[Federal Register Volume 63, Number 24 (Thursday, February 5, 1998)]
[Rules and Regulations]
[Pages 5859-5873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2556]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
Small Business Investment Companies
AGENCY: Small Business Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Small Business Programs Improvement Act of 1996 made a
number of changes to the Small Business Investment Act of 1958, as
amended. For the Small Business
[[Page 5860]]
Investment Company program, these changes include provisions affecting
capital requirements, Leverage eligibility and fees, and the status of
Section 301(d) Licensees. This final rule implements the statutory
provisions; in addition, it makes various technical corrections and
clarifications, as well as other changes to provide greater fairness
and flexibility in such areas as portfolio diversification
requirements, Cost of Money and distributions by SBICs that have issued
Participating Securities.
DATES: This final rule is effective February 5, 1998.
FOR FURTHER INFORMATION CONTACT: Leonard W. Fagan, Investment Division,
at (202) 205-7583.
SUPPLEMENTARY INFORMATION: On October 14, 1997, SBA published a
proposed rule to implement the provisions of Title II of Public Law
104-208 (September 30, 1996), entitled ``The Small Business Programs
Improvement Act of 1996,'' which relate to small business investment
companies (SBICs). See 62 FR 53253. The proposed rule also included
certain other substantive changes, clarifications and technical
corrections to the regulations governing SBICs, including those
concerning portfolio diversification, Cost of Money, and the
computation of distributions to be made by SBICs that have issued
Participating Securities.
SBA received 10 comment letters on the proposed rule during the 30-
day public comment period. This final rule includes changes based on
some of the comments received. In addition, the final rule incorporates
certain provisions of Public Law 105-135, which was enacted December 2,
1997.
Section 301(d) Licensees
Prior to October 1, 1996, an SBIC program applicant could be
licensed under either section 301(c) or section 301(d) of the Small
Business Investment Act of 1958, as amended (Act). A Section 301(d)
Licensee, also known as a ``specialized SBIC'' or ``SSBIC'', agreed to
invest only in businesses owned and controlled by socially or
economically disadvantaged individuals. In return, a Section 301(d)
Licensee received certain benefits not available to other SBICs, such
as eligibility for certain types of subsidized Leverage (as defined in
Sec. 107.50).
Effective October 1, 1996, section 208(b)(3) of Public Law 104-208
repealed section 301(d) of the Act. However, the repeal provision was
accompanied by the following language: ``The repeal * * * shall not be
construed to require the Administrator to cancel, revoke, withdraw, or
modify any license issued under section 301(d) of the Small Business
Investment Act of 1958 before the date of enactment of this Act.''
At the same time, section 208(d) of Public Law 104-208 amended the
Act to eliminate subsidized SBA Leverage. Such Leverage was previously
available to SSBICs in the form of Debentures with an interest rate
subsidy or Preferred Securities with a 4 percent dividend. Although
subsidized Leverage can no longer be issued, the Act does not require
SSBICs to prepay or redeem such Leverage prior to its scheduled
maturity. In addition, an SSBIC may apply for any type of non-
subsidized Leverage (Debentures or Participating Securities) for which
it is eligible.
To implement these statutory changes, SBA proposed revisions to the
definitions of ``Section 301(d) Licensee'' and ``Preferred Securities''
found in Sec. 107.50, as well as to Secs. 107.120, 107.230(d)(4),
107.1100, 107.1160, 107.1400, 107.1420 and 107.1430; Secs. 107.110 and
107.1110 were proposed to be removed. These sections are finalized with
one modification, as discussed hereafter.
SBA received one comment concerning proposed Sec. 107.120. The
proposed rule would have allowed an existing SSBIC which was licensed
as a subsidiary of another Licensee or group of Licensees to continue
its operations under the same conditions as before; however, an
existing SSBIC that was not already a subsidiary would not have been
permitted to become one. The commenter suggested that Section 301(d)
Licensees should continue to have access to this option. Although the
current provision has rarely been used, SBA has no objection to its
continued availability and has revised the final rule accordingly.
Common Control
SBA proposed to broaden a portion of the defined term ``Common
Control'' in Sec. 107.50. The purpose of the change was to reflect the
way the term is actually used in the regulations. The definition is
adopted as proposed.
Management and Ownership Diversity
Proposed Sec. 107.150 is adopted without change. SBA received one
comment on this section expressing support for the general requirement
that a Licensee which plans to obtain SBA Leverage must have diversity
between management and ownership. Under the revised regulation, the
investors relied upon to satisfy the diversity requirement cannot be
Affiliates of one another. In addition, SBA has discretion to reject
for diversity purposes an investor whose ownership interest is not
significant, either in terms of absolute dollars or percentage of
ownership.
These changes reflect policies which SBA has been developing in its
review of license applications. SBA is continuing to refine these
guidelines and expects to incorporate them into its standard operating
procedures.
Capital Requirements
Under the Act as amended by section 208(c) of Public Law 104-208,
SBICs licensed on or after October 1, 1996 must meet increased minimum
capital requirements. These requirements are implemented in
Sec. 107.210, which is finalized as proposed. Under this section, a
company that does not wish to be eligible to issue Participating
Securities must have Regulatory Capital of at least $5,000,000. As an
exception to this general rule, the regulation provides that SBA can
license an applicant with Regulatory Capital of at least $3,000,000,
but only if the applicant meets certain conditions. As mandated by the
Act, this exception is limited to those instances where ``special
circumstances and good cause'' can be shown.
A company that wishes to be eligible to apply for Participating
Securities must have Regulatory Capital of at least $10,000,000, with a
permitted exception for an applicant which demonstrates to SBA's
satisfaction that it can be financially viable over the long term with
a lower amount (but under no circumstances less than $5,000,000). The
regulation does not permit prospective Participating Securities issuers
to be licensed pursuant to the exception available to other applicants,
under which a license may be granted with Regulatory Capital as low as
$3,000,000. For applicants planning to issue Participating Securities,
SBA believes that the ability to meet the standard minimum capital
requirement is an important indicator of the credibility of management.
SBA also doubts that any such applicant can demonstrate financial
viability with Regulatory Capital of only $3,000,000, even on a
temporary basis.
In addition to the Regulatory Capital requirements described above,
Sec. 107.210(a) also requires any company licensed on or after October
1, 1996, to have Leverageable Capital of at least $2,500,000.
Leverageable Capital is a subset of Regulatory Capital; while both
include capital actually contributed to a Licensee by its private
investors, the major difference between them is that Regulatory Capital
also includes the Licensee's unfunded binding
[[Page 5861]]
commitments from Institutional Investors.
SBICs licensed before October 1, 1996, are not required to increase
their capital. Under Sec. 107.210(b), such companies must continue to
meet the applicable minimum capital requirements under the regulations
in effect on September 30, 1996 (see Secs. 107.210 and 107.220 as in
effect on that date). These requirements vary depending upon the date a
company was licensed and the type of SBA Leverage it has issued or
wants to issue.
See also the section of this preamble entitled ``Eligibility for
Leverage and Leverage Commitments''.
Valuations
Section 208(f)(2) of Public Law 104-208 included one provision
related to the valuation of portfolio securities held by Licensees
which was not already reflected in the regulations. Under this
provision, as part of the annual audit of a Licensee's financial
statements, the independent auditor must provide to SBA a statement
that the Licensee's valuations were performed in accordance with its
SBA-approved valuation policy, as required by section 310(d)(2) of the
Act. SBA included this requirement in proposed Sec. 107.503(e), which
is finalized without change.
Reports To Be Filed With SBA
SBA received one comment on proposed Sec. 107.660(d), which would
have required a Licensee to notify SBA if an officer, director, general
partner or other Control Person is charged with or convicted of any
criminal offense other than a misdemeanor involving a minor motor
vehicle violation. The purpose of the proposed rule was to give SBA a
mechanism for updating information typically provided at the time of
licensing by key personnel associated with a license applicant. The
commenter pointed out that the broad regulatory definition of ``Control
Person'' may cause the notification requirement to apply to persons who
were not required to provide personal history statements to SBA as part
of the licensing process and who have no direct role in the management
of the SBIC.
SBA agrees that the proposed regulation may, under certain
circumstances, unnecessarily include persons who are not involved in
the operations of a Licensee. The final rule is modified accordingly,
so that the notification requirement applies to any officer, director
or general partner of a Licensee, and any other person who was required
to provide a personal history statement to SBA in connection with the
SBIC's license (either at the time of licensing or subsequently, as in
the case of a new investor who acquires a significant interest in an
existing SBIC).
Financing of Smaller Enterprises
Proposed Sec. 107.710 is adopted without change. This section
includes a provision applicable to SBICs licensed on or before
September 30, 1996, which issue Leverage after that date and which do
not meet the current minimum capital requirement (Regulatory Capital of
at least $5,000,000 for Debentures or at least $10,000,000 for
Participating Securities). For such Licensees, at least 50 percent of
the aggregate dollar amount of their Financings extended after
September 30, 1996 must be invested in Smaller Enterprises.
