[Code of Federal Regulations]
[Title 13, Volume 1]
[Revised as of January 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 13CFR108]
[Page 102-145]
TITLE 13--BUSINESS CREDIT AND ASSISTANCE
CHAPTER I--SMALL BUSINESS ADMINISTRATION
PART 108_NEW MARKETS VENTURE CAPITAL (``NMVC'') PROGRAM
Subpart A_Introduction to Part 108
Sec.
108.10 Description of the New Markets Venture Capital Program.
108.20 Legal basis and applicability of this part 108.
108.30 Amendments to Act and regulations.
108.40 How to read this part 108.
Subpart B_Definition of Terms Used in This Part 108
108.50 Definition of terms.
Subpart C_Qualifications for the NMVC Program
Organizing a NMVC Company
108.100 Business form.
108.110 Qualified management.
108.120 Economic development primary mission.
108.130 Identified Low Income Geographic Areas.
108.140 SBA approval of initial Management Expenses.
108.150 Management and ownership diversity requirement.
108.160 Special rules for NMVC Companies formed as limited partnerships.
Capitalizing a NMVC Company
108.200 Adequate capital for NMVC Companies.
108.210 Minimum capital requirements for NMVC Companies.
108.230 Private Capital for NMVC Companies.
Subpart D_Application and Approval Process for NMVC Company Designation
108.300 When and how to apply for designation as a NMVC Company.
108.310 Contents of application.
108.320 Contents of comprehensive business plan.
108.330 Grant issuance fee.
Subpart E_Evaluation and Selection of NMVC Companies
108.340 Evaluation and selection--general.
108.350 Eligibility and completeness.
108.360 Evaluation criteria.
108.370 Conditional approval.
108.380 Final approval as a NMVC Company.
Subpart F_Changes in Ownership, Structure, or Control
Changes in Control or Ownership of NMVC Company
108.400 Changes in ownership of 10 percent or more of NMVC Company but
no change of Control.
108.410 Changes in Control of NMVC Company (through change in ownership
or otherwise).
108.420 Prohibition on exercise of ownership or Control rights in NMVC
Company before SBA approval.
108.430 Notification to SBA of transactions that may change ownership or
Control.
108.440 Standards governing prior SBA approval for a proposed transfer
of Control.
108.450 Notification to SBA of pledge of NMVC Company's shares.
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Restrictions on Common Control or Ownership of Two or More NMVC
Companies
108.460 Restrictions on Common Control or ownership of two (or more)
NMVC Companies.
Change in Structure of NMVC Company
108.470 SBA approval of merger, consolidation, or reorganization of NMVC
Company.
Subpart G_Managing the Operations of a NMVC Company
General Requirements
108.500 Lawful operations under the Act.
108.502 Representations to the public.
108.503 NMVC Company's adoption of an approved valuation policy.
108.504 Equipment and office requirements.
108.506 Safeguarding the NMVC Company's assets/Internal controls.
108.507 Violations based on false filings and nonperformance of
agreements with SBA.
108.509 Employment of SBA officials.
Management and Compensation
108.510 SBA approval of NMVC Company's Investment Adviser/Manager.
108.520 Management Expenses of a NMVC Company.
Cash Management by a NMVC Company
108.530 Restrictions on investments of idle funds by NMVC Companies.
Borrowing by NMVC Companies From Non-SBA Sources
108.550 Prior approval of secured third-party debt of NMVC companies.
Voluntary Decrease in Regulatory Capital
108.585 Voluntary decrease in NMVC Company's Regulatory Capital.
Subpart H_Recordkeeping, Reporting, and Examination Requirements for
NMVC Companies
Recordkeeping Requirements For NMVC Companies
108.600 General requirement for NMVC Company to maintain and preserve
records.
108.610 Required certifications for Loans and Investments.
108.620 Requirements to obtain information from Portfolio Concerns.
Reporting Requirements for NMVC Companies
108.630 Requirement for NMVC companies to file financial statements and
supplementary information with SBA (SBA Form 468).
108.640 Requirement to file portfolio financing reports (SBA Form 1031).
108.650 Requirement to report portfolio valuations to SBA.
108.660 Other items required to be filed by NMVC Company with SBA.
108.680 Reporting changes in NMVC Company not subject to prior SBA
approval.
Examinations of NMVC Companies by SBA for Regulatory Compliance
108.690 Examinations.
108.691 Responsibilities of NMVC Company during examination.
108.692 Examination fees.
Subpart I_Financing of Small Businesses by NMVC Companies
Determining the Eligibility of a Small Business for NMVC Financing
108.700 Compliance with size standards in part 121 of this chapter as a
condition of Assistance.
