13 CFR Ch. I (1-1-25 Edition) — Part 107 — Small Business Investment Companies
Summary
Part 107 of Title 13 of the Code of Federal Regulations (1-1-25 Edition) sets out the Small Business Administration's rules for Small Business Investment Companies (SBICs). Its subparts run from definitions and licensing through changes in ownership, operations, recordkeeping, financing of small businesses, SBA financial assistance (Leverage), noncompliance and ending operations. Except for Early Stage SBICs, a Licensee must have Regulatory Capital of at least $5,000,000, and a company licensed on or after October 1, 1996, must have Leverageable Capital of at least $2,500,000. The leverage fee is 3 percent of the face amount of the Leverage issued, and the Leverage ceiling for Licensees under Common Control is $175,000,000 as of June 21, 2018. The file also prints the end of Part 106 on SBA gifts and the opening of Part 108, the New Markets Venture Capital Program.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
Small Business Administration Pt. 107
(b) There must be written docu- PART 107—SMALL BUSINESS
mentation of each Gift solicitation INVESTMENT COMPANIES
and/or acceptance signed by an author-
ized SBA official; Subpart A—Introduction to Part 107
(c) Any Gift solicited and/or accepted
must undergo a determination, prior to Sec.
solicitation of the Gift or prior to ac- 107.20 Legal basis and applicability of this
part 107.
ceptance of the Gift if unsolicited, of 107.25 Severability.
whether a conflict of interest exists be- 107.30 Amendments to Act and regulations.
tween the Donor and SBA; and 107.40 How to read this part 107.
(d) All cash Gifts donated to SBA
under the authority cited in § 106.500 Subpart B—Definition of Terms Used in Part
must be deposited in an SBA trust ac- 107
count at the U.S. Department of the 107.50 Definition of terms.
Treasury.
Subpart C—Qualifying for an SBIC License
§ 106.502 Who has authority to perform
a Gift conflict of interest deter- ORGANIZING AN SBIC
mination? 107.100 Organizing a Section 301(c) Licensee.
(a) For Gifts solicited and/or accept- 107.115 1940 Act and 1980 Act Companies.
ed under sections 4(g), 8(b)(1)(G), and 107.120 Special rules for a Section 301(d) Li-
7(k)(2) of the Small Business Act, the censee owned by another Licensee.
107.130 Requirement for qualified manage-
General Counsel, or designee, must ment.
make the final conflict of interest de- 107.140 SBA approval of initial Management
termination. No Gift shall be solicited Expenses.
and/or accepted under these sections of 107.150 Management-ownership diversifica-
the Small Business Act if such solicita- tion requirement.
tion and/or acceptance would, in the 107.160 Special rules for Licensees formed as
determination of the General Counsel limited partnerships.
(or designee), create a conflict of inter- CAPITALIZING AN SBIC
est.
107.200 Adequate capital for Licensees.
(b) For Gifts of services and facilities 107.210 Minimum capital requirements for
solicited and/or accepted under section Licensees.
5(b)(9), the conflict of interest deter- 107.230 Permitted sources of Private Capital
mination may be made by designated for Licensees.
disaster legal counsel. 107.240 Limitations on including non-cash
capital contributions in Private Capital.
§ 106.503 Are there types of Gifts 107.250 Exclusion of stock options issued by
which SBA may not solicit and/or Licensee from Management Expenses.
accept? APPLYING FOR AN SBIC LICENSE
Yes. SBA shall not solicit and/or ac- 107.300 License application form and fee.
cept Gifts of or for (or use cash Gifts to 107.305 Evaluation of license applicants.
purchase or engage in) the following: 107.310 When and how to apply for licensing
(a) Alcohol products; as an Early Stage SBIC.
(b) Tobacco products; 107.320 Leverage portfolio diversification.
(c) Pornographic or sexually explicit
Subpart D—Changes in Ownership, Con-
objects or services;
trol, or Structure of Licensee; Transfer
(d) Gambling (including raffles and of License
lotteries);
(e) Parties primarily for the benefit CHANGES IN CONTROL OR OWNERSHIP OF
of Government employees; and LICENSEE
(f) Any other product or service pro- 107.400 Changes in ownership of 10 percent
hibited by law or policy. or more of Licensee but no change of
Control.
107.410 Changes in Control of Licensee
(through change in ownership or other-
wise).
49
Pt. 107 13 CFR Ch. I (1–1–25 Edition)
107.420 Prohibition on exercise of ownership REQUIREMENT TO CONDUCT ACTIVE
or Control rights in Licensee before SBA INVESTMENT OPERATIONS
approval.
107.430 Notification to SBA of transactions 107.590 Licensee’s requirement to maintain
that may change ownership or Control. active operations.
107.440 Standards governing prior SBA ap-
proval for a proposed transfer of Control. Subpart F—Recordkeeping, Reporting, and
107.450 Notification to SBA of pledge of Li- Examination Requirements for Licensees
censee’s shares.
RECORDKEEPING REQUIREMENTS FOR
RESTRICTIONS ON COMMON CONTROL OR LICENSEES
OWNERSHIP OF TWO OR MORE LICENSEES 107.600 General requirement for Licensee to
107.460 Restrictions on Common Control or maintain and preserve records.
ownership of two (or more) Licensees. 107.610 Required certifications for Loans
and Investments.
CHANGE IN STRUCTURE OF LICENSEE 107.620 Requirements to obtain information
107.470 SBA approval of merger, consolida- from Portfolio Concerns.
tion, or reorganization of Licensee.
REPORTING REQUIREMENTS FOR LICENSEES
TRANSFER OF LICENSE 107.630 Requirement for Licensees to file fi-
107.475 Transfer of license. nancial statements with SBA (Form 468).
107.640 Requirement to file Portfolio Fi-
Subpart E—Managing the Operations of a nancing Reports (SBA Form 1031).
Licensee 107.650 Requirement to report portfolio
valuations to SBA.
GENERAL REQUIREMENTS 107.660 Other items required to be filed by
107.500 Lawful operations under the Act. Licensee with SBA.
107.501 Identification. 107.665 Civil penalties.
107.502 Representations to the public. 107.670 Application for exemption from civil
107.503 Licensee’s adoption of an approved penalty for late filing of reports.
Valuation Policy. 107.680 Reporting changes in Licensee not
107.504 Equipment and office requirements. subject to prior SBA approval.
107.506 Safeguarding Licensee’s assets/Inter-
nal controls. EXAMINATIONS OF LICENSEES BY SBA FOR
REGULATORY COMPLIANCE
107.507 Violations based on false filings and
nonperformance of agreements with 107.690 Examinations.
SBA. 107.691 Responsibilities of Licensee during
107.509 Employment of SBA officials. examination.
107.692 Examination fees.
MANAGEMENT AND COMPENSATION
107.510 SBA approval of Licensee’s Invest- Subpart G—Financing of Small Businesses
ment Adviser/Manager. by Licensees
107.520 Management Expenses of a Licensee.
DETERMINING THE ELIGIBILITY OF A SMALL
CASH MANAGEMENT BY A LICENSEE BUSINESS FOR SBIC FINANCING
107.530 Restrictions on investments of idle 107.700 Compliance with size standards in
funds by leveraged Licensees. part 121 of this chapter as a condition of
Assistance.
BORROWING BY LICENSEES FROM NON-SBA
107.710 Requirement to finance smaller en-
SOURCES
terprises.
107.550 Prior approval of secured third-party 107.720 Small Businesses that may be ineli-
debt of Leveraged Licensees. gible for financing.
107.560 Subordination of SBA’s creditor po- 107.730 Financings which constitute con-
sition. flicts of interest.
107.565 Restrictions on third-party debt of 107.740 Portfolio diversification (‘‘Overline’’
Early Stage SBICs. limitation).
107.570 [Reserved] 107.750 Conditions for financing a change of
DISTRIBUTIONS AND REDUCTIONS IN ownership of a Small Business.
REGULATORY CAPITAL 107.760 How a change in size or activity of a
Portfolio Concern affects the Licensee
107.585 Distributions and reductions in Reg- and the Portfolio Concern.
ulatory Capital.
50
Small Business Administration Pt. 107
STRUCTURING LICENSEE’S FINANCING OF ELIGI- MAXIMUM AMOUNT OF LEVERAGE FOR WHICH A
BLE SMALL BUSINESSES: TYPES OF FINANC- LICENSEE IS ELIGIBLE
ING
107.1150 Maximum amount of Leverage.
107.800 Financings in the form of Equity Se- 107.1160 Maximum amount of Leverage for a
curities. Section 301(d) Licensee.
107.810 Financing in the form of Loans. 107.1170 Maximum amount of Participating
107.815 Financings in the form of Debt Secu- Securities for any Licensee.
rities.
107.820 Financings in the form of guaran- SPECIAL RULES FOR LEVERAGE ISSUED BY AN
tees. EARLY STAGE SBIC
107.825 Purchasing securities from an under- 107.1180 Required distributions to SBA by
writer or other third party. Early Stage SBICs.
107.1181 Interest reserve requirements for
STRUCTURING LICENSEE’S FINANCING OF AN
Early Stage SBICs.
ELIGIBLE SMALL BUSINESS: TERMS AND CON-
107.1182 Valuation requirements for Early
DITIONS OF FINANCING
Stage SBICs based on Capital Impair-
107.830 Minimum duration/term of financ- ment Percentage.
ing.
107.835 Exceptions to minimum duration/ CONDITIONAL COMMITMENTS BY SBA TO
term of Financing. RESERVE LEVERAGE FOR A LICENSEE
107.840 Maximum term of financing. 107.1200 SBA’s Leverage commitment to a
107.845 Maximum rate of amortization on Licensee—application procedure,
Loans and Debt Securities. amount, and term.
107.850 Restrictions on redemption of Eq- 107.1210 Payment of leverage fee upon re-
uity Securities. ceipt of commitment.
107.855 Interest rate ceiling and limitations 107.1220 Requirement for Licensee to file
on fees charged to small businesses quarterly financial statements.
(‘‘Cost of Money’’). 107.1230 Draw-downs by Licensee under
107.860 Financing fees and expense reim- SBA’s Leverage commitment.
bursements a Licensee may receive from 107.1240 Funding of Licensee’s draw request
a small business. through sale to short-term investor.
107.865 Control of a small business by a Li-
censee. PREFERRED SECURITIES LEVERAGE—SECTION
107.880 Assets acquired in liquidation of 301(d) LICENSEES
Portfolio securities.
107.1400 Dividends or partnership distribu-
LIMITATIONS ON DISPOSITION OF ASSETS tions on 4 percent Preferred Securities.
107.1410 Requirement to redeem 4 percent
107.885 Disposition of assets to Licensee’s Preferred Securities.
Associates or to competitors of Portfolio 107.1420 Articles requirements for 4 percent
Concern. Preferred Securities.
107.1430 Redeeming 4 percent Preferred Se-
MANAGEMENT SERVICES AND FEES
curities with proceeds of non-subsidized
107.900 Management fees for services pro- Debentures.
vided to a Small Business by Licensee or 107.1440 Three percent preferred stock
its Associate. issued before November 21, 1989.
107.1450 Optional redemption of Preferred
Subpart H—Non-leveraged Licensees- Securities.
Exceptions to Regulations
PARTICIPATING SECURITIES LEVERAGE
107.1000 Non-leveraged Licensees—excep- 107.1500 General description of Partici-
tions to this part. pating Securities.
107.1505 Liquidity requirements for Licens-
Subpart I—SBA Financial Assistance for ees issuing Participating Securities.
Licensees (Leverage) 107.1510 How a Licensee computes Ear-
marked Profit (Loss).
GENERAL INFORMATION ABOUT OBTAINING
107.1520 How a Licensee computes and allo-
LEVERAGE
cates Prioritized Payments to SBA.
107.1100 Types of Leverage and application 107.1530 How a Licensee computes SBA’s
procedures. Profit Participation.
107.1120 General eligibility requirements for 107.1540 Distributions by Licensee—
Leverage. Prioritized Payments and Adjustments.
107.1130 Leverage fees and Annual Charges. 107.1550 Distributions by Licensee—per-
107.1140 Licensee’s acceptance of SBA rem- mitted ‘‘tax Distributions’’ to private in-
edies under §§ 107.1800 through 107.1820. vestors and SBA.
51
§ 107.20 13 CFR Ch. I (1–1–25 Edition)
107.1560 Distributions by Licensee—required Subpart L—Miscellaneous
Distributions to private investors and
SBA. 107.1910 Non-waiver of SBA’s rights or
107.1570 Distributions by Licensee—optional terms of Leverage security.
Distribution to private investors and 107.1920 Licensee’s application for exemp-
SBA. tion from a regulation in this part 107.
107.1575 Distributions on other than Pay- 107.1930 Effect of changes in this part 107 on
ment Dates. transactions previously consummated.
107.1580 Special rules for In-Kind Distribu-
AUTHORITY: 15 U.S.C. 662, 681–687, 687b–h,
tions by Licensees.
687k–m.
107.1585 Exchange of Debentures for Partici-
pating Securities. SOURCE: 61 FR 3189, Jan. 31, 1996, unless
107.1590 Special rules for companies licensed otherwise noted.
on or before March 31, 1993.
FUNDING LEVERAGE BY USE OF SBA- Subpart A—Introduction to Part
GUARANTEED TRUST CERTIFICATES (‘‘TCS’’) 107
107.1600 SBA authority to issue and guar-
antee Trust Certificates. § 107.20 Legal basis and applicability
107.1610 Effect of prepayment or early re-
of this part 107.
demption of Leverage on a Trust Certifi- (a) The regulations in this part im-
cate. plement Title III of the Small Business
107.1620 Functions of agents, including Cen- Investment Act of 1958, as amended. All
tral Registration Agent, Selling Agent
Licensees must comply with all appli-
and Fiscal Agent.
107.1630 SBA regulation of Brokers and
cable regulations, accounting guide-
Dealers and disclosure to purchasers of lines and valuation guidelines for Li-
Leverage or Trust Certificates. censees.
107.1640 SBA access to records of the CRA, (b) Provisions of this part which are
Brokers, Dealers and Pool or Trust as- not mandated by the Act shall not su-
semblers. persede existing State law. A party
MISCELLANEOUS
claiming that a conflict exists shall
submit an opinion of independent coun-
107.1700 Transfer by SBA of its interest in sel, citing authorities, for SBA’s reso-
Licensee’s Leverage security. lution of the issues involved.
107.1710 SBA authority to collect or com-
promise its claims. § 107.25 Severability.
107.1720 Characteristics of SBA’s guarantee.
Any provision of this part held to be
Subpart J—Licensee’s Noncompliance invalid or unenforceable as applied to
any person, entity, or circumstance
107.1800 Licensee’s agreement to terms and
shall be construed so as to continue to
conditions in §§ 107.1810 and 107.1820.
give the maximum effect to such provi-
107.1810 Events of default and SBA’s rem-
edies for Licensee’s noncompliance with sion as permitted by law, including as
terms of Debentures. applied to persons or entities not simi-
107.1820 Conditions affecting issuers of Pre- larly situated or to dissimilar cir-
ferred Securities and/or Participating Se- cumstances, unless such holding is that
curities. the provision of this part is invalid and
unenforceable in all circumstances, in
COMPUTATION OF LICENSEE’S CAPITAL
IMPAIRMENT
which event the provision shall be sev-
erable from the remainder of this part
107.1830 Licensee’s Capital Impairment— and shall not affect the remainder
definition and general requirements. thereof.
107.1840 Computation of Licensee’s Capital
Impairment Percentage. [88 FR 46005, July 18, 2023]
107.1845 Determination of Capital Impair-
ment Percentage for Early Stage SBICs. § 107.30 Amendments to Act and regu-
107.1850 Watchlist. lations.
Subpart K—Ending Operations as a A Licensee shall be subject to all ex-
Licensee isting and future provisions of the Act
and parts 107 and 112 of title 13 of the
107.1900 Surrender of license. Code of Federal Regulations.
52
Small Business Administration § 107.50
§ 107.40 How to read this part 107. Associate of a Licensee means any of
the following:
(a) Center Headings. All references in
(1)(i) An officer, director, employee
this part to SBA forms, and instruc-
or agent of a Corporate Licensee;
tions for their preparation, are to the
(ii) A Control Person, employee or
current issue of such forms. Center
agent of a Partnership Licensee;
headings are descriptive and are used
(iii) An Investment Adviser/Manager
for convenience only. They have no
of any Licensee, including any Person
regulatory effect.
who contracts with a Control Person of
(b) Capitalizing defined terms. Terms
a Partnership Licensee to be the In-
defined in § 107.50 are capitalized in this
vestment Adviser/Manager of such Li-
part 107.
censee; or
(c) The pronoun ‘‘you’’ as used in this
(iv) Any Person regularly serving a
part 107 means a Licensee or license ap-
Licensee on retainer in the capacity of
plicant, as appropriate, unless other-
attorney at law.
wise noted.
(2) Any Person who owns or controls,
or who has entered into an agreement
Subpart B—Definition of Terms to own or control, directly or indi-
Used in Part 107 rectly, at least 10 percent of any class
of stock of a Corporate Licensee or a
§ 107.50 Definition of terms. limited partner’s interest of at least 10
Accrual Debenture means a Debenture percent of the partnership capital of a
issued at face value that accrues inter- Partnership Licensee. However, an en-
est over its ten-year term, as to which tity Institutional Investor, as a limited
instrument SBA guarantees both the partner in a Partnership Licensee, is
principal and unpaid accrued interest. not considered an Associate solely be-
Accrual Small Business Investment cause such Person’s investment in the
Company (‘‘Accrual SBIC’’) means a Partnership, including commitments,
Section 301(c) Partnership Licensee, li- represents 10 percent or more but less
censed under § 107.300 and approved by than 50 percent of the Licensee’s part-
SBA to issue Accrual Debentures. Ac- nership capital, provided that such in-
crual SBICs shall be limited to a max- vestment also represents no more than
imum of one and one quarter tiers of five percent of such Person’s net worth
Leverage. and such limited partner also has no
Accumulated Prioritized Payments has role in the management of the subject
the meaning set forth in § 107.1520. Licensee, with no right to control or
Act means the Small Business Invest- approve any matter (other than such
ment Act of 1958, as amended. entity’s vote as a limited partner) in-
Adjustments has the meaning set volving the Licensee.
forth in § 107.1520. (3) Any officer, director, partner
Affiliate or Affiliates has the meaning (other than a limited partner), man-
set forth in § 121.103 of this chapter. ager, agent, or employee of any Asso-
Annual Charge means: ciate described in paragraph (1) or (2) of
Annual Charge means an annual fee this definition.
on the principal amount of outstanding (4) Any Person that directly or indi-
Debentures which is payable to SBA by rectly Controls, or is Controlled by, or
Licensees, subject to the terms and is under Common Control with, a Li-
conditions set forth in §§ 107.585 and censee.
107.1130(d). (5) Any Person that directly or indi-
Articles mean articles of incorpora- rectly Controls, or is Controlled by, or
tion or charter for a Corporate Li- is under Common Control with, any
censee and the partnership agreement Person described in paragraphs (1) and
or certificate for a Partnership Li- (2) of this definition.
censee. (6) Any Close Relative of any Person
Assistance or Assisted means Financ- described in paragraphs (1),(2), (4), and
ing of or management services ren- (5) of this definition.
dered to a Small Business by a Li- (7) Any Secondary Relative of any
censee pursuant to the Act and these Person described in paragraphs (1), (2),
regulations. (4), and (5) of this definition.
53
§ 107.50 13 CFR Ch. I (1–1–25 Edition)
(8) Any concern in which— ble Small Business that obligates the
(i) Any person described in para- Licensee to provide Financing (except
graphs (1) through (6) of this definition a guarantee) to that Small Business in
is an officer; general partner, or man- a fixed or determinable sum, by a fixed
aging member; or or determinable future date. In this
(ii) Any such Person(s) singly or col- context the term ‘‘agreement’’ means
lectively Control or own, directly or in- that there has been agreement on the
directly, an equity interest of at least principal economic terms of the Fi-
10 percent (excluding interests that nancing. The agreement may include
such Person(s) own indirectly through reasonable conditions precedent to the
ownership interests in the Licensee). Licensee’s obligation to fund the com-
(9) Any concern in which any Per- mitment, but these conditions must be
son(s) described in paragraph (7) of this outside the Licensee’s control.
definition singly or collectively own Common Control means a condition
(including beneficial ownership) a ma- where two or more Persons, either
jority equity interest, or otherwise through ownership, management, con-
have Control. As used in this paragraph tract, or otherwise, are under the Con-
(9), ‘‘collectively’’ means together with trol of one group or Person. Two or
any Person(s) described in paragraphs more Licensees are presumed to be
(1) though (7) of this definition. under Common Control if they are Af-
(10) For the purposes of this defini- filiates of each other by reason of com-
tion, if any Associate relationship de- mon ownership or common officers, di-
scribed in paragraphs (1) through (7) of rectors, or general partners; or if they
this definition exists at any time with- are managed or their investments are
in six months before or after the date significantly directed either by a com-
that a Licensee provides Financing, mon independent investment advisor or
then that Associate relationship is con- managerial contractor, or by two or
sidered to exist on the date of the Fi- more such advisors or contractors that
nancing. are Affiliates of each other. This pre-
(11) If any Licensee has any owner- sumption may be rebutted by evidence
ship interest in another Licensee, the satisfactory to SBA.
two Licensees are Associates of each Control means the possession, direct
other. or indirect, of the power to direct or
Capital Call Line has the meaning set cause the direction of the management
forth in § 107.550(c). and policies of a Licensee or other con-
Capital Impairment has the meaning cern, whether through the ownership of
set forth in § 107.1830(c). voting securities, by contract, or oth-
Central Registration Agent or CRA erwise.
means one or more agents appointed by Control Person means any Person that
SBA for the purpose of issuing TCs and controls a Licensee, either directly or
performing the functions enumerated through an intervening entity. A Con-
in § 107.1620 and performing similar trol Person includes:
functions for Debentures and Partici- (1) A general partner of a Partnership
pating Securities funded outside the Licensee;
pooling process. (2) Any Person serving as the general
Charge has the same meaning as An- partner, officer, director, or manager
nual Charge. (in the case of a limited liability com-
Close Relative of an individual means: pany) of any entity that controls a Li-
(1) A current or former spouse; censee, either directly or through an
(2) A father, mother, guardian, broth- intervening entity;
er, sister, son, daughter; or (3) Any Person that—
(3) A father-in-law, mother-in-law, (i) Controls or owns, directly or
brother-in-law, sister-in-law, son-in- through an intervening entity, at least
law, or daughter-in-law. 30 percent of a Partnership Licensee or
Combined Capital means the sum of any entity described in paragraph (1) or
Regulatory Capital and outstanding (2) of this definition; and
Leverage. (ii) Participates in the investment
Commitment means a written agree- decisions of the general partner of such
ment between a Licensee and an eligi- Partnership Licensee; provided that, if
54
Small Business Administration § 107.50
at least 30% of Regulatory Capital is (2) The securities are of a class:
unaffiliated and unassociated with (i) Which is listed and registered on a
management of the Licensee, the man- national securities exchange, or
agement company of the Licensee is a (ii) For which quotation information
government sponsored non-profit enti- is disseminated in the National Asso-
ty, the general partners of the Licensee ciation of Securities Dealers Auto-
are bound by a fiduciary duty to the in- mated Quotation System and as to
vestors in the Licensee, and such mem- which transaction reports and last sale
bers of the general partner may not be data are disseminated pursuant to Rule
hired or removed directly or indirectly 11Aa3–1 (17 CFR 240.11Aa3–1) under the
by such government sponsor, the man- Securities Exchange Act of 1934, as
agement of the Licensee will be deemed amended; and
to be free from any outside Control; (3) The quantity of such securities to
and be distributed to SBA can be sold over
(4) Any Person that controls or owns, a reasonable period of time without
directly or through an intervening en- having an adverse impact upon the
tity, at least 50 percent of a Partner- price of the security.
ship Licensee or any entity described Distribution means any transfer of
in paragraphs (1) or (2) of this defini- cash or non-cash assets to SBA, its
tion. agent or Trustee, or to partners in a
Corporate Licensee. See definition of Partnership Licensee, or to share-
Licensee in this section. holders in a Corporate Licensee. Cap-
Cost of Money has the meaning set italization of Retained Earnings Avail-
forth in § 107.855. able for Distribution constitutes a Dis-
Debenture Rate means the interest tribution to the Licensee’s non-SBA
rate, as published from time to time in partners or shareholders.
the FEDERAL REGISTER by SBA, for ten
Early Stage SBIC means a Section
year debentures issued by Licensees
301(c) Partnership Licensee, licensed
and funded through public sales of cer-
pursuant to § 107.310 of this part, in
tificates bearing SBA’s guarantee. User
which at least 50 percent of all Loans
or guarantee fees, if any, paid by a Li-
and Investments (in dollars) must be
censee are not considered in deter-
made to Small Businesses that are
mining the Debenture Rate.
‘‘early stage’’ companies at the time of
Debentures means debt obligations
the Licensee’s initial Financing (see
issued by Licensees pursuant to section
also § 107.1810(f)(11)). For the purposes
303(a) of the Act and held or guaran-
of this definition, an ‘‘early stage’’
teed by SBA.
company is one that has never
Debt Securities has the meaning set
achieved positive cash flow from oper-
forth in § 107.815.
ations in any fiscal year.
Disadvantaged Business means a
Earmarked Assets has the meaning set
Small Business that is at least 50 per-
forth in § 107.1510(b). (See also
cent owned, and controlled and man-
§ 107.1590.)
aged, on a day to day basis, by a person
or persons whose participation in the Earmarked Profit (Loss) has the mean-
free enterprise system is hampered be- ing set forth in § 107.1510.
cause of social or economic disadvan- Earned Prioritized Payments has the
tages. meaning set forth in § 107.1520.
Distributable Securities means equity Energy Saving Activities means any of
securities that are determined by SBA the following:
(with the advice of a third party expert (1) Manufacturing or research and de-
in the marketing of securities) to meet velopment of products, integral prod-
each of the following requirements: uct components, integral material, or
(1) The securities (which may include related software that meet one or more
securities that are salable pursuant to of the following:
the provisions of Rule 144 (17 CFR (i) Improves residential energy effi-
230.144) under the Securities Act of ciency as demonstrated by meeting De-
1933, as amended) are salable imme- partment of Energy or Environmental
diately without restriction under Fed- Protection Agency criteria for use of
eral and state securities laws; the Energy Star trademark label;
55
§ 107.50 13 CFR Ch. I (1–1–25 Edition)
(ii) Improves commercial energy effi- tems, advanced metering infrastruc-
ciency as demonstrated by being in the ture, electric distribution systems,
upper 25% of efficiency for all similar electric transmission systems, storage
products as designated by the Depart- systems, and cyber security.
ment of Energy’s Federal Energy Man- (2) Installation and/or inspection
agement Program; services associated with the deploy-
(iii) Improves automobile efficiency ment of energy saving products as
or reduces consumption of non-renew- identified by meeting one or more of
able fuels through the use of advanced the following standards:
batteries, power electronics, or electric (i) Deploys products that qualify, in
motors; advanced combustion engine the year in which the investment is
technology; alternative fuels; or ad- made, for installation-related Federal
vanced materials technologies, such as Tax Credits for Residential Consumer
lightweighting; Energy Efficiency;
(iv) Improves industrial energy effi- (ii) Deploys products related to com-
ciency through combined heat and mercial energy efficiency as dem-
power (CHP) prime mover or power onstrated by deploying commercial
generation technologies, heat recovery equipment that is in the upper 25% of
units, absorption chillers, desiccant de- efficiency for all similar products as
humidifiers, packaged CHP systems, designated by the Department of Ener-
more efficient process heating equip- gy’s Federal Energy Management Pro-
ment, more efficient steam generation gram;
equipment, heat recovery steam gen- (iii) Deploys combined heat and
erators, or more efficient use of water power products, goods, or services;
recapture, purification and reuse for (iv) Deploys products that qualify, in
industrial application; the year in which the investment is
(v) Advances commercialization of made, for receiving a Renewable Elec-
technologies developed by recipients of tricity Production Tax Credit as de-
awards from the Department of Energy fined in Internal Revenue Code Section
under the Advanced Research Projects 45 or an Energy Credit as defined in In-
Agency—Energy, Small Business Inno- ternal Revenue Code Section 48; or
vation Research, or Small Business (v) Deploys a product, service, or
Technology Transfer programs; functionality that improves electricity
(vi) Reduces the consumption of non- delivery efficiency by supporting one
renewable energy by providing renew- or more of the smart grid functions as
able energy sources, as demonstrated identified in 42 U.S.C. 17386(d), and that
by meeting the standards, applicable to serves one or more of the following
the year in which the investment is smart grid operational domains: Equip-
made, for receiving a Renewable Elec- ment manufacturing, customer sys-
tricity Production Tax Credit as de- tems, advanced metering infrastruc-
fined in Internal Revenue Code Section ture, electric distribution systems,
45 or an Energy Credit as defined in In- electric transmission systems, or grid
ternal Revenue Code Section 48; cyber security.
(vii) Reduces the consumption of (3) Auditing or consulting services
non-renewable energy for electric performed with the objective of identi-
power generation as described in Inter- fying potential improvements of the
nal Revenue Code Section 48(c)(1)(A) by type described in paragraph (1) or (2) of
providing highly efficient energy con- this definition.
version systems that can use renewable (4) Other manufacturing, service, or
or non-renewable fuel through fuel research and development activities
cells; or that use less energy to provide the
(viii) Improves electricity delivery same level of energy service or reduce
efficiency by supporting one or more of the consumption of non-renewable en-
the smart grid functions as identified ergy by providing renewable energy
in 42 U.S.C. 17386(d), by means of a sources, as determined by SBA. A Li-
product, service, or functionality that censee must obtain such determination
serves one or more of the following in writing prior to providing Financing
smart grid operational domains: Equip- to a Small Business. SBA will consider
ment manufacturing, customer sys- factors including but not limited to:
56
Small Business Administration § 107.50
(i) Results of energy efficiency test- Equity Capital Investments means in-
ing performed in accordance with rec- vestments in a Small Business in the
ognized professional standards, pref- form of common or preferred stock,
erably by a qualified third-party pro- limited partnership interests, options,
fessional, such as a certified energy as- warrants, or similar equity instru-
sessor, energy auditor, or energy engi- ments, including subordinated debt
neer; with equity features if such debt pro-
(ii) Patents or grants awarded to or vides only for interest payments con-
licenses held by the Small Business re- tingent upon and limited to the extent
lated to Energy Saving Activities list- of earnings. Equity Capital Invest-
ed in subsection (1) or (2) above; ments must not require amortization.
(iii) For research and development of Equity Capital Investments may be
products or services that are antici- guaranteed; however, neither Equity
pated to reduce the consumption of Capital Investments nor such guar-
non-renewable energy, written evi- antee may be collateralized or other-
dence from an independent, certified wise secured. Investments classified as
third-party professional of the feasi- Debt Securities (see §§ 107.800 and
bility, commercial potential, and pro- 107.815) are not precluded from quali-
jected energy savings of such products fying as Equity Capital Investments.
or services; and Equity Securities has the meaning set
forth in § 107.800.
(iv) Eligibility of the product or serv-
Final Licensing Fee has the meaning
ice for a Federal tax credit cited in this
set forth in § 107.300.
definition that is not available in the
Financing or Financed means out-
year in which the investment is made,
standing financial assistance provided
but was available in a previous year.
to a Small Business by a Licensee,
Energy Saving Qualified Investment whether through:
means a Financing which: (1) Loans;
(1) Is made by a Licensee licensed (2) Debt Securities;
after September 30, 2008; (3) Equity Securities;
(2) Is in the form of a Loan, Debt Se- (4) Guarantees; or
curity, or Equity Security, each as de- (5) Purchases of securities of a Small
fined in this section; Business through or from an under-
(3) Is made to a Small Business that writer (see § 107.825).
is primarily engaged in Energy Saving GAAP means Generally Accepted Ac-
Activities. A Licensee must obtain a counting Principles as established by
determination from SBA prior to the the Financial Accounting Standards
provision of Financing as to whether a Board (FASB) and refers to established
Small Business is primarily engaged in financial accounting and reporting
Energy Saving Activities. SBA will standards for public and private com-
consider the distribution of revenues, panies and not-for-profit organizations.
employees and expenditures, intellec- Guaranty Agreement means the con-
tual property rights held, and Energy tract entered into by SBA which is a
Saving Activities described in a busi- guarantee backed by the full faith and
ness plan presented to investors as part credit of the United States Govern-
of a formal solicitation in making its ment as to timely payment of principal
determination. However, a Small Busi- and interest on Debentures or the Re-
ness is presumed to be primarily en- demption Price of and Prioritized Pay-
gaged in Energy Saving Activities, and ments on Participating Securities and
no pre-Financing determination by SBA’s rights in connection with such
SBA is required, if: guarantee.
(i) The Small Business derived at Includible Non-Cash Gains means
least 50% of its revenues during its those non-cash gains (as reported on
most recently completed fiscal year SBA Form 468) that are realized in the
from Energy Saving Activities; or form of Publicly Traded and Market-
(ii) The Small Business will utilize able securities or investment grade
100% of the Financing proceeds re- debt instruments. For purposes of this
ceived from a Licensee to engage in definition, investment grade debt in-
Energy Saving Activities. struments means those instruments
57
§ 107.50 13 CFR Ch. I (1–1–25 Edition)
that are rated ‘‘BBB’’ or ‘‘Baa’’, or bet- (vi) An employee benefit or pension
ter, by Standard & Poor’s Corporation plan (as defined in the Employee Re-
or Moody’s Investors Service, respec- tirement Income Security Act of 1974,
tively. Non-rated debt may be consid- as amended (Pub. L. 93–406, 88 Stat.
ered to be investment grade if Licensee 829), excluding plans established under
obtains a written opinion from an in- section 401(k) of the Internal Revenue
vestment banking firm acceptable to Code of 1986 (26 U.S.C. 401(k)), as
SBA stating that the non-rated debt amended).
instrument is equivalent in risk to the (vii) A trust, foundation or endow-
issuer’s investment grade debt. ment exempt from Federal income tax-
Inflation Adjustment is the method- ation under the Internal Revenue Code
ology used to increase SBIC adminis- of 1986, as amended.
trative fees using the Consumer Price (viii) A corporation, partnership or
Index for Urban Consumers (CPI–U), other entity with a net worth (exclu-
calculated by the U.S. Bureau of Labor sive of unfunded commitments from in-
and Statistics (BLS), using the U.S. vestors) of more than $10 million.
city average for all items, not season- (ix) A State, a political subdivision of
ally adjusted, with the base period of a State, or an agency or instrumen-
1982 ¥ 84 = 100. To calculate the Infla- tality of a State or its political sub-
tion Adjustment, each year, SBA will division.
divide the CPI–U from the most recent
(x) An entity managed by an SEC
June by the CPI–U from June of the
regulated Registered Investment Ad-
preceding year. If the result is greater
viser in good standing, provided the Li-
than 1, SBA will increase the relevant
censee’s limited partnership agreement
fees as follows:
(or other governing agreement) con-
(1) Multiply the result by the current
tains sufficient provisions to ensure
fee; and
collectability.
(2) Round to the nearest $100.
(xi) Any other entity that SBA deter-
Initial Licensing Fee has the meaning
mines to be an Institutional Investor.
set forth in § 107.300.
Institutional Investor means: (2) Individuals. (i) Any of the fol-
(1) Entities. Any of the following enti- lowing individuals if he/she is also a
ties if the entity has a net worth (ex- permanent resident of the United
clusive of unfunded commitments from States:
investors) of at least $1 million, or such (A) An individual who is an Accred-
higher amount as is specified in para- ited Investor (as defined in the Securi-
graph (1) of this definition. (See also ties Act of 1933, as amended (15 U.S.C.
§ 107.230(b)(4) for limitations on the 77a–77aa)) and whose commitment to
amount of an Institutional Investor’s the Licensee is backed by a letter of
commitment that may be included in credit from a State or National bank
Private Capital.) acceptable to SBA.
(i) A State or National bank, trust (B) An individual whose personal net
company, savings bank, or savings and worth is at least $2 million and at least
loan association. ten times the amount of his or her
(ii) An insurance company. commitment to the Licensee. The indi-
(iii) A 1940 Act Investment Company vidual’s personal net worth must not
or Business Development Company include the value of any equity in his
(each as defined in the Investment or her most valuable residence.
Company Act of 1940, as amended (15 (C) An individual whose personal net
U.S.C. 8a–1 et seq.). worth (determined in accordance with
(iv) A holding company of any entity paragraph (2)(i)(B) of this definition) is
described in paragraph (1)(i), (ii) or (iii) at least $10 million.
of this definition. (ii) Any individual who is not a per-
(v) An employee benefit or pension manent resident of the United States
plan established for the benefit of em- but who otherwise satisfies paragraph
ployees of the Federal government, any (2)(i) of this definition provided such in-
State or political subdivision of a dividual has irrevocably appointed an
State, or any agency or instrumen- agent within the United States for the
tality of such government unit. service of process.
58
Small Business Administration § 107.50
Investment Adviser/Manager means A Small Business qualifying under this
any Person who furnishes advice or as- paragraph (2) will no longer be an LMI
sistance with respect to operations of a Enterprise as of the 180th day after the
Licensee under a written contract exe- closing of the SBIC financing unless,
cuted in accordance with the provi- on or before such date, at least 50% of
sions of § 107.510. its employees or tangible assets are lo-
Lending Institution means a concern cated in LMI Zones or at least 35% of
that is operating under regulations of a its full-time employees have primary
state or Federal licensing, supervising, residences in LMI Zones.
or examining body, or whose shares are LMI Investment means a financing of
publicly traded and listed on a recog- an LMI Enterprise, made after Sep-
nized stock exchange or NASDAQ and tember 30, 1999, in the form of equity
which has assets in excess of $500 mil- securities or debt securities that are
lion; and which, in either case, holds junior to all existing or future secured
itself out to the public as engaged in borrowings of the business. The debt
the making of commercial and indus- securities may be guaranteed and may
trial loans and whose lending oper- be secured by the assets of the LMI En-
ations are not for the purpose of fi- terprise, but the guarantee may not be
nancing its own or an Associate’s sales collateralized or otherwise secured.
or business operations. LMI Zone means any area located
Leverage means: within a HUBZone (as defined in 13
Leverage means financial assistance CFR 126.103), an Urban Empowerment
provided to a Licensee by SBA, either Zone or Urban Enterprise Community
through the purchase or guaranty of a (as designated by the Secretary of the
Licensee’s Debentures, and any other Department of Housing and Urban De-
SBA financial assistance evidenced by velopment), a Rural Empowerment
a security of the Licensee. Zone or Rural Enterprise Community
Leverageable Capital means Regu-
(as designated by the Secretary of the
latory Capital, excluding unfunded
Department of Agriculture), an area of
commitments.