Under Sec. 107.710(e), a Licensee which has not achieved the
required percentage of investments in Smaller Enterprises is allowed
one additional year to bring its portfolio into compliance. However,
such a Licensee is not eligible for additional Leverage until it
reaches the required percentage. See also the section of this preamble
entitled ``Eligibility for Leverage and Leverage Commitments''.
Passive Businesses
SBA received five comments on proposed Sec. 107.720(b), which dealt
with the financing of passive businesses. SBICs are generally
prohibited from investing in passive businesses, but an exception is
provided for holding companies which pass through substantially all of
the financing proceeds to an active subsidiary. The proposed rule would
have modified the existing exception by allowing a holding company to
pass through proceeds to more than one operating company, rather than a
single company, provided that each operating company qualified as a
``subsidiary'' of the holding company. A subsidiary company was defined
as one in which the financed passive business owns at least 50 percent
of the voting securities.
All of the commenters supported the provision allowing proceeds to
be passed through a holding company to more than one operating company.
However, four of the commenters were concerned that the proposed 50
percent ownership requirement would foreclose another type of
investment structure which may be important to certain Licensees
organized as limited partnerships. Specifically, for a partnership with
tax exempt investors (such as pension funds), direct investment in an
unincorporated business is considered highly undesirable because of the
possibility that the tax exempt investors will be deemed to have
``unrelated business taxable income'' under section 511 of the Internal
Revenue Code of 1986, as amended. The common solution to this problem
is for the partnership to form a wholly-owned corporate subsidiary
which receives funds from its parent and in turn reinvests these funds
in one or more unincorporated operating companies. If an SBIC creates a
passive corporation for this purpose, it is likely that the corporation
would own less than 50 percent of the voting securities of the financed
Small Business. Therefore, the investment would not qualify for the
exception in proposed Sec. 107.720(b)(2).
SBA does not wish to prevent partnership Licensees from investing
in unincorporated Small Businesses, but it has a number of concerns.
First, SBA believes that when a Licensee makes an investment in a
holding company which is unrelated to the Licensee and is, in fact, a
portfolio company, the requirement that proceeds be passed through only
to 50 percent-owned subsidiaries should remain. This provision ensures
that there is a significant relationship between the financed passive
business and the active businesses which ultimately receive the
proceeds, and that the passive business is not functioning simply as a
reinvestor.
Second, SBA believes that there may be significant credit risks
associated with the formation of corporate subsidiaries by SBICs. For
example, Licensees are prohibited by law from filing for bankruptcy
protection, providing SBA with an important safeguard in its effort to
manage the government's financial risk. However, when a Licensee holds
assets through a subsidiary, the possibility arises that these assets
can be shielded through a bankruptcy filing by the subsidiary.
To accommodate the Agency's concerns as well as those of certain
Licensees, SBA is finalizing Sec. 107.720 as follows: The exception in
proposed Sec. 107.720(b)(2) is adopted without change, and a further
exception is added in a new paragraph (b)(3). Under this new provision,
a partnership Licensee may form one or more wholly-owned corporations
with SBA's prior written approval. Such corporations must be formed for
the sole purpose of providing Financing to one or more eligible,
unincorporated Small Businesses. The formation of such corporations is
limited to situations in which a direct investment in the Small
Business would cause one or more of the Licensee's investors to have
unrelated business taxable income. The regulation resolves
[[Page 5862]]
potential contradictions within part 107 by specifying that ownership
of such a corporation does not violate the limitations on Control in
Sec. 107.865(a) or the conflict of interest prohibitions in
Sec. 107.730(a).
SBA wishes to emphasize that the requirement for prior written
approval to form a subsidiary is consistent with longstanding practice
within the SBIC program. SBA's concern in this regard relates not only
to credit risks associated with the shift of assets from a Licensee to
its subsidiaries, but also to the purpose for which a subsidiary is
formed and whether its proposed function is consistent with the purpose
of an SBIC as set forth in the Act.
Co-Investment With Associates
SBA received two comments in support of proposed
Sec. 107.730(d)(3)(iv), which is finalized without change. Under this
provision, co-investments by a non-leveraged SBIC and its non-SBIC
Associate are presumed to be fair and equitable to the SBIC, so that no
specific demonstration of equity is required.
Portfolio Diversification Requirements (``Overline'' Limit)
SBA received four comments on proposed Sec. 107.740, under which a
leveraged SBIC may not have more than 20 percent of its Regulatory
Capital invested in or committed to a single Small Business or group of
related businesses, unless SBA gives its prior written approval (for
SSBICs, the limit is 30 percent of Regulatory Capital). The proposed
rule was intended to address a problem faced by an SBIC which reduces
its Regulatory Capital in a manner permitted by the regulations (such
as when a Participating Securities issuer returns capital to its
investors), and then finds that one or more of its existing investments
now exceed its reduced overline limitation. SBA's proposed solution was
to base a Licensee's maximum permitted investment in or commitment to a
Small Business on its Regulatory Capital at the time the investment or
commitment is made.
All of the commenters supported this change, but suggested that SBA
go further. One commenter felt that an SBIC should have the ability to
make follow-on investments in a Small Business based on the Licensee's
Regulatory Capital at the time the initial investment was made. The
other commenters argued more broadly that an SBIC, particularly a
limited life partnership which expects to return capital to investors
as investments are harvested, should be permitted to base its overline
limit on its initial Regulatory Capital (assuming no further
increases), with no reduction for any subsequent decreases in
Regulatory Capital. The commenters all suggested that an SBIC should
not be forced to reduce the intended investment size reflected in its
business plan because of an early return of capital; one commenter
pointed out that this imposes a penalty which is particularly
unjustified in the case of an SBIC which makes a distribution resulting
from a profitable realization of a portfolio company investment.
SBA understands these concerns, particularly with respect to an
SBIC organized as a limited life partnership which does not reinvest
capital. However, SBA believes that the suggested changes are
prohibited by section 306(a) of the Act. Therefore, the proposed rule
is finalized without change.
Cost of Money
SBA proposed three revisions to Sec. 107.855, which sets forth
limits on interest rates and other charges that SBICs may impose on
Small Businesses, generally referred to as ``Cost of Money''. These
provisions are finalized as proposed. Two of the changes dealt with the
computation of the Cost of Money ceiling, mainly the circumstances
under which Licensees may include in the computation the 1 percent
additional charge on Leverage which is payable to SBA. The other change
involved the treatment of detachable stock purchase warrants.
The four comments received on this section all strongly supported
proposed Sec. 107.855(g)(1), which contained an exclusion from Cost of
Money for a discount on the loan portion of a Debt Security, if the
discount results solely from the allocation of fair value to detachable
stock purchase warrants as required by generally accepted accounting
principles. One commenter suggested that the exclusion be extended to
any discount resulting from the allocation of fair value to an equity
feature of a Debt Security, without regard to whether the equity
feature was in the form of a warrant, common stock or other equity
equivalent. SBA did not expand the proposed language because it has not
encountered this type of Cost of Money issue with equity features other
than warrants; if such an issue arises in the future, the Agency will
consider whether further change is desirable.
Control
Proposed Sec. 107.865 contained two clarifications to the existing
regulation concerning Control of a Small Business by an SBIC, which are
finalized without change. SBA received one comment concerning proposed
Sec. 107.865(c), which set forth the circumstances under which a
Licensee can rebut a presumption of Control. The comment did not
specifically relate to the proposed change, which was merely an
editorial clarification. It concerned the interpretation of the
rebuttal condition in Sec. 107.865(c)(2) which states, in part, that
``[m]anagement of the Small Business can elect at least 40 percent of
the board members of a corporation, general partners of a limited
partnership, or managers of a limited liability company, as
appropriate, and the Investor Group can elect no more than 40
percent.''
The commenter provided the following scenario: There are five seats
on the Small Business's board of directors, three to be filled by
management and two by the Investor Group. One of the seats controlled
by management is vacant, so the actual board composition represents a
50-50 split between management and the Investor Group. The commenter
suggested that these circumstances satisfy the rebuttal condition in
Sec. 107.865(c)(2) because management can fill three of the five board
seats (60 percent), while the Investor Group can fill the remaining two
(40 percent). The vacant seat should not affect the rebuttal, because
the management of the Small Business can exercise its right to fill the
seat and assert control of the board at any time. As long as there are
no restrictions on management's ability to do so, SBA agrees with this
interpretation of the regulation and does not believe that any further
clarification is needed.
Eligibility for Leverage and Leverage Commitments
Section 208 of Public Law 104-208 established certain requirements
which an SBIC must satisfy in order to obtain SBA Leverage. These
requirements are implemented by Sec. 107.1120 (c) and (d), which are
adopted without change from the proposed rule. Under these provisions,
an SBIC licensed after September 30, 1996, with Regulatory Capital of
less than $5,000,000 is ineligible for Leverage until it reaches the
$5,000,000 level. An SBIC licensed on or before September 30, 1996, is
not required to increase its capital in order to obtain additional
Leverage; however, if its Regulatory Capital is less than $5,000,000
($10,000,000 for a company seeking to issue Participating Securities),
it must certify in writing that at least 50 percent of the aggregate
dollar amount of its Financings
[[Page 5863]]
extended after September 30, 1996 will be provided to Smaller
Enterprises (see also Sec. 107.710(c)). Finally, any Licensee seeking
Leverage must certify in writing that it is in compliance with the
general requirement to provide 20 percent of its total Financings to
Smaller Enterprises under Sec. 107.710(b).
