thereafter, you must meet the requirement in paragraph
(b)(1) of this section.
(c) Special requirement for certain leveraged Licensees. (1) This
paragraph (c) applies if you were licensed on or before September 30,
1996, and you issued Leverage after that date, and you have Regulatory
Capital of:
(i) Less than $10,000,000 if such Leverage included Participating
Securities; or
[[Page 60]]
(ii) Less than $5,000,000 if such Leverage was Debentures only.
(2) At the close of each of your fiscal years, at least 50 percent
of the total dollar amount of the Financings you extended after
September 30, 1996 must have been invested in Smaller Enterprises.
(d) Special requirement for Leverage over $90,000,000. If you have
issued Leverage over $90,000,000 (including aggregate Leverage over
$90,000,000 issued by two or more Licensees under Common Control), at
the end of each of your fiscal years the cumulative Financings you
extended to Smaller Enterprises must equal at least:
(1) The dollar amount necessary to satisfy paragraph (b) of this
section; plus
(2) 100 percent of the amount of all Financings made in whole or in
part with Leverage over $90,000,000.
(e) Financing a change of ownership which results in the creation of
a Smaller Enterprises. The Financing of a change of ownership under
Sec. 107.750 which results in the creation of a Smaller Enterprise
qualifies as a Smaller Enterprise Financing.
(f) Non-compliance with this section. If you have not reached the
required percentage of Smaller Enterprise Financings at the end of any
fiscal year, then you must be in compliance by the end of the following
fiscal year. However, you will not be eligible for additional Leverage
until you reach the required percentage (see Sec. 107.1120(c) through
(e)).
[62 FR 11760, Mar. 13, 1997, as amended at 63 FR 5866, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999; 66 FR 30647, June 7, 2001]
Sec. 107.720 Small Businesses that may be ineligible for financing.
(a) Relenders or reinvestors. You are not permitted to finance any
business that is a relender or reinvestor.
(1) Definition. Relenders or reinvestors are businesses whose
primary business activity involves, directly or indirectly, providing
funds to others, purchasing debt obligations, factoring, or long-term
leasing of equipment with no provision for maintenance or repair.
(2) Exception. You may provide Venture Capital Financing to
Disadvantaged Businesses that are relenders or reinvestors (except banks
or savings and loans not insured by agencies of the federal government,
and agricultural credit companies). Without SBA's prior written
approval, total Financings under this paragraph (a)(2) that are
outstanding as of the close of your fiscal year must not exceed your
Regulatory Capital.
(b) Passive Businesses. You are not permitted to finance a passive
business.
(1) Definition. A business is passive if:
(i) It is not engaged in a regular and continuous business operation
(for purposes of this paragraph (b), the mere receipt of payments such
as dividends, rents, lease payments, or royalties is not considered a
regular and continuous business operation); or
(ii) Its employees are not carrying on the majority of day to day
operations, and the company does not provide effective control and
supervision, on a day to day basis, over persons employed under
contract; or
(iii) It passes through substantially all of the proceeds of the
Financing to another entity.
(2) Exception for pass-through of proceeds to subsidiary. You may
finance a passive business if it is a Small Business and it passes
substantially all the proceeds through to one or more subsidiary
companies, each of which is an eligible Small Business that is not
passive. For the purpose of this paragraph (b)(2), ``subsidiary
company'' means a company in which at least 50 percent of the
outstanding voting securities are owned by the Financed passive
business.
(3) Exception for certain Partnership Licensees. With the prior
written approval of SBA, if you are a Partnership Licensee, you may form
one or more wholly-owned corporations in accordance with this paragraph
(b)(3). The sole purpose of such corporation(s) must be to provide
Financing to one or more eligible, unincorporated Small Businesses. You
may form such corporation(s) only if a direct Financing to such Small
Businesses would cause any of your investors to incur unrelated business
taxable income under section 511 of the Internal Revenue Code of 1986,
as amended (26 U.S.C. 511). Your ownership of such corporation(s)
[[Page 61]]
will not constitute a violation of Sec. 107.865(a) and your investment
of funds in such corporation(s) will not constitute a violation of Sec.
107.730(a).
(c) Real Estate Businesses. (1) You are not permitted to finance any
business classified under Major Group 65 (Real Estate) or Industry No.
1531 (Operative Builders) of the SIC Manual, with the following
exceptions:
(i) Title Abstract companies (Industry No. 6541); and
(ii) Companies listed under Industry No. 6531 (for example, real
estate agents, brokers, escrow agents, managers and multiple listing
services) that derive at least 80 percent of their revenue from non-
Affiliate sources.
(2) You are not permitted to finance a business, regardless of SIC
classification, if the Financing is to be used to acquire or refinance
real property, unless the Small Business:
(i) Is acquiring an existing property and will use at least 51
percent of the usable square footage for an eligible business purpose;
or
(ii) Is building or renovating a building and will use at least 67
percent of the usable square footage for an eligible business purpose;
or
(iii) Occupies the subject property and uses at least 67 percent of
the usable square footage for an eligible business purpose.
(d) Project Financing. You are not permitted to finance a business
if:
(1) The assets of the business are to be reduced or consumed,
generally without replacement, as the life of the business progresses,
and the nature of the business requires that a stream of cash payments
be made to the business's financing sources, on a basis associated with
the continuing sale of assets. Examples include real estate development
projects and oil and gas wells; or
(2) The primary purpose of the Financing is to fund production of a
single item or defined limited number of items, generally over a defined
production period, and such production will constitute the majority of
the activities of the Small Business. Examples include motion pictures
and electric generating plants.