Low Income or Moderate Income (as
Leveraged Licensee means a Licensee
recognized by the Federal Financial In-
which has outstanding Leverage, Le-
stitutions Examination Council), or a
verage commitments, or intends to
county with Persistent Poverty (as
issue Leverage in the future.
classified by the Economic Research
Licensee means either a corporation
Service of the Department of Agri-
(Corporate Licensee), or a limited part-
culture).
nership organized pursuant to § 107.160
Loan has the meaning set forth in
(Partnership Licensee), to which a li-
§ 107.810.
cense has been granted pursuant to the
Act. For certain purposes, the Entity Loans and Investments means Port-
General Partner of a Partnership Li- folio Securities, Assets Acquired in
censee is treated as if it were a Li- Liquidation of Portfolio Securities, Op-
censee (see § 107.160(b)(2)). erating Concerns Acquired, and Notes
LMI Enterprise means: and Other Securities Received, as set
(1) A Small Business that has at least forth in the Statement of Financial Po-
50% of its employees or tangible assets sition of SBA Form 468.
located in LMI Zone(s) or in which at Management Expenses has the mean-
least 35% of the full-time employees ing set forth in § 107.520.
have primary residences in LMI 1940 Act Company means a Licensee
Zone(s), in either case determined as of which is registered under the Invest-
the time of application for SBIC fi- ment Company Act of 1940.
nancing; or 1980 Act Company means a Licensee
(2) A Small Business that does not which is registered under the Small
meet the requirements of paragraph (1) Business Investment Incentive Act of
of this definition as of the time of ap- 1980.
plication for SBIC financing but that Non-leveraged Licensee means a Li-
certifies at such time that it intends to censee which has no outstanding Le-
meet the requirements within 180 days verage or Leverage commitment, no
after the closing of the SBIC financing. earmarked assets, and certifies to SBA
59
§ 107.50 13 CFR Ch. I (1–1–25 Edition)
(in writing) that it will not seek Lever- amended, by the holder thereof (or in
age in the future. the case of an In-kind Distribution by
Original Issue Price means the price the distributee thereof), and are of a
paid by the purchaser for securities at class which is traded on a regulated
the time of issuance. stock exchange, or is listed in the
Participating Securities means pre- Automated Quotation System of the
ferred stock, preferred limited partner- National Association of Securities
ship interests, or similar instruments Dealers (NASDAQ), or has, at a min-
issued by Licensees, including deben- imum, at least two market makers as
tures having interest payable only to defined in the relevant sections of the
the extent of earnings, all of which are Securities Exchange Act of 1934, as
subject to the terms set forth in amended (15 U.S.C. 77b et seq.), and in
§§ 107.1500 through 107.1590 and section all cases the quantity of which can be
303(g) of the Act. sold over a reasonable period of time
Partnership Licensee. See definition of
without having an adverse impact upon
Licensee in this section.
the price of the stock.
Payment Date means:
(1) For a Participating Securities Qualified Non-private Funds has the
issuer, each February 1, May 1, August meaning set forth in § 107.230.
1, and November 1 during the term of a Redemption Price means the amount
Participating Security, or required to be paid by the issuer, or
(2) For an Early Stage SBIC, each successor to the issuer, of Preferred or
March 1, June 1, September 1, and De- Participating Securities to repurchase
cember 1 during the term of a Deben- such securities from the holder. The
ture. Redemption Price shall be the Original
Person means a natural person or Issue Price less any prepayments or
legal entity. prior redemptions.
Pool means an aggregation of SBA Regulatory Capital means:
guaranteed Debentures or SBA guaran- (1) General. Regulatory Capital means
teed Participating Securities approved Private Capital, excluding non-cash as-
by SBA. sets contributed to a Licensee or a li-
Portfolio means the securities rep- cense applicant and non-cash assets
resenting a Licensee’s total out- purchased by a license applicant, un-
standing Financing of Small Busi- less such assets have been converted to
nesses. It does not include idle funds or cash or have been approved by SBA for
assets acquired in liquidation of Port- inclusion in Regulatory Capital. For
folio securities. purposes of this definition, sales of con-
Portfolio Concern means a Small Busi- tributed non-cash assets with recourse
ness Assisted by a Licensee.
or borrowing against such assets shall
Preferred Securities means nonvoting
not constitute a conversion to cash.
preferred stock or nonvoting limited
Regulatory Capital becomes
partnership interests issued to SBA
prior to October 1, 1996, by a Section Leverageable Capital when it is paid
301(d) Licensee. Such securities were in.
issued at par value in the case of pre- (2) Exclusion of questionable commit-
ferred stock, or at face value in the ments. An investor’s commitment to a
case of preferred limited partnership Licensee is excluded from Regulatory
interests. Capital if SBA determines that there is
Prioritized Payments has the meaning a lack of enforceable legal agreements
set forth in § 107.1520. under United States law or there is an
Private Capital has the meaning set issue of collectability for financial or
forth in § 107.230. any other reason, provided, however,
Profit Participation has the meaning that the unfunded commitment of an
set forth in § 107.1500(c)(3). investor that has satisfied the applica-
Publicly Traded and Marketable means ble net worth test set forth in the defi-
securities that are salable without re- nition of Institutional Investor will not
striction or that are salable within 12 be of questionable collectability (for fi-
months pursuant to Rule 144 (17 CFR nancial reasons) if the Licensee’s lim-
230.144) of the Securities Act of 1933, as ited partnership agreement (or other
60
Small Business Administration § 107.50
governing agreement) contains suffi- the applicable criteria set forth in part
cient provisions to ensure collect- 121 of this chapter.
ability. Smaller Enterprise has the meaning
Reinvestor SBIC has the meaning set set forth in § 107.710.
forth in § 107.720(a)(2). Start-up Financing means an Equity
Retained Earnings Available for Dis- Capital Investment in a Small Business
tribution (READ) means Undistributed that—
Net Realized Earnings less any Unreal- (1) Has not had sales exceeding
ized Depreciation on Loans and Invest- $3,000,000 or positive cash flow from op-
ments (as reported on SBA Form 468) erations in any of its last three full fis-
and represents the amount that a Li- cal years; and
censee may distribute to investors (in- (2) Was not formed to acquire any ex-
cluding SBA) in accordance with isting business, unless the acquired
§ 107.585 as a profit Distribution, or business satisfies paragraphs (1) and (2)
transfer to Private Capital. of this definition.
Revenue-Based Financing and Rev-
State means one of the United States,
enue-Based Loan have the meaning set
the Commonwealth of Puerto Rico, the
forth in § 107.810.
District of Columbia, Guam, the United
SBA means the Small Business Ad-
States Virgin Islands, the Northern
ministration, 409 Third Street, SW.,
Mariana Islands, and American Samoa.
Washington, DC 20416.
Temporary Debt has the meaning set
SBIC means Small Business Invest-
forth in § 107.570.
ment Company and has the same mean-
ing as ‘‘Licensee’’ as set forth in this Total Intended Leverage Commitment
section. means the dollar amount or ratio of
SBIC website means the website main- SBA Leverage commitments to Private
tained by SBA at www.sba.gov/sbic, Capital commitments. The final Total
which contains information on the Intended Leverage Commitment dollar
SBIC program, including notices, poli- amount applied in the Accrual Deben-
cies, procedures, and forms pertaining ture SBA Share calculation will be fi-
to the program. nalized no later than 12 months after
Secondary Relative of an individual licensure or upon the Licensee’s final
means: close, whichever occurs first.
(1) A grandparent, grandchild, or any Total Private Capital Commitment has
other ancestor or lineal descendent the meaning set forth in § 107.300.
who is not a Close Relative; Trust means the legal entity created
(2) An uncle, aunt, nephew, niece, or for the purpose of holding guaranteed
first cousin; or Debentures or Participating Securities
(3) A spouse of any person described and the guaranty agreement related
in paragraph (1) or (2) of this defini- thereto, receiving, holding and making
tion. any related payments, and accounting
Section 301(c) Licensee has the mean- for such payments.
ing set forth in § 107.100. Trust Certificate Rate means a fixed
Section 301(d) Licensee means a com- rate determined by the Secretary of
pany licensed prior to October 1, 1996 the Treasury at the time Participating
under section 301(d) of the Act as in ef- Securities or Debentures are pooled,
fect on the date of licensing, that may taking into consideration the current
provide Assistance only to Disadvan- average market yield on outstanding
taged Businesses. A Section 301(d) Li- marketable obligations of the United
censee may be organized as a for-profit States with maturities comparable to
corporation, as a non-profit corpora- the maturities of the Trust Certificates
tion, or as a limited partnership. being guaranteed by SBA, adjusted to
Short-term Financing means Financ- the nearest one-eighth of one percent.
ing with a term of less than one year in Trust Certificates (TCs) means certifi-
accordance with the regulations. cates issued by SBA, its agent or
Small Business means a small business Trustee and representing ownership of
concern as defined in section 103(5) of all or a fractional part of a Trust or
the Act (including its Affiliates), which Pool of Debentures or Participating Se-
for purposes of size eligibility, meets curities.
61
§ 107.100 13 CFR Ch. I (1–1–25 Edition)
Trustee means the trustee or trustees Subpart C—Qualifying for an SBIC
of a Trust. License
Underlicensed State means a State in
which the number of operating licens- ORGANIZING AN SBIC
ees per capita is less than the median
number of operating licensees per cap- § 107.100 Organizing a Section 301(c)
ita for all States, where the per capita Licensee.
per State is based on the most recent Section 301(c) Licensee means a com-
resident population published by the pany licensed under section 301(c) of
U.S. Census as of the date of the cal- the Act. It may be organized as a for-
culation. SBA publishes a notice with profit corporation or as a limited part-
the current list of Underlicensed States nership created in accordance with the
on the SBIC website. special rules of § 107.160.
Undistributed Net Realized Earnings
means Undistributed Realized Earnings § 107.115 1940 Act and 1980 Act Com-
less Non-cash Gains/Income, each as re- panies.
ported on SBA Form 468. A 1940 Act or 1980 Act Company is eli-
Unrealized Appreciation means the gible to apply for an SBIC license, and
amount by which a Licensee’s valu- an existing Licensee is eligible to apply
ation of each of its Loans and Invest- for SBA’s approval to convert to a 1940
ments, as determined by its Board of Act or 1980 Act Company. In either
Directors or General Partner(s) in ac- case, the 1940 Act or 1980 Act Company
cordance with Licensee’s valuation may elect to be taxed as a regulated in-
policies, exceeds the cost basis thereof. vestment company under section 851 of
Unrealized Depreciation means the the Internal Revenue Code of 1986, as
amount by which a Licensee’s valu- amended (26 U.S.C. 851). However, a Li-
ation of each of its Loans and Invest- censee making such election may make
ments, as determined by its Board of Distributions only as permitted under
Directors or General Partner(s) in ac- the applicable sections of this part (see
cordance with Licensee’s valuation the definition of Retained Earnings
policies, is below the cost basis thereof. Available for Distribution, § 107.585, and
Unrealized Gain (Loss) on Securities §§ 107.1540 through 107.1580).
Held means the sum of the Unrealized
Appreciation and Unrealized Deprecia- § 107.120 Special rules for a Section
tion on all of a Licensee’s Loans and 301(d) Licensee owned by another
Licensee.
Investments, less estimated future in-
come tax expense or estimated realiz- With SBA’s prior written approval, a
able future income tax benefit, as ap- Section 301(d) Licensee may operate as
propriate. the subsidiary of one or more Licensees
Venture Capital Financing has the (participant Licensees), subject to the
meaning set forth in § 107.1160. following:
Watchlist has the meaning set forth (a) Each participant Licensee must
in § 107.1850. own at least 20 percent of the voting
Wind-down Plan has the meaning set securities of the Section 301(d) Li-
forth in § 107.590. censee.
(b) A participant Licensee must treat
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, its entire capital contribution to the
1996, as amended at 62 FR 11759, Mar. 13, 1997;
subsidiary as a reduction of its
63 FR 5865, Feb. 5, 1998; 64 FR 52645, Sept. 30,
1999; 64 FR 70995, Dec. 20, 1999; 69 FR 8098,
Leverageable Capital. The participant
Feb. 23, 2004; 77 FR 23378, Apr. 19, 2012; 77 FR Licensee’s remaining Leverageable
25051, Apr. 27, 2012; 79 FR 62823, Oct. 21, 2014; Capital must be sufficient to support
82 FR 39340, Aug. 18, 2017; 82 FR 52184, Nov. its outstanding Leverage.
13, 2017; 88 FR 46005, July 18, 2023; 89 FR 3547, (c) A participant Licensee may not
Jan. 19, 2024] transfer its Leverage to a subsidiary
Section 301(d) Licensee.
[63 FR 5865, Feb. 5, 1998]
62
Small Business Administration § 107.150
§ 107.130 Requirement for qualified sively to pool capital from more than
management. one source for the purpose of investing
When applying for a license, and in businesses that are expected to gen-
while you have a license, you must erate substantial returns to the firm’s
show, to the satisfaction of SBA, that investors. In determining whether a
your current or proposed management firm is a traditional investment com-
team is qualified and has the knowl- pany for purposes of this section, SBA
edge, experience and capability nec- will also consider:
essary for investing in the types of (i) The degree to which the managers
businesses contemplated by the Act, of the firm are unrelated to and unaf-
the regulations in this part 107, and filiated with the investors in the firm
your business plan. You must designate or non-profit entity.
at least one individual as the official (ii) Whether the managers of the firm
responsible for contact with SBA. are authorized and motivated to make
investments that, in their independent
[61 FR 3189, Jan. 31, 1996, as amended at 77
judgment, are likely to produce signifi-
FR 25051, Apr. 27, 2012]
cant returns to all investors in the
§ 107.140 SBA approval of initial Man- firm or non-profit entity.
agement Expenses. (iii) Whether the firm or non-profit
If you plan to obtain Leverage, you entity serving as the management
must have your Management Expenses company of a for-profit SBIC benefits
approved by SBA at the time of licens- from the use of the SBIC through the
ing. (See § 107.520 for the definition of financial performance of the SBIC.
Management Expenses.) (iv) Other related factors.
(c) Non-affiliation requirement—(1)
§ 107.150 Management-ownership di- General rule. At least 30 percent of your
versification requirement. Regulatory Capital and Leverageable
(a) Diversification requirement. (Also Capital must be owned and controlled
referenced in this part as the ‘‘diver- by three Persons unaffiliated with your
sity requirement.’’) You must satisfy management and unaffiliated with
the requirements in paragraphs (b), (c) each other, and whose investments are
and (d) of this section: significant in dollar and percentage
(1) In order to obtain an SBIC license terms as determined by SBA. Such Per-
(unless you do not plan to obtain Le- sons must not be your Associates (ex-
verage), cept for their status as your share-
(2) If at the time you were licensed holders, limited partners, or members).
you did not plan to obtain Leverage, A single ‘‘acceptable’’ Institutional In-
but you now wish to be eligible for Le- vestor may be substituted for two or
verage, or three of the three Persons who are oth-
(3) If SBA so requires as a condition erwise required under this paragraph.
of approval of your transfer of Control The following Institutional Investors
under § 107.440. are ‘‘acceptable’’ for this purpose:
(b) Percentage ownership requirement. (i) Entities whose overall activities
(1) General rule. Except as provided in are regulated and periodically exam-
paragraph (b)(2) of this section, no Per- ined by state, Federal or other govern-
son or group of Persons who are Affili- mental authorities satisfactory to
ates of one another may own, directly SBA;
or indirectly, more than 70 percent of (ii) Entities listed on the New York
your Regulatory Capital or your Stock Exchange;
Leverageable Capital. (iii) Entities that are publicly-traded
(2) Exception. An investor that is a and that meet both the minimum nu-
traditional investment company, as de- merical listing standards and the cor-
termined by SBA, may own and control porate governance listing standards of
more than 70 percent of your Regu- the New York Stock Exchange;
latory Capital and your Leverageable (iv) Public or private employee pen-
Capital. For purposes of this section, a sion funds;
traditional investment company must (v) Trusts, foundations, or endow-
be a non-profit entity, or a profes- ments, but only if exempt from Federal
sionally managed firm organized exclu- income taxation; and
63
§ 107.160 13 CFR Ch. I (1–1–25 Edition)
(vi) Other Institutional Investors sat- § 107.160 Special rules for Licensees
isfactory to SBA. formed as limited partnerships.
(2) Look-through for Traditional Invest- A limited partnership organized
ment Company investors. SBA, in its sole under State law solely for the purpose
discretion, may consider the require- of performing the functions and con-
ment in paragraph (c)(1) of this section ducting the activities contemplated
to be satisfied if at least 30 percent of under the Act may apply for a license
your Regulatory Capital and under section 301(c) or section 301 (d) of
Leverageable Capital is owned and con- the Act (‘‘Partnership Licensee’’).
trolled indirectly, through a Tradi- (a) Number of Licensee’s General Part-
tional Investment Company, by Per- ners. If you are a Partnership Licensee,
sons unaffiliated with your manage- you must have as your general part-
ment. ner(s) at least two individuals, or at
(d) Voting requirement. (1) Except as least one corporation, partnership, or
provided in paragraph (d)(2) of this sec- limited liability company (LLC), or
tion, the investors required for you to any combination of individuals, cor-
satisfy diversity may not delegate porations, partnerships, or LLCs.
their voting rights to any Person who (b) Entity General Partner of Licensee.
is your Associate, or who Controls, is A general partner which is a corpora-
Controlled by, or is under Common tion, limited liability company or part-
Control with any of your Associates, nership (an ‘‘Entity General Partner’’)
without prior SBA approval. shall be organized under state law sole-
ly for the purpose of serving as the gen-
(2) Exception. Paragraph (d)(1) of this
eral partner of one or more Licensees.
section does not apply to investors in
(1) SBA must approve any person who
publicly-traded Licensees, to proxies
will serve as an officer, director, man-
given to vote in accordance with spe- ager, or general partner of the Entity
cific instructions for single specified General Partner. This provision must
meetings, or to any delegation of vot- be stated in an Entity General Part-
ing rights to a Person who is neither a ner’s Certificate of Incorporation,
diversity investor in the Licensee nor member agreement, Limited Partner-
affiliated with management of the Li- ship Agreement or other similar gov-
censee. erning instrument which must, in each
(e) Requirement to maintain diversity. case, accompany the license applica-
If you were required to have manage- tion.
ment-ownership diversity at any time, (2) An Entity General Partner is sub-
you must maintain such diversity ject to the same examination and re-
while you have outstanding Leverage porting requirements as a Licensee
or Earmarked Assets. To maintain under section 310(b) of the Act. The re-
management-ownership diversity, you strictions and obligations imposed
may continue to satisfy the diversity upon a Licensee by §§ 107.1800 through
requirement as in effect at the time it 107.1820, and 107.30, 107.410 through
was first applicable to you or you may 107.450, 107.470, 107.475, 107.500, 107.510,
satisfy the management-ownership di- 107.585, 107.600, 107.680, 107.690 through
versity requirement as currently in ef- 107.692, 107.865, and 107.1910 apply also
fect. If, at any time, you no longer to an Entity General Partner of a Li-
have the required management-owner- censee.
ship diversity, you must: (3) The general partner(s) of your En-
tity General Partner(s) will be consid-
(1) Notify SBA within 10 days; and
ered your general partner.
(2) Re-establish diversity within six
(4) If your Entity General Partner is
months. For the consequences of fail-
a limited partnership, its limited part-
ure to re-establish diversity, see ners may be considered your Control
§§ 107.1810(g) and 107.1820(f). Person(s) if they meet the definition
[65 FR 71055, Nov. 29, 2000, as amended at 88 for Control Person in § 107.50.
FR 46007, July 18, 2023; 89 FR 3547, Jan. 19, (5) If your Entity General Partner is
2024] a limited partnership, it is subject to
paragraph (a) of this section.
64
Small Business Administration § 107.210
(c) Other requirements for Partnership you must furnish SBA with evidence
Licensees. If you are a Partnership Li- that you qualify as a partnership for
censee: tax purposes, either by a ruling from
(1) You must have a minimum dura- the Internal Revenue Service, or by an
tion of ten years or two years following opinion of counsel.
the maturity of your last-maturing Le-
verage security, whichever is longer. CAPITALIZING AN SBIC
After 10 years, if all Leverage has been
repaid or redeemed and all amounts § 107.200 Adequate capital for Licens-
due SBA, its agent, or Trustee have ees.
been paid, the Partnership Licensee You must meet the requirements of
may be terminated by a vote of your this § 107.200 to qualify for a license, to
partners. (For purposes of this provi- continue as a Licensee, and to receive
sion SBA is not considered a partner.); Leverage.
(2) None of your general partner(s) (a) You must have enough Regu-
may be removed or replaced by your latory Capital to provide reasonable as-
limited partners without prior written
surance that:
approval of SBA;
(1) You will operate soundly and prof-
(3) Any transferee of, or successor in
interest to, your general partner shall itably over the long term; and
have only the rights and liabilities of a (2) You will be able to operate ac-
limited partner pending SBA’s written tively in accordance with your Articles
approval of such transfer or succession; and within the context of your business
and plan, as approved by SBA.
(4) You must incorporate all the pro- (b) In SBA’s sole discretion, you
visions in this paragraph (c) in your must be economically viable, taking
Limited Partnership Agreement. into consideration actual and antici-
(d) Obligations of a Control Person. All pated income and losses on your Loans
Control Persons are bound by the dis- and Investments, and the experience
ciplinary provisions of sections 313 and and qualifications of your owners and
314 of the Act and by the conflict-of-in- managers.
terest rules under section 312 of the
Act. The term Licensee, as used in § 107.210 Minimum capital require-
§§ 107.30, 107.460, and 107.680 includes all ments for Licensees.
of the Licensee’s Control Persons. The (a) Companies licensed on or after Octo-
term Licensee as used in § 107.670 in- ber 1, 1996. A company licensed on or
cludes only the Licensee’s general part- after October 1, 1996, must have
ner(s). The conditions specified in Leverageable Capital of at least
§§ 107.1800 through 107.1820 and § 107.1910 $2,500,000 and must meet the applicable
apply to all general partners.
minimum Regulatory Capital require-
(e) Liability of general partner for part-
ment in this paragraph (a), unless
nership debts to SBA. Subject to section
lower Leverageable Capital and Regu-
314 of the Act, your general partner is
latory Capital amounts are approved
not liable solely by reason of its status
as a general partner for repayment of by SBA as part of a Wind-down Plan in
any Leverage or debts you owe to SBA accordance with § 107.590(c):
unless SBA, in the exercise of reason- (1) Licensees other than Early Stage
able investment prudence, and with re- SBICs. Except for Early Stage SBICs, a
gard to your financial soundness, de- Licensee must have Regulatory Capital
termines otherwise prior to the pur- of at least $5,000,000. As an exception to
chase or guaranty of your Leverage. the general rule in this paragraph
(f) Reorganization of Licensee. A cor- (a)(1), SBA in its sole discretion and
porate Licensee wishing to reorganize based on a showing of special cir-
as a Partnership Licensee, or a Part- cumstances and good cause, which in-
nership Licensee wishing to reorganize cludes applicants that are
as a Corporate Licensee, may apply to headquartered in an Underlicensed
SBA for approval under § 107.470. State, may license an applicant with
(g) Special Leverage requirement. Be- Regulatory Capital of at least
fore your first issuance of Leverage, $3,000,000, but only if the applicant:
65
§ 107.230 13 CFR Ch. I (1–1–25 Edition)
(i) Has satisfied all licensing stand- are reflected in the retained earnings
ards and requirements except the min- of the corporation; and
imum capital requirement, as deter- (iii) ‘‘Qualified Non-private Funds’’
mined solely by SBA; as defined in paragraph (d) of this sec-
(ii) Has a viable business plan reason- tion.
ably projecting profitable operations; (4) Any portion of a commitment
and from an Institutional Investor with a
(iii) Has a reasonable timetable for net worth of less than $10 million that
achieving Regulatory Capital of at exceeds 10 percent of such Institutional
least $5,000,000. Investor’s net worth and is not backed
(2) Early Stage SBICs. An Early Stage by a letter of credit from a State or
SBIC must have Regulatory Capital of National bank acceptable to SBA.
at least $20 million. (c) Non-cash capital contributions. Cap-
(b) Companies licensed before October 1, ital contributions in a form other than
1996. A company licensed before Octo- cash are subject to the limitations in
ber 1, 1996 must meet the minimum § 107.240.
capital requirements applicable to such (d) Qualified Non-private Funds. Pri-
company, as required by the regula- vate Capital includes ‘‘Qualified Non-
tions in effect on September 30, 1996. private Funds’’ as defined in this para-
See § 107.1120(c)(2) for Leverage eligi- graph (d); however, investors of Quali-
bility requirements. fied Non-private Funds must not con-
[63 FR 5866, Feb. 5, 1998, as amended at 77 FR trol, directly or indirectly, a Licensee’s
25051, Apr. 27, 2012; 82 FR 39340, Aug. 18, 2017; management, or its board of directors
88 FR 46007, July 18, 2023] or general partner(s). Qualified Non-
private Funds are:
§ 107.230 Permitted sources of Private (1) Funds directly or indirectly in-
Capital for Licensees. vested in any Licensee on or before Au-
Private Capital means the contrib- gust 16, 1982 by any Federal agency ex-
uted capital of a Licensee, plus un- cept SBA, under a statute explicitly
funded binding commitments by Insti- mandating the inclusion of such funds
tutional Investors (including commit- in ‘‘Private Capital’’;
ments evidenced by a promissory note) (2) Funds directly or indirectly in-
to contribute capital to a Licensee. vested in any Licensee by any Federal
(a) Contributed capital. For purposes agency under a statute that is enacted
of this section, contributed capital after September 4, 1992, explicitly man-
means the paid-in capital and paid-in dating the inclusion of such funds in
surplus of a Corporate Licensee, or the ‘‘Private Capital’’;
partners’ contributed capital of a Part- (3) Funds invested in any Licensee or
nership Licensee, in either case subject license applicant by one or more State
to the limitations in paragraph (b) of or local government entities (including
this section. any guarantee extended by such enti-
(b) Exclusions from Private Capital. ties) in an aggregate amount that does
Private Capital does not include: not exceed 33 percent of Regulatory
(1) Funds borrowed by a Licensee Capital; and
from any source. (4) Funds invested in or committed in
(2) Funds obtained through the writing to any Section 301(d) Licensee
issuance of Leverage. prior to October 1, 1996, from the fol-
(3) Funds obtained directly or indi- lowing sources:
rectly from any Federal, State, or local (i) A State financing agency, or simi-
government agency or instrumentality, lar agency or instrumentality, if the
except for: funds invested are derived from such
(i) Funds invested by a public pension agency’s net income and not from ap-
fund; propriated State or local funds; and
(ii) Funds obtained from the business (ii) Grants made by a state or local
revenues (excluding any governmental government agency or instrumentality
appropriation) of any federally char- into a nonprofit corporation or institu-
tered or government-sponsored cor- tion exercising discretionary authority
poration established before October 1, with respect to such funds, if SBA de-
1987, to the extent that such revenues termines that such funds have taken
66
Small Business Administration § 107.300
on a private character and the non- § 107.250 Exclusion of stock options
profit corporation or institution is not issued by Licensee from Manage-
a mere conduit. ment Expenses.
(e) Borrowed funds exclusion. You may Stock options issued by any Li-
not accept any capital contribution censee, including a 1940 or 1980 Act
made with funds borrowed by a Person Company, are not considered com-
seeking to own an equity interest pensation and therefore do not count
(whether direct or indirect, beneficial as part of a Licensee’s Management Ex-
or of record) of at least 10 percent of penses.
your Private Capital. This exclusion
APPLYING FOR AN SBIC LICENSE
does not apply if:
(1) Such Person’s net worth is at § 107.300 License application form and
least twice the amount borrowed; or fee.
(2) SBA gives its prior written ap- SBA evaluates license applicants,
proval of the capital contribution. giving first priority to applicants
(f) Public sector contributions. The Act headquartered in Underlicensed States
limits the extent to which funds in- with below median SBIC Financing dol-
vested directly or indirectly by local, lars per State, as determined by SBA
State or Federal Government entities and published periodically in a notice
are eligible to qualify as Leverageable on the SBIC website. Once priority is
Capital. However, SBICs are not re- established, such applicants will con-
stricted from accepting funds invested tinue to receive priority throughout
directly or indirectly from local, State the licensing process. SBA reviews and
or Federal Government entities. The processes applications in two review
funds contributed by such entities may phases (initial review and final licens-
be included in an SBIC applicant’s pro- ing), as follows:
posed formula to calculate manage- (a) Initial review. Except as provided
ment fees. in this paragraph (a), SBIC applicants
must submit a Management Assess-
[61 FR 3189, Jan. 31, 1996, as amended at 63 ment Questionnaire (‘‘MAQ’’) c and the
FR 5866, Feb. 5, 1998; 64 FR 70995, Dec. 20, Initial Licensing Fee, as defined in
1999; 89 FR 3547, Jan. 19, 2024] paragraph (c) of this section. An appli-
cant under Common Control with one
§ 107.240 Limitations on including or more Licensees must submit a writ-
non-cash capital contributions in ten request to SBA, and the Initial Li-
Private Capital.
censing Fee, to be considered for a li-
Non-cash capital contributions to a cense and is exempt from the require-
Licensee or license applicant are in- ment in this paragraph (a) to submit a
cluded in Private Capital only if they MAQ, unless otherwise determined by
fall into one of the following cat- SBA in SBA’s discretion. Eligible ‘‘Ex-
egories: pedited Subsequent Funds’’ as de-
(a) Direct obligations of, or obliga- scribed in § 107.305(e) are permitted to
tions guaranteed as to principal and in- submit a streamlined ‘‘Short-Form’’
terest by, the United States. Subsequent Fund MAQ.
(b) Services rendered or to be ren- (b) Final licensing. An applicant may
dered to you, priced at no more than proceed to the final licensing phase
only if notified in writing by SBA that
their fair market value.
it may do so. Following receipt of such
(c) Tangible assets used in your oper-
notice, in order to proceed to the final
ations, priced at no more than their licensing phase, the applicant must
fair market value. submit a complete license application
(d) Shares in a Disadvantaged Busi- with all required appendices, within
ness received by a subsidiary Section the timeframe identified by SBA and
301(d) Licensee from its parent Li- the Final Licensing Fee, as defined in
censee, valued at the lower of cost or paragraph (c) of this section. If you are
fair value. seeking to be licensed as a Leveraged
(e) Other non-cash assets approved by Licensee and SBA approves your Li-
SBA. cense, SBA will also approve your
67
§ 107.305 13 CFR Ch. I (1–1–25 Edition)
Total Intended Leverage Commitment points multiplied by the Leverage dol-
amount and ratio as defined in § 107.50 lar amount requested by the applicant,
based on the target fund size stated in where the Final Licensing Base Fee is
the MAQ, which means the total Lever- based on the applicant’s Fund Se-
age commitments available to you for quence as follows:
the life of your SBIC, subject to the
provisions of §§ 107.320 and 107.1150. A TABLE 2 TO PARAGRAPH (c)(2)
Licensee is permitted to hold multiple Final licensing
Fund sequence
fund closings within and for up to 12 base fee
months of receiving a License to reach Fund I ............................................................ $10,000
the target fund size. SBA will then de- Fund II ........................................................... 15,000
termine the final Total Intended Le- Fund III .......................................................... 25,000
verage Commitment which is either Fund IV+ ........................................................ 30,000
the dollar amount or ratio to targeted
Private Capital provided at the Green (3) Resubmission Penalty Fee. The Re-
Light. SBA will determine the Total submission Penalty Fee means a $10,000
Private Capital Commitment (defined penalty fee assessed to an applicant
as the total Private Capital committed that has previously withdrawn or is
to a Licensee within 12 months after li- otherwise not approved for a license
censure or upon the Licensee’s final that must be paid in addition to the Ini-
closing, whichever occurs first) amount tial and Final Licensing Fees at the
for the Accrual Debenture SBA Share time the applicant resubmits its appli-
calculation. cation.
(4) Inflation Adjustments. SBA annu-
(c) Licensing Fees. SBIC Initial and
ally adjusts the Initial Licensing Fee,
Final Licensing Fees are non-refund-
Final Licensing Base Fee, and Resub-
able fees determined as set forth in
mission Penalty Fee using the Infla-
paragraphs (c)(1) and (2) of this section.
tion Adjustment and will publish noti-
(1) Initial Licensing Fee. The Initial
fication prior to such adjustment in
Licensing Fee is based on the appli-
the FEDERAL REGISTER identifying the
cant’s fund sequence, where the fund
amount of the fees.
sequence means the order of succession
of private equity or private credit [88 FR 46007, July 18, 2023]
funds for the same fund management
team and same strategy. SBA will de- § 107.305 Evaluation of license appli-
termine the applicant’s fund sequence cants.
based on the management team’s com- SBA will evaluate a license applicant
position and experience as a team. The based on the submitted application ma-
Initial Licensing Fees are as follows: terials, any interviews with the appli-
cant’s management team, and the re-
TABLE 1 TO PARAGRAPH (c)(1) sults of background investigations,
public record searches, and other due
Initial licensing
Fund sequence diligence conducted by SBA and other
fee
Federal agencies. SBA’s evaluation
Fund I ............................................................ $5,000
Fund II ........................................................... 10,000
will consider factors including the fol-
Fund III .......................................................... 15,000 lowing:
Fund IV+ ........................................................ 20,000 (a) Management qualifications. Man-
agement qualifications, including dem-
Example 1 to paragraph (c)(1): If the onstrated investment skills and experi-
management team members of appli- ence as a principal investor, or a com-
cant DEF I consists primarily of the bination of investment skill and rel-
same team members of fund ABC II and evant industry operational experience;
ABC II represented the second fund for business reputation; adherence to legal
those team members, SBA will con- and ethical standards; record of active
sider the fund sequence of DEF I as a involvement in making and monitoring
Fund III, regardless of the number in investments and assisting portfolio
the applicant’s name. companies; managing a regulated busi-
(2) Final Licensing Fee. The Final Li- ness, if applicable; successful history of
censing Fee is calculated as the Final working as a team; and experience in
Licensing Base Fee plus 1.25 basis developing appropriate processes for
68
Small Business Administration § 107.305
evaluating investments and imple- lowing eligibility criteria, the appli-
menting best practices for investment cant can apply for an ‘‘Expediated Sub-
firms. sequent Fund’’ evaluation process:
(b) Demonstrated investment acumen. (i) Consistent strategy and fund size.
Performance of proposed investment Targeted Regulatory Capital to be
team’s prior relevant industry invest- raised is ≤133% the size of their most
ments as well as any supporting oper- recent SBIC fund (inflation adjust-
ating experience, including investment ments will be considered). Same asset
returns measured both in percentage class and investment strategy as most
terms and in comparison to appro- recent license.
priate industry benchmarks; the extent (ii) Clean regulatory history. No major
to which investments have been real- findings, significant ‘‘other matters,’’
ized as a result of sales, repayments, or or unresolved ‘‘other matters’’ related
other exit mechanisms; evidence of to licensees managed by the principals
previous investment or operational ex- of applicant in the previous ten years.
perience contributing to U.S. domestic (iii) Consistent limited partnership
job creation and, when applicable, dem- (LP)-general partnership (GP) dynamics.
onstrated past adherence to statutory No new limited partner will represent
and regulatory SBIC program require- ≥33 percent of the Private Capital of
ments. While a track record is required the licensee upon reaching final close
to apply for an SBIC license, a ‘‘cer- at target fund size or hard cap. SBA
tified’’ track record is not required. would expect to see that a meaningful
(c) Strategy and fit. Applicant’s pro- proportion of a prior SBIC fund’s insti-
posed investment strategy as presented tutional investor base would return to
in its business plan, including adher- support an anticipated subsequent
ence to the Statement of Policy as SBIC fund. The most recent limited
stated in section 102 of the Act, clarity partnership agreement (LPA) of the ac-
of objectives; strength of manage- tive Licensee and all side letters will
ment’s rationale for pursuing the se- have no substantive changes for the ap-
lected strategy; compliance with this plicant fund.
part and applicable provisions of part (iv) Investment performance stability.
121 of this chapter; fit with manage- The most recent licensee net distribu-
ment’s skills and experience; and the tions to paid-in capital (DPI) and net
availability of sufficient resources to total value to paid-in capital (TVPI)
carry out the proposed strategy. As de- TVPI are at or above median vintage
termined by SBA, a Licensee may not year and strategy performance bench-
materially deviate from the proposed marks for the prior three quarters. The
investment strategy after three years principals of the applicant are not
of Licensure. managing a licensee in default or with
(d) Structure and economics. Appli- high Capital Impairment (CIP).
cant’s proposed organizational struc- (v) Consistent or reduced leverage man-
ture and fund economics, including agement. The applicant is requesting a
compliance with this part 107; sound- leverage to Private Capital ratio ≤ the
ness of financial projections and under- current or most recent SBIC licensee
lying assumptions; a compensation at target fund size or hard cap.
plan that provides managers with ap- (vi) Firm stability. Subject to SBA’s
propriate economic incentives; a rea- determination, no material changes to
sonable basis for allocations of profits the broader firm, to include resigna-
and fees to Persons not involved in tions, terminations, or retirements by
management; and governance proce- members of the general partnership, in-
dures that provide appropriate checks vestment committee, broader invest-
and balances. ment team, or key finance and oper-
(e) Subsequent fund applicants. (1) Ap- ations personnel, subject to paragraph
plicants operating an active Licensee (e)(1)(vii) of this section.
that meet the following eligibility cri- (vii) Promotions from within. Dem-
teria can apply under an ‘‘Expediated onstration of promoting internal in-
Subsequent Fund’’ evaluation process. vestment team talent from within the
Should an applicant fulfill and for- firm/organization sponsoring the li-
mally attest to meeting all of the fol- cense.
69
§ 107.310 13 CFR Ch. I (1–1–25 Edition)
(viii) Inclusive equity. Demonstration ing submission deadlines. The Notice
of appropriate/increased sharing of will specify procedures for a particular
carry and/or management company ec- application period.
onomics with promoted talent or dis-
[77 FR 25052, Apr. 27, 2012]
tribution of equitable or increasingly
equitable economics among the part-
§ 107.320 Leverage portfolio diver-
nership. sification.