SBA is also finalizing without change the revisions proposed in
Secs. 107.1200, 107.1230 and 107.1240 to eliminate unnecessary
limitations on the amounts of Leverage commitments and draws and to
facilitate the interim Leverage funding mechanism which SBA is now
developing.
Leverage Fees
SBA proposed changes in Secs. 107.1130 and 107.1210 to implement
provisions of section 208(d)(6) of Public Law 104-208 which affect the
fees SBICs must pay in order to obtain SBA Leverage. Proposed
Sec. 107.1130 is adopted without change; however, Sec. 107.1210 has
been revised as a result of legislation enacted after publication of
the proposed rule.
Under Sec. 107.1130(a), a Licensee must pay a nonrefundable
``leverage fee'' to SBA when Debentures or Participating Securities are
issued. The fee is 3 percent of the face amount of the Leverage issued,
replacing the 2 percent user fee and the 1 percent commitment fee
previously in effect. Section 107.1130(d) requires a Licensee to pay to
SBA an additional ``Charge'' on Debentures and Participating Securities
(see also Sec. 107.50 for the definition of this new term). For both
types of Leverage, the Charge is 1 percent per annum. The Charge is
payable under the same terms and conditions as the interest on
Debentures or the Prioritized Payments on Participating Securities, as
applicable. Thus, a Debenture issuer would pay the Charge in two semi-
annual installments together with its interest payments. In contrast, a
Participating Securities issuer would pay the Charge only when it had
profits and was distributing Prioritized Payments under Sec. 107.1540.
The Charge does not apply to Leverage drawn down against a commitment
obtained from SBA on or before September 30, 1996.
Under proposed Sec. 107.1210(a), if a Licensee received a Leverage
commitment from SBA, it would have been required to prepay the 3
percent leverage fee at the time it received the commitment. However,
section 215(d) of Public Law 105-135, enacted December 2, 1997,
dividend payment of the leverage fee into two stages for Licensees
which receive a Leverage commitment: A nonrefundable fee equal to 1
percent of the committed amount must be paid when the commitment is
received, and 2 percent of the amount of each draw must be paid when
funds are drawn down. To implement this statutory mandate, the final
rule is modified accordingly.
Participating Securities--General
Proposed Sec. 107.1500 is adopted without change. This section
contains clarifications and minor revisions concerning the redemption
and priority in liquidation of Participating Securities, and eliminates
the requirement for a Licensee to maintain a specified level of Equity
Capital Investments.
Liquidity Requirements for Participating Securities
The proposed rule included two minor changes to the liquidity
requirements in Sec. 107.1505. The section is finalized as proposed.
SBA received two comments in support of the revised computation of the
liquidity ratio in Sec. 107.1505(b). Both commenters stated that the
change in the weighting of publicly traded securities will simplify the
computation and also will eliminate the ``double discounting'' of such
securities.
Earmarked Profit (Loss)
Section 107.1510 is adopted as proposed. This section contains
minor technical revisions intended to simplify the computation of
Earmarked Profit (Loss) by Participating Securities issuers.
Prioritized Payments
Section 107.1520 tells a Licensee how to compute Prioritized
Payments and how to determine whether it has profits which will cause
Prioritized Payments to become ``earned'' and therefore payable to SBA.
Four revisions to this section were proposed and are adopted without
change.
First, the regulation implements a provision of Public Law 104-208
by including ``Charges'' (the 1 percent annual fee discussed in this
preamble under the heading ``Leverage Fees'') on outstanding
Participating Securities in the required computations. Although Charges
are not part of Prioritized Payments, they are payable under the same
terms and conditions.
Second, Sec. 107.1520(a) incorporates a technical change intended
to facilitate the interim Leverage funding mechanism currently under
consideration by SBA.
Third, the computation of profit for the purposes of Sec. 107.1520
is revised under Sec. 107.1520(d). Under the previous regulation, a
Licensee's ``profit'' was its cumulative Earmarked Profit minus its
cumulative Earned Prioritized Payments from prior periods. This
computation ignored the fact that some or all of the profit computed in
this manner may have already been distributed under other sections of
the regulations, either to SBA as Profit Participation or to the
Licensee's private investors. The revised rule takes prior profit
distributions into account in determining whether a Licensee has
profits which can be used to pay Prioritized Payments. SBA received two
comments in support of this change.
Finally, Sec. 107.1520(f) provides additional detail concerning the
computation of Adjustments, a type of compounding of unpaid Prioritized
Payments.
Profit Participation
Section 107.1530 is adopted as proposed. SBA received two comments
in support of the proposed regulation. The section contains several
changes affecting the computation of Profit Participation, which must
be allocated to SBA by a Participating Securities issuer when it has
earned profits over and above the amount necessary to pay its
Prioritized Payments in full. Profit Participation is determined by
computing a ``Base'' and a ``Profit Participation Rate'', and
multiplying the Base by the Rate. The rule revises the computation of
the Base with respect to certain losses incurred by a Licensee in prior
periods and provides a simpler method of computing the ``PLC ratio'',
which is one of the variables in the Profit Participation Rate formula.
The rationale for these changes is discussed in detail in the preamble
to the proposed rule.
Tax Distributions
Proposed Sec. 107.1550, which dealt with tax distributions by
Participating Securities issuers organized as limited partnerships or
similar flow-through entities, is adopted as final with one
modification. The proposed changes consisted of clarifications and a
minor technical revision, as discussed in the preamble to the proposed
rule. In the final rule, SBA is incorporating one additional change to
correct an error in Sec. 107.1550(c)(3). The previous regulation stated
that SBA would apply its share of any tax distribution to the Profit
Participation owed by a Licensee under Sec. 107.1530. However, there
are certain circumstances under which SBA's share of a tax distribution
may exceed the Profit Participation owed. In such cases, SBA will apply
its share first to any Profit Participation, and then generally as a
redemption of Participating Securities in order of issue
[[Page 5864]]
(in rare cases, a Licensee may owe other amounts which will be
considered in the application of the distribution). The final rule
incorporates this correction by indicating that SBA will apply its
share of tax distributions in the same order specified for other
profit-based distributions in Sec. 107.1560(g).
Distributions Based on ``Retained Earnings Available for
Distribution''
SBA proposed minor revisions in Sec. 107.1560(a)(1), (a)(4), (b)
and (e) which are finalized without change. These provisions clarify
various aspects of the calculation of distributions by Participating
Securities issuers who have Retained Earnings Available for
Distribution remaining after paying Prioritized Payments and tax
distributions.
Optional Distributions Not Based on READ
Proposed Sec. 107.1570(b) is adopted without change. SBA received
two comments in support of the proposed section, which dealt with
conditions under which a Licensee which has no Retained Earnings
Available for Distribution can make optional distributions to its
private investors and SBA. Both commenters agreed with SBA that the
change in Sec. 107.1570(b)(1)(ii) removes an unintended limitation on
Licensees' ability to make such distributions.
Notice of Participating Securities Distributions
The proposed rule included a prior notice requirement for all
distributions by SBICs which have issued Participating Securities. SBA
is finalizing as proposed the language establishing this requirement in
Secs. 107.1540 through 107.1570, which govern the various types of
distributions. A Licensee must notify SBA 10 business days before any
planned distribution, unless the Agency permits otherwise. SBA received
one comment agreeing that such notification is appropriate given the
complexity of the distribution rules. The commenter did not believe
that the requirement would unreasonably constrain a Licensee's freedom
of action.
Timing of Participating Securities Distributions
Section 107.1575 is adopted as proposed. SBA received three
comments on the proposed rule, all of which supported the additional
flexibility given to Participating Securities issuers wishing to make
distributions on dates other than the established quarterly ``Payment
Dates'' (February 1, May 1, August 1 and November 1 of each year).
All of the commenters raised one issue which may arise when a
Licensee makes a distribution to SBA which includes a redemption of
Participating Securities. The proposed rule specified that in such
cases, the effective date of the redemption would be the next Payment
Date following the distribution date; therefore, a Licensee would be
responsible for Prioritized Payments through the next Payment Date on
the amount of Participating Securities to be redeemed. SBA felt this
provision was necessary because Participating Securities are funded
through the purchase by investors of Trust Certificates, under which
principal can be returned only on Payment Dates.