(e) Farm land purchases. You are not permitted to finance the
acquisition of farm land. Farm land means land which is or is intended
to be used for agricultural or forestry purposes, such as the production
of food, fiber, or wood, or is so taxed or zoned.
(f) Public interest. You are not permitted to finance any business
if the proceeds are to be used for purposes contrary to the public
interest, including but not limited to activities which are in violation
of law, or inconsistent with free competitive enterprise.
(g) Foreign investment--(1) General rule. You are not permitted to
finance a business if:
(i) The funds will be used substantially for a foreign operation; or
(ii) At the time of the Financing or within one year thereafter,
more than 49 percent of the employees or tangible assets of the Small
Business are located outside the United States (unless you can show, to
SBA's satisfaction, that the Financing was used for a specific domestic
purpose).
(2) Exception. This paragraph (g) does not prohibit a Financing used
to acquire foreign materials and equipment or foreign property rights
for use or sale in the United States.
(h) Associated supplier. You are not permitted to finance a business
that purchases, or will purchase, goods or services from a supplier who
is your Associate, except under the following conditions:
(1) The amount of goods and services purchased (or to be purchased)
from your Associate with the proceeds of the Financing, or with funds
released as a result of the Financing, is less than 50 percent of the
total amount of the Financing (75 percent for a Section 301(d)
Licensee);
(2) The price of such goods and services is no higher than that
charged other customers of your Associate; and
(3) The Small Business purchases no capital goods from your
Associate.
(i) Financing Licensees. You are not permitted to provide funds,
directly or indirectly, that the Small Business will use:
(1) To purchase stock in or provide capital to a Licensee; or
[[Page 62]]
(2) To repay an indebtedness incurred for the purpose of investing
in a Licensee.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64
FR 70995, Dec. 20, 1999]
Sec. 107.730 Financings which constitute conflicts of interest.
(a) General rule. You must not self-deal to the prejudice of a Small
Business, the Licensee, its shareholders or partners, or SBA. Unless you
obtain a prior written exemption from SBA for special instances in which
a Financing may further the purposes of the Act despite presenting a
conflict of interest, you must not directly or indirectly:
(1) Provide Financing to any of your Associates.
(2) Provide Financing to an Associate of another Licensee if one of
your Associates has received or will receive any direct or indirect
Financing or a Commitment from that Licensee or a third Licensee
(including Financing or Commitments received under any understanding,
agreement, or cross dealing, reciprocal or circular arrangement).
(3) Borrow money from:
(i) A Small Business Financed by you;
(ii) An officer, director, or owner of at least a 10 percent equity
interest in such business; or
(iii) A Close Relative of any such officer, director, or equity
owner.
(4) Provide Financing to a Small Business to discharge an obligation
to your Associate or free other funds to pay such obligation. This
paragraph (a)(4) does not apply if the obligation is to an Associate
Lending Institution and is a line of credit or other obligation incurred
in the normal course of business.
(5) Provide Financing to a Small Business for the purpose of
purchasing property from your Associate, except as permitted under Sec.
107.720(h).
(b) Rules applicable to Associates. Without SBA' s prior written
approval, your Associates must not, directly or indirectly:
(1) Borrow money from any Person described in paragraph (a)(3) of
this section.
(2) Receive from a Small Business any compensation in connection
with Assistance you provide (except as permitted under Sec. Sec.
107.825(c) and 107.900), or anything of value for procuring, attempting
to procure, or influencing your action with respect to such Assistance.
(c) Applicability of other laws. You are also bound by any
restrictions in Federal or State laws governing conflicts of interest
and fiduciary obligations.
(d) Financings with Associates--(1) Financings with Associates
requiring prior approval. Without SBA's prior written approval, you may
not Finance any business in which your Associate has either a voting
equity interest, or total equity interests (including potential
interests), of at least five percent.
(2) Other Financings with Associates. If you and an Associate
provide Financing to the same Small Business, either at the same time or
at different times, you must be able to demonstrate to SBA's
satisfaction that the terms and conditions are (or were) fair and
equitable to you, taking into account any differences in the timing of
each party's financing transactions.
(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A
Financing that falls into one of the following categories is exempt from
the prior approval requirement in paragraph (d)(1) of this section or is
presumed to be fair and equitable to you for the purposes of paragraph
(d)(2) of this section, as appropriate:
(i) Your Associate is a Lending Institution that is providing
financing under a credit facility in order to meet the operational needs
of the Small Business, and the terms of such financing are usual and
customary.
(ii) Your Associate invests in the Small Business on the same terms
and conditions and at the same time as you.
(iii) Both you and your Associate are leveraged Licensees, and both
have outstanding Participating Securities or neither has outstanding
Participating Securities.
(iv) You have no outstanding Leverage and do not intend to issue
Leverage in the future, and your Associate either is not a Licensee or
has no outstanding Leverage and does not intend to issue Leverage in the
future.
[[Page 63]]
(e) Use of Associates to manage Portfolio Concerns. To protect your
investment, you may designate an Associate to serve as an officer,
director, or other participant in the management of a Small Business.
You must identify any such Associate in your records available for SBA's
review under Sec. 107.600. Without SBA's prior written approval, the
Associate must not:
(1) Have any other direct or indirect financial interest in the
Portfolio Concern that exceeds, or has the potential to exceed, 5
percent of the Portfolio Concern's equity.
(2) Have served for more than 30 days as an officer, director or
other participant in the management of the Portfolio Concern