(ix) Federal Bureau of Investigation
(FBI) criminal and Internal Revenue To minimize ‘‘cost’’ as defined in sec-
Service (IRS) background check no find- tion 502(5)(A) of the Federal Credit Re-
ings. The sponsoring entity and all form Act of 1990, SBA reserves the
principals of the Licensee do not have right to maintain broad diversification
an FBI criminal record and do not have to mitigate concentration of invest-
IRS violations from the date of their ment risk in approving Leverage com-
most recent SBIC fund licensure. mitments for Leveraged Licensees with
(x) No outstanding or unresolved mate- respect to:
rial litigation matters. No outstanding or (a) The year in which they commence
unresolved litigation matters involving operations;
allegations of dishonesty, fraud, or (b) The geographic location (giving
breach of fiduciary duty or otherwise first priority to applicants from Under-
requiring a report under § 107.660(c) or licensed States with below median
(d) as to a prior Licensee, the prospec- SBIC Financing dollars per State); and
tive Applicant’s general partner, or (c) The asset class and investment
any other person who was required by strategy.
SBA to complete a personal history
[88 FR 46009, July 18, 2023]
statement in connection with the li-
cense application.
(xi) No outstanding tax liens. On the Subpart D—Changes in Owner-
principals applying to manage the li- ship, Control, or Structure of
censee, on the most recent or active li- Licensee; Transfer of License
censee, and on the sponsoring entity of
the licensee. CHANGES IN CONTROL OR OWNERSHIP OF
(2) Should an applicant fulfill and LICENSEE
formally attest to meeting all of the
eligibility criteria in paragraph (e)(1) § 107.400 Changes in ownership of 10
of this section, the applicant can sub- percent or more of Licensee but no
mit a streamlined ‘‘Short-Form Subse- change of Control.
quent Fund MAQ’’. (a) Prior approval requirements. You
[77 FR 25052, Apr. 27, 2012, as amended at 88 must obtain SBA’s prior written ap-
FR 46008, July 18, 2023; 89 FR 3547, Jan. 19, proval for any proposed transfer or
2024] issuance of ownership interests that re-
sults in the ownership (beneficial or of
§ 107.310 When and how to apply for li- record) by any Person, or group of Per-
censing as an Early Stage SBIC. sons acting in concert, of at least 10
From time to time, SBA will publish percent of any class of your stock or
a Notice in the FEDERAL REGISTER, in- partnership capital.
viting the submission of applications (b) Fee. A processing fee of $200 must
for licensing as an Early Stage SBIC. accompany each such request for ap-
SBA will not consider an application proval of a change of ownership.
from an Early Stage SBIC applicant
that is under Common Control with an- § 107.410 Changes in Control of Li-
other Early Stage SBIC applicant or an censee (through change in owner-
existing Early Stage SBIC (unless it ship or otherwise).
has no outstanding Leverage or Lever- (a) Prior approval requirements. You
age commitments and will not seek ad- must obtain SBA’s prior written ap-
ditional Leverage in the future). Appli- proval for any proposed transaction or
cants must comply with both the regu- event that results in Control by any
lations in this part 107 and any require- Person(s) not previously approved by
ments specified in the Notice, includ- SBA.
70
Small Business Administration § 107.460
(b) Fee. A processing fee equal to the quested by SBA. As a condition of ap-
combined Licensing Fee (Initial Li- proving a proposed transfer of control,
censing Fee plus the Final Licensing SBA may:
Fee then in effect) defined in § 107.300 (a) Require an increase in your Regu-
must accompany any application for latory Capital;
approval of one or more transactions or (b) Require the new owners or the
events that will result in a transfer of transferee’s Control Person(s) to as-
Control. sume, in writing, personal liability for
[61 FR 3189, Jan. 31, 1996, as amended at 82 your Leverage, effective only in the
FR 52185, Nov. 13, 2017] event of their direct or indirect partici-
pation in any transfer of Control not
§ 107.420 Prohibition on exercise of approved by SBA; or
ownership or Control rights in Li- (c) Require compliance with any
censee before SBA approval. other conditions set by SBA, including
Without prior written SBA approval, compliance with the requirements for
no change of ownership or Control may minimum capital and management-
take effect and no officer, director, em- ownership diversity as in effect at such
ployee or other Person acting on your time for new license applicants.
behalf shall:
[61 FR 3189, Jan. 31, 1996]
(a) Register on your books any trans-
fer of ownership interest to the pro- § 107.450 Notification to SBA of pledge
posed new owner(s); of Licensee’s shares.
(b) Permit the proposed new owner(s)
to exercise voting rights with respect (a) You must notify SBA in writing,
to such ownership interest (including within 30 calendar days, of the terms of
directly or indirectly procuring or vot- any transaction in which:
ing any proxy, consent or authoriza- (1) Any Person, or group of Persons
tion as to such voting rights at any acting in concert, pledges shares of
shareholders’ or partnership meeting); your stock (or equivalent ownership in-
(c) Permit the proposed new owner(s) terests) as collateral for indebtedness;
to participate in any manner in the and
conduct of your affairs (including exer- (2) The shares pledged are at least 10
cising control over your books, records, percent of your Regulatory Capital.
funds or other assets; participating di- (b) If the transaction creates a
rectly or indirectly in any disposition change of ownership or Control, you
thereof; or serving as an officer, direc- must comply with § 107.400 or § 107.410,
tor, partner, employee or agent); or as appropriate.
(d) Allow ownership or Control to
pass to another Person. RESTRICTIONS ON COMMON CONTROL OR
OWNERSHIP OF TWO OR MORE LICENSEES
§ 107.430 Notification to SBA of trans-
actions that may change ownership § 107.460 Restrictions on Common
or Control. Control or ownership of two (or
more) Licensees.
You must promptly notify SBA as
soon as you have knowledge of trans- (a) General rule. Without SBA’s prior
actions or events that may result in a written approval, you must not have an
transfer of Control or ownership of at officer, director, manager, Control Per-
least 10 percent of your capital. If there son, or owner (with a direct or indirect
is any doubt as to whether a particular ownership interest of at least 10 per-
transaction or event will result in such cent) who is also:
a change, report the facts to SBA. (1) An officer, director, manager,
Control Person, or owner (with a direct
§ 107.440 Standards governing prior or indirect ownership interest of at
SBA approval for a proposed trans- least 10 percent) of another Licensee;
fer of Control. or
SBA approval is contingent upon full (2) An officer or director of any Per-
disclosure of the real parties in inter- son that directly or indirectly controls,
est, the source of funds for the new or is controlled by, or is under Com-
owners’ interest, and other data re- mon Control with, another Licensee.
71
§ 107.470 13 CFR Ch. I (1–1–25 Edition)
(b) Exceptions to general rule. This ing Financing to a Small Business, you
§ 107.460 does not apply to: must obtain a written statement from
(1) Common officers, directors, man- the concern acknowledging its aware-
agers, or owners of a Section 301(c) Li- ness that you are ‘‘a Federal licensee
censee and its Section 301(d) sub- under the Small Business Investment
sidiary; or Act of 1958, as amended.’’
(2) Common officers, directors, man-
[88 FR 46009, July 18, 2023]
agers, Control Persons, or owners of
two (or more) Licensees which have no § 107.502 Representations to the pub-
Leverage. lic.
CHANGE IN STRUCTURE OF LICENSEE You may not represent or imply to
anyone that the SBA, the U.S. Govern-
§ 107.470 SBA approval of merger, con- ment or any of its agencies or officers
solidation, or reorganization of Li- has approved any ownership interests
censee. you have issued or obligations you
(a) Prior approval requirements. You have incurred. Be certain to include a
may not merge, consolidate, change statement to this effect in any solicita-
form of organization (corporation or tion to investors. Example: You may
partnership) or reorganize without not represent or imply that ‘‘SBA
SBA’s prior written approval. Any such stands behind the Licensee’’ or that
merger or consolidation will be subject ‘‘Your capital is safe because SBA’s ex-
to § 107.440. perts review proposed investments to
(b) Fee. A processing fee of $5,000 make sure they are safe for the Li-
must accompany any application for censee.’’
approval of a change in your form of
organization (from corporation to part- § 107.503 Licensee’s adoption of an ap-
nership or partnership to corporation). proved valuation policy.
(a) Valuation guidelines. You must
TRANSFER OF LICENSE prepare, document and report the valu-
ations of your Loans and Investments
§ 107.475 Transfer of license. in accordance with the Valuation
You may not transfer your license in Guidelines for SBICs issued by SBA.
any manner without SBA’s prior writ- These guidelines may be obtained from
ten approval. the SBIC website.
(b) SBA approval of valuation policy.
Subpart E—Managing the You must have a written valuation pol-
Operations of a Licensee icy approved by SBA for use in deter-
mining the value of your Loans and In-
GENERAL REQUIREMENTS vestments. You must either:
(1) Adopt without change the model
§ 107.500 Lawful operations under the valuation policy set forth in section III
Act. of the Valuation Guidelines for SBICs;
You must engage only in the activi- or
ties contemplated by the Act and in no (2) Obtain SBA’s prior written ap-
other activities. proval of an alternative valuation pol-
icy. If you are or applying to be a Non-
§ 107.501 Identification. leveraged Licensee, SBA will generally
(a) Publication upon issuance. SBA approve a valuation policy that meets
shall publish in the FEDERAL REGISTER GAAP.
the names of SBICs with date of licen- (c) Responsibility for valuations. Your
sure and Total Intended Leverage Com- board of directors or general partner(s)
mitments approved within 30 days of will be solely responsible for adopting
the end of the month of licensure. your valuation policy and for using it
(b) Identification as a Licensee. You to prepare valuations of your Loans
must display your SBIC license in a and Investments for submission to
prominent location. You must also SBA. If SBA reasonably believes that
have a listed telephone number. Before your valuations, individually or in the
collecting an application fee or extend- aggregate, are materially misstated, it
72
Small Business Administration § 107.510
reserves the right to require you to en- a certified copy of your resolution or
gage, at your expense, an independent other formal document describing your
third party, acceptable to SBA, to sub- control procedures.
stantiate the valuations.
(d) Frequency of valuations. (1) If you § 107.507 Violations based on false fil-
are a Leveraged Licensee, you must ings and nonperformance of agree-
value your Loans and Investments at ments with SBA.
the end of each quarter of your fiscal The following shall constitute a vio-
year, and at the end of your fiscal year. lation of this part:
(2) Otherwise, you must value your (a) Nonperformance. Nonperformance
Loans and Investments only at your of any of the requirements of any De-
fiscal year end. benture, Participating Security or Pre-
(3) On a case-by-case basis, SBA may ferred Security, or of any written
require you to perform valuations more agreement with SBA.
frequently. (b) False statement. In any document
(4) You must report material adverse
submitted to SBA:
changes in valuations at least quar-
terly, within 30 days following the (1) Any false statement knowingly
close of the quarter. made; or
(e) Review of valuations by independent (2) Any misrepresentation of a mate-
public accountant. (1) For valuations rial fact; or
performed as of the end of your fiscal (3) Any failure to state a material
year, your independent public account- fact. A material fact is any fact which
ant must review your valuation proce- is necessary to make a statement not
dures and the implementation of such misleading in light of the cir-
procedures, including adequacy of doc- cumstances under which the statement
umentation. was made.
(2) The independent public account-
ant’s report on your audited annual fi- § 107.509 Employment of SBA officials.
nancial statements (SBA Form 468) Without SBA’s prior written ap-
must include a statement that your proval, for a period of two years after
valuations were prepared in accordance the date of your most recent issuance
with your approved valuation policy of Leverage (or the receipt of any SBA
established in accordance with section Assistance as defined in part 105 of this
310(d)(2) of the Act. chapter), you are not permitted to em-
[61 FR 3189, Jan. 31, 1996, as amended at 63 ploy, offer employment to, or retain for
FR 5866, Feb. 5, 1998; 82 FR 39340, Aug. 18, professional services, any person who:
2017; 88 FR 46009, July 18, 2023; 89 FR 3547, (a) Served as an officer, attorney,
Jan. 19, 2024] agent, or employee of SBA on or within
one year before such date; and
§ 107.504 Equipment and office re-
quirements. (b) As such, occupied a position or
engaged in activities which, in SBA’s
(a) Technology. You must have access determination, involved discretion
to technology to securely send and re- with respect to the granting of Assist-
ceive emails, scan documents, and pre- ance under the Act.
pare and submit electronic information
and reports required by SBA. MANAGEMENT AND COMPENSATION
(b) Accessible office. You must main-
tain an office that is open to the public § 107.510 SBA approval of Licensee’s
during normal working hours. Investment Adviser/Manager.
[88 FR 46009, July 18, 2023] You may employ an Investment Ad-
viser/Manager who will be subject to
§ 107.506 Safeguarding Licensee’s as- the supervision of your board of direc-
sets/Internal controls. tors or general partner. If you have Le-
You must adopt a plan to safeguard verage or plan to seek Leverage, you
your assets and monitor the reliability must obtain SBA’s prior written ap-
of your financial data, personnel, Port- proval of the management contract.
folio, funds and equipment. You must SBA’s approval of an Investment Ad-
provide your bank and custodian with viser/Manager for one Licensee does
73
§ 107.520 13 CFR Ch. I (1–1–25 Edition)
not indicate approval of that manager (1) Direct obligations of, or obliga-
for any other Licensee. tions guaranteed as to principal and in-
(a) Management contract. The con- terest by, the United States, which ma-
tract must: ture within 15 months from the date of
(1) Specify the services the Invest- the investment; or
ment Adviser/Manager will render to (2) Repurchase agreements with fed-
you and to the Small Businesses in erally insured institutions, with a ma-
your Portfolio; and turity of seven days or less. The securi-
(2) Indicate the basis for computing ties underlying the repurchase agree-
Management Expenses. ments must be direct obligations of, or
(b) Material change to approved man- obligations guaranteed as to principal
agement contract. If there is a material and interest by, the United States. The
change, both you and SBA must ap- securities must be maintained in a cus-
prove such change in advance. If you todial account at a federally insured
are uncertain if the change is material, institution; or
submit the proposed revision to SBA. (3) Mutual funds, securities, or other
§ 107.520 Management Expenses of a instruments that exclusively consist
Licensee. of, or represent pooled assets of, invest-
ments described in paragraphs (b)(1) or
SBA must approve any increases in (b)(2) of this section; or
your Management Expenses if you have
(4) Certificates of deposit with a ma-
outstanding Leverage or Earmarked
turity of one year or less, issued by a
Assets.
federally insured institution; or
(a) Definition of Management Expenses.
Management Expenses include: (5) A deposit account in a federally
(1) Salaries; insured institution, subject to a with-
(2) Office expenses; drawal restriction of one year or less;
(3) Travel; or
(4) Business development; (6) A checking account in a federally
(5) Office and equipment rental; insured institution; or
(6) Bookkeeping; and (7) A reasonable petty cash fund.
(7) Expenses related to developing, (c) Deposit of funds in excess of the in-
investigating and monitoring invest- sured amount. (1) You are permitted to
ments. deposit funds in a federally insured in-
(b) Management Expenses do not in- stitution in excess of the institution’s
clude services provided by specialized insured amount, but only if the institu-
outside consultants, outside lawyers tion is ‘‘well capitalized’’ in accordance
and independent public accountants, if with the definition set forth in regula-
they perform services not generally tions of the Federal Deposit Insurance
performed by a venture capital com- Corporation, as amended (12 CFR
pany. 325.103).
(c) If your Management Expenses (2) Exception: You may make a tem-
have not already been approved by porary deposit (not to exceed 30 days)
SBA, you must submit such expenses in excess of the insured amount, in a
for approval with your SBA Form 468 transfer account established to facili-
for your first fiscal year ending after tate the receipt and disbursement of
January 31, 1996. funds or to hold funds necessary to
honor Commitments issued.
CASH MANAGEMENT BY A LICENSEE (d) Deposit of funds in Associate insti-
§ 107.530 Restrictions on investments tution. A deposit in, or a repurchase
of idle funds by leveraged Licens- agreement with, a federally insured in-
ees. stitution that is your Associate is not
(a) Applicability of this section. This considered a Financing of such Asso-
§ 107.530 applies if you have outstanding ciate under § 107.730, provided the terms
Leverage or if you have applied for Le- of such deposit or repurchase agree-
verage. ment are no less favorable than those
(b) Permitted investments of idle funds. available to the general public.
Funds not invested in Small Businesses [61 FR 3189, Jan. 31, 1996, as amended at 77
must be maintained in: FR 20294, Apr. 4, 2012]
74
Small Business Administration § 107.560
BORROWING BY LICENSEES FROM NON- (5) The term of the Capital Call Line
SBA SOURCES may not exceed 12 months, but may be
renewable, provided that each renewal
§ 107.550 Prior approval of secured does not exceed 12 months and you re-
third-party debt of Leveraged Li- main in compliance with the condi-
censees. tions of this paragraph (c); and
(a) Definition. In this section, secured (6) Consistent with § 107.410, the Cap-
third-party debt means any non-SBA ital Call Line contains no provision
debt secured by any of your assets, in- permitting the lender to dictate when
cluding secured guarantees and other capital calls are made or otherwise
contingent obligations that you volun- ceding to the lender any control of the
tarily assume, and secured lines of Licensee or its operations; provided,
credit. however, that the Capital Call Line
(b) General rule. If you are a Lever- may include a provision authorizing
aged Licensee, you must get SBA’s the lender, in the event of a Payment
Default, to endorse, on your behalf,
written approval before you incur any
checks and other forms of payment in
secured third-party debt or refinance
the Lender’s possession and to apply
any debt with secured third-party debt,
the proceeds of such instruments to
including any renewal of a secured line
such Payment Default, with unapplied
of credit, increase in the maximum
and remaining proceeds promptly to be
amount available under a secured line paid to you.
of credit, or expansion of the scope of a (d) Conditions for SBA approval. Ex-
security interest or lien. For purposes cluding Capital Call Lines defined in
of this paragraph (b), ‘‘expansion of the paragraph (c) of this section, SBA ap-
scope of a security interest or lien’’ proval is required for secured third-
does not include the substitution of party debt. As a condition of granting
one asset or group of assets for an- such approval under this section, SBA
other, provided the asset values (as re- may impose such restrictions or limi-
ported on your most recent annual tations as it deems appropriate, taking
Form 468) are comparable. into account your historical perform-
(c) Capital Call Line. Without obtain- ance, current financial position, pro-
ing SBA’s written approval, a Lever- posed terms of the secured debt and
aged Licensee may obtain from a feder- amount of aggregate debt you will have
ally regulated financial institution, a outstanding (including Leverage). SBA
line of credit (‘‘Capital Call Line’’) that will not favorably consider any re-
meets all of the following conditions: quests for approval which include a
(1) The maximum amount available blanket lien on all your assets, or a se-
under the Capital Call Line is no more curity interest in your investor com-
than your unfunded Regulatory Cap- mitments in excess of 125 percent of
ital, as reflected on your most recent the proposed borrowing.
Capital Certificate; [88 FR 46009, July 18, 2023]
(2) Your payment obligations under
the Capital Call Line may be secured, § 107.560 Subordination of SBA’s cred-
but only by your unfunded Regulatory itor position.
Capital; (a) Debentures purchased or guaranteed
(3) The lender under the Capital Call on or before July 1, 1991. Under the
Line may have a right to debit your de- terms of any Debenture purchased or
pository account(s) at the lender’s in- guaranteed by SBA on or before July 1,
stitution, so long as such lender’s right 1991, SBA’s unsecured claims against
to debit is limited to circumstances in- you, as a Debenture-holder or as
volving a default of your obligation to subrogee, are subordinated in favor of
pay principal, interest, or fees due all your other creditors, except to the
(‘‘Payment Default’’) under the Capital extent that such claims may be subject
Call Line and only to the amount of to equitable subordination in SBA’s
such Payment Default; favor.
(4) Each borrowing under the Capital (b) Debentures purchased or guaranteed
Call Line must be repaid, in full, with- after July 1, 1991, including refinancings
in 120 days after it is drawn; of Debentures previously purchased or
75
§ 107.565 13 CFR Ch. I (1–1–25 Edition)
guaranteed. (1) Under the terms of any and in § 107.210, unless such amounts
Debenture purchased or guaranteed by are in accordance with your SBA ap-
SBA after July 1, 1991, SBA’s unsecured proved Wind-down Plan (see § 107.590).
claims against you, as a Debenture- You must report any reductions of
holder or as subrogee, are subordinated Regulatory Capital to SBA within 30
only in favor of non-Associate lenders; days via an updated Capital Certificate
and, to the extent that your indebted- (see § 107.300).
ness to such lenders exceeds the lesser (b) Non-Accrual Leveraged Licensees. If
of $10,000,000 or 200 percent of your Reg- you are a Standard Debenture Lever-
ulatory Capital (determined as of the aged Licensee that is also an Early
date your Debentures were purchased Stage SBIC, you are subject to the dis-
or guaranteed), SBA’s unsecured tributions identified in § 107.1180. If you
claims enjoy parity with those of other are a Standard Debenture Leveraged
unsecured creditors, except with re- Licensee, you may distribute READ to
spect to indebtedness created on or be- your private investors without SBA ap-
fore July 1, 1991. proval only after considering any ma-
(2) In order to induce others to lend terial adverse changes to your port-
you money after your Debenture has folio. You must obtain SBA’s prior
been purchased or guaranteed, SBA written approval to reduce your Regu-
may agree in writing on a case-by-case latory Capital by more than two per-
basis to subordinate its unsecured cent in any fiscal year. In seeking
claims, on such terms as it may deter- SBA’s prior written approval, you must
mine, in favor of one or more of your disclose any material adverse changes
Associates, or in favor of other lenders or certify that you have no material
in excess of the amounts mentioned in adverse changes and provide an up-
paragraph (b)(1) of this section. dated Wind-down Plan. You must re-
(3) SBA reserves the authority to tain sufficient Regulatory Capital to
refuse to subordinate its claims if it de- meet the minimum capital require-
termines, at the time you request your ments of § 107.210 and sufficient
Debenture be purchased or guaranteed, Leverageable Capital to avoid having
that the exercise of reasonable invest- excess Leverage in violation of section
ment prudence and your financial con- 303 of the Act and § 107.1150. You must
dition warrant such refusal. report any reductions of Regulatory
Capital to SBA within 30 days via an
§ 107.565 Restrictions on third-party updated Capital Certificate (see
debt of Early Stage SBICs. § 107.300).
If you are an Early Stage SBIC and (c) Accrual SBICs and Reinvestor
you have outstanding Leverage or a SBICs. If you are an Accrual SBIC or
Leverage commitment, you must get Reinvestor SBIC, unless you receive
SBA’s prior written approval to have, prior written approval from SBA to
incur, or refinance any third-party make a distribution solely to cover tax
debt other than accounts payable from liabilities, you may only distribute as
routine business operations. follows:
(1) Payment of Annual Charges and ac-
[77 FR 25052, Apr. 27, 2012]
crued interest. Prior to any non-tax dis-
§ 107.570 [Reserved] tribution, you must pay any Annual
Charges owed to SBA and all accrued
DISTRIBUTIONS AND REDUCTIONS IN interest on your outstanding Leverage.
REGULATORY CAPITAL (2) Calculate SBA’s share of distribu-
tion. Prior to any non-tax distribution,
§ 107.585 Distributions and reductions you must make payments to SBA on a
in Regulatory Capital. pro rata basis with any distributions
(a) Non-leveraged Licensees. If you are based on your SBA Total Intended Le-
a Non-leveraged Licensee, you may verage Commitment relative to your
make distributions to your private in- Total Private Capital Commitments,
vestors without SBA prior approval. At inclusive of Qualified Non-Private
all times, you must retain sufficient Funds, determined within 12 months of
Regulatory Capital to meet the min- Licensure calculated as follows: SBA’s
imum capital requirements in the Act Share = Total Distributions × [Total
76
Small Business Administration § 107.590
Intended Leverage Commitment/(Total made a tax distribution, you must
Intended Leverage Commitment + make a distribution to SBA pursuant
Total Private Capital Commitments)] to the formula set forth in paragraph
where: (c)(2) of this section, as if you had
(i) Total Distributions means any made a non-tax distribution.
prior tax distributions plus the total (5) Report distribution to SBA. You
amount of distributions, whether profit must report to SBA the distribution,
or return of capital, you intend to the calculations, and the amounts dis-
make after paying all accrued interest tributed to each party as part of your
and Annual Charges; annual and quarterly Form 468 (see
(ii) Total Intended Leverage Commit- §§ 107.630 and 107.1220).
ment is as defined in § 107.300. Example 1 to paragraph (c): Your Total In-
(iii) Total Private Capital Commit- tended Leverage Commitment is $50 million,
ments is as defined in § 107.300. and your Total Private Capital Commit-
(3) Apply SBA Share. You must repay ments are $25 million. You currently have
$25 million in Outstanding Leverage, $25 mil-
SBA outstanding Leverage in an
lion in unfunded Leverage commitments,
amount no less than SBA’s Share to and $15 million in Leverageable Capital. You
the extent of Outstanding Leverage owe $1 million in accrued interest and An-
and report the SBA calculation to nual Charges. You have $61 million to dis-
SBA. If SBA’s Share is greater than tribute.
Outstanding Leverage and you have Step 1: Payment of Annual Charges and all
unfunded Leverage commitments, you accrued interest. You would first pay the $1
must submit a Leverage commitment million in accrued interest and Annual
Charges.
cancellation equal to SBA’s Share
Step 2: Calculate SBA’s Share of Distribu-
minus the SBA Leverage redemption tion. SBA’s share is calculated as: $60 mil-
up to the unfunded Leverage commit- lion × [$50 million/($50 million + $25 million)]
ments. = $40 million.
(4) Distribute to private investors. You Step 3: Apply SBA Share. You would repay
must report SBA’s Share calculation to $25 million in Outstanding Leverage and can-
SBA prior to distributing READ to cel $15 million of your unfunded Leverage
your private investors without SBA ap- commitments.
proval and only after considering any Step 4: Distribute to Private Investors. You
would distribute $35 million to Private Inves-
adverse changes to your portfolio. You tors.
must pay Annual Charges to SBA prior Step 5: Report Distribution to SBA. You
to distributing READ. After repaying would then report the distribution to SBA,
all accrued interest, Annual Charges, detailing the amounts and calculations from
and outstanding Leverage calculated as steps 1 through 4 of this example 1.
SBA’s Share, you may distribute READ [88 FR 46009, July 18, 2023, as amended at 89
to your private investors without SBA FR 3548, Jan. 19, 2024]
approval only after considering any ad-
verse changes to your portfolio. You REQUIREMENT TO CONDUCT ACTIVE
must obtain SBA’s prior written ap- INVESTMENT OPERATIONS
proval to reduce your Regulatory Cap-
ital by more than two percent in any § 107.590 Licensee’s requirement to
fiscal year. In seeking SBA’s prior maintain active operations.
written approval, you must disclose (a) Activity test. You must conduct ac-
any material adverse changes or cer- tive operations, as determined under
tify that you have no material adverse this § 107.590, as a condition of your li-
changes and provide an updated Wind- cense. You will be considered active if:
down Plan. You must retain sufficient (1) During the eighteen months pre-
Regulatory Capital to meet the min- ceding your most recent fiscal year
imum capital requirements of § 107.210 end, you made Financings totaling at
and sufficient Leverageable Capital to least 20 percent of your Regulatory
avoid having excess Leverage in viola- Capital; or
tion of section 303 of the Act and (2) Your idle funds did not exceed 20
§ 107.1150. You must report any reduc- percent of your total assets (at cost) at
tions of Regulatory Capital to SBA your most recent fiscal year end.
within 30 days. Prior to any reduction (b) Permitted exceptions to activity re-
in Regulatory Capital, if you have quirements. You are considered active if
77
§ 107.600 13 CFR Ch. I (1–1–25 Edition)
your failure to meet the requirements (2) Rule for new Licensees. If you re-
in paragraph (a) of this section is the ceived your license after January 31,
result of one or more of the following 1996, or if you received your license less
factors: than eighteen months before the fiscal
(1) Your excess idle funds are the re- year end determined under paragraph
sult of the receipt, within the previous (d)(1) of this section, you must meet
nine months, of realized gains, repay- the activity requirements in this
ments, additional capital contribu- § 107.590 as of the end of your second
tions, or Leverage. full fiscal year beginning after the date
(2) It is necessary for you to main- you received your license.
tain excess idle funds to conduct your [61 FR 3189, Jan. 31, 1996, as amended at 88
operations because: FR 46010, July 18, 2023]
(i) Your unfunded commitments from
investors are no more than 20 percent Subpart F—Recordkeeping, Re-
of your Regulatory Capital; and
(ii) You cannot receive additional Le-
porting, and Examination Re-
verage, solely because SBA has insuffi- quirements for Licensees
cient funds available. RECORDKEEPING REQUIREMENTS FOR
(3) You have not made sufficient LICENSEES
Financings because of a lack of avail-
able funds, evidenced by Loans and In- § 107.600 General requirement for Li-
vestments (at cost) equal to at least 90 censee to maintain and preserve
percent of your Combined Capital as of records.
your most recent fiscal year end. (a) Maintaining your accounting
(4) You have not made sufficient records. You must establish and main-
Financings solely because SBA has re- tain your accounting records using
stricted your ability to make invest- SBA’s standard chart of accounts for
ments. Licensees, unless SBA approves other-
(c) Applicability of activity require- wise.
ments. The activity requirements in (b) Location of records. You must keep
paragraph (a) of this section do not the following records at your principal
apply if you have filed a Wind-down place of business or, in the case of
Plan approved by SBA. Wind-down paragraph (b)(3) of this section, at the
Plan means a plan that you prepare branch office that is primarily respon-
when you decide that you will no sible for the transaction:
longer make any Financings other (1) All your accounting and other fi-
than follow-on investments, and that nancial records;
you update annually when you file (2) All minutes of meetings of direc-
your SBA Form 468. The plan must tors, stockholders, executive commit-
contain your best estimates of the fol- tees, partners, or other officials; and
lowing: (3) All documents and supporting ma-
(1) The remaining number of years terials related to your business trans-
you expect to operate. actions, except for any items held by a
(2) For each of your Loans and In- custodian under a written agreement
vestments, the expected liquidation between you and a Portfolio Concern or
date and anticipated proceeds. non-SBA lender, or any securities held
(3) The timing of your repayment of in a safe deposit box, or by a licensed
obligations to SBA. securities broker in an amount not ex-
(4) The timing and amount of any ceeding the broker’s per-account insur-
planned reductions in your Manage- ance coverage.
ment Expenses. (c) Preservation of records. You must
(d) Phase-in of activity requirements— retain all the records that are the basis
(1) General rule. You must meet the ac- for your financial reports. Such records
tivity requirements in this § 107.590 as must be preserved for the periods speci-
of the end of your first full fiscal year fied in this paragraph (c), and must re-
beginning after January 31, 1996. Until main accessible for the first two years
then, you will be considered active if of the preservation period.
you meet the activity requirements in (1) You must preserve for at least 15
effect on January 30, 1996. years or, in the case of a Partnership
78
Small Business Administration § 107.610
Licensee, at least two years beyond the showing that the concern is a Small
date of liquidation: Business.
(i) All your accounting ledgers and (b) SBA Form 652, a certification by
journals, and any other records of as- the concern you are financing that it
sets, asset valuations, liabilities, eq- will not illegally discriminate (see part
uity, income, and expenses. 112 of this chapter).
(ii) Your Articles, bylaws, minute (c) SBA Form 1941 (for Section 301(d)
books, and license application. Licensees only), executed both by you
(iii) All documents evidencing owner- and by the concern you are financing.
ship of the Licensee including owner- By executing this document, both par-
ship ledgers, and ownership transfer ties certify that the concern is a Dis-
registers. advantaged Business.
(2) You must preserve for at least six (d) A certification by the concern you
years all supporting documentation are financing of the intended use of the
(such as vouchers, bank statements, or proceeds. For securities purchased
canceled checks) for the records listed from an underwriter in a public offer-
in paragraph (b)(1) of this section. ing, you may substitute a prospectus
(3) After final disposition of any item indicating the intended use of proceeds.
in your Portfolio, you must preserve (e) For each LMI Investment:
for at least six years: (1) A certification by the concern,
(i) Financing applications and Fi- dated as of the date of application for
nancing instruments. SBIC financing, as to the basis for its
(ii) All loan, participation, and es- qualification as an LMI Enterprise,
crow agreements. (2) If the concern qualifies as an LMI
(iii) Size status declarations (SBA Enterprise as defined in paragraph (2)
Form 480) and Financing Eligibility of the definition of LMI Enterprise in
Statements (SBA Form 1941). § 107.50, an additional certification
(iv) Any capital stock certificates dated no later than the date 180 days
and warrants of the Portfolio Concern after the closing of the LMI Invest-
that you did not surrender or exercise. ment, as to the location of the con-
(v) All other documents and sup- cern’s employees or tangible assets or
porting material relating to the Port- the principal residences of its full-time
folio Concern, including correspond- employees as of the date of such cer-
ence. tification, and
(4) You may substitute a computer- (3) Certification(s) by the SBIC, made
scanned or generated copy for the contemporaneously with the certifi-
original of any record covered by this cation(s) of the concern, that the con-
paragraph (c). cern qualifies as an LMI Enterprise as
[61 FR 3189, Jan. 31, 1996, as amended at 79 of the date(s) of the concern’s certifi-
FR 62823, Oct. 21, 2014] cation(s) and the basis for such quali-
fication.
§ 107.610 Required certifications for (f) For each Energy Saving Qualified
Loans and Investments. Investment:
For each of your Loans and Invest- (1) If a pre-Financing determination
ments, you must have the documents of eligibility by SBA is not required
listed in this section. Except for infor- under the definition of Energy Saving
mation and documentation prepared Activities or Energy Saving Qualified
under paragraphs (f)(2) and (3) of this Investment:
section, you must keep these docu- (i) A certification by you, dated as of
ments in your files and make them the closing date of the Financing, as to
available to SBA upon request. the basis for the qualification of the
(a) SBA Form 480, the Size Status Financing as an Energy Saving Quali-
Declaration, executed both by you and fied Investment;
by the concern you are financing. By (ii) Supporting documentation of the
executing this document, both parties Energy Saving Activities engaged in by
certify that the concern is a Small the concern;
Business. For securities purchased (iii) Supporting documentation of ei-
from an underwriter in a public offer- ther the percentage of its revenues de-
ing, you may substitute a prospectus rived from Energy Saving Activities
79
§ 107.620 13 CFR Ch. I (1–1–25 Edition)
during the concern’s most recently (ii) Documentation that you have re-
completed fiscal year, which must be viewed the information submitted by
at least 50 percent, or the concern’s in- the concern under paragraph (f)(5)(i) of
tended use of the Financing proceeds, this section and have reasonably deter-
all of which must be used for Energy mined that 100 percent of the Financ-
Saving Activities; and ing proceeds were used for Energy Sav-
(iv) A certification by the concern, ing Activities.
dated as of the closing date of the Fi- (g) For each passive business fi-
nancing, that any information it pro- nanced under § 107.720(b)(3), a certifi-
vided to you in connection with this cation by you, dated as of the closing
paragraph (f)(1) is true and correct to date of the Financing, as to the basis
the best of its knowledge. for the qualification of the Financing
(2) If, prior to providing Financing, under § 107.720(b)(3) and identifying one
you must obtain a determination from or more limited partners for which a
SBA that the activities in which a con- direct Financing would cause those in-
cern is engaged are Energy Saving Ac- vestors:
tivities, submit to SBA in writing a de- (1) To incur ‘‘unrelated business tax-
scription of the product or service able income’’ under section 511 of the
being provided or developed, including Internal Revenue Code (26 U.S.C. 511);
all available documentation of the en- or
ergy savings produced or anticipated, (2) To incur ‘‘effectively connected
addressing the factors considered under income’’ to foreign investors under sec-
paragraph (4) of the definition of ‘‘En- tions 871 and 882 of the Internal Rev-
ergy Saving Activities’’ in § 107.50 and enue Code (26 U.S.C. 871 and 882).
certified by the concern to be true and [61 FR 3189, Jan. 31, 1996, as amended at 64
correct to the best of its knowledge. FR 52646, Sept. 30, 1999; 77 FR 23379, Apr. 19,
(3) If, prior to providing Financing, 2012; 82 FR 39340, Aug. 18, 2017]
you must obtain a determination from
SBA that the concern is ‘‘primarily en- § 107.620 Requirements to obtain in-
gaged’’ in Energy Saving Activities, formation from Portfolio Concerns.
submit to SBA in writing all available All the information required by this
information concerning the factors section is subject to the requirements
considered under paragraph (3) of the of § 107.600 and must be in English.
definition of ‘‘Energy Saving Qualified (a) Information for initial Financing de-
Investment’’ in § 107.50, certified by the cision. Before extending any Financing,
concern to be true and correct to the you must require the applicant to sub-
best of its knowledge. mit such financial statements, plans of
(4) For each Financing closed after operation (including intended use of fi-
you obtain a determination from SBA nancing proceeds), cash flow analyses
under paragraph (f)(2) or (3) of this sec- and projections as are necessary to
tion, a certification by you, dated as of support your investment decision. The
the closing date of the Financing, that information submitted must be con-
to the best of your knowledge, you sistent with the size and type of the
have no reason to believe that the ma- business and the amount of the pro-
terials submitted are incorrect. posed Financing.
(5) For each Financing closed based (b) Updated financial information. (1)
on supporting documentation of the The terms of each Financing must re-
concern’s intended use of proceeds for quire the Portfolio Concern to provide,
Energy Saving Activities under para- at least annually, sufficient financial
graph (f)(1)(iii) of this section: information to enable you to perform
(i) Documentation by the concern, the following required procedures:
dated no later than six months after (i) Evaluate the financial condition
the closing of the Financing, of the of the Portfolio Concern for the pur-
proceeds used to date for Energy Sav- pose of valuing your investment;
ing Activities, with further updates (ii) Determine the continued eligi-
provided at six month intervals until bility of the Portfolio Concern; and
100 percent of the Financing proceeds (iii) Verify the use of Financing pro-
have been accounted for; and ceeds.
80
Small Business Administration § 107.640
(2) Demographic information on the ant must carry at least $1,000,000 of Er-
Portfolio Concern’s ownership is re- rors and Omissions insurance, or be
quested for reporting purposes only and self-insured and have a net worth of at
is on a voluntary basis. least $1,000,000.
(3) The information submitted to you (b) Interim filings of Form 468. When
must be certified by the president, requested by SBA, you must file in-
chief executive officer, treasurer, chief terim reports on Form 468. SBA may
financial officer, general partner, or require you to file the entire form or
proprietor of the Portfolio Concern. only certain statements and schedules.
(4) For financial and valuation pur- You must file such reports on or before
poses, you may accept a complete copy the last day of the month following the
of the Federal income tax return filed end of the reporting period. If you have
by the Portfolio Concern (or its propri- an outstanding Leverage commitment
etor) in lieu of financial statements, from SBA, see the filing requirements
but only if appropriate for the size and in § 107.1220. Reinvestor SBICs must file
type of the business involved. such reports within 120 calendar days
(5) The requirements in this para- of the end of the reporting period.
graph (b) do not apply when you ac- (c) Standards for preparation of Form
quire securities from an underwriter in 468. You must prepare SBA Form 468 in
a public offering (see § 107.825). In that accordance with SBA’s Accounting
case, you must keep copies of all re- Standards and Financial Reporting Re-
ports furnished by the Portfolio Con- quirements for Small Business Invest-
cern to the holders of its securities. ment Companies.