The commenters understood why SBA must continue to ``charge'' the
Prioritized Payment on Participating Securities up to the next Payment
Date, but asked whether SBA could provide a mechanism (such as an
escrow provision) which would allow a Licensee to earn interest on any
redemption payment that it distributes to SBA, from the date of
distribution until the next Payment Date. SBA is sympathetic to this
request and believes that the result would be fair both to Licensees
and to the Agency. To facilitate such an arrangement, SBA is exploring
the possibility of allowing SBICs to establish individual escrow
accounts at a designated financial institution to hold the proceeds of
distributions made on dates other than Payment Dates. The accounts
would be for the benefit of SBA, but any interest income would inure to
the benefit of the Licensee. Each SBIC would be responsible for any
expenses incurred in establishing and maintaining its account. The use
of an escrow account would be an option available to SBICs, but would
not be required. SBA does not believe that such an arrangement requires
a change in the regulations. SBA will provide further information to
Licensees as soon as possible.
In-Kind Distributions by Licensees
SBA received three comments on proposed Sec. 107.1580. The section
sets forth the conditions under which a Participating Securities issuer
can make distributions in the form of securities rather than cash. All
of the commenters supported the proposed revision permitting a Licensee
to pay Prioritized Payments under Sec. 107.1540 via an in-kind
distribution. Two of the commenters suggested that SBA also consider
allowing SBICs to make tax distributions under Sec. 107.1550 in the
form of securities. SBA feels strongly that tax distributions should be
made on a cash-only basis. As stated in the preamble to the proposed
rule, the intent of such distributions is to provide investors in flow-
through entities with sufficient cash to pay their anticipated tax
liabilities, and an in-kind distribution does not satisfy this purpose.
Therefore, the proposed rule is finalized without change.
Exchange of Debentures for Participating Securities
Proposed Secs. 107.1585 and 107.1590 are finalized without change.
In these sections, references to the retirement of Debentures through
the issuance of Preferred Securities are eliminated, and provisions
governing the retirement of Debentures through the issuance of
Participating Securities are reorganized and reworded without
substantive change.
Characteristics of SBA's Leverage Guarantee
Section 107.1720 is adopted as proposed. The section restores
language setting forth the unconditional nature and other
characteristics of SBA's guarantee which was inadvertently dropped in a
previous regulatory revision.
Capital Impairment
Proposed Sec. 107.1830(a) is finalized without change. The
provision clarifies that SBA Leverage is subject to the Capital
Impairment regulations in effect on the date the Leverage is issued. In
addition, it requires a Licensee to comply with any specific conditions
to which it has agreed by contract with SBA.
Miscellaneous Corrections and Editorial Changes
The proposed definition of ``Commitment'' in Sec. 107.50 is
finalized without change. The definition is reworded in the third
person (i.e., to refer to ``a Licensee'' instead of ``you'') to conform
to the style in which the other definitions are written.
The proposed correction of the SIC code for Operative Builders in
Sec. 107.720(c) is adopted as final.
Proposed Sec. 107.1600(a) is adopted as final. Under this
provision, references to section 321 of the Act are changed to section
319, reflecting the amendment of the Act by Public Law 104-208. In
addition, to implement section 215(e) of Public Law 105-135,
Sec. 107.1600(b) is revised to state that SBA will issue guarantees of
Leverage and of Trust Certificates at intervals of not more than six
months, rather than three months.
[[Page 5865]]
The proposed definition of Trust Certificate Rate is adopted as
final. The definition incorporates certain technical changes to
facilitate the interim funding mechanism currently under consideration
by SBA.
Limited Liability Companies
Section 208(b)(1) of Public Law 104-208 amended the Act to permit
SBICs to organize as limited liability companies (LLCs). SBA is
studying the legal and administrative issues which may arise in
connection with LLCs, and will publish a proposed rule to implement
this form of organization by SBICs at a later date.
Although SBA regulations do not yet provide for LLC Licensees, SBA
has the statutory authority to license such companies. SBA's current
policy is to accept a license application from an LLC only if the LLC
is organized under Delaware's Limited Liability Company Act and does
not intend to issue Participating Securities, which SBA has not yet
developed in a form suitable for use by an LLC. SBA may reconsider
these limitations as SBA acquires greater familiarity with the LLC form
of organization and as a body of case law is created under the various
state LLC laws. The adoption of a Uniform LLC Act by a significant
number of states also would induce SBA to reexamine its current
preference for Delaware law.
Until SBA regulations are revised to accommodate LLC Licensees,
such Licensees should understand that SBA regards the members of the
LLC to be equivalent to the general partners in a partnership Licensee
unless the LLC's operating agreement clearly indicates otherwise. Thus,
all members of an LLC Licensee will automatically be considered Control
Persons and Associates of the Licensee unless the LLC's operating
agreement vests management authority only in certain members of the
company.
Compliance With Executive Orders, 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this final rule will not be a significant
regulatory action for purposes of Executive Order 12866 because it will
not have an annual effect on the economy of more than $100 million, and
that it will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq. The purpose of the rule is to
implement provisions of Public Law 104-208 which relate to small
business investment companies, and to make certain other changes,
primarily technical corrections and clarifications, to the regulations
governing SBICs.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this final rule will contain no new reporting or
recordkeeping requirements.
For purposes of Executive Order 12612, SBA certifies that this
final rule will not have any federalism implications warranting the
preparation of a Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this
final rule is drafted, to the extent practicable, in accordance with
the standards set forth in Section 2 of that Order.
List of Subjects in 13 CFR Part 107
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons set forth above, part 107 of title 13 of the Code
of Federal Regulations is amended as follows:
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
1. The authority citation for part 107 is revised to read as
follows:
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g
and 687m.
2. Section 107.50 is amended by revising the definitions for
Commitment, Common Control, Preferred Securities, Section 301(d)
Licensee, and Trust Certificate Rate, and adding in alphabetical order
a definition of Charge, to read as follows:
Sec. 107.50 Definitions of terms.
* * * * *
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).
* * * * *
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.
* * * * *
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.
* * * * *
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.
* * * * *
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.
* * * * *
Sec. 107.110 [Removed]
3. Section 107.110 is removed.
4. Section 107.120 is revised to read as follows:
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:
[[Page 5866]]
(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.
5. In Sec. 107.150, the introductory text of paragraph (a)(1) is
revised to read as follows:
Sec. 107.150 Management and ownership diversity requirement.
* * * * *
(a) Requirement one. * * *
(1) At least 30 percent of your Regulatory Capital and Leverageable
Capital must be owned by Persons unrelated to management. To satisfy
this requirement, such Persons must not be your Associates (except for
their status as your shareholders or limited partners) and must not
Control, be Controlled by, or be under Common Control with any of your
Associates. You must have as investors at least three such Persons who
are not Affiliates of one another and whose investments are significant
in both dollar and percentage terms, as determined by SBA. As an
alternative, you may substitute one investor who is an acceptable
Institutional Investor for the three investors who are otherwise
required. For purposes of this paragraph (a)(1), the following
Institutional Investors are acceptable:
* * * * *
6. Section 107.210 is revised to read as follows:
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.
Sec. 107.220 [Removed]
7. Section 107.220 is removed.
8. Section 107.230 is amended by revising the introductory text of
paragraph (d)(4) to read as follows:
Sec. 107.230 Permitted sources of Private Capital for Licensees.
* * * * *
(d) Qualified Non-private Funds. * * *
(4) Funds invested in or committed in writing to any Section 301(d)
Licensee prior to October 1, 1996, from the following sources:
* * * * *
9. In Sec. 107.503, paragraphs (a), (b) and (e), and the heading
and first sentence of paragraph (c), are revised to read as follows:
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.
(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. * * *
* * * * *
(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.
10. Section 107.660 is amended by redesignating paragraph (d) as
paragraph (e) and by adding a new paragraph (d) to read as follows:
Sec. 107.660 Other items required to be filed by Licensee with SBA.
* * * * *
(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.
* * * * *
11. Section 107.710 is amended by adding a sentence at the end of
paragraph (e) and by revising paragraphs (b) and (c) to read as
follows:
Sec. 107.710 Requirement to Finance Smaller Enterprises.
* * * * *
(b) Smaller Enterprise Financings.--(1) General rule. At the close
of each of your fiscal years, at least 20 percent of the total dollar
amount of the Financings you extended since April 25, 1994 must have
been invested in Smaller Enterprises. If you were licensed after April
25, 1994, the 20 percent requirement applies to the total dollar amount
of the Financings you
[[Page 5867]]
extended since you were licensed plus any pre-licensing investments
approved by SBA for inclusion in your Regulatory Capital.
(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 was Participating
Securities; or
(ii) Less than $5,000,000 if such Leverage was Debentures.
(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.
* * * * *
(e) Non-compliance with this section. * * * However, you will not
be eligible for additional Leverage until you reach the required
percentage (see Sec. 107.1120(c) and (d)).
12. In Sec. 107.720, paragraph (b)(2) is revised, paragraph (b)(3)
is added, and the introductory text of paragraph (c)(1) is revised to
read as follows:
Sec. 107.720 Small Businesses that may be ineligible for Financing.
* * * * *
(b) Passive Businesses. * * *
(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) 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:
* * * * *
13. In Sec. 107.730, paragraph (d)(3)(iv) is revised to read as
follows:
Sec. 107.730 Financings which constitute conflicts of interest.