108.710 Requirement to finance Low-Income Enterprises.
108.720 Small Businesses that may be ineligible for financing.
108.730 Financings which constitute conflicts of interest.
108.740 Portfolio diversification (``overline'' limitation).
108.760 How a change in size or activity of a Portfolio Concern affects
the NMVC Company and the Portfolio Concern.
Structuring NMVC Company's Financing of Eligible Small Businesses
108.800 Financings in the form of equity interests.
108.820 Financings in the form of guarantees.
108.825 Purchasing securities from an underwriter or other third party.
Limitations on Disposition of Assets
108.885 Disposition of assets to NMVC Company's Associates.
Management Services and Fees
108.900 Fees for management services provided to a Small Business by a
NMVC Company or its Associate.
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Subpart J_SBA Financial Assistance for NMVC Companies (Leverage)
General Information About Obtaining Leverage
108.1100 Type of Leverage and application procedures.
108.1120 General eligibility requirement for Leverage.
108.1130 Leverage fees payable by NMVC Company.
108.1140 NMVC Company's acceptance of SBA remedies under Sec. 108.1810.
Maximum Amount of Leverage for Which a NMVC Company is Eligible
108.1150 Maximum amount of Leverage for a NMVC Company.
Conditional Commitments by SBA to Reserve Leverage for a NMVC Company
108.1200 SBA's Leverage commitment to a NMVC Company'application
procedure, amount, and term.
108.1220 Requirement for NMVC Company to file financial statements at
the time of request for a draw.
108.1230 Draw-downs by NMVC Company under SBA's Leverage commitment.
108.1240 Funding of NMVC Company's draw request through sale to third-
party.
Funding Leverage by Use of SBA Guaranteed Trust Certificates (``TCs'')
108.1600 SBA authority to issue and guarantee Trust Certificates.
108.1610 Effect of prepayment or early redemption of Leverage on a Trust
Certificate.
108.1620 Functions of agents, including Central Registration Agent,
Selling Agent and Fiscal Agent.
108.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
108.1640 SBA access to records of the CRA, Brokers, Dealers and Pool or
Trust assemblers.
Miscellaneous
108.1700 Transfer by SBA of its interest in a NMVC Company's Leverage
security.
108.1710 SBA authority to collect or compromise its claims.
108.1720 Characteristics of SBA's guarantee.
Subpart K_NMVC Company's Noncompliance With Terms of Leverage
108.1810 Events of default and SBA's remedies for NMVC Company's
noncompliance with terms of Debentures.
Computation of NMVC Company's Capital Impairment
108.1830 NMVC Company's Capital Impairment definition and general
requirements.
108.1840 Computation of NMVC Company's Capital Impairment Percentage.
Subpart L_Ending Operations as a NMVC Company
108.1900 Termination of participation as a NMVC Company.
Subpart M_Miscellaneous
108.1910 Non-waiver of SBA's rights or terms of Leverage security.
108.1920 NMVC Company's application for exemption from a regulation in
this part 108.
108.1930 Effect of changes in this part 108 on transactions previously
consummated.
108.1940 Procedures for designation of additional Low-Income Geographic
Areas
Subpart N_Requirements and Procedures for Operational Assistance Grants
to NMVC Companies and SSBICs
108.2000 Operational Assistance grants to NMVC Companies and SSBICs.
108.2001 When and how SSBICs may apply for Operational Assistance
grants.
108.2002 Eligibility of SSBICs to apply for Operational Assistance
grants.
108.2003 Grant issuance fee for SSBICs.
108.2004 Contents of application submitted by SSBICs.
108.2005 Contents of plan submitted by SSBICs.
108.2006 Evaluation and selection of SSBICs.
108.2007 Grant award to SSBICs.
108.2010 Restrictions on use of Operational Assistance grant funds.
108.2020 Amount of Operational Assistance grant.
108.2030 Matching requirements.
108.2040 Reporting and recordkeeping requirements.
Authority: 15 U.S.C. 689-689q.
Source: 66 FR 28609, May 23, 2001, unless otherwise noted.
Subpart A_Introduction to Part 108
Sec. 108.10 Description of the New Markets Venture Capital Program.
The New Markets Venture Capital (``NMVC'') Program is a
developmental venture capital program for the purpose of promoting
economic development and the creation of wealth and
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job opportunities in low-income geographic areas and among individuals
living in such areas. SBA selects and then enters into participation
agreements with selected newly formed venture capital companies, and
provides leverage in the form of debenture guarantees to such companies
to allow them to make equity capital investments in smaller enterprises
located in low-income geographic areas. SBA also awards grants to such
companies and to Specialized Small Business Investment Companies so that
they can provide operational assistance to such smaller enterprises in
connection with such investments.
Sec. 108.20 Legal basis and applicability of this part 108.
The regulations in this part implement Part B of Title III of the
Small Business Investment Act of 1958, as amended (15 U.S.C. 661 et
seq.). All NMVC Companies must comply with all applicable SBA
regulations, accounting guidelines and valuation guidelines for NMVC
Companies, available from SBA.