(c) Information required for examina- (d) Reporting of economic impact infor-
tion purposes. You must obtain any in- mation on Form 468. Your annual filing
formation requested by SBA’s exam- of SBA Form 468 must include an as-
iners for the purpose of verifying the sessment of the economic impact of
certifications made by a Portfolio Con- each Financing, specifying the full-
cern under § 107.610. In this regard, your time equivalent net jobs created and
Financing documents must contain total jobs created or retained, and the
provisions requiring the Portfolio Con- impact of the Financing on the reve-
cern to give you and/or SBA’s exam- nues and profits of the business and on
iners access to its books and records taxes paid by the business and its em-
for such purpose. ployees.
(e) Fund management contact and op-
[61 FR 3189, Jan. 31, 1996, as amended at 88
FR 46010, July 18, 2023]
tional demographic information. The Li-
censee shall provide and update man-
REPORTING REQUIREMENTS FOR agement contact information. Demo-
LICENSEES graphic information is requested for re-
porting purposes only and on a vol-
§ 107.630 Requirement for Licensees to untary basis.
file financial statements with SBA
(Form 468). [61 FR 3189, Jan. 31, 1996, as amended at 82
FR 39340, Aug. 18, 2017; 88 FR 46011, July 18,
(a) Annual filing of Form 468. For each 2023; 89 FR 3548, Jan. 19, 2024]
fiscal year, you must submit to SBA fi-
nancial statements and supplementary § 107.640 Requirement to file Portfolio
information prepared on SBA Form 468. Financing Reports (SBA Form
You must file Annual Form 468 within 1031).
90 calendar days of the end of your fis- For each Financing of a Small Busi-
cal year. Reinvestor SBICs must file ness (excluding guarantees), you must
Annual Form 468 within 120 calendar submit a Portfolio Financing Report
days of the end of your fiscal year. on SBA Form 1031 within 30 calendar
(1) Audit of Form 468. The annual days of the end of the calendar year
Form 468 must be audited by an inde- quarter (March, June, September, and
pendent public accountant acceptable December) following the closing date of
to SBA. the Financing. SBA also permits Form
(2) Insurance requirement for public ac- 1031s for portfolio company financings
countant. Unless SBA approves other- to be disaggregated and submitted indi-
wise, your independent public account- vidually for each portfolio company
81
§ 107.650 13 CFR Ch. I (1–1–25 Edition)
within 30 days of the closing of a Fi- you, or by your security holder(s) in a
nancing or otherwise submitted on a personal or derivative capacity,
more frequent basis. If you are on the against an officer, director, Investment
Watchlist, SBA may require more fre- Adviser or other Associate of yours for
quent reporting (see § 107.1850). alleged breach of official duty.
[88 FR 46011, July 18, 2023] (2) SBA may require you to submit
copies of the pleadings and other docu-
§ 107.650 Requirement to report port- ments SBA may specify.
folio valuations to SBA. (3) Where proceedings have been ter-
You must determine the value of minated by settlement or final judg-
your Loans and Investments in accord- ment, you must promptly advise SBA
ance with § 107.503. You must report of the terms.
such valuations to SBA within 90 cal- (4) This paragraph (c) does not apply
endar days of the end of the fiscal year to collection actions or proceedings to
in the case of annual valuations, and if enforce your ordinary creditors’ rights.
you are a Leveraged Licensee within 45 (d) Notification of criminal charges. If
calendar days following the close of any officer, director, or general partner
other reporting periods. Reinvestor
of the Licensee, or any other person
SBICs must report valuations to SBA
who was required by SBA to complete
within 120 calendar days of the end of
a personal history statement in con-
the fiscal year in the case of annual
valuations, and within 120 calendar nection with your license, is charged
days following the close of other re- with or convicted of any criminal of-
porting periods. You must report mate- fense other than a misdemeanor involv-
rial adverse changes in valuations at ing a minor motor vehicle violation,
least quarterly, within 30 days fol- you must report the incident to SBA
lowing the close of the quarter. within 5 calendar days. Such report
must fully describe the facts which per-
[89 FR 3548, Jan. 19, 2024]
tain to the incident.
§ 107.660 Other items required to be (e) Other reports. You must file any
filed by Licensee with SBA. other reports that SBA may require by
(a) Reports to owners. You must give written directive.
SBA a copy of any report you furnish [61 FR 3189, Jan. 31, 1996, as amended at 63
to your investors, including any pro- FR 5866, Feb. 5, 1998; 88 FR 46011, July 18,
spectus, quarterly or annual valuation 2023]
data, materials presented to investors
during any meetings (including any an- § 107.665 Civil penalties.
nual meeting), fund management de- Except as provided in § 107.670, a Li-
mographic information, letter, or other censee that violates any regulation or
publication concerning your financial written directive issued by SBA, re-
operations or those of any Portfolio quiring the filing of any regular or spe-
Concern no later than 30 calendar days
cial report pursuant to this part, shall
after you submit the report to your
be fined a civil penalty of not more
private investors.
than $324 for each day the Licensee
(b) Documents filed with SEC. You
must give SBA a copy of any report, fails to file such report. The civil pen-
application or document you file with alties provided for in this section shall
the Securities and Exchange Commis- accrue to the United States and may be
sion. recovered in a civil action brought by
(c) Litigation reports. When you be- the SBA.
come a party to litigation or other pro- [81 FR 31491, May 19, 2016, as amended at 82
ceedings, you must give SBA a report FR 9969, Feb. 9, 2017; 83 FR 7363, Feb. 21, 2018;
within 30 days that describes the pro- 84 FR 12061, Apr. 1, 2019; 85 FR 13727, Mar. 10,
ceedings and identifies the other par- 2020; 86 FR 52957, Sept. 24, 2021; 87 FR 28758,
ties involved and your relationship to May 11, 2022; 88 FR 50004, Aug. 1, 2023; 89 FR
them. 48134, June 5, 2024]
(1) The proceedings covered by this
paragraph (c) include any action by
82
Small Business Administration § 107.692
§ 107.670 Application for exemption SBA notifies you to the contrary with-
from civil penalty for late filing of in 90 days after receiving it. SBA’s ap-
reports. proval is contingent upon your full dis-
(a) If it is impracticable to submit closure of all relevant facts and is sub-
any required report within the time al- ject to any conditions SBA may pre-
lowed, you may apply for an extension. scribe.
The request for an extension must:
(1) Be filed before the reporting dead- EXAMINATIONS OF LICENSEES BY SBA
line; FOR REGULATORY COMPLIANCE
(2) Certify to an extraordinary occur-
§ 107.690 Examinations.
rence, not within your control, that
makes timely filing of the report im- SBA will examine all Licensees for
practicable; and the purpose of evaluating regulatory
(3) Be accompanied by written evi- compliance.
dence of such occurrence, where appro-
priate. § 107.691 Responsibilities of Licensee
(b) Upon receipt of your request, SBA during examination.
may exempt you from the civil penalty You must make all books, records
stated in § 107.665, in such manner and and other pertinent documents and ma-
under such conditions as SBA deter- terials available for the examination,
mines. including any information required by
[61 FR 3189, Jan. 31, 1996, as amended at 81
the examiner under § 107.620(c). In addi-
FR 31491, May 19, 2016] tion, the agreement between you and
the independent public accountant per-
§ 107.680 Reporting changes in Li- forming your audit must provide that
censee not subject to prior SBA ap- any information in the accountant’s
proval. working papers be made available to
(a) Changes to be reported for post ap- SBA upon request.
proval. (1) This section applies to any
changes in your Articles, ownership, § 107.692 Examination fees.
capitalization, management, operating (a) General. SBA will assess fees for
area, or investment policies that do examinations in accordance with this
not require SBA’s prior approval. You § 107.692. Unless SBA determines other-
must report such changes to SBA with- wise on a case by case basis, SBA will
in 30 days for post approval. A proc- not assess fees for special examinations
essing fee of $200 must accompany each to obtain specific information.
request for post approval of new offi- (b) Base Fee. (1) The Base Fee will be
cers, directors, or Control Persons. assessed based on your total assets (at
(2) Exception for non-leveraged Licens- cost) as of the date of your latest cer-
ees. If you do not have outstanding Le- tified financial statement, including if
verage or Earmarked Assets, you are requested by SBA in connection with
not required to obtain post approval of the examination, a more recently sub-
new directors or new officers other mitted interim statement. For pur-
than your chief operating officer; how- poses of this section, Base Fee means
ever, you must notify SBA of the new the Minimum Base Fee plus 0.024% of
directors or officers within 30 days. assets at cost, rounded to the nearest
(b) Approval by SBA. You may con- $100, not to exceed the Maximum Base
sider any change submitted under this Fee. The Minimum and Maximum Base
section § 107.680 to be approved unless Fees are adjusted annually as follows:
Maximum Maximum
base fee for
Time period Minimum base fee for
non-lever-
(Based on the examination start date) base fee leveraged
aged SBICs
SBICs
December 13, 2017 to September 30, 2018 ................................................................ $6,000 $22,500 $26,000
October 1, 2018 to September 30, 2019 ...................................................................... 7,000 25,000 32,000
October 1, 2019 to September 30, 2020 ...................................................................... 8,000 27,500 38,000
October 1, 2020 to September 30, 2021 ...................................................................... 9,000 30,000 44,000
83
§ 107.700 13 CFR Ch. I (1–1–25 Edition)
(2) In the table in paragraph (b)(1) of Examination fee ad- Amount of addition ¥ % of base fee
this section, a Non-leveraged SBIC ditions
means any SBIC that, as of the date of Unresolved Find- 5% of Base Fee for every 30 days or
the examination, has no outstanding ings. portion thereof beyond the 90 day
Leverage or Leverage commitment, cure period or such later date as
SBA sets forth in the notice for each
has no Earmarked Assets, and certifies unresolved finding.
to SBA that it will not seek Leverage
in the future. Beginning on October 1, (e) Delay fee. If, in the judgment of
2021, SBA will annually adjust the Min- SBA, the time required to complete
imum Base Fee and Maximum Base your examination is delayed due to
Fees using the Inflation Adjustment your lack of cooperation or the condi-
and will publish a Notice prior to such tion of your records, SBA may assess
adjustment in the FEDERAL REGISTER an additional fee of $700 per day. Begin-
identifying the amount of the fees. ning on October 1, 2021, SBA will annu-
(c) Adjustments to Base Fee. In order ally adjust this fee using the Inflation
to determine the amount of your exam- Adjustment and will publish a Notice
ination fee, your Base Fee, as deter- prior to such adjustment in the FED-
mined in paragraph (b) of this section, ERAL REGISTER identifying the amount
will be increased based on the fol- of the fee.
lowing criteria:
(1) If you were not fully responsive to [62 FR 23338, Apr. 30, 1997, as amended at 77
the letter of notification of examina- FR 25052, Apr. 27, 2012; 82 FR 52185, Nov. 13,
2017]
tion (that is, you did not provide all re-
quested documents and information
within the time period stipulated in Subpart G—Financing of Small
the notification letter in a complete Businesses by Licensees
and accurate manner, or you did not
prepare or did not have available all in- DETERMINING THE ELIGIBILITY OF A
formation requested by the examiner SMALL BUSINESS FOR SBIC FINANCING
for on-site review) after a written
warning by the SBA, you will pay an § 107.700 Compliance with size stand-
additional charge equal to 15% of your ards in part 121 of this chapter as a
condition of Assistance.
Base Fee;
(2) If you maintain your records/files You are permitted to provide finan-
in multiple locations (as permitted cial assistance and management serv-
under § 107.600(b)), you will pay an addi- ices only to a Small Business. To deter-
tional charge equal to 10% of your Base mine whether an applicant is a Small
Fee; and Business, you may use either the finan-
(3) For any regulatory violation that cial size standards in § 121.301(c)(2) of
remains unresolved 90 days from the this chapter or the industry standard
date SBA notified you that you must covering the industry in which the ap-
take corrective action (as established plicant is primarily engaged, as set
by the date of the notification letter) forth in § 121.301(c)(1) of this chapter.
or such later date as SBA sets forth in [61 FR 3189, Jan. 31, 1996, as amended at 74
the notice, you will pay an additional FR 33915, July 14, 2009]
charge equal to 5% of the Base Fee for
every 30 days or portion thereof that § 107.710 Requirement to finance
the violation remains unresolved after smaller enterprises.
the cure period, unless SBA resolves Your Portfolio must include
the finding in your favor. Financings to Smaller Enterprises.
(d) Fee additions table. The following (a) Definition of Smaller Enterprise. A
table summarizes the additions noted Smaller Enterprise means any small
in paragraph (c) of this section: business concern that:
Examination fee ad- (1) Both together with its Affiliates,
Amount of addition ¥ % of base fee
ditions and by itself, meets the size standard
Non-responsive ...... 15%.
of § 121.201 of this chapter at the time
Records/Files at 10%. of Financing for the industry in which
multiple locations. it is then primarily engaged; or
84
Small Business Administration § 107.710
(2) Together with its affiliates has a Common Control) must have been in-
net worth of not more than $6 million vested in Smaller Enterprises.
and average net income after Federal (3) If you were licensed on or before
income taxes (excluding any carry-over February 17, 2009, and you have re-
losses) for the preceding two years no ceived an SBA Leverage commitment
greater than $2 million. If the appli- after February 17, 2009:
cant is not required by law to pay Fed- (i) For all Financings made after the
eral income taxes at the enterprise date of the first Leverage commitment
level, but is required to pass income issued after February 17, 2009, at least
through to its shareholders, partners, 25 percent (in dollars) of your
beneficiaries, or other equitable own- Financings must have been invested in
ers, the applicant’s ‘‘net income after
Smaller Enterprises, and
Federal income taxes’’ will be its net
income reduced by an amount com- (ii) For all Financings made before
puted as follows: February 17, 2009, at least 20 percent (in
(i) If the applicant is not required by dollars) of your Financings, excluding
law to pay State (and local, if any) in- Financings made in whole or in part
come taxes at the enterprise level, with Leverage in excess of $90 million,
multiply its net income by the mar- must have been invested in Smaller
ginal State income tax rate (or by the Enterprises. In addition, 100 percent of
combined State and local income tax all Financings made in whole or in part
rates, as applicable) that would have with Leverage in excess of $90 million
applied if it were a taxable corpora- (including aggregate Leverage over $90
tion. million issued by two or more Licens-
(ii) Multiply the applicant’s net in- ees under Common Control) must have
come, less any deduction for State and been invested in Smaller Enterprises.
local income taxes calculated under (c) Special requirement for certain lever-
paragraph (a)(2)(i) of this section, by aged Licensees. (1) This paragraph (c)
the marginal Federal income tax rate applies if you were licensed on or be-
that would have applied if the appli- fore September 30, 1996, and you issued
cant were a taxable corporation. Leverage after that date, and you have
(iii) Add the results obtained in para- Regulatory Capital of:
graphs (a)(2)(i) and (a)(2)(ii) of this sec- (i) Less than $10,000,000 if such Lever-
tion. age included Participating Securities;
(b) Smaller Enterprise Financings. At or
the close or each of your fiscal years, (ii) Less than $5,000,000 if such Lever-
and at the time of any application to age was Debentures only.
draw Leverage, you must satisfy the (2) At the close of each of your fiscal
Smaller Enterprise financing require- years, at least 50 percent of the total
ment in this paragraph (b) that applies
dollar amount of the Financings you
to you.
extended after September 30, 1996 must
(1) If you were licensed after Feb-
have been invested in Smaller Enter-
ruary 17, 2009, at least 25 percent (in
prises.
dollars) of your Financings must have
been invested in Smaller Enterprises. (d) Financing a change of ownership
(2) If you were licensed on or before which results in the creation of a
February 17, 2009, and you have re- Smaller Enterprises. The Financing of
ceived no SBA Leverage commitment a change of ownership under § 107.750
issued after February 17, 2009, at least which results in the creation of a
20 percent (in dollars) of your Smaller Enterprise qualifies as a
Financings, excluding Financings made Smaller Enterprise Financing.
in whole or in part with Leverage in (e) Non-compliance with this section. If
excess of $90 million, must have been you have not reached the required per-
invested in Smaller Enterprises. In ad- centage of Smaller Enterprise
dition, 100 percent of all Financings Financings at the end of any fiscal
made in whole or in part with Leverage year, then you must be in compliance
in excess of $90 million (including ag- by the end of the following fiscal year.
gregate Leverage over $90 million However, you will not be eligible for
issued by two or more Licensees under additional Leverage until you reach
85
§ 107.720 13 CFR Ch. I (1–1–25 Edition)
the required percentage (see § 107.1120(c) any such investments in CDFIs or
and (g)). MDIs pursuant to this section are not
[62 FR 11760, Mar. 13, 1997, as amended at 63 subject to the requirement that such
FR 5866, Feb. 5, 1998; 64 FR 70995, Dec. 20, CDFIs or MDIs make direct financings
1999; 66 FR 30647, June 7, 2001; 74 FR 33915, solely to Small Businesses. In addition
July 14, 2009] to Equity Capital Investments, Re-
investor SBIC Licensees may provide
§ 107.720 Small Businesses that may be
ineligible for financing. long-term debt or loan financing to
CDFIs and MDIs.
(a) Relenders or reinvestors. You are (ii) Equity Capital Investments to Dis-
not permitted to finance any business advantaged Businesses. Licensees may
that is a relender or reinvestor.
provide Equity Capital Investments to
(1) Definition. Relenders or reinves-
Disadvantaged Businesses that are re-
tors are businesses whose primary busi-
ness activity involves, directly or indi- lenders or reinvestors (except banks or
rectly, providing funds to others, pur- savings and loans not insured by agen-
chasing debt obligations, factoring, or cies of the Federal Government, and
long-term leasing of equipment with no agricultural credit companies).
provision for maintenance or repair. (b) Passive Businesses. You are not
(2) Exceptions—(i) Reinvestor SBICs. permitted to finance a passive busi-
Reinvestor SBIC means a Section 301(c) ness.
Partnership licensed as a Reinvestor (1) Definition. A business is passive if:
SBIC under § 107.300 and approved by (i) It is not engaged in a regular and
SBA at the time of licensing to issue continuous business operation (for pur-
Accrual Debentures and shall provide a poses of this paragraph (b), the mere
meaningful percentage of Equity Cap- receipt of payments such as dividends,
ital Investments to underserved Small rents, lease payments, or royalties is
Business reinvestors (except banks, not considered a regular and contin-
savings and loans not insured by agen- uous business operation); or
cies of the Federal Government, and
(ii) Its employees are not carrying on
agricultural credit companies) that
the majority of day to day operations,
make direct financings solely to Small
Businesses with at least 50% of employ- and the company does not provide ef-
ees in the United States, Small Busi- fective control and supervision, on a
nesses Concerns headquartered in the day to day basis, over persons em-
United States, owned and controlled by ployed under contract; or
United States citizens and/or entities, (iii) It passes through substantially
and Small Businesses eligible for in- all of the proceeds of the Financing to
vestment based on SBA size standards another entity.
defined in § 121.301 of this chapter or (2) Exception for pass-through of pro-
SBIC alternative size standards defined ceeds to subsidiary. You may provide Fi-
in § 121.301(c) of this chapter at the nancing directly to passive businesses,
time of initial investment. SBA may including passive businesses that you
require that each Reinvestor SBIC ob- have formed, if it is a Small Business
tain from each such Small Business re- and it passes substantially all the pro-
investor a written agreement that such ceeds through to (or uses substantially
Small Business reinvestor has only all the proceeds to acquire) one or
provided and will only provide financ- more subsidiary companies, each of
ing in compliance with this paragraph which is an eligible Small Business
(a)(2)(i) and will provide to such Re- that is not passive. For the purpose of
investor SBIC information reasonably this paragraph (b)(2), ‘‘subsidiary com-
necessary to verify compliance with
pany’’ means a company in which the
this paragraph (a)(2)(i). A Reinvestor
financed passive business either:
SBIC may make Equity Capital Invest-
ments to Disadvantaged Businesses (i) Directly owns, or will own as a re-
that are relenders or reinvestors, in- sult of the Financing, at least 50 per-
cluding Community Development Fi- cent of the outstanding voting securi-
nancial Institutions (CDFIs) and Mi- ties; or
nority Deposit Institutions (MDIs), and
86
Small Business Administration § 107.720
(ii) Indirectly owns, or will own as a permitted under paragraphs (b)(2) or (3)
result of the Financing, at least 50 per- of this section must meet all of the fol-
cent of the outstanding voting securi- lowing conditions:
ties (by directly owning the out- (i) For the purposes of this paragraph
standing voting securities of another (b), ‘‘substantially all’’ means at least
passive Small Business that is the di- 99 percent of the Financing proceeds
rect owner of the outstanding voting after deduction of actual application
securities of the subsidiary company). fees, closing fees, and expense reim-
(3) Exception for certain Partnership Li- bursements, which may not exceed
censees. If you are a Partnership Li- those permitted by § 107.860.
censee, you may form one or more (ii) If you and/or your Associate
blocker entities in accordance with charge fees permitted by § 107.860 and/or
this paragraph (b)(3). For the purposes § 107.900, the total amount of such fees
of this paragraph, a ‘‘blocker entity’’ charged to all passive and non-passive
means a corporation or a limited liabil- businesses that are part of the same Fi-
ity company that elects to be taxed as nancing may not exceed the fees that
a corporation for Federal income tax would have been permitted if the Fi-
purposes. The sole purpose of a blocker nancing had been provided directly to a
entity must be to provide Financing to non-passive Small Business. Any such
one or more eligible, unincorporated fees received by your Associate must
Small Businesses. You may form such be paid to you in cash within 30 days of
blocker entities only if a direct Fi- the receipt of such fees.
nancing to such Small Businesses (iii) For the purposes of this part 107,
would cause any of your investors to each passive and non-passive business
incur ‘‘unrelated business taxable in- included in the Financing is a Portfolio
come’’ under section 511 of the Internal Concern and subject to the provisions
Revenue Code (26 U.S.C. 511) or to incur set forth in the Act. The terms of the
‘‘effectively connected income’’ to for- financing must also provide SBA with
eign investors under sections 871 and access to Portfolio Concern informa-
882 of the Internal Revenue Code (26 tion in compliance with this part 107,
U.S.C. 871 and 882) or (for an investor including without limitation §§ 107.600
that has elected to be taxed as a regu- and 107.620.
lated investment company) receive or (c) Real Estate Businesses. (1) You are
be deemed to receive gross income that not permitted to finance any business
does not qualify under section 851(b)(2) classified under North American Indus-
of the Internal Revenue Code (26 U.S.C. try Classification System (NAICS)
851(b)(2)). Your ownership and invest- codes 531110 (lessors of residential
ment of funds in such blocker entities buildings and dwellings), 531120 (lessors
will not constitute a violation of of nonresidential buildings except
§ 107.730(a). For each passive business miniwarehouses), 531190 (lessors of
financed under this section other real estate property), 237210 (land
107.720(b)(3), you must provide a certifi- subdivision), or 236117 (new housing for-
cation to SBA as required under sale builders). You are not permitted to
§ 107.610(g). A blocker entity formed finance any business classified under
under this paragraph may provide Fi- NAICS codes 236118 (residential remod-
nancing: elers), 236210 (industrial building con-
(i) Directly to one or more eligible struction), or 236220 (commercial and
non-passive Small Businesses; or institutional building construction), if
(ii) Directly to a passive Small Busi- such business is primarily engaged in
ness that passes substantially all the construction or renovation of prop-
proceeds directly to (or uses substan- erties on its own account rather than
tially all the proceeds to acquire) one as a hired contractor. You are per-
or more eligible non-passive Small mitted to finance a business classified
Businesses in which the passive Small under NAICS codes 531210 (offices of
Business directly owns, or will own as real estate agents and brokers), 531311
a result of the Financing, at least 50% (residential property managers), 531312
of the outstanding voting securities. (nonresidential property managers),
(4) Additional conditions for permitted 531320 (offices of real estate appraisers),
passive business financings. Financings or 531390 (other activities related to
87
§ 107.730 13 CFR Ch. I (1–1–25 Edition)
real estate), only if such business de- (i) The funds will be used substan-
rives at least 80 percent of its revenue tially for a foreign operation; or
from non-Affiliate sources. (ii) At the time of the Financing or
(2) You are not permitted to finance within one year thereafter, more than
a Small Business, regardless of NAICS 49 percent of the employees or tangible
classification, if the Financing is to be assets of the Small Business are lo-
used to acquire or refinance real prop- cated outside the United States (unless
erty, unless the Small Business: you can show, to SBA’s satisfaction,
(i) Is acquiring an existing property that the Financing was used for a spe-
and will use at least 51 percent of the cific domestic purpose).
usable square footage for an eligible (2) Exception. This paragraph (g) does
business purpose; or not prohibit a Financing used to ac-
(ii) Is building or renovating a build- quire foreign materials and equipment
ing and will use at least 67 percent of or foreign property rights for use or
the usable square footage for an eligi- sale in the United States.
ble business purpose; or (h) Associated supplier. You are not
(iii) Occupies the subject property permitted to finance a business that
and uses at least 67 percent of the usa- purchases, or will purchase, goods or
ble square footage for an eligible busi- services from a supplier who is your
ness purpose. Associate, except under the following
(d) Project Financing. You are not per- conditions:
mitted to finance a business if: (1) The amount of goods and services
(1) The assets of the business are to purchased (or to be purchased) from
be reduced or consumed, generally your Associate with the proceeds of the
without replacement, as the life of the Financing, or with funds released as a
business progresses, and the nature of result of the Financing, is less than 50
the business requires that a stream of percent of the total amount of the Fi-
cash payments be made to the nancing (75 percent for a Section 301(d)
business’s financing sources, on a basis Licensee);
associated with the continuing sale of (2) The price of such goods and serv-
assets. Examples include real estate ices is no higher than that charged
development projects and oil and gas other customers of your Associate; and
wells; or (3) The Small Business purchases no
(2) The primary purpose of the Fi- capital goods from your Associate.
nancing is to fund production of a sin- (i) Financing Licensees. You are not
gle item or defined limited number of permitted to provide funds, directly or
items, generally over a defined produc- indirectly, that the Small Business will
tion period, and such production will use:
constitute the majority of the activi- (1) To purchase stock in or provide
ties of the Small Business. Examples capital to a Licensee, provided that a
include motion pictures and electric Reinvestor SBIC is permitted to make
generating plants. Equity Capital Investments in Non-le-
(e) Farm land purchases. You are not veraged Licensees.
permitted to finance the acquisition of (2) To repay an indebtedness incurred
farm land. Farm land means land for the purpose of investing in a Li-
which is or is intended to be used for censee.
agricultural or forestry purposes, such [61 FR 3189, Jan. 31, 1996, as amended at 63
as the production of food, fiber, or FR 5867, Feb. 5, 1998; 64 FR 70995, Dec. 20,
wood, or is so taxed or zoned. 1999; 79 FR 62823, Oct. 21, 2014; 82 FR 39340,
(f) Public interest. You are not per- Aug. 18, 2017; 88 FR 46011, July 18, 2023; 89 FR
mitted to finance any business if the 3548, Jan. 19, 2024]
proceeds are to be used for purposes
contrary to the public interest, includ- § 107.730 Financings which constitute
ing but not limited to activities which conflicts of interest.
are in violation of law, or inconsistent (a) General rule. You must not self-
with free competitive enterprise. deal to the prejudice of a Small Busi-
(g) Foreign investment—(1) General ness, the Licensee, its shareholders or
rule. You are not permitted to finance partners, or SBA. Unless you obtain a
a business if: prior written exemption from SBA for
88
Small Business Administration § 107.730
special instances in which a Financing (4) Provide Financing to a Small
may further the purposes of the Act de- Business to discharge an obligation to
spite presenting a conflict of interest, your Associate or free other funds to
you must not directly or indirectly: pay such obligation. This paragraph
(1) Provide Financing to any of your (a)(4) does not apply if the obligation is
Associates, except for when the Small to an Associate Lending Institution
Business that receives the Financing is and is a line of credit or other obliga-
your Associate, pursuant to paragraph tion incurred in the normal course of
(8)(ii) of Associate as defined in § 107.50, business.
only because an investment fund that (5) Provide Financing to a Small
is your Associate holds a 10% or great- Business for the purpose of purchasing
er equity interest in the Small Busi- property from your Associate, except
ness and either of the following condi- as permitted under § 107.720(h).
tions is met: (b) Rules applicable to Associates.
(i) You and the Associate investment Without SBA’ s prior written approval,
fund previously invested in the Small your Associates must not, directly or
Business at the same time and on the indirectly:
same terms and conditions; and you (1) Borrow money from any Person
and the Associate investment fund are described in paragraph (a)(3) of this
providing follow-on financing to the section.
Small Business at the same time, on (2) Receive from a Small Business
the same terms and conditions, and in any compensation in connection with
the same proportionate dollar amounts Assistance you provide (except as per-
as your respective investments in the mitted under §§ 107.825(c) and 107.900),
previous round(s) of financing. or anything of value for procuring, at-
Example 1 to paragraph (a)(1)(i): If you tempting to procure, or influencing
invested $2 million and your Associate your action with respect to such As-
invested $1 million in the previous sistance.
round, your respective follow-on in- (c) Applicability of other laws. You are
vestments would be in the same 2:1 also bound by any restrictions in Fed-
ratio. eral or State laws governing conflicts
(ii) An independent third party is in- of interest and fiduciary obligations.
vesting in the Small Business at the (d) Financings with Associates—(1)
same time as the Licensee and on the Financings with Associates requiring
same terms and conditions as the Li- prior approval. Without SBA’s prior
censee and represents a significant por- written approval, you may not Finance
tion of the Financing; provided, that if any business in which your Associate
the Licensee has a prior Financing in has either a voting equity interest, or
such Small Business, a Licensee’s posi- total equity interests (including poten-
tion in such prior Financing may not tial interests), of at least five percent.
be diminished or diluted to the benefit (2) Other Financings with Associates. If
of an Associate. you and an Associate provide Financ-
(2) Provide Financing to an Associate ing to the same Small Business, either
of another Licensee if one of your Asso- at the same time or at different times,
ciates has received or will receive any you must be able to demonstrate to
direct or indirect Financing or a Com- SBA’s satisfaction that the terms and
mitment from that Licensee or a third conditions are (or were) fair and equi-
Licensee (including Financing or Com- table to you, taking into account any
mitments received under any under- differences in the timing of each par-
standing, agreement, or cross dealing, ty’s financing transactions.
reciprocal or circular arrangement). (3) Exceptions to paragraphs (d)(1) and
(3) Borrow money from: (d)(2) of this section. A Financing that
(i) A Small Business Financed by falls into one of the following cat-
you; egories is exempt from the prior ap-
(ii) An officer, director, or owner of proval requirement in paragraph (d)(1)
at least a 10 percent equity interest in of this section or is presumed to be fair
such business; or and equitable to you for the purposes
(iii) A Close Relative of any such offi- of paragraph (d)(2) of this section, as
cer, director, or equity owner. appropriate:
89
§ 107.740 13 CFR Ch. I (1–1–25 Edition)
(i) Your Associate is a Lending Insti- publish notice of the transaction in the
tution that is providing financing FEDERAL REGISTER.
under a credit facility in order to meet [61 FR 3189, Jan. 31, 1996, as amended at 63
the operational needs of the Small FR 5867, Feb. 5, 1998; 64 FR 70996, Dec. 20,
Business, and the terms of such financ- 1999; 77 FR 20294, Apr. 4, 2012; 88 FR 46011,
ing are usual and customary. July 18, 2023]
(ii) Your Associate invests in the
Small Business on the same terms and § 107.740 Portfolio diversification
(‘‘Overline’’ limitation).
conditions and at the same time as
you. If you are a Leveraged Licensee, the
(iii) You are a Non-leveraged Li- aggregate amount of financings you
censee, and your Associate either is may provide and commitments you
not a Licensee or is a Non-leveraged may issue to a Small Business and its
Licensee. affiliates may not, without SBA’s prior
(e) Use of Associates to manage Port- written approval, exceed 10 percent of
folio Concerns. To protect your invest- the sum of:
ment, you may designate an Associate (a) Your Private Capital; and
to serve as an officer, director, or other (b) The total amount of Leverage
participant in the management of a principal (excluding any interest which
Small Business. You must identify any may become due or accrue at any point
following the issuance of Leverage)
such Associate in your records avail-
projected to be issued in the business
able for SBA’s review under § 107.600.
plan that was approved by SBA at the
Without SBA’s prior written approval, time you were licensed.
the Associate must not:
(1) Have any other direct or indirect [89 FR 3548, Jan. 19, 2024]
financial interest in the Portfolio Con-
cern that exceeds, or has the potential § 107.750 Conditions for financing a
change of ownership of a Small
to exceed, 5 percent of the Portfolio Business.
Concern’s equity.
(2) Have served for more than 30 days You may finance a change of owner-
as an officer, director or other partici- ship of a Small Business only under the
conditions set forth in this section.
pant in the management of the Port-
folio Concern before you provided Fi- (a) The Financing must:
nancing. (1) Promote the sound development
or preserve the existence of the Small
(3) Receive any income or anything
Business;
of value from the Portfolio Concern un-
(2) Help create a Small Business as a
less it is for your benefit, with the ex-
result of a corporate divestiture; or
ception of director’s fees, expenses, and
(3) Facilitate ownership in a Dis-
distributions based upon the Associ-
advantaged Business.
ate’s ownership interest in the Con-
(b) The Resulting Concern (as defined
cern.
in paragraph (c) of this section) must:
(f) 1940 and 1980 Act Companies: SEC
(1) Be a Small Business under
exemptions. If you are a 1940 or 1980 Act
§ 107.700;
Company and you receive an exemption
(2) Have 500 or fewer full-time equiva-
from the Securities and Exchange
lent employees; or meet one of the ap-
Commission for a transaction described
propriate debt/equity ratio tests:
in this § 107.730, you need not obtain
(i) If you have outstanding Leverage,
SBA’s approval of the transaction. the Resulting Concern’s ratio of debt
However, you must promptly notify to equity must be no more than 5 to 1;
SBA of the transaction and satisfy the or
public notice requirements in para- (ii) If you have no outstanding Lever-
graph (g) of this section. age, the Resulting Concern’s ratio of
(g) Public notice. Before granting an debt to equity must be no more than 8
exemption under this § 107.730, SBA will to 1.
(c) Definitions. (1) The ‘‘Resulting
Concern’’ is determined by viewing the
90
Small Business Administration § 107.800
business as though the change of own- cumstances and was not contemplated
ership had already occurred, giving ef- at the time the Financing was made.
fect to all contemplated financing, (3) Additional Financing. If SBA ap-
mergers, and acquisitions. proves your request to retain an in-
(2) For purposes of this section, vestment under paragraph (b)(2) of this
‘‘debt’’ means long-term debt, includ- section, you may provide additional Fi-
ing contingent liabilities, but exclud- nancing to the Portfolio Concern to the
ing accounts payable, operating leases, extent necessary to protect against the
letters of credit, subordinated notes loss of the amount of your original in-
payable to the seller, any other liabil- vestment, subject to the overline limi-
ities approved for exclusion by SBA
tations of § 107.740.
and short-term working capital loans
(c) Effect of a change in business activ-
(so long as the loans carry a zero bal-
ance for 30 consecutive days during the ity occurring more than one year after the
concern’s fiscal year). initial Financing. If a Portfolio Concern
(3) For purposes of this section, ‘‘eq- becomes ineligible because of a change
uity’’ means common and preferred in business activity more than one
stock (corporation), contributed cap- year after your initial Financing you
ital (partnership), or membership in- may:
terests (limited liability company). (1) Retain your investment; and
(2) Provide additional Financing to
§ 107.760 How a change in size or ac- the Portfolio Concern to the extent
tivity of a Portfolio Concern affects necessary to protect against the loss of
the Licensee and the Portfolio Con-
cern. the amount of your original invest-
ment, subject to the overline limita-
(a) Effect on Licensee of a change in tions of § 107.740.
size of a Portfolio Concern. If a Portfolio
Concern no longer qualifies as a Small STRUCTURING LICENSEE’S FINANCING OF
Business you may keep your invest- ELIGIBLE SMALL BUSINESSES: TYPES
ment in the concern and: OF FINANCING
(1) Subject to the overline limita-
tions of § 107.740, you may provide addi- § 107.800 Financings in the form of Eq-
tional Financing to the concern up to uity Securities.
the time it makes a public offering of
(a) You may purchase the Equity Se-
its securities.
curities of a Small Business. You may
(2) Even after the concern makes a
not, inadvertently or otherwise:
public offering, you may exercise any
stock options, warrants, or other rights (1) Become a general partner in any
to purchase Equity Securities which unincorporated business; or
you acquired before the public offering, (2) Become jointly or severally liable
or fund Commitments you made before for any obligations of an unincor-
the public offering. porated business.
(b) Effect of a change in business activ- (b) Definition. Equity Securities
ity occurring within one year of Licens- means stock of any class in a corpora-
ee’s initial Financing—(1) Retention of tion, stock options, warrants, limited
Investment. Unless you receive SBA’s partnership interests in a limited part-
written approval, you may not keep nership, membership interests in a lim-
your investment in a Portfolio Con- ited liability company, or joint venture
cern, small or otherwise, which be- interests. If the Financing agreement
comes ineligible by reason of a change contains debt-type acceleration provi-
in its business activity within one year sions or includes redemption provi-
of your initial investment. sions, other than those permitted
(2) Request for SBA’s approval to retain under § 107.850, the security will be con-
investment. If you request that SBA ap- sidered a Debt Security for purposes of
prove the retention of your invest-
§ 107.855 and § 107.1150(c)(1).
ment, your request must include suffi-
cient evidence to demonstrate that the [61 FR 3189, Jan. 31, 1996, as amended at 74
change in business activity was caused FR 33915, July 14, 2009]
by an unforeseen change in cir-
91
§ 107.810 13 CFR Ch. I (1–1–25 Edition)
§ 107.810 Financing in the form of § 107.820 Financings in the form of
Loans. guarantees.
You may make Loans to Small Busi- At the request of a Small Business or
nesses. A Loan means a transaction where necessary to protect your exist-
evidenced by a debt instrument with no ing investment, you may guarantee the
provision for you to acquire Equity Se- monetary obligation of a Small Busi-
curities. Loans may include Revenue- ness to any non-Associate creditor.