* * * * *
(d) Financings with Associates. * * *
(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. * *
*
(iv) Both you and your Associate are non-leveraged Licensees, or
you are a non-leveraged Licensee and your Associate is not a Licensee.
* * * * *
14. In Sec. 107.740, paragraph (a) is revised to read as follows:
Sec. 107.740 Portfolio diversification (``overline'' limitation).
(a) General rule. This Sec. 107.740 applies if you have outstanding
Leverage or want to be eligible for Leverage. Without SBA's prior
written approval, you may provide Financing or a Commitment to a Small
Business only if the resulting amount of your aggregate outstanding
Financings and Commitments to such Small Business and its Affiliates
does not exceed:
(1) 20 percent of your Regulatory Capital as of the date of the
Financing or Commitment if you are a Section 301(c) Licensee; or
(2) 30 percent of your Regulatory Capital as of the date of the
Financing or Commitment if you are a Section 301(d) Licensee.
* * * * *
15. Section 107.855 is amended by revising paragraphs (c)(1),
(c)(4)(i) and (d)(4), redesignating paragraphs (g)(1) through (g)(10)
as paragraphs (g)(2) through (g)(11), and adding a new paragraph (g)(1)
to read as follows:
Sec. 107.855 Interest rate ceiling and limitations on fees charged to
Small Businesses (``Cost of Money'').
* * * * *
(c) How to determine the Cost of Money ceiling for a Financing. * *
*
(1) Choose a base rate for your Cost of Money computation. The base
rate may be either the Debenture Rate currently in effect plus the
applicable Charge determined under Sec. 107.1130(d)(1), or your own
``Cost of Capital'' as determined under paragraph (d) of this section.
* * * * *
(4) * * *
(i) The current Debenture Rate plus the applicable Charge
determined under Sec. 107.1130(d)(1);
* * * * *
(d) How to determine your Cost of Capital. * * *
(4) For all qualified borrowings outstanding at your last fiscal
year or fiscal quarter end, determine the aggregate interest expense
for the past four fiscal quarters, excluding amortization of loan fees.
For the purposes of this paragraph (d)(4):
(i) Interest expense on Debentures includes the 1 percent Charge
paid by a Licensee under Sec. 107.1130(d)(1); and
(ii) Section 301(d) Licensees with outstanding subsidized
Debentures are presumed to have paid interest at the rate stated on the
face of such Debentures, without regard to any subsidy paid by SBA.
* * * * *
(g) Charges excluded from the Cost of Money. * * *
(1) Discount on the loan portion of a Debt Security, if such
discount exists solely as the result of the allocation of value to
detachable stock purchase warrants in accordance with generally
accepted accounting principles.
* * * * *
16. In Sec. 107.865, the first sentence of paragraph (c)(2) and
paragraph (d)(1) are revised to read as follows:
Sec. 107.865 Restrictions on Control of a Small Business by a
Licensee.
* * * * *
(c) Rebuttals to presumption of Control. * * *
(2) The management of the Small Business can elect at least 40
percent of the board members of a corporation, general partners of a
limited partnership, or managers of a limited liability company, as
appropriate, and the Investor Group can elect no more than 40 percent.
* * *
* * * * *
(d) Temporary Control permitted. * * *
(1) Where reasonably necessary for the protection of your existing
investment;
* * * * *
[[Page 5868]]
17. Section 107.1100 is revised to read as follows:
Sec. 107.1100 Types of Leverage and application forms.
(a) Types of Leverageable available. You may apply for Leverage
from SBA in one or both of the following forms:
(1) The purchase or guarantee of your Debentures.
(2) The purchase or guarantee of your Participating Securities.
(b) Application forms. Use SBA Form 1022 to apply for Debentures
and SBA Form 1022B to apply for Participating Securities.
(c) Where to send your application. Send all Leverage applications
to SBA, Investment Division, 409 Third Street, S.W., Washington, DC
20416.
Sec. 107.1110 [Removed]
18. Section 107.1110 is removed.
19. Section 107.1120 is amended by revising paragraph (c),
redesignating paragraphs (d) through (f) as paragraphs (e) through (g),
and adding a new paragraph (d) to read as follows:
Sec. 107.1120 General eligibility requirements for Leverage.
* * * * *
(c) Meet the minimum capital requirements of Sec. 107.210, subject
to the following additional conditions:
(1) If you were licensed after September 30, 1996 under the
exception in Sec. 107.210(a)(1), you will not be eligible for Leverage
until you have Regulatory Capital of at least $5,000,000.
(2) If you were licensed on or before September 30, 1996, and have
Regulatory Capital of less than $5,000,000 (less than $10,000,000 if
you wish to issue Participating Securities):
(i) You must certify in writing that at least 50 percent of the
aggregate dollar amount of your Financings extended after September 30,
1996 will be provided to Smaller Enterprises (as defined in
Sec. 107.710(a)); and
(ii) You must demonstrate to SBA's satisfaction that the approval
of Leverage will not create or contribute to an unreasonable risk of
default or loss to the United States government, based on such
measurements of profitability and financial viability as SBA deems
appropriate.
(d) Certify in writing that you are in compliance with the
requirement to finance Smaller Enterprises in Sec. 107.710(b).
* * * * *
20. Section 107.1130 is amended by revising the section heading and
paragraphs (a) through (c), redesignating paragraph (d) as paragraph
(e), and adding a new paragraph (d) to read as follows:
Sec. 107.1130 Leverage fees and additional charges payable by
Licensee.
(a) Leverage fee. You must pay a leverage fee to SBA for each
issuance of a Debenture or Participating Security. The fee is 3 percent
of the face amount of the Leverage issued.
(b) Payment of leverage fee. (1) If you issue a Debenture or
Participating Security to repay or redeem existing Leverage, you must
pay the leverage fee before SBA will guarantee or purchase the new
Leverage security.
(2) If you issue a Debenture or Participating Security that is not
used to repay or redeem existing Leverage, SBA will deduct the leverage
fee from the proceeds remitted to you, unless you prepaid the fee under
Sec. 107.1210.
(c) Refundability. The leverage fee is not refundable under any
circumstances.
(d) Additional charge for Leverage.--(1) Debentures. You must pay
to SBA a Charge of 1 percent per annum on the outstanding amount of
your Debentures issued on or after October 1, 1996, payable under the
same terms and conditions as the interest on the Debentures. This
Charge does not apply to Debentures issued pursuant to a Leverage
commitment obtained from SBA on or before September 30, 1996.
(2) Participating Securities. You must pay to SBA a Charge of 1
percent per annum on the outstanding amount of your Participating
Securities issued on or after October 1, 1996, payable under the same
terms and conditions as the Prioritized Payments on the Participating
Securities. This Charge does not apply to Participating Securities
issued pursuant to a Leverage commitment obtained from SBA on or before
September 30, 1996.
* * * * *
21. Section 107.1160 is amended by adding introductory text to read
as follows:
Sec. 107.1160 Maximum amount of Leverage for a Section 301(d)
Licensee.
This section applies to Leverage issued by a Section 301(d)
Licensee on or before September 30, 1996. Effective October 1, 1996, a
Section 301(d) Licensee may apply to issue new Leverage, or refinance
existing Leverage, only on the same terms permitted under
Sec. 107.1150.
* * * * *
22. Section 107.1200 is amended by revising paragraphs (c) and (d)
to read as follows:
Sec. 107.1200 SBA's Leverage commitment to a Licensee--application
procedure, amount, and term.
* * * * *
(c) Limitations on the amount of a Leverage commitment. The amount
of a Leverage commitment must be a multiple of $5,000.
(d) Term of Leverage commitment. SBA's Leverage commitment will
automatically lapse on the expiration date stated in the commitment
letter issued to you by SBA.
23. Section 107.1210 is revised to read as follows:
Sec. 107.1210 Payment of leverage fee upon receipt of commitment.
(a) Partial prepayment of leverage fee. As a condition of SBA's
Leverage commitment, and before you draw any Leverage under such
commitment, you must pay to SBA a non-refundable fee equal to 1 percent
of the face amount of the Debentures or Participating Securities
reserved under the commitment. This amount represents a partial
prepayment of the 3 percent leverage fee established under
Sec. 107.1130(a).
(b) Automatic cancellation of commitment. Unless you pay the fee
required under paragraph (a) of this section by 5:00 P.M. Eastern Time
on the 30th calendar day following the issuance of SBA's Leverage
commitment, the commitment will be automatically canceled.
24. In Sec. 107.1230, paragraphs (a) and (b) are revised to read as
follows:
Sec. 107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
(a) Licensee's authorization of SBA to purchase or guarantee
securities. By submitting a request for a draw against SBA's Leverage
commitment, you authorize SBA, or any agent or trustee SBA designates,
to guarantee your Debenture or Participating Security and to sell it
with SBA's guarantee.