Sec. 108.30 Amendments to Act and regulations.
A NMVC Company is subject to all provisions of the Act and parts 108
and 112 of title 13 of the Code of Federal Regulations.
Sec. 108.40 How to read this part 108.
(a) Center headings. All references in this part to SBA forms, and
instructions for their preparation, are to the current issue of such
forms (available from Investment Division, SBA). Center headings are
descriptive and are used for convenience only. They have no regulatory
effect.
(b) Capitalizing defined terms. Terms defined in Sec. 108.50 have
initial capitalization in this part 108.
(c) ``You.'' The pronoun ``you'' as used in this part 108 means a
NMVC Company unless otherwise noted.
Subpart B_Definition of Terms Used in This Part 108
Sec. 108.50 Definition of terms.
The following definitions apply to this part 108:
Act means the Small Business Investment Act of 1958, as amended (15
U.S.C. 661 et seq.).
Affiliate or Affiliates has the meaning set forth in Sec. 121.103
of this chapter.
Applicant means any entity submitting an application to SBA for
designation as a NMVC Company under this part.
Articles mean articles of incorporation or charter for a Corporate
NMVC Company, the partnership agreement or certificate for a Partnership
NMVC Company, and the operating agreement or other organizational
documents for a LLC NMVC Company.
Assistance or Assisted means Financing of or management services
rendered to a Small Business by or through a NMVC Company pursuant to
the Act and this part.
Associate of a NMVC Company means any of the following:
(1)(i) An officer, director, employee or agent of a Corporate NMVC
Company;
(ii) A Control Person, employee or agent of a Partnership NMVC
Company;
(iii) A managing member of a LLC NMVC Company;
(iv) An Investment Adviser/Manager of any NMVC Company, including
any Person who contracts with a Control Person of a Partnership NMVC
Company to be the Investment Adviser/Manager of such NMVC Company; or
(v) Any Person regularly serving a NMVC Company on retainer in the
capacity of attorney at law.
(2) Any Person who owns or controls, or who has entered into an
agreement to own or control, directly or indirectly, at least 10 percent
of any class of stock of a Corporate NMVC Company or 10 percent of the
membership interests of an LLC NMVC Company, or a limited partner's
interest of at least 10 percent of the partnership capital of a
Partnership NMVC Company. However, neither a limited partner in a
Partnership NMVC Company nor a non-managing member in an LLC NMVC
Company is considered an Associate if such Person is an entity
Institutional Investor whose investment in
[[Page 106]]
the Partnership, including commitments, represents no more than 33
percent of the capital of the NMVC Company and no more than five percent
of such Person's net worth.
(3) Any officer, director, partner (other than a limited partner),
manager, agent, or employee of any Associate described in paragraph (1)
or (2) of this definition.
(4) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, a NMVC Company.
(5) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, any Person described in
paragraphs (1) and (2) of this definition.
(6) Any Close Relative of any Person described in paragraphs (1),
(2), (4), and (5) of this definition.
(7) Any Secondary Relative of any Person described in paragraphs
(1), (2), (4), and (5) of this definition.
(8) Any concern in which--
(i) Any person described in paragraphs (1) through (6) of this
definition is an officer; general partner, or managing member; or
(ii) Any such Person(s) singly or collectively Control or own,
directly or indirectly, an equity interest of at least 10 percent
(excluding interests that such Person(s) own indirectly through
ownership interests in the NMVC Company).
(9) Any concern in which any Person(s) described in paragraph (7) of
this definition singly or collectively own (including beneficial
ownership) a majority equity interest, or otherwise have Control. As
used in this paragraph (9), ``collectively'' means together with any
Person(s) described in paragraphs (1) though (7) of this definition.
(10) For the purposes of this definition, if any Associate
relationship described in paragraphs (1) through (7) of this definition
exists at any time within six months before or after the date that a
NMVC Company provides Financing, then that Associate relationship is
considered to exist on the date of the Financing.
(11) If any NMVC Company has any ownership interest in another NMVC
Company, the two NMVC companies are Associates of each other.
Capital Impairment has the meaning set forth in Sec. 108.1830(b).
Central Registration Agent or CRA means one or more agents appointed
by SBA for the purpose of issuing TCs and performing the functions
enumerated in Sec. 108.1620 and performing similar functions for
Debentures funded outside the pooling process.
Close Relative of an individual means:
(1) A current or former spouse;
(2) A father, mother, guardian, brother, sister, son, daughter; or
(3) A father-in-law, mother-in-law, brother-in-law, sister-in-law,
son-in-law, or daughter-in-law.