Based Financing or Revenue-Based (a) You may not issue a guaranty if:
Loans in which you provide financing (1) You would become subject to
to a Small Business in exchange for a State regulation as an insurance, guar-
percentage of the Small Business’s an- anty or surety business;
ticipated future revenue which shall (2) The amount of the guaranty plus
any direct Financings to the Small
not exceed 19% of the Small Business’s
Business exceed the overline limita-
annual gross revenue.
tions of § 107.740, except that a pledge of
[88 FR 46011, July 18, 2023] the Equity Securities of the issuer or a
subordination of your lien or creditor
§ 107.815 Financings in the form of position does not count toward your
Debt Securities. overline; or
You may purchase Debt Securities (3) The total financing cost to the
from Small Businesses. Small Business exceeds the cost of
(a) Definitions. Debt Securities are in- money limits of § 107.855.
struments evidencing a loan with an (b) Pledge of Licensee’s assets as guar-
option or any other right to acquire anty. For purposes of this section, a
Equity Securities in a Small Business guaranty with recourse only to specific
asset(s) you have pledged is equal to
or its Affiliates, or a loan which by its
the fair market value of such asset(s)
terms is convertible into an equity po-
or the amount of the debt guaranteed,
sition, or a loan with a right to receive
whichever is less.
royalties that are excluded from the
Cost of Money pursuant to § 107.825 Purchasing securities from
§ 107.855(g)(12). Consideration must be an underwriter or other third
paid for all options that you acquire. party.
(b) Restriction on options obtained by (a) Securities purchased through or
Licensee’s management and employees. If from an underwriter. You may purchase
you have outstanding Leverage or plan the securities of a Small Business
to obtain Leverage, your employees, of- through or from an underwriter if:
ficers, directors or general partners, or (1) You purchase such securities
the general partners of the manage- within 90 days of the date the public of-
ment company that is providing serv- fering is first made;
ices to you or to your general partner, (2) Your purchase price is no more
may obtain options in a Financed than the original public offering price;
Small Business only if: and
(1) They participate in the Financing (3) The amount paid by you for the
on a pari passu basis with you; or securities (less ordinary and reasonable
(2) SBA gives its prior written ap- underwriting charges and commissions)
proval; or has been, or will be, paid to the Small
(3) The options received are com- Business, and the underwriter certifies
pensation for service as a member of in writing that this requirement has
the board of directors of the Small been met.
(b) Recordkeeping requirements. If you
Business, and such compensation does
have outstanding Leverage or plan to
not exceed that paid to other outside
obtain Leverage, you must keep
directors. In the absence of such direc-
records available for SBA’s inspection
tors, fees must be reasonable when
which show the relevant details of the
compared with amounts paid to outside
transaction, including, but not limited
directors of similar companies.
to, date, price, commissions, and the
[61 FR 3189, Jan. 31, 1996, as amended at 65 underwriter’s certifications required
FR 69432, Nov. 17, 2000] under paragraph (c) of this section.
92
Small Business Administration § 107.835
(c) Underwriter’s requirements. If you Small Business within the first year of
have outstanding Leverage or plan to your acquisition except as permitted in
obtain Leverage, the underwriter must § 107.850.
certify whether it is your Associate. (c) Special rules for Loans and Debt Se-
You may pay reasonable and cus- curities—(1) Term. The minimum term
tomary commissions and expenses to for Loans and Debt Securities starts
an Associate underwriter for the por- with the first disbursement of the Fi-
tion of an offering that you purchase, nancing.
provided it is no more than 25 percent (2) Prepayment. You must permit vol-
of the total offering. If you buy more untary prepayment of Loans and Debt
than 25 percent of the offering, the Securities by the Small Business. You
amount you pay to the Associate un- must obtain SBA’s prior written ap-
derwriter must not exceed the total of proval of any restrictions on the abil-
the application and closing fees and re- ity of the Small Business to prepay
imbursable expenses permitted by other than the imposition of a reason-
§ 107.860. able prepayment penalty under para-
(d) Securities purchased from another graph (c)(3) of this section. For pur-
Licensee or from SBA. You may pur- poses of evaluating prepayment re-
chase from, or exchange with, another strictions under this section, require-
Licensee, Portfolio securities (or any ments to apply prepayments pro rata
interest therein). Such purchase or ex- among a group of lenders participating
change may only be made on a non-re- in such Financing that is pari passu in
course basis. You may not have more rights to payment will not be deemed
than one-third of your total as- to constitute a restriction on prepay-
sets(valued at cost) invested in such se- ments.
curities. If you have previously sold (3) Prepayment penalties. You may
Portfolio Securities (or any interest charge a reasonable prepayment pen-
therein) on a recourse basis, you shall alty which must be agreed upon at the
include the amount for which you may time of the Financing. If SBA deter-
be contingently liable in your overline mines that a prepayment penalty is un-
computation. reasonable, you must refund the entire
(e) Purchases of securities from other penalty to the Small Business. A pre-
non-issuers. You may purchase securi- payment penalty equal to 5 percent of
ties of a Small Business from a non- the outstanding balance during the
issuer not previously described in this first year of any Financing, declining
§ 107.825 if: by one percentage point per year
(1) Such acquisition is a reasonably through the fifth year, is considered
necessary part of the overall sound Fi- reasonable.
nancing of the Small Business under [61 FR 3189, Jan. 31, 1996, as amended at 69
the Act; or FR 8098, Feb. 23, 2004; 88 FR 46012, July 18,
(2) The securities are acquired to fi- 2023]
nance a change of ownership under
§ 107.750. § 107.835 Exceptions to minimum dura-
tion/term of Financing.
STRUCTURING LICENSEE’S FINANCING OF You may make a Short-term Financ-
AN ELIGIBLE SMALL BUSINESS: TERMS ing for a term less than one year if the
AND CONDITIONS OF FINANCING Financing is:
(a) An interim Financing in con-
§ 107.830 Minimum duration/term of fi- templation of long-term Financing.
nancing. The contemplated long-term Financing
(a) General rule. The duration/term of must be in an amount at least equal to
all your Financings must be for a min- the short-term Financing, and must be
imum period of one year. made by you alone or in participation
(b) Restrictions on mandatory redemp- with other investors; or
tion of Equity Securities. If you have ac- (b) For protection of your prior in-
quired Equity Securities, options or vestment(s); or
warrants on terms that include re- (c) For the purpose of Financing a
demption by the Small Business, you change of ownership under § 107.750.
must not require redemption by the The total amount of such Financings
93
§ 107.840 13 CFR Ch. I (1–1–25 Edition)
may not exceed 20 percent of your as one based on earnings or book
Loans and Investments (at cost) at the value); or
end of any fiscal year; or (ii) The fair market value of the con-
(d) For the purpose of aiding a Small cern at the time of redemption, as de-
Business in performing a contract termined by a professional appraisal
awarded under a Federal, State, or performed under an agreement accept-
local government set-aside program for able to both parties.
‘‘minority’’ or ‘‘disadvantaged’’ con- (c) Any method for determining the
tractors. redemption price must be agreed upon
[61 FR 3189, Jan. 31, 1996, as amended at 64 no later than the date of the first (or
FR 52646, Sept. 30, 1999; 69 FR 8098, Feb. 23, only) closing of the Financing.
2004]
[61 FR 3189, Jan. 31, 1996, as amended at 64
§ 107.840 Maximum term of Financing. FR 52646, Sept. 30, 1999; 69 FR 8098, Feb. 23,
2004]
The maximum term of any Loan or
Debt Security Financing must be no § 107.855 Interest rate ceiling and limi-
longer than 20 years. tations on fees charged to Small
Businesses (‘‘Cost of Money’’).
§ 107.845 Maximum rate of amortiza-
tion on Loans and Debt Securities. ‘‘Cost of Money’’ means the interest
The principal of any Loan (or the and other consideration that you re-
loan portion of any Debt Security) ceive from a Small Business. Subject
with a term of one year or less cannot to lower ceilings prescribed by local
be amortized faster than straight line. law, the Cost of Money to the Small
If the term is greater than one year, Business must not exceed the ceiling
the principal cannot be amortized fast- determined under this section.
er than straight line for the first year. (a) Financings to which the Cost of
[69 FR 8098, Feb. 23, 2004]
Money rules apply. This section applies
to all Loans and Debt Securities. As re-
§ 107.850 Restrictions on redemption quired by § 107.800(b), you must include
of Equity Securities. as Debt Securities any equity interests
(a) A Portfolio Concern cannot be re- with redemption provisions that do not
quired to redeem Equity Securities meet the restrictions in § 107.850.
earlier than one year from the date of (b) When to determine the Cost of
the first closing unless: Money ceiling for a Financing. You may
(1) The concern makes a public offer- determine your Cost of Money ceiling
ing, or has a change of management or for a particular Financing as of the
control, or files for protection under date you issue a Commitment or as of
the provisions of the Bankruptcy Code, the date of the first closing of the Fi-
or materially breaches your Financing nancing. Once determined, the Cost of
agreement; or Money ceiling remains fixed for the du-
(2) You make a follow-on investment, ration of the Financing.
in which case the new securities may (c) How to determine the Cost of Money
be redeemed in less than one year, but ceiling for a Financing. At a minimum,
no earlier than the redemption date as- you may use a Cost of Money ceiling of
sociated with your earliest Financing 19 percent for a Loan and 14 percent for
of the concern.
a Debt Security. To determine whether
(b) The redemption price must be ei-
you may charge more, do the following:
ther:
(1) A fixed amount that is no higher (1) Choose a base rate for your Cost
than the price you paid for the securi- of Money computation. The base rate
ties; or may be either the Debenture Rate cur-
(2) An amount that cannot be fixed or rently in effect plus the applicable
determined before the time of redemp- Charge determined under
tion. In this case, the redemption price § 107.1130(d)(1), or your own ‘‘Cost of
must be based on: Capital’’ as determined under para-
(i) A reasonable formula that reflects graph (d) of this section.
the performance of the concern (such
94
Small Business Administration § 107.855
(2) For a Loan, add 11 percentage of loan fees. For the purposes of this
points to the base rate; for a Debt Se- paragraph (d)(4):
curity, add 6 percentage points. In ei- (i) Interest expense on Debentures in-
ther case, round the sum down to the cludes the 1 percent Charge paid by a
nearest eighth of one percent. Licensee under § 107.1130(d)(1); and
(3) If the result is more than 19 per- (ii) Section 301(d) Licensees with out-
cent (for a Loan) or 14 percent (for a standing subsidized Debentures are pre-
Debt Security), you may use it as your sumed to have paid interest at the rate
Cost of Money ceiling. stated on the face of such Debentures,
(4) If two or more Licensees partici- without regard to any subsidy paid by
pate in the same Financing of a Small SBA.
Business, the base rate used in this (5) Divide the interest expense from
paragraph (c) is the highest of the fol- paragraph (d)(4) of this section by the
lowing: weighted average borrowings from
(i) The current Debenture Rate plus paragraph (d)(3) of this section, and
the applicable Charge determined multiply by 100. The result is your Cost
under § 107.1130(d)(1); of Capital, which you may use to com-
(ii) The Cost of Capital of the lead Li- pute a Cost of Money ceiling under
censee; or paragraph (c) of this section.
(iii) The weighted average of the Cost (e) SBA review of Cost of Capital com-
of Capital for all Licensees partici- putation. You must keep your Cost of
pating in the Financing. Capital computations in a separate file
(d) How to determine your Cost of Cap- available for SBA’s review.
ital. ‘‘Cost of Capital’’ is an optional (1) A computation that is kept in
computation of the weighted average such a file and is audited by your inde-
interest rate you pay on your ‘‘quali- pendent public accountant is consid-
fied borrowings’’. ‘‘Qualified bor- ered correct unless SBA demonstrates
rowings’’ means your Debentures to- otherwise.
gether with your borrowings at or (2) If a computation is not kept in
below the usual interest rate charged such a file or is unaudited, you must
by banks in your locality on the date prove its accuracy to SBA’s satisfac-
your loan was made. tion.
(1) For any fiscal year, you may com- (f) Charges included in the Cost of
pute your Cost of Capital: Money. The Cost of Money includes all
(i) As of the first day of your fiscal interest, points, discounts, fees, royal-
year, to remain in effect for the entire ties, profit participation, and any other
year; or consideration you receive from a Small
(ii) As of the first day of every fiscal Business, except for the specific exclu-
quarter during the fiscal year, to re- sions in paragraph (g) of this section.
main in effect for the duration of the For equity interests subject to the Cost
quarter. of Money rules (see paragraph (a) of
(2) For each qualified borrowing out- this section), you must include:
standing at your last fiscal year or fis- (1) The portion of the fixed redemp-
cal quarter end, multiply the ending tion price that exceeds your original
principal balance (net of related cost.
unamortized fees) by the number of (2) Any amount of a redemption that
days during the past four fiscal quar- is paid out of accounts other than the
ters that the borrowing was out- Small Business’s capital accounts (cap-
standing, and divide the result by 365. ital, paid-in surplus, or retained earn-
(3) Add together the amounts com- ings of a corporation; or partners’ cap-
puted for all borrowings under para- ital of a partnership).
graph (d)(2) of this section. The result (g) Charges excluded from the Cost of
is your weighted average borrowings. Money. You may exclude from the Cost
(4) For all qualified borrowings out- of Money:
standing at your last fiscal year or fis- (1) Discount on the loan portion of a
cal quarter end, determine the aggre- Debt Security, if such discount exists
gate interest expense for the past four solely as the result of the allocation of
fiscal quarters, excluding amortization value to detachable stock purchase
95
§ 107.860 13 CFR Ch. I (1–1–25 Edition)
warrants in accordance with generally (2) Discount the cash flows back to
accepted accounting principles. the first disbursement date using the
(2) Closing fees, application fees, and Cost of Money ceiling from paragraph
expense reimbursements, each as per- (c) of this section as the discount rate.
mitted under § 107.860. (3) If the result is zero or less, the Fi-
(3) Reasonable prepayment penalties nancing is within the Cost of Money
permitted under § 107.830(d)(3). ceiling; if it is greater than zero, the
(4) Out-of-pocket conveyance and/or Financing exceeds the Cost of Money
recordation fees and taxes. ceiling.
(5) Reasonable closing costs. [61 FR 3189, Jan. 31, 1996, as amended at 63
(6) Fees for management services as FR 5867, Feb. 5, 1998; 64 FR 52646, Sept. 30,
permitted under § 107.900. 1999; 65 FR 69432, Nov. 17, 2000; 77 FR 20294,
(7) Reasonable and necessary out-of- Apr. 4, 2012; 89 FR 3548, Jan. 19, 2024]
pocket expenses you incur to monitor
the Financing. § 107.860 Financing fees and expense
(8) Board of director fees not in ex- reimbursements a Licensee may re-
cess of those paid to other outside di- ceive from a Small Business.
rectors, if your board representation You may collect Financing fees and
meets the requirements of § 107.730(e). receive expense reimbursements from a
(9) A reasonable fee for arranging fi- Small Business only as permitted
nancing for a Small Business from a under this § 107.860.
source that is neither a Licensee nor (a) Application fee. You may collect a
an Associate of yours. The Small Busi- nonrefundable application fee from a
ness must agree in writing to pay such Small Business to review its Financing
a fee before you arrange the financing. application. The application fee may be
(10) The difference between the con- collected at the same time as the clos-
tractual interest rate of the Financing ing fee under paragraph (c) or (d) of
and a default rate of interest permitted this section, or earlier. The fee must
as follows: be:
(i) If a Small Business is in default, (1) No more than 1 percent of the
you may charge a default rate of inter- amount of Financing requested (or, if
est as much as 7 percentage points two or more Licensees participate in
higher than the contractual rate until the Financing, their combined applica-
the default is cured. tion fees are no more than 1 percent of
(ii) For this purpose, ‘‘default’’ the total Financing requested); and
means either failure to pay an amount (2) Agreed to in writing by the Fi-
when due or failure to provide informa- nancing applicant.
tion required under the Financing doc- (b) SBA review of application fees. For
uments. any fiscal year, if the number of appli-
(11) Royalty payments based on im- cation fees you collect is more than
provement in the performance of the twice the number of Financings closed,
Small Business after the date of the Fi- SBA in its sole discretion may deter-
nancing. mine that you are engaged in activities
(12) Gains realized on the disposition not contemplated by the Act, in viola-
of Equity Securities issued by the tion of § 107.500.
Small Business. (c) Closing fee—Loans. You may
(h) How to evaluate compliance with charge a closing fee on a Loan if:
the Cost of Money ceiling. You must de- (1) The fee is no more than 2 percent
termine whether a Financing is within of the Financing amount (or, if two or
the Cost of Money ceiling based on its more Licensees participate in the Fi-
discounted cash flows, as follows: nancing, their combined closing fees
(1) Beginning with the date of the are no more than 2 percent of the total
first disbursement (‘‘period zero’’), Financing amount); and
identify your cash inflows and cash (2) You charge the fee no earlier than
outflows for each period of the Financ- the date of the first disbursement.
ing. The appropriate period to use (d) Closing fee—Debt or Equity
(such as years, quarters, or months) de- Financings. You may charge a Closing
pends on how you have structured the Fee on a Debt Security or Equity Secu-
disbursements and payments. rity Financing if:
96
Small Business Administration § 107.880
(1) The fee is no more than 4 percent sumed to exist whenever you or the In-
of the Financing amount (or, if two or vestor Group own or control, directly
more Licensees participate in the Fi- or indirectly:
nancing, their combined closing fees (1) At least 50 percent of the out-
are no more than 4 percent of the total standing voting securities, if there are
Financing amount); and fewer than 50 shareholders; or
(2) You charge the fee no earlier than (2) More than 25 percent of the out-
the date of the first disbursement. standing voting securities, if there are
(e) Limitation on dual fees. If another 50 or more shareholders; or
Licensee or an Associate of yours col-
(3) At least 20 percent of the out-
lects a transaction fee under § 107.900(e)
in connection with your Financing of a standing voting securities, if there are
Small Business, the sum of the trans- 50 or more shareholders and no other
action fee and your application and party holds a larger block.
closing fees cannot exceed the max- (c) Rebuttals to presumption of Control.
imum application and closing fees per- A presumption of Control under para-
mitted under this § 107.860. graph (b) of this section is rebutted if:
(f) Expense reimbursements. You may (1) The management of the Small
charge a Small Business for the reason- Business owns at least a 25 percent in-
able out-of-pocket expenses, other than terest in the voting securities of the
Management Expenses, that you incur business; and
to process its Financing application. If (2) The management of the Small
SBA determines that any of your reim- Business can elect at least 40 percent of
bursed expenses are unreasonable or the board members of a corporation,
are Management Expenses, SBA will general partners of a limited partner-
require you to include such amounts in ship, or managers of a limited liability
the Cost of Money or refund them to company, as appropriate, and the In-
the Small Business. vestor Group can elect no more than 40
(g) Breakup fee. If a Small Business percent. The balance of such officials
accepts your Commitment and then may be elected through mutual agree-
fails to close the Financing because it ment by management and the Investor
has accepted funds from another Group.
source, you may charge a ‘‘breakup (d) Extension of Control. With SBA’s
fee’’ equal to the closing fee that you prior written approval you, or the In-
would have been permitted to charge vestor Group, may retain Control for
under paragraph (c) or (d) of this sec-
such additional period as may be rea-
tion.
sonably necessary to complete divesti-
[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, ture of Control or to ensure the finan-
1996] cial stability of the portfolio company.
(e) Additional Financing for businesses
§ 107.865 Control of a Small Business
by a Licensee. under Licensee’s Control. If you assume
Control of a Small Business, you may
(a) In general. You, or you and your later provide additional Financing,
Associates (in the latter case, the ‘‘In- without an exemption under
vestor Group’’), may exercise Control § 107.730(a)(1).
over a Small Business for purposes con-
nected to your investment, through [61 FR 3189, Jan. 31, 1996, as amended at 63
ownership of voting securities, man- FR 5867, Feb. 5, 1998; 64 FR 52646, Sept. 30,
agement agreements, voting trusts, 1999; 67 FR 64790, Oct. 22, 2002]
majority representation on the board
of directors, or otherwise. The period of § 107.880 Assets acquired in liquida-
tion of Portfolio securities.
such Control will be limited to the sev-
enth anniversary of the date on which You may acquire assets in full or par-
such Control was initially acquired, or tial liquidation of a Small Business’s
any earlier date specified by the terms obligation to you under the conditions
of any investment agreement. permitted by this § 107.880. The assets
(b) Presumption of control. Control may be acquired from the Small Busi-
over a Small Business based on owner- ness, a guarantor of its obligation, or
ship of voting securities will be pre- another party.
97
§ 107.885 13 CFR Ch. I (1–1–25 Edition)
(a) Timely disposition of assets. You MANAGEMENT SERVICES AND FEES
must dispose of assets acquired in liq-
uidation of a Portfolio security within § 107.900 Management fees for services
provided to a Small Business by Li-
a reasonable period of time. censee or its Associate.
(b) Permitted expenditures to preserve
assets. (1) You may incur reasonably This § 107.900 applies to management
necessary expenditures to maintain services that you or your Associate
provide to a Small Business during the
and preserve assets acquired.
term of a Financing or prior to Financ-
(2) You may incur reasonably nec-
ing. It does not apply to management
essary expenditures for improvements services that you or your Associate
to render such assets saleable. provide to a Small Business that you
(3) You may make payments of mort- do not finance. Fees permitted under
gage principal and interest (including this section are not included in the
amounts in arrears when you acquired Cost of Money (see § 107.855).
the asset), pay taxes when due, and pay (a) Permitted management fees. You or
for necessary insurance coverage. your Associate may provide manage-
(c) SBA approval of expenditures. This ment services to a Small Business fi-
paragraph (c) applies if you have out- nanced by you if:
standing Leverage or are applying for (1) You or your Associate have en-
Leverage. Any application for SBA ap- tered into a written contract with the
proval under this paragraph must Small Business;
specify all expenses estimated to be (2) The fees charged are for services
necessary pending disposal of the as- actually performed;
sets. Without SBA’s prior written ap- (3) Services are provided on an hourly
proval: fee, project fee, or other reasonable
(1) Your total expenditures under basis; and
paragraphs (b)(1) and (b)(2) of this sec- (4) You can demonstrate to SBA,
upon request, that the rate does not ex-
tion plus your total Financing(s) to the
ceed the prevailing rate charged for
Small Business must not exceed your
comparable services by other organiza-
overline limit under § 107.740; and
tions in the geographic area of the
(2) Your total expenditures under Small Business.
paragraph (b) of this section plus your (b) Fees for service as a board member.
total Financing(s) to the Small Busi- You or your Associate may receive fees
ness must not exceed 35 percent of your in the form of cash, warrants, or other
Regulatory Capital. payments, for services provided as
members of the board of directors of a
LIMITATIONS ON DISPOSITION OF ASSETS Small Businesses Financed by you. The
fees must not exceed those paid to
§ 107.885 Disposition of assets to Li-
other outside board members. In the
censee’s Associates or to competi-
tors of Portfolio Concern. absence of such board members, fees
must be reasonable when compared
Sale of assets to Associate. Except with with amounts paid to outside directors
SBA’s prior written approval, you are of similar companies.
not permitted to dispose of assets (in- (c) SBA approval required. You must
cluding assets acquired in liquidation) obtain SBA’s prior written approval of
to any Associate if you have out- any management contract that does
standing Leverage or Earmarked As- not satisfy paragraphs (a) or (b) of this
sets. As a prerequisite to such ap- section.
proval, you must demonstrate that the (d) Recordkeeping requirements. You
proposed terms of disposal are at least must keep a record of hours spent and
as favorable to you as the terms ob- amounts charged to the Small Busi-
tainable elsewhere. ness, including expenses charged.
(e) Transaction fees. (1) You may
[61 FR 3189, Jan. 31, 1996, as amended at 67 charge reasonable transaction fees for
FR 64791, Oct. 22, 2002] work you or your Associate perform to
prepare a client for a public offering,
private offering, or sale of all or part of
98
Small Business Administration § 107.1120
the business, and for assisting with the (4) Your initial Management Ex-
transaction. Compensation may be in penses under § 107.140 and increases in
the form of cash, notes, stock, and/or your Management Expenses under
options. § 107.520. However, you must have your
(2) Your Associate may charge mar- Management Expenses approved by
ket rate investment banking fees to a SBA in order to become eligible for Le-
Small Business on that portion of a Fi- verage.
nancing that you do not provide. (5) Options obtained from a Small
Business by your management or em-
Subpart H—Non-leveraged Li- ployees under § 107.815(b).
censees—Exceptions to Regu- (c) You are exempt from the require-
lations ment in § 107.680 to obtain SBA’s post
approval of new directors and new offi-
§ 107.1000 Non-leveraged Licensees— cers, other than your chief operating
exceptions to this part. officer. However, you must notify SBA
The regulatory exceptions in this of the new directors or officers within
section apply to Non-leveraged Licens- 30 days, and you must have all direc-
ees. tors and officers approved by SBA in
(a) You are exempt from the fol- order to become eligible for Leverage.
lowing provisions (but you must come [61 FR 3189, Jan. 31, 1996, as amended at 88
into compliance with them to become FR 46012, July 18, 2023]
eligible for Leverage):
(1) The overline limitation in Subpart I—SBA Financial Assist-
§ 107.740.
(2) The restrictions in § 107.530 on in- ance for Licensees (Lever-
vestments of idle funds, provided you age)
do not engage in activities not con-
GENERAL INFORMATION ABOUT
templated by the Act.
OBTAINING LEVERAGE
(3) The restrictions in § 107.550 on
third-party debt. § 107.1100 Types of Leverage and ap-
(4) The restrictions in § 107.880 on ex- plication procedures.
penses incurred to maintain or improve
(a) Types of Leverageable available.
assets acquired in liquidation of Port-
You may apply for Leverage from SBA
folio securities.
in one or both of the following forms:
(5) The recordkeeping requirements
and fee limitations in § 107.825 (b) and (1) The purchase or guarantee of your
(c), respectively, for securities pur- Debentures.
chased through or from an underwriter. (2) The purchase or guarantee of your
(b) You are exempt from the require- Participating Securities.
ments to obtain SBA’s prior approval (b) Applying for Leverage. The Lever-
for: age application process has two parts.
(1) A decrease in your Regulatory You must first apply for SBA’s condi-
Capital of more than two percent under tional commitment to reserve a spe-
§ 107.585 (but not below the minimum cific amount of Leverage for your fu-
required under the Act or these regula- ture use. You may then apply to draw
tions). You must report the reduction down Leverage against the commit-
to SBA within 30 days. ment. See §§ 107.1200 through 107.1240.
(2) Disposition of any asset to your [63 FR 5868, Feb. 5, 1998, as amended at 64 FR
Associate under § 107.885. 70996, Dec. 20, 1999; 82 FR 39341, Aug. 18, 2017]
(3) A contract to employ an Invest-
ment Adviser/Manager under § 107.510. § 107.1120 General eligibility require-
However, you must notify SBA of the ments for Leverage.
Management Expenses to be incurred To be eligible for Leverage, you
under such contract, or of any subse- must:
quent material changes in such Man- (a) Demonstrate a need for Leverage,
agement Expenses, within 30 days of evidenced by your investment activity
execution. In order to become eligible and a lack of sufficient funds for in-
for Leverage, you must have the con- vestment. For your first issuance of
tract approved by SBA. Leverage, if you have invested at least
99
§ 107.1130 13 CFR Ch. I (1–1–25 Edition)
50 percent of your Leverageable Cap- Small Businesses located in low-in-
ital, you are presumed to lack suffi- come geographic areas.
cient funds for investment. (g) Certify in writing that you are in
(b) Have adequate Private Capital to compliance with the requirement to fi-
satisfy the requirements for financial nance Smaller Enterprises in
viability under § 107.200. § 107.710(b).
(c) Meet the minimum capital re- (h) Show, to the satisfaction of SBA,
quirements of § 107.210, subject to the that your management is qualified and
following additional conditions: has the knowledge, experience, and ca-
(1) If you were licensed after Sep- pability necessary for investing in the
tember 30, 1996, under the exception in types of businesses contemplated by
§ 107.210(a)(1), you will not be eligible the Act, the regulations in this part
for Leverage until you have Regulatory and your business plan.
Capital of at least $5,000,000, unless you (i) Be in compliance with the regula-
were licensed because you are tions in this part.
headquartered in an Underlicensed (j) If required by SBA, have your
State. Control Person(s) assume, in writing,
(2) If you were licensed on or before personal responsibility for your Lever-
September 30, 1996, and have Regu- age, effective only if such Control Per-
latory Capital of less than $5,000,000 son(s) participate (directly or indi-
(less than $10,000,000 if you wish to rectly) in a transfer of Control not ap-
issue Participating Securities): proved by SBA.
(i) You must certify in writing that
(k) If you are an Early Stage SBIC,
at least 50 percent of the aggregate dol-
certify in writing that in accordance
lar amount of your Financings ex-
with § 107.1810(f)(11), at least 50 percent
tended after September 30, 1996 will be
of the aggregate dollar amount of your
provided to Smaller Enterprises (as de-
Financings will be provided to ‘‘early
fined in § 107.710(a)); and
stage’’ companies as defined under the
(ii) You must demonstrate to SBA’s
definition of Early Stage SBIC in
satisfaction that the approval of Lever-
§ 107.50 of this part.
age will not create or contribute to an
unreasonable risk of default or loss to [61 FR 3189, Jan. 31, 1996, as amended at 63
the United States government, based FR 5868, Feb. 5, 1998; 64 FR 70996, Dec. 20,
on such measurements of profitability 1999; 74 FR 33916, July 14, 2009; 77 FR 25053,
and financial viability as SBA deems Apr. 27, 2012; 79 FR 62824, Oct. 21, 2014; 88 FR
46012, July 18, 2023; 89 FR 3548, Jan. 19, 2024]
appropriate.
(d) For any Leverage draw that § 107.1130 Leverage fees and Annual
would cause you and any other Licens- Charges.
ees under Common Control to have ag-
gregate outstanding Leverage in excess (a) Leverage fee. You must pay a le-
of the amount permitted under Section verage fee to SBA for each issuance of
303(b)(2)(A)(ii) of the Act, which, as of a Debenture or Participating Security.
June 21, 2018, is $175,000,000, certify that The fee is 3 percent of the face amount
none of the Licensees has a condition of the Leverage issued.
of Capital Impairment. See also (b) Payment of leverage fee. (1) If you
§ 107.1150(b). issue a Debenture or Participating Se-
(e) For any Leverage request pursu- curity to repay or redeem existing Le-
ant to § 107.1150(d)(2)(i), certify that at verage, you must pay the leverage fee
least 50 percent (in dollars) of your before SBA will guarantee or purchase
Financings made on or after the date of the new Leverage security.
such request will be invested in Small (2) If you issue a Debenture or Par-
Businesses located in low-income geo- ticipating Security that is not used to
graphic areas. repay or redeem existing Leverage,
(f) For any Leverage request pursu- SBA will deduct the leverage fee from
ant to § 107.1150(d)(2)(ii), certify that at the proceeds remitted to you, unless
least 50 percent (in dollars) of the you prepaid the fee under § 107.1210.
Financings made by each Licensee (c) Refundability. The leverage fee is
under Common Control on or after the not refundable under any cir-
date of such request will be invested in cumstances.
100
Small Business Administration § 107.1150
(d) Additional charge for Leverage—(1) formed by the CRA. SBA will not col-
Debentures. You must pay to SBA an lect any fee for its guarantee of TCs.
Annual Charge, not to exceed 1.38 per-
[61 FR 3189, Jan. 31, 1996, as amended at 63
cent per annum, on the outstanding FR 5868, Feb. 5, 1998; 77 FR 25053, Apr. 27,
principal amount of your Debentures, 2012; 88 FR 46012, July 18, 2023; 89 FR 3549,
payable under the same terms and con- Jan. 19, 2024]
ditions as the interest on the Deben-
tures. For Leverage issued pursuant to § 107.1140 Licensee’s acceptance of
Leverage commitments approved on or SBA remedies under §§ 107.1800
after October 1, 2023, the Annual through 107.1820.
Charge, established and published, If you issue Leverage after April 25,
shall not be less than 0.10 percent per 1994, you automatically agree to the
annum, subject to the following provi- terms and conditions in §§ 107.1800
sions: through 107.1820 as they exist at the
(i) For Leverage issued pursuant to time of issuance. The effect of these
Leverage commitments approved on or terms and conditions is the same as if
after October 1, 2024, the Annual they were fully incorporated in the
Charge, established and published, terms of your Leverage.
shall not be less than 0.20 percent per
annum. MAXIMUM AMOUNT OF LEVERAGE FOR
WHICH A LICENSEE IS ELIGIBLE
(ii) For Leverage issued pursuant to
Leverage commitments approved on or § 107.1150 Maximum amount of Lever-
after October 1, 2025, the Annual age.
Charge, established and published,
shall not be less than 0.25 percent per A Leveraged Licensee, other than an
Early Stage SBIC, may have maximum
annum.
outstanding Leverage as set forth in
(iii) For Leverage issued pursuant to
paragraphs (a), (b), (d), and (e) of this
Leverage commitments approved on or section. An Early Stage SBIC may
after October 1, 2026, the Annual have maximum outstanding Leverage
Charge, established and published, as set forth in paragraph (c) of this sec-
shall not be less than 0.30 percent per tion. In general, SBA will approve Le-
annum. verage commitment requests in excess
(iv) For Leverage issued pursuant to of 200 percent of Regulatory Capital
Leverage commitments approved on or and draw requests in excess of 200 per-
after October 1, 2027, the Annual cent of Leverageable Capital only after
Charge, established and published an- a Licensee has demonstrated con-
nually, shall not be less than 0.35 per- sistent, sustainable profitability based
cent per annum. on a conservative investment strategy
(v) For Leverage issued pursuant to that limits downside risk. Any such
Leverage commitments approved on or Leverage request must be supported by
after October 1, 2028, the Annual an up-to-date business plan that re-
Charge, established and published an- flects continuation of the Licensee’s
nually, shall not be less than 0.40 per- successful investment strategy and
cent per annum. demonstrates the Licensee’s ability to
(2) Participating Securities. You must pay all SBA obligations in accordance
pay to SBA a Charge, not to exceed 1.46 with their terms.
percent per annum, on the outstanding (a) Individual Licensee. Subject to
amount of your Participating Securi- SBA’s credit policies, if you are a Le-
ties issued on or after October 1, 1996, veraged Licensee and not an Accrual
payable under the same terms and con- SBIC, the maximum amount of Lever-
ditions as the Prioritized Payments on age you may have outstanding at any
the Participating Securities. This time is the Individual Maximum. If you
Charge does not apply to Participating are an Accrual SBIC, the maximum
Securities issued pursuant to a Lever- amount of Leverage and accrued inter-
age commitment obtained from SBA est you may have outstanding at any
on or before September 30, 1996. time is the Individual Maximum. The
(e) Other Leverage fees. SBA may es- Individual Maximum means the lesser
tablish a fee structure for services per- of:
101
§ 107.1150 13 CFR Ch. I (1–1–25 Edition)
(1) 300 percent of your Leverageable (ii) $50 million.
Capital; (d) Additional Leverage based on invest-
(2) 100 percent of your Leverageable ment in low-income geographic areas.
Capital if you have less than $5 Million Subject to SBA’s credit policies, you
in Regulatory Capital and you were Li- may have outstanding Leverage in ex-
censed because you are headquartered cess of the amounts permitted by para-
in an Underlicensed State; or graphs (a) and (b) of this section in ac-
(3) The maximum Leverage available cordance with this paragraph (d). If
to a single Licensee under section you were licensed before October 1,
303(b) of the Act. 2009, you may seek additional Leverage
(b) Multiple Licensees under Common under paragraph (d)(1) only. If you were
Control. Subject to SBA’s credit poli- licensed on or after October 1, 2009, you
cies, two or more Licenses under Com- may seek additional Leverage under
mon Control may have maximum ag- paragraph (d)(1) or (2), but not both. In
gregate outstanding Leverage as per- this paragraph (d), ‘‘low income geo-
mitted under the Act. For any Accrual graphic areas’’ are as defined in § 108.50
SBIC or Reinvestor SBIC under Com- of this chapter. Any investment that
mon Control, the aggregate accrued in- you use as a basis to seek additional le-
terest associated with Accrual Deben- verage under this paragraph (d) cannot
tures will be included in determining also be used to seek additional leverage
whether this maximum has been ex- under paragraph (e) of this section.
ceeded. However, for any Leverage (1) Investment in Smaller Enterprises lo-
draw(s) by one or more such Licensees cated in low-income geographic areas. To
that would cause the aggregate out- determine whether you may request a
standing Leverage to exceed the Indi- draw that would cause you to have out-
vidual Maximum, each of the Licensees standing Leverage in excess of the
under Common Control must certify amount determined under paragraph
that it does not have a condition of
(a) of this section:
Capital Impairment. See also
(i) Determine the cost basis, as re-
§ 107.1120(d).
ported on your most recent filing of
Example 1 to paragraph (b): If a fund
manager has both a regular Leveraged SBA Form 468, of any investments in
Licensee with $250 million in out- the Equity Securities of a Smaller En-
standing Leverage and an Accrual terprise located in a low-income geo-
SBIC with $50 million in Accrual De- graphic area.
bentures that could accrue interest of (ii) Calculate the amount that equals
$25 million at maturity, SBA will apply 50 percent of your Leverageable Cap-
the principal from the regular Lever- ital.
age plus the $50 million from the Ac- (iii) Subtract from your outstanding
crual Debenture plus the $25 million in Leverage the lesser of paragraph
potential accrued interest for a com- (d)(1)(i) or (ii).
bined total of $325 million. (iv) If the amount calculated in para-
(c) Early Stage SBICs. Subject to graph (d)(1)(iii) is less than the max-
SBA’s credit policies, if you are an imum leverage determined under para-
Early Stage SBIC: graph (a) of this section, the difference
(1) The total amount of any and all between the two amounts equals your
Leverage commitments you receive additional Leverage availability.
from SBA shall not exceed 100 percent (2) Investment in Small Businesses lo-
of your highest Regulatory Capital or cated in low-income geographic areas.
$50 million, whichever is less; This paragraph (d)(2) applies only to
(2) On a cumulative basis, the total Licensees licensed on or after October
amount of Leverage you have issued 1, 2009. You may substitute a maximum
shall not exceed the total amount of Leverage amount of $175,000,000 for the
capital paid in by your investors; and $150,000,000 set forth in paragraph (a)(2)
(3) The maximum amount of Lever- of this section, and a maximum Lever-
age you may have outstanding at any age amount of $250,000,000 for the
time is the lesser of: $225,000,000 set forth in paragraph (b) of
(i) 100 percent of your Leverageable this section, if you satisfy the fol-
Capital, or lowing conditions:
102
Small Business Administration § 107.1160
(i) At least 50 percent (in dollars) of graph (a) of this section, the difference
your Financings preceding the date of between the two amounts equals your
such request must have been invested additional Leverage availability.
in Small Businesses located in low-in-
[74 FR 33916, July 14, 2009, as amended at 77
come geographic areas. In addition, FR 23380, Apr. 19, 2012; 77 FR 25053, Apr. 27,
you must certify that at least 50 per- 2012; 79 FR 62824, Oct. 21, 2014; 82 FR 39341,
cent (in dollars) of your Financings on Aug. 18, 2017; 88 FR 46012, July 18, 2023]
or after the date of such request will be
invested in Small Businesses located in § 107.1160 Maximum amount of Lever-
low-income geographic areas. age for a Section 301(d) Licensee.