(b) Limitations on amount of draw. The amount of a draw must be a
multiple of $5,000. SBA, in its discretion, may determine a minimum
dollar amount for draws against SBA's Leverage commitments. Any such
minimum amounts will be published in Notices in the Federal Register
from time to time.
* * * * *
25. Section 107.1240 is amended by revising paragraphs (a)(1), (b),
(c) and (d) to read as follows:
Sec. 107.1240 Funding of Licensee's draw request through sale to
short-term investor.
(a) Licensee's authorization of SBA to arrange sale of securities
to short-term investor. * * *
[[Page 5869]]
(1) The sale of your Debenture or Participating Security to a
short-term investor at a rate that may be different from the Trust
Certificate Rate which will be established at the time of the pooling
of your security;
* * * * *
(b) Sale of Debentures to a short-term investor. If SBA sells your
Debenture to a short-term investor:
(1) The sale price will be the face amount.
(2) At the next scheduled date for the sale of Debenture Trust
Certificates, whether or not the sale actually occurs, you must pay
interest to the short-term investor for the short-term period. If the
actual sale of Trust Certificates takes place after the scheduled date,
you must pay the short-term investor interest from the scheduled sale
date to the actual sale date. This additional interest is due on the
actual sale date.
(3) Failure to pay the interest constitutes noncompliance with the
terms of your Leverage (see Sec. 107.1810).
(c) Sale of Participating Securities to a short-term investor. If
SBA sells your Participating Security to a short-term investor, the
sale price will be the face amount.
(d) Licensee's right to repurchase its Debentures before pooling.
You may repurchase your Debentures from the short-term investor before
they are pooled. To do so, you must:
(1) Give SBA written notice at least 10 days before the cut-off
date for the pool in which your Debenture is to be included; and
(2) Pay the face amount of the Debenture, plus interest, to the
short-term investor.
Sec. 107.1350 [Redesignated as Sec. 107.1585]
26. Subpart I of Part 107 is amended by removing the undesignated
center heading ``Exchange of Outstanding Debentures for Participating
or Preferred Securities--Section 301(d) Licensees'' preceding
Sec. 107.1350, by redesignating Sec. 107.1350 as Sec. 107.1585 and
revising it to read as follows:
Sec. 107.1585 Exchange of Debentures for Participating Securities.
You may, in SBA's discretion, retire a Debenture through the
issuance of Participating Securities. To do so, you must:
(a) Obtain SBA's approval to issue Participating Securities;
(b) Pay all unpaid accrued interest on the Debenture, plus any
applicable prepayment penalties, fees, and other charges;
(c) Have outstanding Equity Capital Investments (at cost) equal to
the amount of the Debenture being refinanced; and
(d) Classify all your existing Loans and Investments as Earmarked
Assets.
27. In Sec. 107.1400, the section heading and introductory text are
revised to read as follows:
Sec. 107.1400 Dividends or partnership distributions on 4 percent
Preferred Securities.
If you issued Preferred Securities to SBA on or after November 21,
1989, you must pay SBA a dividend or partnership distribution of 4
percent per year, from the date you issued Preferred Securities to the
date you repay them, both inclusive. The dividend or partnership
distribution is:
* * * * *
28. Section 107.1420 is revised to read as follows:
Sec. 107.1420 Articles requirements for 4 percent Preferred
Securities.
If you have outstanding 4 percent Preferred Securities, your
Articles must contain all the provisions in Secs. 107.1400 and
107.1410.
Sec. 107.1430 [Amended]
29. Section Sec. 107.1430 is amended by removing the last sentence.
30. In Sec. 107.1500, paragraphs (b)(1) and (b)(4), the last
sentence of paragraph (e), and paragraph (f)(2) are revised to read as
follows:
Sec. 107.1500 General description of Participating Securities.
* * * * *
(b) Special eligibility requirements for Participating Securities.
* * *
(1) Minimum capital (see Sec. 107.210).
* * * * *
(4) Equity investing, as set forth in this paragraph (b)(4). If you
issue Participating Securities, you must invest an amount equal to the
Original Issue Price of such securities solely in Equity Capital
Investments, as defined in Sec. 107.50.
* * * * *
(e) Mandatory redemption of Participating Securities. * * * You
must pay the Redemption Price plus any unpaid Earned Prioritized
Payments and any earned Adjustments and earned Charges (see
Sec. 107.1520).
(f) Priority of Participating Securities in liquidation of
Licensee. * * *
(2) Any Earned Prioritized Payments and any earned Adjustments and
earned Charges (see Sec. 107.1520); and
* * * * *
31. In Sec. 107.1505, paragraphs (a)(1) through (a)(3) are added
and the last sentence of paragraph (a) introductory text and paragraph
(b) are revised to read as follows:
Sec. 107.1505 Liquidity requirements for Licensees issuing
Participating Securities.
* * * * *
(a) Definition of Liquidity Impairment. * * * You are responsible
for calculating whether you have a condition of Liquidity Impairment:
(1) As of the close of your fiscal year;
(2) At the time you apply for Leverage, unless SBA permits
otherwise; and
(3) At such time as you contemplate making any Distribution.
(b) Computation of Liquidity Ratio. Your Liquidity Ratio equals
your Total Current Funds Available (A) divided by your Total Current
Funds Required (B), as determined in the following table:
Calculation of Liquidity Ratio
----------------------------------------------------------------------------------------------------------------
Amount
Financial account reported on Weight Weighted
SBA form 468 amount
----------------------------------------------------------------------------------------------------------------
(1) Cash and invested idle funds................................ .............. x 1.00 ..............
(2) Commitments from investors.................................. .............. x 1.00 ..............
(3) Current maturities.......................................... .............. x 0.50 ..............
(4) Other current assets........................................ .............. x 1.00 ..............
(5) Publicly Traded and Marketable Securities................... .............. x 1.00 ..............
(6) Anticipated operating revenue for next 12 months............ (1) x 1.00 ..............
(7) Total Current Funds Available............................... .............. .............. A
(8) Current liabilities......................................... .............. x 1.00 ..............
(9) Commitments to Small Businesses............................. .............. x 0.75 ..............
(10) Anticipated operating expense for next 12 months........... (1) x 1.00 ..............
[[Page 5870]]
(11) Anticipated interest expense for next 12 months............ (1) x 1.00 ..............
(12) Contingent liabilities (guarantees)........................ .............. x 0.25 ..............
(13) Total Current Funds Required............................... .............. .............. B
----------------------------------------------------------------------------------------------------------------
\1\ As determined by Licensee's management under its business plan.
32. In Sec. 107.1510, the introductory text, the last sentence of
paragraph (c) introductory text, the formula in paragraph (c), and
paragraph (d)(1)(ii) are revised to read as follows:
Sec. 107.1510 How a Licensee computes Earmarked Profit (Loss).
Computing your Earmarked Profit (Loss) is the first step in
determining your obligations to pay Prioritized Payments, Adjustments
and Charges under Sec. 107.1520 and Profit Participation under
Sec. 107.1530.
* * * * *
(c) How to compute your Earmarked Asset Ratio. * * * Otherwise,
compute your Earmarked Asset Ratio using the following formula:
EAR = (EA LI) x 100
where:
EAR = Earmarked Asset Ratio.
EA = Average Earmarked Assets (at cost) for the fiscal year or
interim period.
LI = Average Loans and Investments (at cost) for the fiscal year or
interim period.
(d) How to compute your Earmarked Profit (Loss) if Earmarked Asset
Ratio is 100 percent.
(1) * * *
(ii) For the purpose of determining Net Income (Loss), leverage
fees paid to SBA and partnership syndication costs that you incur must
be capitalized and amortized on a straight-line basis over not less
than five years.
* * * * *
33. Section 107.1520 is revised to read as follows:
Sec. 107.1520 How a Licensee computes and allocates Prioritized
Payments to SBA.
This section tells you how to compute Prioritized Payments,
Adjustments and Charges on Participating Securities and determine the
amounts you must pay. To distribute these amounts, see Sec. 107.1540.
(a) How to compute Prioritized Payments and Adjustments--(1)
Prioritized Payments. For a full fiscal year, the Prioritized Payment
on an outstanding Participating Security equals the Redemption Price
times the related Trust Certificate Rate. For an interim period, you
must prorate the annual Prioritized Payment. If your Participating
Security was sold to a short-term investor in accordance with
Sec. 107.1240, the Prioritized Payment for the short-term period equals
the Redemption Price times the short-term rate.
(2) Adjustments. Compute Adjustments using paragraph (f) of this
section.
(3) Charges. Compute Charges in accordance with
Sec. 107.1130(d)(2).
(b) Licensee's obligation to pay Prioritized Payments, Adjustments
and Charges. You are obligated to pay Prioritized Payments, Adjustments
and Charges only if you have profit as determined in paragraph (d) of
this section.
(1) Prioritized Payments that you must pay (or have already paid)
because you have sufficient profit are ``Earned Prioritized Payments''.
(2) Prioritized Payments that have not become payable because you
lack sufficient profit are ``Accumulated Prioritized Payments''. Treat
all Prioritized Payments as ``Accumulated'' until they become
``Earned'' under this section.