(ii) If you are requesting a draw that This section applies to Leverage
would cause you and any other Licens- issued by a Section 301(d) Licensee on
ees under Common Control to have ag- or before September 30, 1996. Effective
gregate outstanding Leverage in excess October 1, 1996, a Section 301(d) Li-
of $225,000,000, at least 50 percent (in censee may apply to issue new Lever-
dollars) of the Financings made by age, or refinance existing Leverage,
each Licensee under Common Control only on the same terms permitted
preceding the date of such request under § 107.1150.
must have been invested in Small Busi-
(a) Maximum amount of subsidized Le-
nesses located in low-income geo-
verage. (1) ‘‘Subsidized Leverage’’
graphic areas. In addition, each such
means Debentures with a reduced in-
Licensee must certify that at least 50
terest rate and Preferred Securities. If
percent (in dollars) of its Financings on
you are a Section 301(d) Licensee:
or after the date of such request will be
(i) The maximum amount of sub-
invested in Small Businesses located in
sidized Leverage you may have out-
low-income geographic areas.
standing at any time is the lesser of 400
(e) Additional Leverage based on En-
percent of your Leverageable Capital,
ergy Saving Qualified Investments in
or $35,000,000. The same limit applies to
Smaller Enterprises. (1) Subject to SBA’s
a group of Section 301(d) Licensees
credit policies, if you were licensed on
under Common Control.
or after October 1, 2008, you may have
outstanding Leverage in excess of the (ii) The maximum amount of Pre-
amounts permitted by paragraphs (a) ferred Securities you may have out-
and (b) of this section in accordance standing at any time is 200 percent of
with this paragraph (e). Any invest- your Leverageable Capital.
ment that you use as a basis to seek (2) Certain types and amounts of sub-
additional Leverage under this para- sidized Leverage have special eligi-
graph (e) cannot also be used to seek bility requirements (see paragraphs (c)
additional Leverage under paragraph and (d) of this section).
(d) of this section. (b) Maximum amount of total Leverage.
(2) To determine whether you may Use § 107.1150 to determine your max-
request a draw that would cause you to imum amount of Leverage as if you
have outstanding Leverage in excess of were a Section 301(c) Licensee. If the
the amount determined under para- result is more than your maximum
graph (a) of this section: subsidized Leverage, then this is your
(i) Determine the cost basis, as re- maximum total (subsidized plus non-
ported on your most recent filing of subsidized) Leverage. Otherwise, your
SBA Form 468, of any Energy Saving maximum total Leverage is the same
Qualified Investments in a Smaller En- as your maximum subsidized Leverage.
terprise that individually do not exceed For Participating Securities, see
20% of your Regulatory Capital. § 107.1170.
(ii) Calculate the amount that equals (c) Special eligibility requirements for
33% of your Leverageable Capital. fourth tier of Leverage. A ‘‘fourth tier of
(iii) Subtract from your outstanding Leverage’’ is any amount of out-
Leverage the lesser of paragraph standing Leverage in excess of 300 per-
(e)(2)(i) or (ii). cent of your Leverageable Capital.
(iv) If the amount calculated in para- (1) To qualify for a fourth tier of Le-
graph (e)(2)(iii) is less than the max- verage, you must have invested (or
imum Leverage determined under para- have Commitments to invest) at least
103
§ 107.1170 13 CFR Ch. I (1–1–25 Edition)
30 percent of your ‘‘Total Funds Avail- on SBA Form 468 under either Assets
able for Investment’’ in ‘‘Venture Cap- Acquired in Liquidation of Portfolio
ital Financings’’ (see the definitions in Securities or Operating Concerns Ac-
paragraphs (e) and (f) of this section). quired.
(2) While you have a fourth tier of
[61 FR 3189, Jan. 31, 1996, as amended at 63
Leverage, you must maintain Venture FR 5868, Feb. 5, 1998; 74 FR 33916, July 14,
Capital Financings (at cost) that equal 2009]
at least 30 percent of your Total Funds
Available for Investment. § 107.1170 Maximum amount of Par-
(d) Special eligibility requirements for ticipating Securities for any Li-
second tier of Preferred Securities. A censee.
‘‘second tier of Preferred Securities’’ is The maximum amount of Partici-
any amount of outstanding Preferred pating Securities you may have out-
Securities in excess of 100 percent of standing at any time is 200 percent of
your Leverageable Capital. your Leverageable Capital. If you are a
(1) To qualify for a second tier of Pre- Section 301(d) Licensee, the maximum
ferred Securities: combined amount of Participating Se-
(i) If your license was issued after Oc- curities and Preferred Securities you
tober 13, 1971, you must have at least may have outstanding at any time is
$500,000 of Leverageable Capital. 200 percent of your Leverageable Cap-
(ii) You must have invested (or have ital.
Commitments to invest) at least the
same dollar amount in Venture Capital SPECIAL RULES FOR LEVERAGE ISSUED
Financings. BY AN EARLY STAGE SBIC
(2) While you have a second tier of
Preferred Securities, you must main- § 107.1180 Required distributions to
tain at least the same dollar amount of SBA by Early Stage SBICs.
Venture Capital Financings (at cost). (a) Distribution requirement. If you are
(e) Definition of ‘‘Total Funds Avail- an Early Stage SBIC with outstanding
able for Investment’’. Total Funds Avail- Leverage, you may make Distributions
able for Investment means the result to your investors and to SBA only as
obtained from the following formula: permitted under this section. See also
§ 107.585. For the purposes of this sec-
T = .90 × (CA + LI)
tion, ‘‘Distributions’’ do not include re-
Where: quired payments to SBA of interest
T = Total funds available for investment and Charges and payments of Leverage
CA = Total current assets principal at maturity, all of which
LI = Total Loans and Investment at cost (as shall be paid in accordance with the
reported on SBA Form 468), net of cur- terms of the Leverage. You may make
rent maturities
a Distribution on any Payment Date.
(f) Definition of ‘‘Venture Capital Fi- Unless SBA permits otherwise, you
nancing’’. Venture Capital Financing must notify SBA in writing of any
means an investment represented by planned distribution under this sec-
common or preferred stock, a limited tion, including computations of the
partnership interest, or a similar own- amounts distributable to SBA and your
ership interest; or by an unsecured investors, at least 10 business days be-
debt instrument that is subordinated fore the distribution date.
by its terms to all other borrowings of (b) How SBA will apply Distributions.
the issuer. Any amounts you distribute to SBA, or
(1) A debt secured by any agreement its designated agent or Trustee, under
with a third party is not a Venture this section will be applied to repay-
Capital Financing, whether or not you ment of principal of outstanding De-
have a security interest in any asset of bentures in order of issue. You may
the third party or have recourse prepay any Debenture in whole, but not
against the third party. in part, on any Payment Date without
(2) A Financing that originally quali- penalty.
fied as a Venture Capital Financing (c) Condition for making a Distribution.
will continue to qualify (at its original You may make a Distribution under
cost), even if you later must report it this section only if you have paid all
104
Small Business Administration § 107.1181
interest and Charges on your out- (5) The amount of your Distribution
standing Debentures that are due and to SBA will be the least of:
payable, or will pay such interest and (i) The result in paragraph (d)(4) of
Charges simultaneously with your Dis- this section;
tribution. (ii) Your current proposed Distribu-
(d) SBA’s share of Distribution. For tion; or
each proposed Distribution, determine
(iii) Your outstanding Leverage.
SBA’s share of the Distribution as fol-
lows: (e) Additional Leverage prepayment. On
(1) Determine the highest ratio of any Payment Date, subject to the
outstanding Leverage to Leverageable terms of your Leverage, you may make
Capital that you have ever attained a payment to SBA to be applied to re-
(your ‘‘Highest Leverage Ratio’’). For payment of the principal of one or
the purpose of determining your High- more outstanding Debentures in order
est Leverage Ratio, any deferred inter- of issue, without making any Distribu-
est Debentures issued at a discount tion to your investors.
must be included in the computation at
[77 FR 25053, Apr. 27, 2012]
their face value.
(2) Determine SBA’s percentage share § 107.1181 Interest reserve require-
of cumulative Distributions: ments for Early Stage SBICs.
(i) If your Capital Impairment Per-
centage under § 107.1840 is less than 50 (a) Reserve requirement. If you are an
percent as of the Distribution date or Early Stage SBIC with outstanding Le-
your Highest Leverage Ratio equals 0.5 verage, for each Debenture which re-
or less, except as provided in paragraph quires periodic interest payments to
(d)(2)(iii) of this section, SBA’s per- SBA during the first five years of its
centage share of cumulative Distribu- term, you must maintain a reserve suf-
tions equals: ficient to pay the interest and Charges
[Highest Leverage Ratio/(Highest Le- on such Debenture for the first 21 Pay-
verage Ratio + 1)] × 100 ment Dates following the date of
For example, if your Highest Leverage issuance. This reserve may consist of
Ratio equals 1, then SBA’s share of any combination of the following:
any distribution you make will be (1) Binding unfunded commitments
50 percent. from your Institutional Investors that
(ii) If your Capital Impairment Per- cannot be called for any purpose other
centage under § 107.1840 is 50 percent or than the payment of interest and
greater as of the Distribution date and Charges to SBA, or the payment of any
your Highest Leverage Ratio is greater amounts due to SBA; and
than 0.5, SBA’s percentage share of cu- (2) Cash maintained in a separate
mulative Distributions equals 100 per- bank account or separate investment
cent. account permitted under § 107.530 of
(iii) If you have a condition of Cap-
this part and separately identified in
ital Impairment under § 107.1830 and
your financial statements as ‘‘re-
your Highest Leverage Ratio equals 0.5
or less as of the Distribution date, stricted cash’’ available only for the
SBA’s percentage share of cumulative purpose of paying interest and Charges
Distributions equals 100 percent. to SBA, or for the payment of any
(3) Multiply the sum of all your prior amounts due to SBA.
Distributions and your current pro- (b) The required reserve associated
posed Distribution (including Distribu- with an individual Debenture shall be
tions to SBA, your limited partners reduced on each Payment Date upon
and your General Partner) by SBA’s payment of the required interest and
percentage share of cumulative Dis- Charges. If you prepay a Debenture
tributions as determined in paragraph prior to the 21st Payment Date fol-
(d)(2) of this section. lowing its date of issuance, the reserve
(4) From the result in paragraph requirement associated with that De-
(d)(3) of this section, subtract the sum benture shall be correspondingly elimi-
of all your prior Distributions to SBA nated.
under this § 107.1180.
105
§ 107.1182 13 CFR Ch. I (1–1–25 Edition)
(c) Your limited partnership agree- stated in the commitment letter issued
ment must incorporate the reserve re- to you by SBA.
quirement in paragraph (a) of this sec-
[61 FR 3189, Jan. 31, 1996, as amended at 63
tion. FR 5868, Feb. 5, 1998]
[77 FR 25053, Apr. 27, 2012]
§ 107.1210 Payment of leverage fee
§ 107.1182 Valuation requirements for upon receipt of commitment.
Early Stage SBICs based on Capital (a) Partial prepayment of leverage fee.
Impairment Percentage.
As a condition of SBA’s Leverage com-
(a) If you are an Early Stage SBIC, mitment, and before you draw any Le-
you must compute your Capital Im- verage under such commitment, you
pairment Percentage and determine must pay to SBA a non-refundable fee
whether you have a condition of Cap- equal to 1 percent of the face amount
ital Impairment in accordance with of the Debentures or Participating Se-
§§ 107.1830 and 107.1840 of this part. curities reserved under the commit-
(b) You must promptly notify SBA in ment. This amount represents a partial
writing if your Capital Impairment prepayment of the 3 percent leverage
Percentage is at least 50 percent, even fee established under § 107.1130(a).
if your maximum permitted Capital (b) Automatic cancellation of commit-
Impairment Percentage is higher. ment. Unless you pay the fee required
(c) Upon receipt of your notification under paragraph (a) of this section by
under paragraph (b) of this section, or 5:00 P.M. Eastern Time on the 30th cal-
upon making its own determination endar day following the issuance of
that your Capital Impairment Percent- SBA’s Leverage commitment, the com-
age is at least 50 percent, SBA has the mitment will be automatically can-
right to require you to engage, at your celed.
expense, an independent third party,
[63 FR 5868, Feb. 5, 1998]
acceptable to SBA, to prepare valu-
ations of some or all of your Loans and § 107.1220 Requirement for Licensee to
Investments, as designated by SBA. file quarterly financial statements.
[77 FR 25053, Apr. 27, 2012] Leveraged Licensees must submit to
SBA a Financial Statement on SBA
CONDITIONAL COMMITMENTS BY SBA TO Form 468 (Short Form) as of the close
RESERVE LEVERAGE FOR A LICENSEE of each quarter of your fiscal year
§ 107.1200 SBA’s Leverage commitment (other than the fourth quarter, which
to a Licensee—application proce- is covered by your annual filing of
dure, amount, and term. Form 468 under § 107.630(a)). You must
file this form within 45 days after the
(a) General. Under the provisions in close of the quarter. You will not be el-
§§ 107.1200 through 107.1240, you may igible for a draw if you are not in com-
apply for SBA’s conditional commit- pliance with this section.
ment to reserve a specific amount and
type of Leverage for your future use. [88 FR 46012, July 18, 2023]
You may then apply to draw down Le-
verage against the commitment. § 107.1230 Draw-downs by Licensee
(b) Applying for a Leverage commit- under SBA’s Leverage commitment.
ment. SBA will notify you when it is (a) Licensee’s authorization of SBA to
accepting requests for Leverage com- purchase or guarantee securities. By sub-
mitments. Upon receipt of your re- mitting a request for a draw against
quest, SBA will send you a complete SBA’s Leverage commitment, you au-
application package. thorize SBA, or any agent or trustee
(c) Limitations on the amount of a Le- SBA designates, to guarantee your De-
verage commitment. The amount of a Le- benture or Participating Security and
verage commitment must be a multiple to sell it with SBA’s guarantee.
of $5,000. (b) Limitations on amount of draw. The
(d) Term of Leverage commitment. amount of a draw must be a multiple of
SBA’s Leverage commitment will auto- $5,000. SBA, in its discretion, may de-
matically lapse on the expiration date termine a minimum dollar amount for
106
Small Business Administration § 107.1240
draws against SBA’s Leverage commit- (4) A statement that the proceeds are
ments. Any such minimum amounts needed to fund one or more particular
will be published in Notices in the FED- Small Businesses or to provide liquid-
ERAL REGISTER from time to time. ity for your operations. If required by
(c) Effect of regulatory violations on Li- SBA, the statement must include the
censee’s eligibility for draws—(1) General name and address of each Small Busi-
rule. You are eligible to make a draw ness, and the amount and anticipated
against SBA’s Leverage commitment closing date of each proposed Financ-
only if you are in compliance with all ing.
applicable provisions of the Act and (e) Reporting requirements after draw-
SBA regulations (i.e., no unresolved ing funds. (1) Within 30 calendar days
statutory or regulatory violations). after the actual closing date of each Fi-
(2) Exception to general rule. If you are nancing funded with the proceeds of
not in compliance, you may still be eli- your draw, you must file an SBA Form
gible for draws if: 1031 confirming the closing of the
(i) SBA determines that your out- transaction.
standing violations are of non-sub- (2) If SBA required you to provide in-
stantive provisions of the Act or regu- formation concerning a specific
lations and that you have not repeat- planned Financing under paragraph
edly violated any non-substantive pro- (d)(3) of this section, and such Financ-
visions; or ing has not closed within 60 calendar
(ii) You have agreed with SBA on a days after the anticipated closing date,
course of action to resolve your viola- you must give SBA a written expla-
tions and such agreement does not pre- nation of the failure to close.
vent you from issuing Leverage. (3) If you do not comply with this
(d) Procedures for funding draws. You paragraph (e), you will not be eligible
may request a draw at any time during for additional draws. SBA may also de-
the term of the commitment. With termine that you are not in compliance
each request, submit the following doc- with the terms of your Leverage under
umentation: §§ 107.1810 or 107.1820.
(1) A statement certifying that there
has been no material adverse change in [61 FR 3189, Jan. 31, 1996, as amended at 63
your financial condition since your last FR 5868, Feb. 5, 1998; 64 FR 70996, Dec. 20,
filing of SBA Form 468 (see also 1999]
§ 107.1220 for SBA Form 468 filing re-
§ 107.1240 Funding of Licensee’s draw
quirements). request through sale to short-term
(2) If your request is submitted more investor.
than 30 days following the end of your
fiscal year, but before you have sub- (a) Licensee’s authorization of SBA to
mitted your annual filing of SBA Form arrange sale of securities to short-term in-
468 (Long Form) in accordance with vestor. By submitting a request for a
§ 107.630(a), a preliminary unaudited an- draw of Debenture or Participating Se-
nual financial statement on SBA Form curity Leverage, you authorize SBA, or
468 (Short Form). any agent or trustee SBA designates,
(3) A statement certifying that to the to enter into any agreements (and to
best of your knowledge and belief, you bind you to such agreements) nec-
are in compliance with all provisions of essary to accomplish:
the Act and SBA regulations (i.e., no (1) The sale of your Debenture or
unresolved regulatory or statutory vio- Participating Security to a short-term
lations), or a statement listing any investor at a rate that may be different
specific violations you are aware of. Ei- from the Trust Certificate Rate which
ther statement must be executed by will be established at the time of the
one of the following: pooling of your security;
(i) An officer of the Licensee; (2) The purchase of your security
(ii) An officer of a corporate general from the short-term investor, either by
partner of the Licensee; or you or on your behalf; and
(iii) An individual who is authorized (3) The pooling of your security with
to act as or for a general partner of the other securities with the same matu-
Licensee. rity date.
107
§ 107.1400 13 CFR Ch. I (1–1–25 Edition)
(b) Sale of Debentures to a short-term (b) Cumulative. This means that if
investor. If SBA sells your Debenture to you do not pay the entire dividend or
a short-term investor: partnership distribution for a given fis-
(1) The sale price will be the face cal year, the unpaid balance accumu-
amount. lates as a distribution in arrears. You
(2) At the next scheduled date for the do not have to pay interest on distribu-
sale of Debenture Trust Certificates, tions in arrears.
whether or not the sale actually oc- (c) Preferred. This means that you
curs, you must pay interest to the must pay SBA in full (including dis-
short-term investor for the short-term tributions in arrears) before setting
period. If the actual sale of Trust Cer- aside or paying any amount to any
tificates takes place after the sched- other equity holder.
uled date, you must pay the short-term (d) Payable at the discretion of your
investor interest from the scheduled Board of Directors or General Part-
sale date to the actual sale date. This ner(s), except that all distributions in
additional interest is due on the actual arrears must be paid in full when you
sale date. redeem the Preferred Securities.
(3) Failure to pay the interest con- [61 FR 3189, Jan. 31, 1996, as amended at 63
stitutes noncompliance with the terms FR 5869, Feb. 5, 1998]
of your Leverage (see § 107.1810).
(c) Sale of Participating Securities to a § 107.1410 Requirement to redeem 4
short-term investor. If SBA sells your percent Preferred Securities.
Participating Security to a short-term You must redeem 4 percent Preferred
investor, the sale price will be the face Securities not later than 15 years from
amount. the date of issuance. At the redemption
(d) Licensee’s right to repurchase its date, you must pay to SBA:
Debentures before pooling. You may re- (a) The par value (of preferred stock)
purchase your Debentures from the or face value (of a preferred limited
short-term investor before they are partnership interest); plus
pooled. To do so, you must: (b) Any unpaid dividends or partner-
(1) Give SBA written notice at least ship distributions accrued to the re-
10 days before the cut-off date for the demption date.
pool in which your Debenture is to be
included; and § 107.1420 Articles requirements for 4
percent Preferred Securities.
(2) Pay the face amount of the Deben-
ture, plus interest, to the short-term If you have outstanding 4 percent
investor. Preferred Securities, your Articles
must contain all the provisions in
[61 FR 3189, Jan. 31, 1996, as amended at 63 §§ 107.1400 and 107.1410.
FR 5868, Feb. 5, 1998]
[63 FR 5869, Feb. 5, 1998]
PREFERRED SECURITIES LEVERAGE—
SECTION 301(d) LICENSEES § 107.1430 Redeeming 4 percent Pre-
ferred Securities with proceeds of
§ 107.1400 Dividends or partnership non-subsidized Debentures.
distributions on 4 percent Pre- If SBA approves, a Section 301(d) Li-
ferred Securities. censee may use the proceeds of a De-
If you issued Preferred Securities to benture to redeem Preferred Securities
SBA on or after November 21, 1989, you at their mandatory redemption date,
must pay SBA a dividend or partner- including any accrued unpaid dividends
ship distribution of 4 percent per year, or partnership distributions.
from the date you issued Preferred Se- [61 FR 3189, Jan. 31, 1996, as amended at 63
curities to the date you repay them, FR 5869, Feb. 5, 1998]
both inclusive. The dividend or part-
nership distribution is: § 107.1440 Three percent preferred
(a) Computed on the par value of the stock issued before November 21,
outstanding stock or the face value of 1989.
the outstanding limited partnership in- Before November 21, 1989, Preferred
terest. Securities were available only in the
108
Small Business Administration § 107.1500
form of preferred stock and had a pre- PARTICIPATING SECURITIES LEVERAGE
ferred and cumulative dividend of 3
percent. If you have such preferred § 107.1500 General description of Par-
stock outstanding, you must follow ticipating Securities.
§ 107.1400 (except for § 107.1400(d)), sub- (a) Types of Participating Securities.
stituting ‘‘3 percent’’ for ‘‘4 percent’’ Participating Securities are redeem-
throughout.) Dividends on 3 percent able, preferred, equity-type securities.
preferred stock are payable at the dis- SBA may purchase or guarantee Par-
cretion of your Board of Directors or ticipating Securities issued by Licens-
General Partner(s), except that all ees in the form of limited partnership
dividends in arrears must be paid in interests, preferred stock, or deben-
full before any non-SBA investor re- tures with interest payable only to the
ceives any distribution. Upon your liq- extent of earnings. The structure,
uidation, SBA is entitled to payment of terms and conditions of Participating
all dividends in arrears even if you Securities are set forth in detail in
§§ 107.1500 through 107.1590.
have no Retained Earnings Available
for Distribution at such time. (b) Special eligibility requirements for
Participating Securities. In addition to
§ 107.1450 Optional redemption of Pre- the general eligibility requirements for
ferred Securities. Leverage under § 107.1120, Participating
Securities issuers must also comply
(a) Redemption at par or face value. A with special rules on:
Section 301(d) Licensee may redeem (1) Minimum capital (see § 107.210).
Preferred Securities at any time, pro- (2) Liquidity (see § 107.1505).
vided you give SBA at least 30 days
(3) Non-SBA borrowing (see § 107.570).
written notice. You may redeem all or
(4) Equity investing, as set forth in
only part of your Preferred Securities,
this paragraph (b)(4). If you issue Par-
but the par value or face value of the ticipating Securities, you must invest
securities being redeemed must be at an amount equal to the Original Issue
least $50,000. At the redemption date, Price of such securities solely in Eq-
you must pay to SBA: uity Capital Investments, as defined in
(1) The par value (of preferred stock) § 107.50.
or face value (of a preferred limited (c) Special features of Participating Se-
partnership interest); plus curities—Prioritized Payments, Adjust-
(2) Any unpaid dividends or partner- ments, and Profit Participation. When
ship distributions accrued to the re- you issue Participating Securities, you
demption date. agree to make the following payments:
(b) Repurchase of 3 percent preferred (1) Prioritized Payments. Depending
stock for less than par value. If you upon the type of Participating Secu-
issued 3 percent preferred stock to rity you issue, Prioritized Payments
SBA, you may ask SBA to sell it back may be preferred partnership distribu-
to you at a price less than its par tions, preferred dividends, or interest.
value. The terms and conditions of any Your obligation to pay Prioritized Pay-
such transaction will be as set forth in ments is contingent upon your profits
the Notice published in the FEDERAL as determined under § 107.1520.
REGISTER on April 1, 1994 (Copies of (2) Adjustments to Prioritized Payments.
this notice are available from SBA, 409 If you have unpaid Prioritized Pay-
3rd Street, SW., Washington, DC, ments, you must compute Adjust-
20416). SBA has sole discretion to: ments, which are additional contingent
obligations determined under § 107.1520.
(1) Approve or disapprove the sale.
The conditions for paying Adjustments
(2) Determine the sale price after
are the same as for Prioritized Pay-
considering any factors SBA considers ments.
appropriate.
(3) SBA Profit Participation. Profit
(3) Determine the form of payment Participation is an amount payable to
SBA will accept. SBA is not authorized SBA under § 107.1530 in consideration
to accept the proceeds of a subsidized for SBA’s guarantee of your Partici-
Debenture as payment. pating Securities.
109
§ 107.1505 13 CFR Ch. I (1–1–25 Edition)
(d) Distributions by Licensees issuing (3) Any Profit Participation allocated
Participating Securities. Sections 107.1540 to SBA under § 107.1530.
through 107.1580 govern both required [61 FR 3189, Jan. 31, 1996, as amended at 63
and optional Distributions by Partici- FR 5869, Feb. 5, 1998]
pating Securities issuers. Distributions
include both profit distributions and § 107.1505 Liquidity requirements for
returns of capital, paid either to SBA Licensees issuing Participating Se-
or to your non-SBA investors. curities.
(e) Mandatory redemption of Partici- If you have outstanding Partici-
pating Securities. You must redeem Par- pating Securities, you must maintain
ticipating Securities at the redemption sufficient liquidity to avoid a condition
date, which is the same as the matu- of Liquidity Impairment. Such a condi-
rity date of the Trust Certificates for tion will constitute noncompliance
the Trust containing such securities. with the terms of your Leverage under
The redemption date can never be later § 107.1820(e).
(a) Definition of Liquidity Impairment.
than 15 years after the issue date. You
A condition of Liquidity Impairment
must pay the Redemption Price plus
exists when your Liquidity Ratio, as
any unpaid Earned Prioritized Pay-
determined in paragraph (b) of this sec-
ments and any earned Adjustments and tion, is less than 1.20. You are respon-
earned Charges (see § 107.1520). sible for calculating whether you have
(f) Priority of Participating Securities in a condition of Liquidity Impairment:
liquidation of Licensee. In the event of (1) As of the close of your fiscal year;
your liquidation, the following are sen- (2) At the time you apply for Lever-
ior in priority, for all purposes, to all age, unless SBA permits otherwise; and
other equity interests you have issued (3) At such time as you contemplate
at any time: making any Distribution.
(1) The Redemption Price of Partici- (b) Computation of Liquidity Ratio.
pating Securities; Your Liquidity Ratio equals your Total
(2) Any Earned Prioritized Payments Current Funds Available (A) divided by
and any earned Adjustments and your Total Current Funds Required
earned Charges (see § 107.1520); and (B), as determined in the following
table:
CALCULATION OF LIQUIDITY RATIO
Amount reported
Financial account Weight Weighted amount
on SBA form 468
(1) Cash and invested idle funds ........................... × 1.00
(2) Commitments from investors ............................ × 1.00
(3) Current maturities .............................................. × 0.50
(4) Other current assets ......................................... × 1.00
(5) Publicly Traded and Marketable Securities ...... × 1.00
(6) Anticipated operating revenue for next 12 1 × 1.00
months.
(7) Total Current Funds Available .......................... A
(8) Current liabilities ................................................ × 1.00
(9) Commitments to Small Businesses .................. × 0.75
(10) Anticipated operating expense for next 12 1 × 1.00
months.
(11) Anticipated interest expense for next 12 1 × 1.00
months.
(12) Contingent liabilities (guarantees) ................... × 0.25
(13) Total Current Funds Required ........................ B
1 As determined by Licensee’s management under its business plan.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]
110
Small Business Administration § 107.1510
§ 107.1510 How a Licensee computes LI = Average Loans and Investments (at
Earmarked Profit (Loss). cost) for the fiscal year or interim pe-
riod.
Computing your Earmarked Profit
(Loss) is the first step in determining (d) How to compute your Earmarked
your obligations to pay Prioritized Profit (Loss) if Earmarked Asset Ratio is
Payments, Adjustments and Charges 100 percent. (1) (i) If your Earmarked
under § 107.1520 and Profit Participa- Asset Ratio from paragraph (b) of this
tion under § 107.1530. section is 100 percent, use the following
(a) Requirement to compute your Ear- formula to compute your Earmarked
marked Profit (Loss). While you have Profit (Loss):
Participating Securities outstanding or EP = NI + IK + EME
have Earmarked Assets (as defined in
paragraph (b) of this section), you must where:
compute your Earmarked Profit (Loss) EP = Earmarked Profit (Loss)
for: NI = Net Income (Loss), as reported on SBA
(1) Each full fiscal year. Form 468 except as otherwise provided in
(2) Any interim period (consisting of this paragraph (d)(1)
one or more fiscal quarters) for which IK = Unrealized Appreciation (Depreciation)
you want to make a Distribution. on Earmarked Assets that you are dis-
(b) How to determine your Earmarked tributing as an In-Kind Distribution
under § 107.1580
Assets. ‘‘Earmarked Assets’’ means all
EME = Excess Management Expenses
the Loans and Investments that you
have when you issue Participating Se- (ii) For the purpose of determining
curities or that you acquire while you Net Income (Loss), leverage fees paid
have Participating Securities out- to SBA and partnership syndication
standing, and any non-cash assets that costs that you incur must be capital-
you receive in exchange for such Loans ized and amortized on a straight-line
and Investments. basis over not less than five years.
(1) An Earmarked Asset remains ear- (2) ‘‘Excess Management Expenses’’
marked until you dispose of it, even if are those that exceed the following
you no longer have any outstanding limit:
Participating Securities. (i) For a full fiscal year, the limit is
(2) Investments you make after re- the lower of:
deeming all your Participating Securi- (A) 2.5 percent of your weighted aver-
ties are not Earmarked Assets. How- age Combined Capital for the year, plus
ever, if you issue new Participating Se- $125,000 if Combined Capital is below
curities, all of your Loans and Invest- $20,000,000; or
ments again become Earmarked As- (B) Your Management Expenses ap-
sets. proved by SBA.
(3) If you were licensed before March (ii) For less than a full fiscal year,
31, 1993, you may be permitted to ex- you must prorate the annual amounts
clude Loans and Investments held at in paragraph (d)(2)(i) of this section to
that date from Earmarked Assets determine the limit.
under § 107.1590.
(e) How to compute your Earmarked
(c) How to compute your Earmarked
Profit (Loss) if Earmarked Asset Ratio is
Asset Ratio. You must determine your
less than 100 percent. If your Earmarked
Earmarked Asset Ratio each time you
Asset Ratio is less than 100 percent,
compute Earmarked Profit (Loss). If
compute your Earmarked Profit (Loss)
all your Loans and Investments are
as follows:
Earmarked Assets, your Earmarked
Asset Ratio equals 100 percent. Other- (1) Do the Earmarked Profit (Loss)
wise, compute your Earmarked Asset computation in paragraph (d) of this
Ratio using the following formula: section.
(2) Subtract your net realized gain
EAR = (EA ÷ LI) × 100 (loss) (as reported on SBA Form 468) on
where: Loans and Investments that are not
EAR = Earmarked Asset Ratio. Earmarked Assets.
EA = Average Earmarked Assets (at cost) for (3) Separate the result from para-
the fiscal year or interim period. graph (e)(2) of this section into:
111
§ 107.1520 13 CFR Ch. I (1–1–25 Edition)
(i) Net realized gain (loss) (as re- cause you have sufficient profit are
ported on SBA Form 468) on Ear- ‘‘Earned Prioritized Payments’’.
marked Assets (‘‘EGL’’); and (2) Prioritized Payments that have
(ii) The remainder (‘‘R’’). not become payable because you lack
(4) Your Earmarked Profit (Loss) sufficient profit are ‘‘Accumulated
equals: Prioritized Payments’’. Treat all
Prioritized Payments as ‘‘Accumu-
EGL + (R × Earmarked Asset Ratio) lated’’ until they become ‘‘Earned’’
(f) How to compute your cumulative under this section.
Earmarked Profit (Loss). Sum your Ear- (3) Adjustments (computed under
marked Profit (Loss) for all fiscal paragraph (f) of this section) and
years and for any interim period fol- Charges (computed under
lowing the end of your last fiscal year. § 107.1130(d)(2)) are ‘‘earned’’ according
The total is your cumulative Ear- to the same criteria applied to
marked Profit (Loss), which you must Prioritized Payments.
use in the Prioritized Payment com- (c) How to keep track of Prioritized
putations under § 107.1520. Payments. You must establish three ac-
counts to record your Accumulated and
[61 FR 3189, Jan. 31, 1996, as amended at 63 Earned Prioritized Payments:
FR 5870, Feb. 5, 1998] (1) Accumulation Account. The Accu-
mulation Account is a memorandum
§ 107.1520 How a Licensee computes
and allocates Prioritized Payments account. Its balance represents your
to SBA. Accumulated Prioritized Payments,
unearned Adjustments and unearned
This section tells you how to com- Charges.
pute Prioritized Payments, Adjust- (2) Distribution Account. The Distribu-
ments and Charges on Participating tion Account is a liability account. Its
Securities and determine the amounts balance represents your unpaid Earned
you must pay. To distribute these Prioritized Payments, earned Adjust-
amounts, see § 107.1540. ments and earned Charges.
(a) How to compute Prioritized Pay- (3) Earned Payments Account. The
ments and Adjustments—(1) Prioritized Earned Payments Account is a memo-
Payments. For a full fiscal year, the randum account. Each time you add to
Prioritized Payment on an outstanding the Distribution Account balance, add
Participating Security equals the Re- the same amount to the Earned Pay-
demption Price times the related Trust ments Account. Its balance represents
Certificate Rate. For an interim pe- your total (paid and unpaid) Earned
riod, you must prorate the annual Prioritized Payments, earned Adjust-
Prioritized Payment. If your Partici- ments and earned Charges.
pating Security was sold to a short- (d) How to determine your profit for
term investor in accordance with Prioritized Payment purposes. As of the
§ 107.1240, the Prioritized Payment for end of each fiscal year and any interim
the short-term period equals the Re- period for which you want to make a
demption Price times the short-term Distribution:
rate. (1) Bring the Accumulation Account
(2) Adjustments. Compute Adjust- up to date by adding to it all
ments using paragraph (f) of this sec- Prioritized Payments and Charges
tion. through the end of the appropriate fis-
(3) Charges. Compute Charges in ac- cal period.
cordance with § 107.1130(d)(2). (2) Determine whether you have prof-
(b) Licensee’s obligation to pay it for the purposes of this section by
Prioritized Payments, Adjustments and doing the following computation:
Charges. You are obligated to pay (i) Cumulative Earmarked Profit
Prioritized Payments, Adjustments (Loss) under § 107.1510(f); minus
and Charges only if you have profit as (ii) The Earned Payments Account
determined in paragraph (d) of this sec- balance; minus
tion. (iii) All Distributions previously
(1) Prioritized Payments that you made under §§ 107.1550, 107.1560 and
must pay (or have already paid) be- 107.1570(a); minus
112
Small Business Administration § 107.1530
(iv) Any Profit Participation pre- making any Distribution. You must
viously allocated to SBA under distribute any Earned Prioritized Pay-
§ 107.1530, but not yet distributed. ments, earned Adjustments and earned
(3) The amount computed in para- Charges in accordance with § 107.1540.
graph (d)(2) of this section, if greater (2) After you dispose of all your Ear-
than zero, is your profit. If the amount marked Assets and make any required
is zero or less, you have no profit. Distributions in accordance with
(4) If you have a profit, continue with § 107.1540, your obligation to pay any
paragraph (e) of this section. Other- remaining Accumulated Prioritized
wise, continue with paragraph (f) of Payments, unearned Adjustments and
this section. unearned Charges will be extinguished.
(e) Allocating Prioritized Payments to
the Distribution Account. (1) If you have [63 FR 5870, Feb. 5, 1998]
a profit under paragraph (d) of this sec-
tion, determine the lesser of: § 107.1530 How a Licensee computes
SBA’s Profit Participation.
(i) Your profit; or
(ii) The balance in your Accumula- This section tells you how to com-
tion Account. pute SBA’s Profit Participation. Profit
(2) Subtract the result in paragraph Participation is included in the Dis-
(e)(1) of this section from the Accumu- tributions you make to SBA under
lation Account and add it to the Dis- §§ 107.1550 and 107.1560.
tribution Account and the Earned Pay- (a) How to compute Profit Participa-
ments Account. tion. Profit Participation equals your
(f) How to compute Adjustments. You ‘‘Base’’ times your ‘‘Profit Participa-
must compute Adjustments as of the tion Rate’’ (if the Base is zero or less,
end of each fiscal year if you have a you do not owe SBA Profit Participa-
balance greater than zero in either tion). Compute the Base using para-
your Accumulation Account or your graph (c) of this section and the Profit
Distribution Account, after giving ef- Participation Rate using paragraphs
fect to any Distribution that will be (d) through (g) of this section. You
made no later than the second Pay- must compute your Earmarked Profit
ment Date following the fiscal year (Loss) under § 107.1510 and your
end. Prioritized Payments and Adjustments
(1) Determine the combined average under § 107.1520 before you can compute
Accumulation Account and Distribu- Profit Participation.
tion Account balances for the fiscal (b) How to keep track of Profit Partici-
year, assuming that Prioritized Pay- pation. You must establish a Profit
ments accumulate on a daily basis Participation Account to record your
without compounding. computations under this section and
(2) Multiply the average balance payments under §§ 107.1550 and 107.1560.
computed in paragraph (f)(1) of this Its balance represents your unpaid
section by the average of the Trust Profit Participation.
Certificate Rates for all the Partici- (c) How to compute the Base. As of the
pating Securities poolings during the end of each fiscal year and any year-to-
fiscal year. date interim period for which you want
(3) Add the amounts computed in this to make a Distribution, compute your
paragraph (f) to your Accumulation Base using the following formula:
Account.
(g) Licensee’s obligation to pay B = EP ¥ PPA ¥ UL
Prioritized Payments after redeeming Par- where:
ticipating Securities. This paragraph (g)
applies if you have redeemed all your B = Base.