(3) Adjustments (computed under paragraph (f) of this section) and
Charges (computed under Sec. 107.1130(d)(2)) are ``earned'' according
to the same criteria applied to Prioritized Payments.
(c) How to keep track of Prioritized Payments. You must establish
three accounts to record your Accumulated and Earned Prioritized
Payments:
(1) Accumulation Account. The Accumulation Account is a memorandum
account. Its balance represents your Accumulated Prioritized Payments,
unearned Adjustments and unearned Charges.
(2) Distribution Account. The Distribution Account is a liability
account. Its balance represents your unpaid Earned Prioritized
Payments, earned Adjustments and earned Charges.
(3) Earned Payments Account. The Earned Payments Account is a
memorandum account. Each time you add to the Distribution Account
balance, add the same amount to the Earned Payments Account. Its
balance represents your total (paid and unpaid) Earned Prioritized
Payments, earned Adjustments and earned Charges.
(d) How to determine your profit for Prioritized Payment purposes.
As of the end of each fiscal year and any interim period for which you
want to make a Distribution:
(1) Bring the Accumulation Account up to date by adding to it all
Prioritized Payments and Charges through the end of the appropriate
fiscal period.
(2) Determine whether you have profit for the purposes of this
section by doing the following computation:
(i) Cumulative Earmarked Profit (Loss) under Sec. 107.1510(f);
minus
(ii) The Earned Payments Account balance; minus
(iii) All Distributions previously made under Secs. 107.1550,
107.1560 and 107.1570(a); minus
(iv) Any Profit Participation previously allocated to SBA under
Sec. 107.1530, but not yet distributed.
(3) The amount computed in paragraph (d)(2) of this section, if
greater than zero, is your profit. If the amount is zero or less, you
have no profit.
(4) If you have a profit, continue with paragraph (e) of this
section. Otherwise, continue with paragraph (f) of this section.
(e) Allocating Prioritized Payments to the Distribution Account.
(1) If you have a profit under paragraph (d) of this section, determine
the lesser of:
(i) Your profit; or
(ii) The balance in your Accumulation Account.
(2) Subtract the result in paragraph (e)(1) of this section from
the Accumulation Account and add it to the Distribution Account and the
Earned Payments Account.
(f) How to compute Adjustments. You must compute Adjustments as of
the end of each fiscal year if you have a balance greater than zero in
either your Accumulation Account or your Distribution Account, after
giving effect to any Distribution that will be made no
[[Page 5871]]
later than the second Payment Date following the fiscal year end.
(1) Determine the combined average Accumulation Account and
Distribution Account balances for the fiscal year, assuming that
Prioritized Payments accumulate on a daily basis without compounding.
(2) Multiply the average balance computed in paragraph (f)(1) of
this section by the average of the Trust Certificate Rates for all the
Participating Securities poolings during the fiscal year.
(3) Add the amounts computed in this paragraph (f) to your
Accumulation Account.
(g) Licensee's obligation to pay Prioritized Payments after
redeeming Participating Securities. This paragraph (g) applies if you
have redeemed all your Participating Securities, but you still hold
Earmarked Assets and still have a balance in your Accumulation Account.
(1) You must continue to perform all the procedures in this section
as of the end of each fiscal quarter and prior to making any
Distribution. You must distribute any Earned Prioritized Payments,
earned Adjustments and earned Charges in accordance with Sec. 107.1540.
(2) After you dispose of all your Earmarked Assets and make any
required Distributions in accordance with Sec. 107.1540, your
obligation to pay any remaining Accumulated Prioritized Payments,
unearned Adjustments and unearned Charges will be extinguished.
34. Section 107.1530 is amended by removing paragraphs (e)(3) and
(e)(4) and revising paragraphs (c), (e)(2) and (h) to read as follows:
Sec. 107.1530 How a Licensee computes SBA's Profit Participation.
* * * * *
(c) How to compute the Base. As of the end of each fiscal year and
any year-to-date interim period for which you want to make a
Distribution, compute your Base using the following formula:
B = EP-PPA-UL
where:
B = Base.
EP = Earmarked Profit (Loss) for the period from Sec. 107.1510.
PPA = Prioritized Payments for the period from Sec. 107.1520(a)(1),
Adjustments (if applicable) from Sec. 107.1520(f), and Charges (if
applicable) from Sec. 107.1130(d)(2).
UL = ``Unused Loss'' from prior periods as determined in this
paragraph (c).
(1) If the Base computed as of the end of your previous fiscal year
(your ``Previous Base'') was less than zero, your Unused Loss equals
your Previous Base.
(2) If your Previous Base was zero or greater, your Unused Loss
equals zero, with the following exception: If you made an interim
Distribution of Profit Participation during your previous fiscal year,
and your Previous Base was lower than the interim Base on which your
Distribution was computed, then your Unused Loss equals the difference
between the interim Base and the Previous Base. For example, assume you
are computing your Base as of December 31, 1997, your fiscal year end.
Your Previous Base, computed as of December 31, 1996, was $3,000,000.
During 1996, you made an interim Distribution which was computed on a
Base of $3,500,000 as of June 30, 1996. The $500,000 difference between
the 1996 interim and year-end Bases would be carried forward as Unused
Loss in the computation of your Base as of December 31, 1997.
(3) If you had no Participating Securities outstanding as of the
end of your last fiscal year, you may request SBA's approval to treat
your Undistributed Net Realized Loss, as reported on SBA Form 468 for
that year, as Unused Loss. If you did not file SBA Form 468 because you
were not yet licensed as of the end of your last fiscal year, you may
request SBA's approval to treat pre-licensing losses as Unused Loss.
* * * * *
(e) Compute the ``PLC ratio''. * * *
(2) Exception. You may reduce the ratio computed under paragraph
(e)(1) of this section if you have increased your Leverageable Capital
above its highest previous level. The increase must have taken place at
least 120 days before the date as of which your Base is computed. In
addition, the increase must have been expressly provided for in a plan
of operations submitted to and approved by SBA in writing, or must be
the result of the takedown of commitments or the conversion of non-cash
assets that were included in your Private Capital. If these conditions
are satisfied, compute your reduced PLC ratio as follows:
(i) Divide the highest dollar amount of Participating Securities
you have ever had outstanding by your increased Leverageable Capital.
(ii) If the result in paragraph (e)(2)(i) of this section is lower
than your PLC ratio currently in effect, such result will become your
new PLC ratio.
* * * * *
(h) Computing SBA's Profit Participation. If the Base from
paragraph (c) of this section is greater than zero, you must compute
SBA's Profit Participation as follows:
(1) Multiply the Base from paragraph (c) of this section by the
Profit Participation Rate from paragraph (g) of this section.
(2) If your last Profit Participation computation was for an
interim period during the same fiscal year and used a higher Profit
Participation Rate than the Rate you just used in paragraph (h)(1) of
this section, you must adjust the amount computed in paragraph (h)(1)
of this section as follows:
(i) Determine the difference between the Profit Participation Rate
you just used in paragraph (h)(1) of this section and the Rate used in
your previous computation;
(ii) Multiply the difference by the Base from your last Profit
Participation computation; and
(iii) Add the result to the amount you computed in paragraph (h)(1)
of this section.
(3) Reduce the Profit Participation computed in paragraphs (h)(1)
and (h)(2) of this section by any amounts of Profit Participation that
you distributed or reserved for distribution to SBA, or its designated
agent or Trustee, for any previous interim period(s) during the fiscal
year. The result is SBA's Profit Participation (unless it is less than
zero, in which case SBA's Profit Participation is zero).
* * * * *
35. Section 107.1540 is amended by adding a sentence at the end of
the introductory text to read as follows:
Sec. 107.1540 Distributions by Licensee--Prioritized Payment and
Adjustments.
* * * You must notify SBA of any planned distribution under this
section 10 business days before the distribution date, unless SBA
permits otherwise.
* * * * *
36. Section 107.1550 is amended by adding a sentence at the end of
the introductory text and by revising paragraphs (a)(1), (b) and (c)(3)
to read as follows:
Sec. 107.1550 Distributions by Licensee--permitted ``tax
Distributions'' to private investors and SBA.
* * * You must notify SBA of any planned distribution under this
section 10 business days before the distribution date, unless SBA
permits otherwise.
(a) Conditions for making a tax Distribution. * * *
(1) You have paid all your Prioritized Payments, Adjustments, and
Charges, so that the balance in both your Distribution Account and your
[[Page 5872]]
Accumulation Account is zero (see Sec. 107.1520).
* * * * *
(b) How to compute the Maximum Tax Liability. (1) Compute your
Maximum Tax Liability for a full fiscal year only. Use the following
formula:
M=(TOI x HRO) + (TCG x HRC)
where:
M=Maximum Tax Liability.
TOI=Net ordinary income allocated to your partners or other owners
for Federal income tax purposes for the fiscal year immediately
preceding the Distribution, excluding Prioritized Payments allocated to
SBA.