EP = Earmarked Profit (Loss) for the period
Participating Securities, but you still
from § 107.1510.
hold Earmarked Assets and still have a
PPA = Prioritized Payments for the period
balance in your Accumulation Ac- from § 107.1520(a)(1), Adjustments (if ap-
count. plicable) from § 107.1520(f), and Charges (if
(1) You must continue to perform all applicable) from § 107.1130(d)(2).
the procedures in this section as of the UL = ‘‘Unused Loss’’ from prior periods as
end of each fiscal quarter and prior to determined in this paragraph (c).
113
§ 107.1530 13 CFR Ch. I (1–1–25 Edition)
(1) If the Base computed as of the end must have been expressly provided for
of your previous fiscal year (your in a plan of operations submitted to
‘‘Previous Base’’) was less than zero, and approved by SBA in writing, or
your Unused Loss equals your Previous must be the result of the takedown of
Base. commitments or the conversion of non-
(2) If your Previous Base was zero or cash assets that were included in your
greater, your Unused Loss equals zero, Private Capital. If these conditions are
with the following exception: If you satisfied, compute your reduced PLC
made an interim Distribution of Profit ratio as follows:
Participation during your previous fis- (i) Divide the highest dollar amount
cal year, and your Previous Base was of Participating Securities you have
lower than the interim Base on which ever had outstanding by your increased
your Distribution was computed, then
Leverageable Capital.
your Unused Loss equals the difference
(ii) If the result in paragraph (e)(2)(i)
between the interim Base and the Pre-
vious Base. For example, assume you of this section is lower than your PLC
are computing your Base as of Decem- ratio currently in effect, such result
ber 31, 1997, your fiscal year end. Your will become your new PLC ratio.
Previous Base, computed as of Decem- (f) Compute the Profit Participation
ber 31, 1996, was $3,000,000. During 1996, Rate (before indexing). Compute the
you made an interim Distribution Profit Participation Rate (before in-
which was computed on a Base of dexing) using the table in this para-
$3,500,000 as of June 30, 1996. The graph (f). Then go to paragraph (g) of
$500,000 difference between the 1996 in- this section to determine whether to
terim and year-end Bases would be car- index the Profit Participation Rate.
ried forward as Unused Loss in the
If your PLC ratio is: Then your Profit Participation Rate is:
computation of your Base as of Decem-
ber 31, 1997. 1 or less ................ 9% × PLC Ratio.
(3) If you had no Participating Secu- More than 1 .......... 9% + [3% × (PLC ratio-1)].
rities outstanding as of the end of your
last fiscal year, you may request SBA’s (g) Indexing the Profit Participation
approval to treat your Undistributed Rate. The Profit Participation Rate is
Net Realized Loss, as reported on SBA indexed, up or down, to the yield-to-
Form 468 for that year, as Unused Loss. maturity on Treasury bonds with a re-
If you did not file SBA Form 468 be- maining term of ten (10) years (the
cause you were not yet licensed as of ‘‘Treasury Rate’’). You must perform
the end of your last fiscal year, you the indexing procedures in this para-
may request SBA’s approval to treat graph (g) unless the Treasury Rate was
pre-licensing losses as Unused Loss. exactly 8 percent on every date that
(d) How to compute the Profit Partici- you issued Participating Securities.
pation Rate. You must determine your (1) Licensees that have issued Partici-
Profit Participation Rate each time
pating Securities on only one occasion.
you compute a Base that is greater
Determine the Treasury Rate for the
than zero. Compute the Rate by fol-
date you issued your Participating Se-
lowing the steps in paragraphs (e)
curity. Adjust the Profit Participation
through (g) of this section.
(e) Compute the ‘‘PLC ratio’’—(1) Gen- Rate from paragraph (f) of this section
eral rule. The ‘‘PLC ratio’’ is the high- by the percentage difference between
est ratio of outstanding Participating the Treasury Rate and 8 percent. For
Securities to Leverageable Capital that example, assume that you issued Par-
you have ever attained. ticipating Securities when the Treas-
(2) Exception. You may reduce the ury Rate was 10 percent. The percent-
ratio computed under paragraph (e)(1) age difference between 10 percent and 8
of this section if you have increased percent is 25 percent. If you had a PLC
your Leverageable Capital above its ratio of 1, the Profit Participation
highest previous level. The increase Rate before indexing would be 9 per-
must have taken place at least 120 days cent. You would increase this rate by
before the date as of which your Base is 25 percent, giving you a Profit Partici-
computed. In addition, the increase pation Rate of 11.25 percent.
114
Small Business Administration § 107.1550
(2) Licensees that have issued Partici- (i) Determine the difference between
pating Securities on more than one occa- the Profit Participation Rate you just
sion. Determine the Treasury Rate for used in paragraph (h)(1) of this section
each of the dates you issued Partici- and the Rate used in your previous
pating Securities. computation;
(i) Compute an average of all such (ii) Multiply the difference by the
Treasury Rates, weighted to reflect the Base from your last Profit Participa-
dollar amount of each issuance (ignor- tion computation; and
ing any redemptions) and the number (iii) Add the result to the amount
of days from the date of each issuance you computed in paragraph (h)(1) of
to the date as of which you are com- this section.
(3) Reduce the Profit Participation
puting the Profit Participation Rate.
computed in paragraphs (h)(1) and
Example to paragraph (g)(2)(i) of this section. (h)(2) of this section by any amounts of
If you issued $10 million of Participating Se- Profit Participation that you distrib-
curities on the 60th day of Fiscal Year 1 uted or reserved for distribution to
when the Treasury Rate was 8 percent, and SBA, or its designated agent or Trust-
another $15 million on the 100th day of Fiscal ee, for any previous interim period(s)
Year 3 when the Treasury Rate was 10 per-
cent, then the weighted average Treasury
during the fiscal year. The result is
Rate computed as of the end of Fiscal Year SBA’s Profit Participation (unless it is
3 would be 8.55 percent. [Days elapsed since less than zero, in which case SBA’s
first issuance of Participating Securities = Profit Participation is zero).
1,035; days elapsed since second issuance of (i) Allocation of Profit Participation.
Participating Securities = 265; weighted Before any Distribution and in any
amount of first issuance = $10,000,000 × 1,035/ case within 120 days following the end
1,035 = $10,000,000; weighted amount of second of your fiscal year, you must add the
issuance = $15,000,000 × 265/1035 = $3,840,579; amount of Profit Participation com-
weighted average amount of Participating
Securities issued = $10,000,000 + $3,840,579 =
puted under this § 107.1530 to the Profit
$13,840,579; weighted average Treasury Rate= Participation Account. You must re-
{(.08 × $10,000,000) + (.10 × $3,840,579)} / serve funds equal to this amount for
$13,840,579 = 8.55%] distribution to SBA, or its designated
agent or Trustee; you may not reinvest
(ii) Adjust the Profit Participation these funds or use them for any other
Rate from paragraph (f) of this section purpose.
by the percentage difference between
the weighted average Treasury Rate [61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9,
1996, as amended at 63 FR 5871, Feb. 5, 1998]
and 8 percent. In the example given in
paragraph (g)(2)(i) of this section, if the § 107.1540 Distributions by Licensee—
PLC ratio were equal to 2, the Profit Prioritized Payments and Adjust-
Participation Rate for the fiscal year ments.
would be 12.83 percent. [{((.0855¥.08) ÷ After you compute Prioritized Pay-
.08) + 1} × .12 × 100 = 12.83%] ments and Adjustments under § 107.1520,
(h) Computing SBA’s Profit Participa- you must distribute them in accord-
tion. If the Base from paragraph (c) of ance with this § 107.1540. You must no-
this section is greater than zero, you tify SBA of any planned distribution
must compute SBA’s Profit Participa- under this section 10 business days be-
tion as follows: fore the distribution date, unless SBA
(1) Multiply the Base from paragraph permits otherwise.
(c) of this section by the Profit Partici-
[61 FR 3189, Jan. 31, 1996, as amended at 63
pation Rate from paragraph (g) of this
FR 5871, Feb. 5, 1998; 88 FR 46012, July 18,
section. 2023]
(2) If your last Profit Participation
computation was for an interim period § 107.1550 Distributions by Licensee—
during the same fiscal year and used a permitted ‘‘tax Distributions’’ to pri-
higher Profit Participation Rate than vate investors and SBA.
the Rate you just used in paragraph If you have outstanding Partici-
(h)(1) of this section, you must adjust pating Securities or Earmarked Assets,
the amount computed in paragraph and you are a limited partnership, ‘‘S
(h)(1) of this section as follows: Corporation,’’ or equivalent pass-
115
§ 107.1550 13 CFR Ch. I (1–1–25 Edition)
through entity for tax purposes, you (2) You may compute the highest
may make ‘‘tax Distributions’’ to your combined marginal Federal and State
investors in accordance with this income tax rate on ordinary income
§ 107.1550, whether or not they have an and capital gains using either indi-
actual tax liability. SBA receives a vidual or corporate rates. However, you
share of any tax Distribution you must apply the same type of rate, ei-
make. This section tells you when you ther individual or corporate, to both
may make a ‘‘tax Distribution’’ and ordinary income and capital gains.
how to compute it. You must notify (3) In determining the combined Fed-
SBA of any planned distribution under eral and State income tax rate, you
this section 10 business days before the must assume that State income taxes
distribution date, unless SBA permits are deductible from Federal income
otherwise. taxes. For example, if the Federal tax
(a) Conditions for making a tax Dis- rate was 35 percent and the State tax
tribution. You may make a tax Dis- rate was 5 percent, the combined tax
tribution only if: rate would be [35% × (1¥.05)] + 5% =
(1) You have paid all your Prioritized 38.25%.
Payments, Adjustments, and Charges, (4) For purposes of this paragraph (b),
so that the balance in both your Dis- the ‘‘State income tax’’ is that of the
tribution Account and your Accumula- State where your principal place of
tion Account is zero (see § 107.1520). business is located, and does not in-
(2) You satisfy the liquidity require- clude any local income taxes.
ment in § 107.1505. (c) SBA’s share of the tax Distribution.
(3) The tax Distribution does not ex- (1) SBA’s percentage share of the tax
ceed your Retained Earnings Available Distribution is equal to the Profit Par-
for Distribution. ticipation Rate computed under
(4) The tax Distribution does not ex- § 107.1530.
ceed the Maximum Tax Liability from (2) SBA may direct you to pay its
paragraph (b) of this section. share of the tax Distribution to its des-
(b) How to compute the Maximum Tax ignated agent or Trustee.
Liability. (1) You may compute your (3) SBA will apply its share of the tax
Maximum Tax Liability for a full fiscal Distribution in the order set forth in
year or for any calendar quarter. Use § 107.1560(g).
the following formula: (d) Paying a tax Distribution. You may
M = (TOI × HRO) + (TCG × HRC) make an annual tax Distribution on
the first or second Payment Date fol-
where: lowing the end of your fiscal year. You
M = Maximum Tax Liability may make a quarterly tax Distribution
TOI = Net ordinary income allocated to your on the first Payment Date following
partners or other owners for Federal in-
come tax purposes for the fiscal year or
the end of the calendar quarter for
calendar quarter for which the Distribu- which the Distribution is being made.
tion is being made, excluding Prioritized See also § 107.1575(a).
Payments allocated to SBA. (e) Excess tax Distributions. (1) As of
HRO = The highest combined marginal Fed- the end of your fiscal year, you must
eral and State income tax rate for cor- determine whether you made any ex-
porations or individuals on ordinary in- cess tax Distributions for the year in
come, determined in accordance with
accordance with paragraph (e)(2) of this
paragraphs (b)(2) through (b)(4) of this
section. section. Any tax Distributions that you
TCG = Net capital gains allocated to your make for a subsequent period must be
partners or other owners for Federal in- reduced by the excess amount distrib-
come tax purposes for the fiscal year or uted.
calendar quarter for which the Distribu- (2) Determine your excess tax Dis-
tion is being made, excluding Prioritized tributions by adding together all your
Payments allocated to SBA. quarterly tax Distributions for the
HRC = The highest combined marginal Fed-
year (ignoring any required reductions
eral and State income tax rate for cor-
porations or individuals on capital gains, for excess tax Distributions made in
determined in accordance with para- prior years), and subtracting the max-
graphs (b)(2) through (b)(4) of this sec- imum tax Distribution that you would
tion. have been permitted to make based
116
Small Business Administration § 107.1560
upon a single computation performed tions on either the first or second Pay-
for the entire fiscal year. The result, if ment Date following the end of your
greater than zero, is your excess tax fiscal year.
Distribution for the year. (d) Effect of Distributions on Retained
[61 FR 3189, Jan. 31, 1996, as amended at 63 Earnings Available for Distribution. Dis-
FR 5871, Feb. 5, 1998; 64 FR 70996, Dec. 20, tributions under this § 107.1560 have the
1999] following effect on your Retained Earn-
ings Available for Distribution:
§ 107.1560 Distributions by Licensee— (1) All Distributions to private inves-
required Distributions to private tors reduce Retained Earnings Avail-
investors and SBA.
able for Distribution.
You must make Distributions under (2) Distributions to SBA, or its des-
this § 107.1560 if you have outstanding ignated agent or Trustee, reduce Re-
Participating Securities or Earmarked tained Earnings Available for Distribu-
Assets and you satisfy the conditions tion if they are applied as payments of
in paragraph (a) of this section. Dis- Profit Participation or distributions on
tributions under this section are deter- Preferred Securities (see paragraph (g)
mined as of the end of each fiscal year. of this section).
You must notify SBA of any planned (3) Distributions to SBA, or its des-
distribution under this section 10 busi- ignated agent or Trustee, do not reduce
ness days before the distribution date, Retained Earnings Available for Dis-
unless SBA permits otherwise. tribution if they are applied as a repay-
(a) Conditions for making Distributions. ment or redemption of Leverage (see
Distributions under this section are paragraph (g) of this section).
subject to the following conditions: (e) SBA’s share of the total Distribu-
(1) You must have paid all Prioritized
tion. Use the following table to deter-
Payments, Adjustments and Charges,
mine the percentage share of the total
so that the balance in both your Dis-
Distribution (from paragraph (b) of this
tribution Account and your Accumula-
section) that goes to SBA (or its des-
tion Account is zero (see §§ 107.1520 and
ignated agent or Trustee):
107.1540).
(2) You must have made any per- SBA’S PERCENTAGE SHARE OF TOTAL
mitted tax Distribution that you DISTRIBUTION
choose to make under § 107.1550.
(3) You must satisfy the liquidity re- If your ratio of Leverage to Then SBA’s percentage
quirement in § 107.1505. Leverageable Capital as of share of the Distribution is:
the fiscal period end is:
(4) The amount you distribute under
this section must not exceed your re- Over 200% ............................. [Leverage / (Leverage +
maining Retained Earnings Available Leverageable Capital)] ×
100.
for Distribution. Over 100% but not over 50%.
(b) Total amount you must distribute. 200%.
Unless SBA permits otherwise, the 100% or less .......................... Profit Participation Rate from
total amount you must distribute § 107.1530.
equals the result (if greater than zero)
of the following computation: (f) Exceptions to the Distribution re-
(1) Your Retained Earnings Available quirement. (1) With SBA’s prior written
for Distribution as of the end of your approval, you may withhold from dis-
fiscal year, after giving effect to any tribution reasonable reserves necessary
Distribution under §§ 107.1540 and to protect your investments or relative
107.1550; minus position in Loans and Investments and
(2) All previous Distributions under to meet contingent liabilities.
this section and § 107.1570(a) that were (i) If you submit a written request for
applied as redemptions or repayments SBA approval, you may consider it ap-
of Leverage; plus proved unless SBA notifies you other-
(3) All previous Distributions under wise within 30 days from receipt.
§ 107.1570(b) that reduced your Retained (ii) Reserves that you withhold from
Earnings Available for Distribution. distribution may not be used to make
(c) When you must make Distributions. investments in additional portfolio
You must make the required Distribu- companies.
117
§ 107.1570 13 CFR Ch. I (1–1–25 Edition)
(iii) Withholding of reserves under (3) You may make such Distributions
this paragraph (f)(1) is not a ‘‘payment only on the next Payment Date fol-
failure’’ in violation of § 107.1820(e)(6). lowing the end of your fiscal quarter.
(2) SBA may restrict Distributions (4) The total amount of such Dis-
under this § 107.1560 if SBA determines tributions may not exceed the result of
that the value of your assets is materi- the following computation:
ally overstated. SBA must give you no- (i) Your Retained Earnings Available
tice of such a determination in advance for Distribution as of the end of your
of your proposed Distribution. fiscal quarter; minus
(g) How SBA will apply your Distribu- (ii) All previous Distributions under
tions. Your Distributions to SBA (or its this paragraph (a) or § 107.1560 that
designated agent or Trustee) under this were applied as redemptions or repay-
§ 107.1560 will be applied in the fol- ments of Leverage; plus
lowing order: (iii) All previous Distributions under
(1) First, to Profit Participation; paragraph (b) of this section that re-
(2) Second, to the extent there re- duced your Retained Earnings Avail-
main any Retained Earnings Available able for Distribution.
for Distribution, to distributions on (b) Other optional Distributions. On
Preferred Securities; any Payment Date, you may make ad-
(3) Third, as a redemption of Partici- ditional Distributions to your private
pating Securities in order of issue; investors and to SBA (or its designated
(4) Fourth, as a redemption of Pre- agent or Trustee) under this paragraph
ferred Securities; and (b).
(1) Conditions for making a Distribu-
(5) Fifth, as the repayment of prin-
tion. You may make a Distribution
cipal of any outstanding Debentures,
under this paragraph (b) only if:
with such repayment to be made into
(i) You have distributed all Earned
escrow on terms and conditions SBA
Prioritized Payments, earned Adjust-
determines.
ments, and earned Charges, so that the
[61 FR 3189, Jan. 31, 1996, as amended at 63 balance in your Distribution Account
FR 5872, Feb. 5, 1998] is zero (see § 107.1520).
(ii) You have distributed all Profit
§ 107.1570 Distributions by Licensee— Participation computed under § 107.1530
optional Distribution to private in- which you are required to distribute
vestors and SBA.
under § 107.1560 or permitted to dis-
If you have outstanding Partici- tribute under paragraph (a) of this sec-
pating Securities or Earmarked Assets, tion, as appropriate, and you have
you may make two types of optional made all required Distributions under
Distributions under this § 107.1570: § 107.1560.
quarterly Distributions determined the (iii) You satisfy the liquidity require-
same way as the required annual Dis- ment in § 107.1505 or obtain SBA’s prior
tributions in § 107.1560, and Distribu- written approval of the Distribution.
tions allocated between SBA and your (iv) You do not have a condition of
private investors in proportion to the Capital Impairment.
capital contributions of each. You (v) The Distribution does not reduce
must notify SBA of any planned dis- your Regulatory Capital (excluding
tribution under this section 10 business commitments from Institutional Inves-
days before the distribution date, un- tors) below the minimum required
less SBA permits otherwise. under § 107.210, unless SBA approves the
(a) Quarterly Distributions subject to reduction as part of a plan of liquida-
conditions in § 107.1560. (1) You may tion.
make Distributions under this para- (vi) The Distribution does not cause
graph (a) as of the end of any fiscal you to have excess Leverage contrary
quarter, giving SBA (or its designated to section 303 of the Act.
agent or Trustee) a percentage share (2) SBA’s share of Distribution. (i) If
determined under § 107.1560(e). your Capital Impairment Percentage
(2) Such Distributions are subject to under § 107.1840 is zero, SBA’s percent-
all the provisions in § 107.1560 (a)(1), age share of any Distribution under
(a)(3), (a)(4), (d), (f)(2), and (g). this paragraph (b) equals:
118
Small Business Administration § 107.1580
[Leverage /(Leverage + Leverageable (3) Optional Distributions under
Capital)] × 100 § 107.1540(a)(2) and § 107.1570 may be
made on any date.
In this formula, use Leverage and (4) Quarterly Distributions under
Leverageable Capital as of the date of § 107.1550 must be made no earlier than
the Distribution, after giving effect to the last day of the calendar quarter for
any Distribution under § 107.1560 and which the Distribution is being made
paragraph (a) of this section. and no later than the first Payment
(ii) If your Capital Impairment Per- Date following the end of such calendar
centage under § 107.1840 is greater than quarter.
zero, you must modify the formula in (b) Conditions for making Distribution.
paragraph (b)(2)(i) of this section by re- All Distributions under this section are
placing Leverageable Capital with: subject to the following conditions:
Leverageable Capital × (100% ¥ CIP) (1) You must obtain SBA’s written
approval before the distribution date;
where ‘‘CIP’’ is your Capital Impairment (2) The ending date of the period for
Percentage or 100 percent, whichever is
less.
which you compute your Earmarked
Profits, Prioritized Payments, Adjust-
(3) How SBA will apply Distributions. ments, Charges, Profit Participation,
Any amounts you distribute to SBA, or Retained Earnings Available for Dis-
its designated agent or Trustee, under tribution, liquidity ratio, Capital Im-
this paragraph (b) will be applied as a pairment, and any other applicable
repayment or redemption of Leverage computations required under §§ 107.1500
in the order set forth in § 107.1560(g)(3) through 107.1570, must be:
through (g)(5). (i) The distribution date, or
(4) Effect of Distributions on Retained (ii) If your Distribution includes an-
Earnings Available for Distribution. Any nual Distributions under
amounts you distribute to non-SBA in- §§ 107.1540(a)(1), 107.1550 and/or 107.1560,
vestors under this paragraph (b) must your most recent fiscal year end;
reduce your Retained Earnings Avail- (3) If your Distribution includes an
able for Distribution to zero before re- amount which SBA will apply as a re-
ducing your Private Capital. demption of Participating Securities,
(5) Permitted exception to § 107.585. You the effective date of such redemption,
may make any Distribution permitted for all purposes including future com-
by this paragraph (b), even if the result putations of Prioritized Payments, will
is a reduction in your Regulatory Cap- be the next Payment Date following
ital that would otherwise be prohibited the distribution date.
under § 107.585.
[63 FR 5872, Feb. 5, 1998, as amended at 64 FR
[61 FR 3189, Jan. 31, 1996, as amended at 63 70997, Dec. 20, 1999]
FR 5872, Feb. 5, 1998]
§ 107.1580 Special rules for In-Kind
§ 107.1575 Distributions on other than Distributions by Licensees.
Payment Dates. (a) In-Kind Distributions while Licensee
(a) Permitted Distributions on other has outstanding Participating Securities.
than Payment Dates. Notwithstanding A Distribution under §§ 107.1540, 107.1560
any provisions to the contrary in or 107.1570 may consist of securities (an
§§ 107.1540 through 107.1570, you may ‘‘In-Kind Distribution’’). Such a Dis-
make Distributions on dates other tribution must satisfy the conditions
than Payment Dates as follows: in this paragraph (a).
(1) Required annual Distributions (1) You may distribute only Distrib-
under § 107.1540(a)(1), annual Distribu- utable Securities.
tions under § 107.1550, and any Distribu- (2) You must distribute each security
tions under § 107.1560 must be made no pro-rata to all investors and to SBA or
later than the second Payment Date its designated agent or Trustee, based
following the end of your fiscal year. on the amounts that each party would
(2) Required Distributions under receive if the Distribution were in
§ 107.1540(b) must be made no later than cash.
the first Payment Date following the (3) You must impute a gain (loss) on
end of the applicable fiscal quarter; each security being distributed as if it
119
§ 107.1585 13 CFR Ch. I (1–1–25 Edition)
were being sold, using the value of the § 107.1590 Special rules for companies
security as of the declaration date of licensed on or before March 31,
the Distribution (if you are a Corporate 1993.
Licensee) or the distribution date (if This section applies to companies li-
you are a Partnership Licensee). censed on or before March 31, 1993 that
(4) You must deposit SBA’s share of apply to issue Participating Securities.
securities being distributed with a dis- (a) Election to exclude pre-existing port-
position agent designated by SBA. As folio. You may choose to exclude all
an alternative, if you agree, SBA may (but not a portion) of your Loans and
direct you to dispose of its shares. In Investments as of March 31, 1993, from
this case, you must promptly remit the classification as Earmarked Assets if:
proceeds to SBA. (1) The proceeds of your first
(b) In-Kind Distributions after Licensee issuance of Participating Securities
has redeemed all Participating Securities. are not used to refinance outstanding
This paragraph (b) applies from the Debentures (see § 107.1585(a)). SBA will
time you redeem all your Participating consider payment or prepayment of
Securities until you dispose of all your any outstanding Debenture to be a refi-
Earmarked Assets. nancing unless you demonstrate to
(1) You may make an In-Kind Dis- SBA’s satisfaction that you can pay
tribution of an Earmarked Asset only the Debenture principal without rely-
if you pay SBA the lower of: ing on the proceeds of the Partici-
(i) An amount equal to the Unreal- pating Securities.
ized Appreciation on the asset; or (2) SBA, in its sole discretion, ap-
(ii) The full amount of your Accumu- proves the exclusion.
lated Prioritized Payments and unpaid (b) Treatment of pre-existing portfolio if
Adjustments. not excluded. If you do not choose to ex-
(2) You must obtain SBA’s prior writ- clude your Loans and Investments as of
ten approval of any In-Kind Distribu- March 31, 1993, they will be Earmarked
tion of Earmarked Assets that are not Assets for all purposes.
Distributable Securities, specifically (c) Requirements for Licensee’s first
including approval of the valuation of issuance of Participating Securities. When
the assets. you apply for your first issuance of
[61 FR 3189, Jan. 31, 1996, as amended at 63 Participating Securities, you must
FR 5872, Feb. 5, 1998; 64 FR 70997, Dec. 20, comply with the following:
1999] (1) For each of your Loans and In-
vestments, you must submit:
§ 107.1585 Exchange of Debentures for (i) The most recent annual report (or
Participating Securities. fiscal year-end financial statements)
You may, in SBA’s discretion, retire and the most recent interim financial
a Debenture through the issuance of statements of the Small Business; and
Participating Securities. To do so, you (ii) Your valuation reports on the
must: Small Business, prepared as of the end
(a) Obtain SBA’s approval to issue of each of your last three fiscal years.
Participating Securities; If you have applied for Participating
(b) Pay all unpaid accrued interest on Securities on the basis of interim fi-
the Debenture, plus any applicable pre- nancial statements, you must also sub-
payment penalties, fees, and other mit a valuation report as of your in-
charges; terim financial statement date.
(c) Have outstanding Equity Capital (2) If you have negative Undistrib-
Investments (at cost) equal to the uted Net Realized Earnings and/or a
amount of the Debenture being refi- net Unrealized Loss on Securities Held,
nanced; and SBA may require you to undergo a
(d) Classify all your existing Loans quasi-reorganization in accordance
and Investments as Earmarked Assets. with generally accepted accounting
principles.
[63 FR 5869, Feb. 5, 1998]
120
Small Business Administration § 107.1610
(3) If your financial statements ac- interest paid on the Debentures, or the
companying the Participating Securi- Redemption Price of and Prioritized
ties application are for an interim pe- Payments on the Participating Securi-
riod, you must have your SBA-ap- ties, in the Pool or Trust against which
proved independent public accountant they are issued.
perform a limited-scope audit of the (e) Formation of a Pool or Trust hold-
statements. For purposes of this para- ing Leverage Securities. SBA shall ap-
graph (d)(3), ‘‘limited scope audit’’ prove the formation of each Pool or
means auditing procedures sufficient Trust. SBA may, in its discretion, es-
to enable the independent public ac- tablish the size of the Pools and their
countant to express an opinion on the composition, the interest rate on the
Statement of Financial Position and TCs issued against Trusts or Pools,
the accompanying Schedule of Loans fees, discounts, premiums and other
and Investments. charges made in connection with the
[61 FR 3189, Jan. 31, 1996, as amended at 63 Pools, Trusts, and TCs, and any other
FR 5873, Feb. 5, 1998] characteristics of a Pool or Trust it
deems appropriate.
FUNDING LEVERAGE BY USE OF SBA-
GUARANTEED TRUST CERTIFICATES [61 FR 3189, Jan. 31, 1996, as amended at 63
FR 5873, Feb. 5, 1998]
(‘‘TCS’’)
§ 107.1600 SBA authority to issue and § 107.1610 Effect of prepayment or
guarantee Trust Certificates. early redemption of Leverage on a
Trust Certificate.
(a) Authorization. Sections 319(a) and
(b) of the Act authorize SBA or its CRA (a) The rights, if any, of a Licensee to
to issue TCs, and SBA to guarantee the prepay any Debenture or make early
timely payment of the principal and in- redemption of any Participating Secu-
terest thereon. Any guarantee by SBA rity are established by the terms of
of such TC is limited to the principal such securities, and no such right is
and interest due on the Debentures or created or denied by the regulations in
the Redemption Price of and this part.
Prioritized Payments on Participating (b) SBA’s rights to purchase or pre-
Securities in any Trust or Pool back- pay any Debenture without premium
ing such TC. The full faith and credit are established by the terms of the
of the United States is pledged to the Guaranty Agreement relating to the
payment of all amounts due under the Debenture. SBA’s rights to redeem, at
guarantee of any TC. any time, any Participating Security
(b) Periodic exercise of authority. SBA without premium are established by
will issue guarantees of Debentures and the terms of the Guaranty Agreement
Participating Securities under section relating to the Participating Security.
303 and of TCs under section 319 of the (c) Any prepayment of a Debenture
Act at six month intervals, or at short- or early redemption of a Participating
er intervals, taking into account the Security pursuant to the terms of the
amount and number of such guarantees Guaranty Agreement relating to such
or TCs. securities, shall reduce the SBA guar-
(c) SBA authority to arrange public or antee of timely payment of principal
private fundings of Leverage. SBA in its and interest on a TC in proportion to
discretion may arrange for public or the amount of principal or Redemption
private financing under its guarantee Price that such prepaid Debenture or
authority. Such financing arranged by redeemed Participating Security rep-
SBA may be accomplished by the sale resents in the Trust or Pool backing
of individual Debentures or Partici- such TC.
pating Securities, aggregations of De- (d) SBA shall be discharged from its
bentures or Participating Securities, or guarantee obligation to the holder or
Pools or Trusts of Debentures or Par- holders of any TC, or any successor or
ticipating Securities. transferee of such holder, to the extent
(d) Pass-through provisions. TCs shall of any such prepayment, whether or
provide for a pass-through to their not such successor or transferee shall
holders of all amounts of principal and have notice of any such prepayment.
121
§ 107.1620 13 CFR Ch. I (1–1–25 Edition)
(e) Interest on prepaid Debentures cost of funding Debentures or Partici-
and Prioritized Payments on Partici- pating Securities.
pating Securities shall accrue only (iii) Monitor the performance of the
through the date of such voluntary pre- Selling Agent, Poolers, CRA, and the
payment or SBA payment, as the case Trustee.
may be. (iv) Perform such other functions as
(f) In the event that all Debentures SBA, from time to time, may prescribe.
or Participating Securities consti- (3) Central Registration Agent. Pursu-
tuting a Trust or Pool are prepaid, the ant to a contract entered into with
TCs backed by such Trust or Pool shall SBA, the CRA, as SBA’s agent, will do
be redeemed by payment of the unpaid the following with respect to the Pools
principal and interest on the TCs; Pro- or Trust Certificates for the Deben-
vided, however, that in the case of the tures or Participating Securities:
prepayment of a Debenture pursuant to (i) Form an SBA-approved Pool or
the provisions of the Guaranty Agree- Trust;
ment relating to the Debenture, the (ii) Issue the TCs in the form pre-
CRA shall pass through pro rata to the scribed by SBA;
holders of the TCs any such prepay- (iii) Transfer the TCs upon the sale of
ments including any prepayment pen- original issue TCs in any secondary
alty paid by the obligor Licensee pur- market transaction;
suant to the terms of the Debenture. (iv) Receive payments from Licens-
ees;
§ 107.1620 Functions of agents, includ- (v) Make periodic payments as sched-
ing Central Registration Agent, uled or required by the terms of the
Selling Agent and Fiscal Agent. TCs, and pay all amounts required to
(a) Agents. SBA will appoint or cause be paid upon prepayment of Debentures
to be appointed agent(s) to perform or redemption of Participating Securi-
functions necessary to market and ties;
service Debentures, Participating Se- (vi) Hold, safeguard, and release all
curities, or TCs pursuant to this part. Debentures and Participating Securi-
(1) Selling Agent. As a condition of ties constituting Trusts or Pools upon
guaranteeing a Debenture or Partici- instructions from SBA;
pating Security, SBA shall cause each (vii) Remain custodian of such other
Licensee to appoint a Selling Agent to documentation as SBA shall direct by
perform functions which include, but written instructions;
are not limited to: (viii) Provide for the registration of
all pooled Debentures and Partici-
(i) Selecting qualified entities to be-
pating Securities, all Pools and Trusts,
come pool or Trust assemblers
and all TCs;
(‘‘Poolers’’).
(ix) Perform such other functions as
(ii) Receiving guaranteed Debentures
SBA may deem necessary to imple-
and Participating Securities as well as
ment the provisions of this section.
negotiating the terms and conditions (b) Functions. The function of locat-
of periodic offerings of Debentures and/ ing purchasers, and negotiating and
or TCs with Poolers on behalf of Li- closing the sale of Debentures, Partici-
censees. pating Securities and TCs, may be per-
(iii) Directing and coordinating peri- formed either by SBA or an agent ap-
odic sales of Debentures and Partici- pointed by SBA. Nothing in the regula-
pating Securities and/or TCs. tions in this part shall be interpreted
(iv) Arranging for the production of to prevent the CRA from acting as
the Offering Circular, certificates, and SBA’s agent for this purpose.
such other documents as may be re-
quired from time to time. § 107.1630 SBA regulation of Brokers
(2) Fiscal Agent. SBA shall appoint a and Dealers and disclosure to pur-
Fiscal Agent to: chasers of Leverage or Trust Cer-
(i) Establish performance criteria for tificates.
Poolers. (a) Disclosure to purchasers. Prior to
(ii) Monitor and evaluate the finan- any sale of a Debenture, Participating
cial markets to determine those fac- Security, or TC, SBA shall require the
tors that will minimize or reduce the seller, or the broker or dealer as agent
122
Small Business Administration § 107.1710
for the seller, to disclose to the pur- (d) Termination/suspension proceedings.
chaser, in a form prescribed or ap- A broker’s or dealer’s participation in
proved by SBA, specified information the market for Debentures, Partici-
on the terms, conditions, and yield of pating Securities or TCs will be con-
such instrument. ducted in accordance with part 134 of
(b) Brokers and Dealers. Each broker, this chapter. SBA may, for any of the
dealer, and Pool or Trust assembler ap- reasons stated in paragraphs (b)(1)
proved by SBA pursuant to these regu- through (b)(4) of this section, suspend
lations shall either be regulated by a the privilege of any broker or dealer to
Federal financial regulatory agency, or participate in this market. SBA shall
be a member of the National Associa- give written notice at least ten (10)
tion of Securities Dealers (NASD), and business days prior to the effective
shall be in good standing in respect to date of such suspension. Such notice
compliance with the financial, ethical, shall inform the broker or dealer of the
and reporting requirements of such opportunity for a hearing pursuant to
body. They also shall be in good stand- part 134 of this chapter.
ing with SBA as determined by the
SBA Associate Administrator for In- § 107.1640 SBA access to records of the
CRA, Brokers, Dealers and Pool or
vestment (see paragraph (d) of this sec- Trust assemblers.
tion) and shall provide a fidelity bond
or insurance in such amount as SBA The CRA and any broker, dealer and
may require. Pool or Trust assembler operating
(c) Suspension and/or termination of under the regulations in this part shall
Broker or Dealer. SBA shall exclude make all books, records and related
from the sale and all other dealings in materials associated with Debentures,
Debentures, Participating Securities or Participating Securities and TCs avail-
TCs any broker or dealer: able to SBA for review and copying
purposes. Such access shall be at such
(1) If such broker’s or dealer’s au-
party’s primary place of business dur-
thority to engage in the securities
ing normal business hours.
business has been revoked or suspended
by a supervisory agency. When such MISCELLANEOUS
authority has been suspended, such
broker or dealer will be suspended by § 107.1700 Transfer by SBA of its inter-
SBA for the duration of such suspen- est in Licensee’s Leverage security.
sion by the supervisory agency. Upon such conditions and for such
(2) If such broker or dealer has been consideration as it deems reasonable,
indicted or otherwise formally charged SBA may sell, assign, transfer, or oth-
with a misdemeanor or felony bearing erwise dispose of any Preferred Secu-
on its fitness, such broker or dealer rity, Debenture, Participating Secu-
may be suspended while the charge is rity, or other security held by or on be-
pending. Upon conviction, participa- half of SBA in connection with Lever-
tion may be terminated. age. Upon notice by SBA, Licensee will
(3) If such broker or dealer has suf- make all payments of principal, divi-
fered an adverse final civil judgment, dends, interest, Prioritized Payments,
holding that such broker or dealer has and redemptions as shall be directed by
committed a breach of trust or viola- SBA. Licensee will be liable for all
tion of law or regulation protecting the damage or loss which SBA may sustain
integrity of business transactions or by reason of such disposal, up to the
relationships, participation in the mar- amount of Licensee’s liability under
ket for Debentures, Participating Secu- such security, plus court costs and rea-
rities or TCs may be terminated. sonable attorney’s fees incurred by
(4) If such broker or dealer has failed SBA.
to make full disclosure of the informa-
tion required by SBA in paragraph (a) § 107.1710 SBA authority to collect or
of this section, such broker’s or deal- compromise its claims.
er’s participation in the market for De- SBA may, upon such conditions and
bentures, Participating Securities or for such consideration as it deems rea-
TCs may be terminated. sonable, collect or compromise all
123
§ 107.1720 13 CFR Ch. I (1–1–25 Edition)
claims relating to Preferred or Partici- edies in paragraph (c) of this section to
pating Securities or obligations held or take effect immediately.
guaranteed by SBA, and all legal or eq- (1) Insolvency. You become equitably
uitable rights accruing to SBA. or legally insolvent.
(2) Voluntary assignment. You make a
§ 107.1720 Characteristics of SBA’s voluntary assignment for the benefit of
guarantee. creditors without SBA’s prior written
If SBA agrees to guarantee a Licens- approval.
ee’s Debentures or Participating Secu- (3) Bankruptcy. You file a petition to
rities, such guarantee will be uncondi- begin any bankruptcy or reorganiza-
tional, irrespective of the validity, reg- tion proceeding, receivership, dissolu-
ularity or enforceability of the Deben- tion or other similar creditors’ rights
tures or Participating Securities or proceeding, or such action is initiated
any other circumstances which might against you and is not dismissed within
constitute a legal or equitable dis- 60 days.
charge or defense of a guarantor. Pur- (c) SBA remedies for automatic events
suant to its guarantee, SBA will make of default. Upon the occurrence of one
timely payments of principal and in- or more of the events in paragraph (b)
terest on the Debentures or the Re- of this section:
demption Price of and Prioritized Pay- (1) Without notice, presentation or
ments on the Participating Securities. demand, the entire indebtedness evi-
denced by your Debentures, including
[63 FR 5873, Feb. 5, 1998] accrued interest, and any other
amounts owed SBA with respect to
Subpart J—Licensee’s your Debentures, is immediately due
Noncompliance and payable; and
(2) You automatically consent to the
§ 107.1800 Licensee’s agreement to appointment of SBA or its designee as
terms and conditions in §§ 107.1810 your receiver under section 311(c) of
and 107.1820. the Act.