HRO=The highest combined marginal Federal and State income tax rate
for corporations or individuals on ordinary income, determined in
accordance with paragraphs (b)(2) through (b)(4) of this section.
TCG=Net capital gains allocated to your partners or other owners
for Federal income tax purposes for the fiscal year immediately
preceding the Distribution, excluding Prioritized Payments allocated to
SBA.
HRC=The highest combined marginal Federal and State income tax rate
for corporations or individuals on capital gains, determined in
accordance with paragraphs (b)(2) through (b)(4) of this section.
(2) You may compute the highest combined marginal Federal and State
income tax rate on ordinary income and capital gains using either
individual or corporate rates. However, you must apply the same type of
rate, either individual or corporate, to both ordinary income and
capital gains.
(3) In determining the combined Federal and State income tax rate,
you must assume that State income taxes are deductible from Federal
income taxes. For example, if the Federal tax rate was 35 percent and
the State tax rate was 5 percent, the combined tax rate would be [35%
x (1-.05)] + 5% = 38.25%.
(4) For purposes of this paragraph (b), the ``State income tax'' is
that of the State where your principal place of business is located,
and does not include any local income taxes.
(c) SBA's share of the tax Distribution.
* * * * *
(3) SBA will apply its share of the tax Distribution in the order
set forth in Sec. 107.1560(g).
* * * * *
37. In Sec. 107.1560, in the first column of the table in paragraph
(e), the column heading is revised to read ``If your ratio of Leverage
to Leverageable Capital as of the fiscal period end is:'', a sentence
is added at the end of the introductory text, and paragraphs (a)(1),
(a)(4) and (b) are revised to read as follows:
Sec. 107.1560 Distributions by Licensee--required Distributions to
private investors and SBA.
* * * You must notify SBA of any planned distribution under this
section 10 business days before the distribution date, unless SBA
permits otherwise.
(a) Conditions for making Distributions.
* * * * *
(1) You must have paid all Prioritized Payments, Adjustments and
Charges, so that the balance in both your Distribution Account and your
Accumulation Account is zero (see Secs. 107.1520 and 107.1540).
* * * * *
(4) The amount you distribute under this section must not exceed
your remaining Retained Earnings Available for Distribution.
(b) Total amount you must distribute. Unless SBA permits otherwise,
the total amount you must distribute equals the result (if greater than
zero) of the following computation:
(1) Your Retained Earnings Available for Distribution as of the end
of your fiscal year, after giving effect to any Distribution under
Secs. 107.1540 and 107.1550; minus
(2) All previous Distributions under this section and
Sec. 107.1570(a) that were applied as redemptions or repayments of
Leverage; plus
(3) All previous Distributions under Sec. 107.1570(b) that reduced
your Retained Earnings Available for Distribution.
* * * * *
38. Section 107.1570 is amended by adding a sentence at the end of
the introductory text and by revising the heading of paragraph (b)(1)
and paragraphs (b)(1)(i) and (b)(1)(ii) to read as follows:
Sec. 107.1570 Distributions by Licensee--optional Distributions to
private investors and SBA.
* * * You must notify SBA of any planned distribution under this
section 10 business days before the distribution date, unless SBA
permits otherwise.
* * * * *
(b) Other optional Distributions. * * *
(1) Conditions for making a Distribution. * * *
(i) You have distributed all Earned Prioritized Payments, earned
Adjustments, and earned Charges, so that the balance in your
Distribution Account is zero (see Sec. 107.1520).
(ii) You have distributed all Profit Participation computed under
Sec. 107.1530 which you are required to distribute under Sec. 107.1560
or permitted to distribute under paragraph (a) of this section, as
appropriate, and you have made all required Distributions under
Sec. 107.1560.
* * * * *
39. Section 107.1575 is added to subpart I to read as follows:
Sec. 107.1575 Distributions on other than Payment Dates.
(a) Permitted Distributions on other than Payment Dates.
Notwithstanding any provisions to the contrary in Secs. 107.1540
through 107.1570, you may make Distributions on dates other than
Payment Dates as follows:
(1) Required annual Distributions under Secs. 107.1540(a)(1), and
any Distributions under Secs. 107.1550 and 107.1560, must be made no
later than the second Payment Date following the end of your fiscal
year;
(2) Required Distributions under Sec. 107.1540(b) must be made no
later than the first Payment Date following the end of the applicable
fiscal quarter;
(3) Optional Distributions under Sec. 107.1540(a)(2) and
Sec. 107.1570 may be made on any date.
(b) Conditions for making Distribution. All Distributions under
this section are subject to the following conditions:
(1) You must obtain SBA's written approval before the distribution
date;
(2) You must use the distribution date as the ending date of the
period for which you compute your Earmarked Profits, Prioritized
Payments, Adjustments, Charges, Profit Participation, Retained Earnings
Available for Distribution, liquidity ratio, Capital Impairment, and
any other applicable computations required under Secs. 107.1500 through
107.1570;
(3) If your Distribution includes an amount which SBA will apply as
a redemption of Participating Securities, the effective date of such
redemption, for all purposes including future computations of
Prioritized Payments, will be the next Payment Date following the
distribution date.
40. In Sec. 107.1580, the heading and introductory text of
paragraph (a) are revised to read as follows:
Sec. 107.1580 Special rules for In-Kind Distributions by Licensees.
(a) In-Kind Distributions. A Distribution under Secs. 107.1540,
107.1560 or 107.1570 may consist of securities (an ``In-Kind
Distribution'').
[[Page 5873]]
Such a Distribution must satisfy the conditions in this paragraph (a).
* * * * *
41. Section 107.1590 is amended by removing paragraph (c),
redesignating paragraph (d) as paragraph (c), and revising paragraph
(a)(1) to read as follows:
Sec. 107.1590 Special rules for companies licensed on or before March
31, 1993.
* * * * *
(a) Election to exclude pre-existing portfolio. * * *
(1) The proceeds of your first issuance of Participating Securities
are not used to refinance outstanding Debentures (see
Sec. 107.1585(a)). SBA will consider payment or prepayment of any
outstanding Debenture to be a refinancing unless you demonstrate to
SBA's satisfaction that you can pay the Debenture principal without
relying on the proceeds of the Participating Securities.
* * * * *
42. In Sec. 107.1600, the first sentence of paragraph (a) and
paragraph (b) are revised to read as follows:
Sec. 107.1600 SBA authority to issue and guarantee Trust Certificates.
(a) Authorization. Sections 319(a) and (b) of the Act authorize SBA
or its CRA to issue TCs, and SBA to guarantee the timely payment of the
principal and interest thereon. * * *
(b) Periodic exercise of authority. SBA will issue guarantees of
Debentures and Participating Securities under section 303 and of TCs
under section 319 of the Act at six month intervals, or at shorter
intervals, taking into account the amount and number of such guarantees
or TCs.
* * * * *
43. Section 107.1720 is added to subpart I to read as follows:
Sec. 107.1720 Characteristics of SBA's guarantee.
If SBA agrees to guarantee a Licensee's Debentures or Participating
Securities, such guarantee will be unconditional, irrespective of the
validity, regularity or enforceability of the Debentures or
Participating Securities or any other circumstances which might
constitute a legal or equitable discharge or defense of a guarantor.
Pursuant to its guarantee, SBA will make timely payments of principal
and interest on the Debentures or the Redemption Price of and
Prioritized Payments on the Participating Securities.
44. In Sec. 107.1820, paragraph (e)(9) is revised to read as
follows:
Sec. 107.1820 Conditions affecting issuers of Preferred Securities
and/or Participating Securities.
* * * * *
(e) Restricted Operations Conditions. * * *
(9) Failure to meet investment requirements. You fail to make the
amount of Equity Capital Investments required for Participating
Securities (Sec. 107.1500(b)(4)), if applicable to you; or you fail to
maintain as of the end of each fiscal year the investment ratios or
amounts required for Leverage in excess of 300 percent of Leverageable
Capital (Sec. 107.1160(c)) or Preferred Securities in excess of 100
percent of Leverageable Capital (Sec. 107.1160(d)), if applicable to
you. In determining whether you have met the maintenance requirements
in Sec. 107.1160(c) or (d), SBA will disregard any prepayment, sale, or
disposition of Venture Capital Financings, any increase in Leverageable
Capital, and any receipt of additional Leverage, within 120 days prior
to the end of your fiscal year.
* * * * *
45. In Sec. 107.1830, paragraph (a) is revised to read as follows:
Sec. 107.1830 Licensee's Capital Impairment--definition and general
requirements.
(a) Applicability of this section. This section applies to Leverage
issued on or after April 25, 1994. For Leverage issued before April 25,
1994, you must comply with paragraphs (e) and (f) of this section and
the Capital Impairment regulations in this part in effect when you
issued your Leverage. For all Leverage issued, you must also comply
with any contractual provisions to which you have agreed.
* * * * *
Dated: January 28, 1998.
Aida Alvarez,
Administrator.
[FR Doc. 98-2556 Filed 2-4-98; 8:45 am]
BILLING CODE 8025-01-P