Any Licensee that violates the terms (d) Events of default with notice. For
and conditions of its Leverage is sub- any occurrence (as determined by SBA)
ject to SBA remedies. The terms, con- of one or more of the events in this
ditions and remedies in § 107.1810 apply paragraph (d), SBA may avail itself of
to outstanding Debentures issued after one or more of the remedies in para-
April 25, 1994. The terms, conditions graph (e) of this section.
and remedies in § 107.1820 apply to out- (1) Fraud. You commit a fraudulent
standing Preferred Securities and Par- act which causes detriment to SBA’s
ticipating Securities issued after April position as a creditor or guarantor.
25, 1994, or if you have Earmarked As- (2) Fraudulent transfers. You make
sets in your portfolio. any transfer or incur any obligation
that is fraudulent under the terms of 11
§ 107.1810 Events of default and SBA’s U.S.C. 548.
remedies for Licensee’s noncompli- (3) Willful conflicts of interest. You
ance with terms of Debentures. willfully violate § 107.730.
(a) Applicability of this section. This (4) Willful non-compliance. You will-
§ 107.1810 applies to Debentures issued fully violate one or more of the sub-
after April 25, 1994. By issuing such De- stantive provisions of the Act, specifi-
bentures, you automatically agree to cally including but not limited to the
the terms, conditions and remedies in provisions summarized in section 310(c)
this section, as in effect at the time of of the Act, or any substantive regula-
issuance and as if fully set forth in the tion promulgated under the Act.
Debentures. Debentures issued before (5) Repeated Events of Default. At any
April 25, 1994 continue to be governed time after being notified by SBA of the
by the remedies in effect at the time of occurrence of an event of default under
their issuance. paragraph (f) of this section, you en-
(b) Automatic events of default. The oc- gage in similar behavior which results
currence of one or more of the events in another occurrence of the same
in this paragraph (b) causes the rem- event of default.
124
Small Business Administration § 107.1810
(6) Transfer of Control. You violate tributions in your partnership agree-
§ 107.475 and/or willfully violate ment, as appropriate;
§ 107.410, and as a result of such viola- (iii) Distributions by Participating
tion you undergo a transfer of Control. Securities issuers as permitted under
(7) Non-cooperation under § 107.1810(h). §§ 107.1540 through 107.1580; and
You fail to take appropriate steps, sat- (iv) Distributions by Early Stage
isfactory to SBA, to accomplish any SBICs as permitted under § 107.1180.
action SBA may have required under (3) Failure to make payment. Unless
paragraph (h) of this section. otherwise approved by SBA, you fail to
(8) Non-notification of Events of De- make timely payment of any amount
fault. You fail to notify SBA as soon as due under any security or obligation of
you know or reasonably should have yours that is issued to, held or guaran-
known that any event of default exists teed by SBA.
under this section.
(4) Failure to maintain Regulatory Cap-
(9) Non-notification of defaults to oth-
ital. You fail to maintain the minimum
ers. You fail to notify SBA in writing
Regulatory Capital required under
within ten days from the date of a dec-
these regulations or, without the prior
laration of an event of default or non-
written consent of SBA, you reduce
performance under any note, debenture
your Regulatory Capital, except as per-
or indebtedness of yours, issued to or
mitted by §§ 107.585 and 107.1560 through
held by anyone other than SBA.
107.1580.
(e) SBA remedies for events of default
with notice. Upon written notice to you (5) Capital Impairment. You have a
of the occurrence (as determined by condition of Capital Impairment as de-
SBA) of one or more of the events in termined under § 107.1830.
paragraph (d) of this section: (6) Cross-default. An obligation of
(1) SBA may declare the entire in- yours that is greater than $100,000 be-
debtedness evidenced by your Deben- comes due or payable (with or without
tures, including accrued interest, and/ notice) before its stated maturity date,
or any other amounts owed SBA with for any reason including your failure to
respect to your Debentures, imme- pay any amount when due. This provi-
diately due and payable; and sion does not apply if you pay the
(2) SBA may avail itself of any rem- amount due within any applicable
edy available under the Act, specifi- grace period or contest the payment of
cally including institution of pro- the obligation in good faith by appro-
ceedings for the appointment of SBA or priate proceedings.
its designee as your receiver under sec- (7) Nonperformance. You violate or
tion 311(c) of the Act. fail to perform one or more of the
(f) Events of default with opportunity terms and conditions of any security or
to cure. For any occurrence (as deter- obligation of yours that is issued to,
mined by SBA) of one or more of the held or guaranteed by SBA, or of any
events in this paragraph (f), SBA may agreement with or conditions imposed
avail itself of one or more of the rem- by SBA in its administration of the
edies in paragraph (g) of this section. Act and the regulations promulgated
(1) Excessive Management Expenses. under the Act.
Without the prior written consent of (8) Noncompliance. Except as other-
SBA, you incur Management Expenses wise provided in paragraph (d)(5) of this
in excess of those permitted under section, SBA determines that you have
§ 107.520. violated one or more of the substantive
(2) Improper Distributions. You make provisions of the Act, specifically in-
any Distribution to your shareholders cluding but not limited to the provi-
or partners, except with the prior writ- sions summarized in section 310(c) of
ten consent of SBA, other than: the Act, or any substantive regulation
(i) Distributions permitted under promulgated under the Act.
§ 107.585; (9) Failure to maintain investment ratio.
(ii) Payments from Retained Earn- You fail to maintain the investment
ings Available for Distribution based ratio for Leverage in excess of 300 per-
on either the shareholders’ pro-rata in- cent of Leverageable Capital (see
terests or the provisions for profit dis- § 107.1160(c)), if applicable to you, as of
125
§ 107.1810 13 CFR Ch. I (1–1–25 Edition)
the end of each fiscal year. In deter- (h) Repeated non-substantive violations.
mining whether you have maintained If you repeatedly fail to comply with
the ratio, SBA will disregard any pre- one or more of the non-substantive pro-
payment, sale, or disposition of Ven- visions of the Act or any non-sub-
ture Capital Financing, any increase in stantive regulation promulgated under
Leverageable Capital, and any receipt the Act, SBA, after written notifica-
of additional Leverage, within 120 days tion to you and until you cure such
prior to the end of your fiscal year. condition to SBA’s satisfaction, may
(10) Failure to maintain diversity. You deny you additional Leverage and/or
fail to maintain diversity between require you to take such actions as
management and ownership as required SBA may determine to be appropriate
by § 107.150, if applicable to you. under the circumstances.
(11) Failure by an Early Stage SBIC to (i) Consent to removal of officers, direc-
meet investment requirements. You are an tors, or general partners and/or appoint-
Early Stage SBIC and, beginning on ment of receiver. The Articles of any Li-
the first fiscal quarter end when your censee issuing Debentures after April
cumulative total Financings (in dol- 25, 1994 must include the following pro-
lars) are at least equal to your Regu- visions as a condition to the purchase
latory Capital, you have not made at or guarantee by SBA of such Leverage.
least 50 percent of such Financings to Upon the occurrence of any of the
Small Businesses that at the time of events specified in paragraphs (d)(1)
your initial Financing were ‘‘early through (d)(6) or (f)(1) through (f)(3) of
stage’’ companies, as defined under the this section as determined by SBA,
definition of Early Stage SBIC in SBA shall have the right, and your
§ 107.50 of this part. consent to SBA’s exercise of such
(12) Failure by an Early Stage SBIC to right:
maintain required interest reserve. You (1) With respect to a Corporate Li-
are an Early Stage SBIC and you fail censee, upon written notice, to require
to maintain a sufficient reserve to pay you to replace, with individuals ap-
interest and Charges on your Deben- proved by SBA, one or more of your of-
tures as required under § 107.1181 of this ficers and/or such number of directors
part. of your board of directors as is suffi-
(g) SBA remedies for events of default cient to constitute a majority of such
with opportunity to cure. (1) Upon writ- board; or
ten notice to you of the occurrence (as (2) With respect to a Partnership Li-
determined by SBA) of one or more of censee, upon written notice, to require
the events of default in paragraph (f) of you to remove the person(s) responsible
this section, and subject to the condi- for such occurrence and/or to remove
tions in paragraph (g)(2) of this section: the general partner of Licensee, which
(i) SBA may declare the entire in- general partner shall then be replaced
debtedness evidenced by your Deben- in accordance with Licensee’s Articles
tures, including accrued interest, and/ by a new general partner approved by
or any other amounts owed SBA with SBA; and/or
respect to your Debentures, imme- (3) With respect to either a Corporate
diately due and payable; and or Partnership Licensee, to obtain the
(ii) SBA may avail itself of any rem- appointment of SBA or its designee as
edy available under the Act, specifi- your receiver under section 311(c) of
cally including institution of pro- the Act for the purpose of continuing
ceedings for the appointment of SBA or your operations. The appointment of a
its designee as your receiver under sec- receiver to liquidate a Licensee is not
tion 311(c) of the Act. within such consent, but is governed
(2) SBA may invoke the remedies in instead by the relevant provisions of
paragraph (g)(1) of this section only if: the Act.
(i) It has given you at least 15 days to (j) Additional SBA remedies applicable
cure the default(s); and to Debentures issued by Early Stage
(ii) You fail to cure the default(s) to SBICs. If you are an Early Stage SBIC,
SBA’s satisfaction within the allotted upon SBA’s payment pursuant to its
time. guarantee of any of your Debentures,
126
Small Business Administration § 107.1820
SBA shall have the following addi- pairment within the time limits set by
tional rights and you consent to SBA’s SBA in writing. In this regard:
exercise of any or all of such rights: (i) You are not considered to have a
(1) To prohibit you from making any condition of extreme Capital Impair-
additional investments except for in- ment during the first eight years fol-
vestments under legally binding com- lowing your first issuance of Partici-
mitments you entered into before such pating Securities.
payment by SBA and, subject to SBA’s (ii) This paragraph (b)(1) does not
prior written approval, investments give you an additional opportunity to
that are necessary to protect your in- cure if you have already had an oppor-
vestments; tunity to cure your Capital Impair-
(2) Until all Leverage is repaid and ment under paragraph (e)(3) of this sec-
amounts related thereto are paid in tion.
full, to prohibit Distributions by you (2) Voluntary assignment. You make a
to any party other than SBA, its agent voluntary assignment for the benefit of
or Trustee; creditors.
(3) To require all your commitments (3) Bankruptcy. You begin any bank-
from investors to be funded at the ear- ruptcy or reorganization proceeding,
liest time(s) permitted in accordance receivership, dissolution or other simi-
with your Articles; lar creditors’ rights proceeding, or such
(4) To review and re-determine your action is initiated against you and is
approved Management Expenses; and not dismissed within 60 days.
(5) To the appointment of SBA or its
(4) Transfer of Control. You violate
designee as your receiver under section
§ 107.475 and/or willfully violate
311(c) of the Act for the purpose of con-
§ 107.410, and such violation results in a
tinuing your operations.
transfer of Control.
[61 FR 3189, Jan. 31, 1996, as amended at 74 (5) Fraud. You commit a fraudulent
FR 33916, July 14, 2009; 77 FR 25054, Apr. 27, act which causes serious detriment to
2012]
SBA’s position as a guarantor or inves-
§ 107.1820 Conditions affecting issuers tor.
of Preferred Securities and/or Par- (6) Fraudulent transfers. You make
ticipating Securities. any transfer or incur any obligation
(a) Applicability of this section. This that is fraudulent under the terms of 11
section applies if you have Preferred U.S.C. 548.
Securities issued after April 25, 1994, or (c) Contingent Removal Conditions.
if you issue Participating Securities or Upon the occurrence (as determined by
have Earmarked Assets in your port- SBA) of any of the following conditions
folio. Your Articles must include the (‘‘Contingent Removal Conditions’’),
provisions of this § 107.1820 as a condi- SBA may avail itself of one or more of
tion to SBA’s purchase of Preferred Se- the remedies in paragraph (d) of this
curities or guarantee of Participating section, but only if you fail to remove
Securities and for as long as you own the person(s) SBA identifies as respon-
Earmarked Assets. Preferred Securities sible for such occurrence and/or cure
issued before April 25, 1994 continue to such occurrence to SBA’s satisfaction
be governed by the remedies in effect within a time period determined by
at the time of their issuance. SBA (but not less than 15 days):
(b) Removal Conditions. Upon the oc- (1) Willful conflicts of interest. You
currence (as determined by SBA) of willfully violate § 107.730.
any of the following conditions (‘‘Re- (2) Willful or repeated noncompliance.
moval Conditions’’), SBA may avail You willfully or repeatedly violate one
itself of one or more of the remedies in or more of the substantive provisions
paragraph (d) of this section: of the Act, specifically including but
(1) Insolvency or extreme Capital Im- not limited to the provisions summa-
pairment. You become equitably or le- rized in section 310(c) of the Act, or any
gally insolvent, or have a Capital Im- substantive regulation promulgated
pairment Percentage of 100 percent or under the Act.
more (‘‘extreme Capital Impairment’’) (3) Failure to comply with restrictions
and have not cured such Capital Im- under paragraph (f) of this section. You
127
§ 107.1820 13 CFR Ch. I (1–1–25 Edition)
fail to comply with the restrictions im- pairment within time limits set by
posed by SBA under paragraph (f) of SBA in writing.
this section. (4) Improper Distributions. You make
(d) SBA remedies for Removal Condi- any Distribution to your shareholders
tions and Contingent Removal Conditions. or partners other than those permitted
Upon the occurrence (as determined by by §§ 107.585 and 107.1560 through
SBA) of any Removal Condition, or any 107.1580.
Contingent Removal Condition accom- (5) Excessive Management Expenses.
panied by your failure to act as set Without the prior written consent of
forth in paragraph (c) of this section, SBA, you incur Management Expenses
SBA has the following rights, and you in excess of those permitted under
consent to SBA’s exercise of any or all § 107.520.
of such rights: (6) Failure to make payment. You fail
(1) With respect to a Corporate Li- to pay any amounts due under Pre-
censee, upon written notice, to require ferred Securities or required by
you to replace, with individuals ap- §§ 107.1500 through 107.1590, unless oth-
proved by SBA, one or more of your of- erwise permitted by SBA.
ficers and/or such number of directors (7) Noncompliance. Except as other-
as is sufficient to constitute a majority wise provided for in paragraphs (c)(1)
of your board of directors; or and (c)(2) of this section, SBA deter-
(2) With respect to a Partnership Li- mines that you have failed to comply
censee, upon written notice, to require with one or more of the substantive
you to remove the person(s) responsible provisions of the Act, specifically in-
for such occurrence and/or to remove cluding but not limited to the provi-
your general partner, who shall then be sions summarized in section 310(c) of
replaced in accordance with your Arti- the Act, or any substantive regulation
cles by a new general partner approved promulgated under the Act.
by SBA; and/or (8) Failure to maintain diversity. You
(3) With respect to either a Corporate fail to maintain diversity between
or Partnership Licensee, to the ap- management and ownership as required
pointment of SBA or its designee as by § 107.150, if applicable to you.
your receiver under section 311(c) of (9) Failure to meet investment require-
the Act for the purpose of continuing ments. You fail to make the amount of
your operations. The appointment of a Equity Capital Investments required
receiver to liquidate a Licensee is not for Participating Securities
within such consent, but is governed (§ 107.1500(b)(4)), if applicable to you; or
instead by the relevant provisions of you fail to maintain as of the end of
the Act. each fiscal year the investment ratios
(e) Restricted Operations Conditions. or amounts required for Leverage in
Upon the occurrence (as determined by excess of 300 percent of Leverageable
SBA) of any of the following conditions Capital (§ 107.1160(c)) or Preferred Secu-
(‘‘Restricted Operations Conditions’’), rities in excess of 100 percent of
SBA may avail itself of any of the rem- Leverageable Capital (§ 107.1160(d)), if
edies in paragraph (f) of this section. applicable to you. In determining
(1) Removal Conditions or Contingent whether you have met the maintenance
Removal Conditions. Any condition oc- requirements in § 107.1160(c) or (d), SBA
curs which is listed in paragraphs (b) or will disregard any prepayment, sale, or
(c) of this section. disposition of Venture Capital
(2) Failure to maintain Regulatory Cap- Financings, any increase in
ital. You fail to maintain the minimum Leverageable Capital, and any receipt
Regulatory Capital required by this of additional Leverage, within 120 days
part. prior to the end of your fiscal year.
(3) Capital or Liquidity Impairment. (10) Nonperformance. You violate or
You have a condition of Capital Im- fail to perform one or more of the
pairment as determined under § 107.1830 terms and conditions of any Partici-
or, if applicable, a condition of Liquid- pating Security or Preferred Security
ity Impairment as determined under or of any agreement with or condition
§ 107.1505, and you fail to cure the im- imposed by SBA in its administration
128
Small Business Administration § 107.1830
of the Act and the regulations promul- you additional Leverage and/or require
gated thereunder. you to take such actions as SBA may
(11) Noncooperation under paragraph determine to be appropriate under the
(g) of this section. You fail to take ap- circumstances.
propriate steps, satisfactory to SBA, to
[61 FR 3189, Jan. 31, 1996, as amended at 63
accomplish such action as SBA may
FR 5873, Feb. 5, 1998]
have required under paragraph (g) of
this section. COMPUTATION OF LICENSEE’S CAPITAL
(f) SBA remedies for Restricted Oper- IMPAIRMENT
ations Conditions. Upon the occurrence
of any Restricted Operations Condi- § 107.1830 Licensee’s Capital Impair-
tion, and until such condition(s) are ment—definition and general re-
cured to SBA’s satisfaction within a quirements.
time period determined by SBA (but (a) Applicability of this section. This
not less than 15 days), upon written no- section applies to Leverage issued on
tice SBA shall have the following
or after April 25, 1994. For Leverage
rights, and you consent to SBA’s exer-
issued before April 25, 1994, you must
cise of any or all of such rights:
comply with paragraphs (e) and (f) of
(1) To prohibit you from making any
this section and the Capital Impair-
additional investments except for in-
ment regulations in this part in effect
vestments under legally binding com-
when you issued your Leverage. For all
mitments you entered into before such
Leverage issued, you must also comply
notice and, subject to SBA’s prior writ-
with any contractual provisions to
ten approval, investments that are nec-
essary to protect your investments; which you have agreed.
(2) Until all Leverage is redeemed (b) Significance of Capital Impairment
and amounts due are paid, to prohibit condition. If you have a condition of
Distributions by you to any party Capital Impairment, you are not in
other than SBA, its agent or Trustee; compliance with the terms of your Le-
(3) To require all your commitments verage. As a result, SBA has the right
from investors to be funded at the ear- to impose the applicable remedies for
liest time(s) permitted in accordance noncompliance in §§ 107.1810(g) and
with your Articles; and 107.1820(f).
(4) To review and re-determine your (c) Definition of Capital Impairment
approved Management Expenses. condition. You have a condition of Cap-
(g) Repeated non-substantive violations. ital Impairment if your Capital Impair-
If you repeatedly fail to comply with ment Percentage, as computed in
one or more of the non-substantive pro- § 107.1840, exceeds:
visions of the Act or any non-sub- (1) For Section 301(d) Licensees, 75
stantive regulation promulgated there- percent.
under, SBA, after written notification (2) For Section 301(c) Licensees, the
to you and until such condition is appropriate percentage from the fol-
cured to SBA’s satisfaction, will deny lowing table:
MAXIMUM PERMITTED CAPITAL IMPAIRMENT PERCENTAGES FOR SECTION 301(c) LICENSEES
Then your maximum
If the percentage of equity capital invest- And your ratio of outstanding leverage to leverageable permitted capital impair-
ments (at cost) in your portfolio is: capital is: ment percentage is:
67% ............................................................. 100% or less .................................................................... 70
Over 100% but not over 200% ........................................ 60
Over 200% ....................................................................... 50
At least 40% but under 67% ...................... 100% or less .................................................................... 55
Over 100% but not over 200% ........................................ 50
Over 200% ....................................................................... 40
Under 40% .................................................. 100% or less .................................................................... 45
Over 100% but not over 200% ........................................ 40
Over 200% ....................................................................... 35
129
§ 107.1840 13 CFR Ch. I (1–1–25 Edition)
(d) Phase-in of maximum permitted tion. If you have an Unrealized Loss on
Capital Impairment Percentages for Sec- Securities Held, SBA will continue
tion 301(c) Licensees. If you are a Sec- with paragraph (c)(2) of this section.
tion 301(c) Licensee, regardless of your (2) Add together your Undistributed
maximum permitted Capital Impair- Net Realized Earnings, your Includible
ment Percentage under paragraph (c) Non-cash Gains, and either your Unre-
of this section, you will not have a con- alized Loss on Securities Held or your
dition of Capital Impairment if: Adjusted Unrealized Gain.
(1) Your Capital Impairment Percent- (3) If the sum in paragraph (c)(2) of
age does not exceed 50 percent; and this section is zero or greater, your
(2) You have not reached your first Capital Impairment Percentage is zero.
fiscal year end occurring after April 25, (4) If the sum in paragraph (c)(2) of
1995. this section is less than zero, drop the
(e) Quarterly computation requirement negative sign, divide by your Regu-
and procedure. SBA will determine latory Capital (excluding Treasury
whether you have a condition of Cap- Stock), and multiply by 100. The result
ital Impairment as of the end of each is your Capital Impairment Percent-
fiscal quarter. If SBA finds you age.
capitally impaired, they will notify (d) How to compute your Adjusted Un-
you. realized Gain. (1) Subtract Unrealized
(f) SBA’s right to determine Licensee’s Depreciation from Unrealized Appre-
Capital Impairment condition. SBA may ciation. This is your ‘‘Net Apprecia-
make its own determination of your tion’’.
Capital Impairment condition at any (2) Determine your Unrealized Appre-
time. ciation on Publicly Traded and Mar-
[61 FR 3189, Jan. 31, 1996, as amended at 63 ketable securities. This is your ‘‘Class
FR 5873, Feb. 5, 1998; 88 FR 46012, July 18, 1 Appreciation’’.
2023] (3) Determine your Unrealized Appre-
ciation on securities that are not Pub-
§ 107.1840 Computation of Licensee’s licly Traded and Marketable and meet
Capital Impairment Percentage. the following criteria, which must be
(a) General. This section contains the substantiated to the satisfaction of
procedures SBA will use to determine SBA (this is your ‘‘Class 2 Apprecia-
your Capital Impairment Percentage. tion’’):
SBA will compare your Capital Impair- (i) The Small Business that issued
ment Percentage to the maximum per- the security received a significant sub-
mitted under § 107.1830(c) to determine sequent equity financing by an inves-
whether you have a condition of Cap- tor whose objectives were not pri-
ital Impairment. marily strategic and at a price that
(b) Preliminary impairment test. If you conclusively supports the Unrealized
satisfy the preliminary impairment Appreciation;
test, your Capital Impairment Percent- (ii) Such financing represents a sub-
age is zero and SBA will not have to stantial investment in the form of an
perform any more procedures in this arm’s length transaction by a sophisti-
section. Otherwise, SBA will continue cated new investor in the issuer’s secu-
with paragraph (c) of this section. You rities; and
satisfy the test if the following (iii) Except as provided for Early
amounts are both zero or greater: Stage SBICs in § 107.1845, such financ-
(1) The sum of Undistributed Net Re- ing occurred within 24 months of the
alized Earnings, as reported on SBA date of the Capital Impairment com-
Form 468, and Includible Non-Cash putation, or the Small Business’s pre-
Gains. tax cash flow from operations for its
(2) Unrealized Gain (Loss) on Securi- most recent fiscal year was at least 10
ties Held. percent of the Small Business’s average
(c) How to compute Capital Impairment contributed capital for such fiscal year.
Percentage. (1) If you have an Unreal- (4) Except as provided for Early
ized Gain on Securities Held, SBA will Stage SBICs in § 107.1845, perform the
compute your Adjusted Unrealized appropriate computation from the fol-
Gain using paragraph (d) of this sec- lowing table:
130
Small Business Administration § 107.1845
ADJUSTED UNREALIZED GAIN BEFORE ESTIMATED TAX EFFECTS
Then adjusted unrealized gain
If: And: before taxes is:
Class 1 Appreciation ≤Net Appreciation .... Class 1 Appreciation + Class 2 Ap- (80% × Class 1 Appreciation) + (50% ×
preciation ≤Net Appreciation. Class 2 Appreciation).
Class 1 Appreciation ≤Net Appreciation .... Class 1 Appreciation + Class 2 Ap- (80% × Class 1 Appreciation) + [(50% × (Net
preciation >Net Appreciation. Appreciation ¥ Class 1 Appreciation)].
Class 1 Appreciation >Net Appreciation .... .......................................................... 80% × Net Appreciation.
(5) Reduce the gain computed in that the valuation and any other rel-
paragraph (d)(4) of this section by your evant information conclusively support
estimate of related future income tax the original Class 2 appreciation, SBA
expense. Subject to any adjustment re- may approve an extension to use all or
quired by paragraph (d)(6) of this sec- part of the original Class 2 Apprecia-
tion, the result is your Adjusted Unre- tion for up to an additional 24 months
alized Gain for use in paragraph (c)(2) (the ‘‘extension period’’).
of this section. (3) At the end of any extension pe-
(6) If any securities that are the riod, you may submit a new request to
source of either Class 1 or Class 2 Ap- retain the use of the original Class 2
preciation are pledged or encumbered Appreciation, repeating the steps in
in any way, SBA will reduce the Ad- paragraphs (a)(1) and (2) of this section.
justed Unrealized Gain computed in (4) SBA may reconsider its approval
paragraph (d)(5) of this section by the to retain the use of the original Class 2
amount of the related borrowing or Appreciation at any time based on in-
other obligation, up to the amount of formation that may affect the value of
the Unrealized Appreciation on the se- an investment.
curities. (b) Any time you submit a request
[61 FR 3189, Jan. 31, 1996, as amended at 77 for SBA approval to retain the use of
FR 25054, Apr. 27, 2012; 88 FR 46013, July 18, the original Class 2 Appreciation under
2023] paragraph (a) of this section, you may
also request SBA’s written approval to
§ 107.1845 Determination of Capital modify your computation of Adjusted
Impairment Percentage for Early Unrealized Gain under § 107.1840(d)(4) as
Stage SBICs. provided in paragraph (c) of this sec-
This section applies to Early Stage tion.
SBICs only. Except as modified by this (c) If SBA determines that the appre-
section, all provisions of § 107.1840 apply ciation on an investment, based on its
to an Early Stage SBIC. current fair value, is at least two times
(a) To determine your Class 2 Appre- the original Class 2 Appreciation on
ciation under § 107.1840(d)(3), SBA will the investment, SBA may allow you,
use the following provisions instead of based on relevant information, to com-
§ 107.1840(d)(3)(iii): pute your Adjusted Unrealized Gain for
(1) Such financing occurred within 24 the duration of the extension period as
months of the date of the Capital Im- follows:
pairment computation. At the end of (1) Compute Adjusted Unrealized
the 24 month period following the fi- Gain in accordance with § 107.1840(d)(4).
nancing, you may request SBA’s writ- (2) If your result in paragraph (c)(1)
ten approval to retain the use of the of this section was computed using the
original Class 2 Appreciation on the in- first line of the table in § 107.1840(d)(4):
vestment for up to 24 additional (i) Calculate 50 percent of the origi-
months. nal Class 2 Appreciation on the indi-
(2) In considering your request, SBA vidual investment that is the subject of
may obtain its own valuation of the in- this paragraph (c), and
vestment, require you to obtain a valu- (ii) Add it to the result from para-
ation performed by an independent graph (c)(1) of this section to determine
third party acceptable to SBA, and your Adjusted Unrealized Gain.
may consider any other information (3) If your result in paragraph (c)(1)
that it deems relevant. To the extent of this section was computed using the
131
§ 107.1850 13 CFR Ch. I (1–1–25 Edition)
second line of the table in fined as the year in which you were li-
§ 107.1840(d)(4): censed as an SBIC, after three years
(i) Calculate 50 percent of the origi- based on the private investor’s total
nal Class 2 Appreciation on the indi- value to paid-in capital (TVPI), where
vidual investment that is the subject of TVPI is calculated as (cumulative dis-
this paragraph (c). tributions to private investors plus net
(ii) Subtract your Class 1 Apprecia- asset value minus expenses and carried
tion from your Net Appreciation, and interest)/cumulative private investor
multiply the result by 50 percent. paid in capital.
(iii) Add the lesser of (c)(3)(i) and (ii) (6) Your leverage coverage ratio
of this section to the result from para- (LCR) falls below 1.25, where LCR is
graph (c)(1) of this section to determine calculated as ((Total As-
your Adjusted Unrealized Gain. sets¥Liabilities excluding SBA Lever-
[77 FR 25054, Apr. 27, 2012, as amended at 88 age¥Other Assets) + Unfunded Private
FR 46013, July 18, 2023] Commitments)/Outstanding Leverage,
or a Capital Impairment Percentage
§ 107.1850 Watchlist. approaching your threshold set forth in
Under certain circumstances, SBA § 107.1830.
may place Licensees on a Watchlist as (7) You default on your interest pay-
a process to increase proactive commu- ment and fail to pay within 30 days of
nication between SBA and the Licensee the date it is due. (Note: This event rep-
to help mitigate the potential for a fu- resents an event of default under
ture default or significant regulatory § 107.1810(f) for which SBA maintains
violation. Being on a Watchlist means its rights under § 107.1810(g) if the Li-
that SBA has determined, based on cer- censee does not cure to SBA’s satisfac-
tain triggers discussed in this section, tion.)
a Licensee will provide a heightened (8) Outstanding or unresolved regu-
level of reporting and communication latory matters.
with SBA. (b) Requirements for Licensees on the
(a) Watchlist triggers. SBA may place Watchlist. If SBA places you on the
you on the Watchlist for any of the fol- Watchlist, you will be required to com-
lowing: ply with any or all of the following:
(1) You perform an investment that (1) You must submit Portfolio Com-
is a direct violation of your fund’s stat- pany Financing Reports (SBA Form
ed investment policy as identified in 1031s), required under § 107.640, within
its limited partnership agreement (or 30 calendar days of the financing date.
other governing agreement) or as pre- (2) You must participate in monthly
sented to SBA in its license application portfolio reviews with SBA.
under § 107.300. (3) You must file quarterly valuation
(2) The key person clause in your reports on specific or all of your port-
limited partnership agreement (or folio company holdings, as requested
other governing agreement) is invoked by SBA.
due to a change in personnel of man- (4) You must submit a letter formally
agement team members identified as requesting whether you may submit a
key persons. request for a subsequent fund if you are
(3) You or your General Partner has currently on the Watchlist or have
been named as a party in litigation managed any Licensee on a Watchlist
proceedings brought by a Federal agen- within the last 12 months. If you have
cy, involving felony charges, or allega- already submitted a request or are oth-
tions of dishonesty, fraud, or breach of erwise in the Licensing process (see
fiduciary duty. § 107.300), SBA may suspend processing
(4) You have violated a material pro- your request until it is satisfied that
vision in your limited partnership SBA’s concerns are resolved or other-
agreement (or other governing agree- wise disapprove your request for a sub-
ment) or any side letter agreement. sequent fund. SBA maintains the right
(5) You rank in the bottom quartile to deny approval of any request to sub-
for the primary strategy benchmark, mit a subsequent fund request or any
as identified by the Licensee at the subsequent fund request submitted
time of licensure, by vintage year, de- under § 107.300.
132
Small Business Administration § 107.1920
(c) Removal from the Watchlist. SBA Subpart K—Ending Operations as
will remove you from the Watchlist if a Licensee
the event that triggered your addition
to the Watchlist (see paragraph (a) in § 107.1900 Surrender of license.
this section) is resolved to SBA’s satis- You may not surrender your license
faction. Accordingly, SBA may require without SBA’s prior written approval.
any or all of the following resolutions: Your request for approval must be ac-
(1) Successful completion of a port- companied by an offer of immediate re-
folio review to confirm compliance of payment of all of your outstanding Le-
your adherence to your investment pol- verage (including any prepayment pen-
icy. alties thereon), or by a plan satisfac-
(2) SBA’s written approval of your tory to SBA for the orderly liquidation
key person resolution. of the Licensee.
(3) SBA’s written acknowledgement
of pending litigation. Subpart L—Miscellaneous
(4) SBA’s written consent to the reso- § 107.1910 Non-waiver of SBA’s rights
lution of the LPA or side letter viola- or terms of Leverage security.
tion.
SBA’s failure to exercise or delay in
(5) Two quarters of performance exercising any right or remedy under
above a bottom quartile industry the Act or the regulations in this part
benchmark based on the TVPI by vin- does not constitute a waiver of such
tage year and strategy, as calculated right or remedy. SBA’s failure to re-
under paragraph (a) of this section. quire you to perform any term or pro-
(6) Two quarters of consistent report- vision of your Leverage does not affect
ing of your LCR, as calculated under SBA’s right to enforce such term or
paragraph (a) of this section, exceeding provision. Similarly, SBA’s waiver of,
1.25. or failure to enforce, any term or pro-
(7) You are current on your Leverage vision of your Leverage or of any event
interest payments. or condition set forth in § 107.1810 or
(8) A completed regulatory examina- § 107.1820 does not constitute a waiver
tion acceptable to SBA. of any succeeding breach of such term
or provision or condition.
(d) Watchlist communications—(1) Noti-
fication to Licensee. If you trigger any § 107.1920 Licensee’s application for
of the events under paragraph (a) of exemption from a regulation in this
this section, SBA will notify you in part 107.
writing that you have been placed on You may file an application in writ-
the Watchlist, identify the event(s) ing with SBA to have a proposed action
which triggered your placement on the exempted from any procedural or sub-
Watchlist, the actions you must take stantive requirement, restriction, or
as noted under paragraph (b) of this prohibition to which it is subject under
section, and the remedies as identified this part, unless the provision is man-
under paragraph (c) of this section. dated by the Act. SBA may grant an
(2) Watchlist status disclosure. SBA exemption for such applicant, condi-
will not disclose your Watchlist status tionally or unconditionally, provided
publicly. the exemption would not be contrary
(3) Removal from Watchlist status noti- to the purposes of the Act. Your appli-
cation must be accompanied by sup-
fication. SBA will provide you with
porting evidence which demonstrates
written notice after SBA determines
to SBA’s satisfaction that:
that you have resolved all matter iden- (a) The proposed action is fair and eq-
tified in your notification letter and uitable; and
satisfied the applicable requirements (b) The exemption requested is rea-
set forth in paragraph (c) of this sec- sonably calculated to advance the best
tion. interests of the SBIC program in a
[88 FR 46013, July 18, 2023, as amended at 89 manner consonant with the policy ob-
FR 3549, Jan. 19, 2024] jectives of the Act and the regulations
in this part.
133
§ 107.1930 13 CFR Ch. I (1–1–25 Edition)
§ 107.1930 Effect of changes in this 108.320 Contents of comprehensive business
part 107 on transactions previously plan.
consummated. 108.330 Grant issuance fee.
The legality of a transaction covered Subpart E—Evaluation and Selection of
by the regulations in this part is gov- NMVC Companies
erned by the regulations in this part in
effect at the time the transaction was 108.340 Evaluation and selection—general.
consummated, regardless of later 108.350 Eligibility and completeness.
108.360 Evaluation criteria.
changes. Nothing in this part bars SBA 108.370 Conditional approval.
enforcement action with respect to any 108.380 Final approval as a NMVC Company.
transaction consummated in violation
of provisions applicable at the time, Subpart F—Changes in Ownership,
but no longer in effect. Structure, or Control
CHANGES IN CONTROL OR OWNERSHIP OF NMVC
PART 108—NEW MARKETS VENTURE COMPANY
CAPITAL (‘‘NMVC’’) PROGRAM 108.400 Changes in ownership of 10 percent
or more of NMVC Company but no
Subpart A—Introduction to Part 108 change of Control.
108.410 Changes in Control of NMVC Com-
Sec.
pany (through change in ownership or
108.10 Description of the New Markets Ven-
otherwise).
ture Capital Program.
108.420 Prohibition on exercise of ownership
108.20 Legal basis and applicability of this
or Control rights in NMVC Company be-
part 108.
fore SBA approval.
108.30 Amendments to Act and regulations.
108.430 Notification to SBA of transactions
108.40 How to read this part 108.
that may change ownership or Control.
108.440 Standards governing prior SBA ap-
Subpart B—Definition of Terms Used in This proval for a proposed transfer of Control.
Part 108 108.450 Notification to SBA of pledge of
108.50 Definition of terms. NMVC Company’s shares.
RESTRICTIONS ON COMMON CONTROL OR OWN-
Subpart C—Qualifications for the NMVC ERSHIP OF TWO OR MORE NMVC COMPA-
Program NIES
ORGANIZING A NMVC COMPANY 108.460 Restrictions on Common Control or
ownership of two (or more) NMVC Com-
108.100 Business form. panies.
108.110 Qualified management.
108.120 Economic development primary mis- CHANGE IN STRUCTURE OF NMVC COMPANY
sion.
108.130 Identified Low Income Geographic 108.470 SBA approval of merger, consolida-
Areas. tion, or reorganization of NMVC Com-
108.140 SBA approval of initial Management pany.
Expenses.
108.150 Management and ownership diver- Subpart G—Managing the Operations of a
sity requirement. NMVC Company
108.160 Special rules for NMVC Companies
GENERAL REQUIREMENTS
formed as limited partnerships.
108.500 Lawful operations under the Act.
CAPITALIZING A NMVC COMPANY 108.502 Representations to the public.
108.200 Adequate capital for NMVC Compa- 108.503 NMVC Company’s adoption of an ap-
nies. proved valuation policy.
108.210 Minimum capital requirements for 108.504 Equipment and office requirements.
NMVC Companies. 108.506 Safeguarding the NMVC Company’s
108.230 Private Capital for NMVC Compa- assets/Internal controls.
nies. 108.507 Violations based on false filings and
nonperformance of agreements with
Subpart D—Application and Approval SBA.
108.509 Employment of SBA officials.
Process for NMVC Company Designation
MANAGEMENT AND COMPENSATION
108.300 When and how to apply for designa-
tion as a NMVC Company. 108.510 SBA approval of NMVC Company’s
108.310 Contents of application. Investment Adviser/Manager.
134
File and source
- File
- CFR-2025-title13-vol1-part107.pdf
- Size
- 420,013 bytes
- SHA-256
- 787708686b2800e2d96b33294742ab6876e572111ab48ff99ac49464f236b294
- Original
- www.govinfo.gov