Commitment means a written agreement between a NMVC Company and an
eligible Small Business that obligates the NMVC Company to provide
Financing (except a guarantee) to that Small Business in a fixed or
determinable sum, by a fixed or determinable future date. In this
context the term ``agreement'' means that there has been agreement on
the principal economic terms of the Financing. The agreement may include
reasonable conditions precedent to the NMVC Company's obligation to fund
the commitment, but these conditions must be outside the NMVC Company's
control.
Common Control means a condition where two or more Persons, either
through ownership, management, contract, or otherwise, are under the
Control of one group or Person. Two or more NMVC companies are presumed
to be under Common Control if they are Affiliates of each other by
reason of common ownership or common officers, directors, or general
partners; or if they are managed or their investments are significantly
directed either by a common independent investment advisor or managerial
contractor, or by two or more such advisors or contractors that are
Affiliates of each other. This presumption may be rebutted by evidence
satisfactory to SBA.
Community Development Finance means debt and equity-type investments
in low-income communities.
Conditionally Approved NMVC Company means a company that--
(1) Has applied for participation as a NMVC Company, and
(2) SBA has conditionally approved to participate in the NMVC
program
[[Page 107]]
for a specified period of time not to exceed two years, subject to the
company fulfilling the requirements to be a NMVC Company within that
specified period of time.
Control means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a NMVC
Company or other concern, whether through the ownership of voting
securities, by contract, or otherwise.
Control Person means any Person that controls a NMVC Company, either
directly or through an intervening entity. A Control Person includes:
(1) A general partner of a Partnership NMVC Company;
(2) Any Person serving as the general partner, officer, director, or
manager (in the case of a limited liability company) of any entity that
controls a NMVC Company, either directly or through an intervening
entity;
(3) Any Person that--
(i) Controls or owns, directly or through an intervening entity, at
least 10 percent of a Partnership NMVC Company or any entity described
in paragraphs (1) or (2) of this definition; and
(ii) Participates in the investment decisions of the general partner
of such Partnership NMVC Company;
(4) Any Person that controls or owns, directly or through an
intervening entity, at least 50 percent of a Partnership NMVC Company or
any entity described in paragraphs (1) or (2) of this definition.
Corporate NMVC Company. See definition of NMVC Company in this
section.
Debentures means debt obligations issued by NMVC companies pursuant
to section 355 of the Act and held or guaranteed by SBA.
Debt Securities are instruments evidencing a loan with an option or
any other right to acquire Equity Securities in a Small Business or its
Affiliates, or a loan which by its terms is convertible into an equity
position. Consideration must be paid for all options that you acquire.
Developmental Venture Capital means capital in the form of Equity
Capital Investments in Smaller Enterprises made with a primary objective
of fostering economic development in Low-Income Geographic Areas.
Distribution means any transfer of cash or non-cash assets to SBA,
its agent or Trustee, or to partners in a Partnership NMVC Company, or
to shareholders in a Corporate NMVC Company, or to members in an LLC
NMVC Company. Capitalization of Retained Earnings Available for
Distribution constitutes a Distribution to the NMVC Company's non-SBA
partners, shareholders, or members.
Equity Capital Investments means investments in the form of common
or preferred stock, limited partnership interests, options, warrants, or
similar equity instruments, including subordinated debt with equity
features if such debt provides only for interest payments contingent
upon and limited to the extent of earnings. Equity Capital Investments
must not require amortization. Equity Capital Investments may be
guaranteed by one or more third parties; however, neither Equity Capital
Investments nor such guarantee may be collateralized or otherwise
secured. Investments classified as Debt Securities are not precluded
from qualifying as Equity Capital Investments. Equity Capital
Investments may provide for royalty payments only if the royalty
payments are based on the earnings of the concern.
Equity Securities means stock of any class in a corporation, stock
options, warrants, limited partnership interests in a limited
partnership, membership interests in a limited liability company, or
joint venture interests.
Financing or Financed means outstanding financial assistance
provided to a Small Business by a NMVC Company, whether through:
(1) Loans;
(2) Debt Securities;
(3) Equity Securities;
(4) Guarantees; or
(5) Purchases of securities of a Small Business through or from an
underwriter (see Sec. 108.825).
Guaranty Agreement means the contract entered into by SBA which is a
guarantee backed by the full faith and credit of the United States
Government as to timely payment of principal and interest on Debentures
and SBA's
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rights in connection with such guarantee.
Includible Non-Cash Gains means those non-cash gains (as reported on
SBA Form 468) that are realized in the form of Publicly Traded and
Marketable securities or investment grade debt instruments. For purposes
of this definition, investment grade debt instruments means those
instruments that are rated ``BBB'' or ``Baa'', or better, by Standard &
Poor's Corporation or Moody's Investors Service, respectively. Non-rated
debt may be considered to be investment grade if a NMVC Company obtains
a written opinion from an investment banking firm acceptable to SBA
stating that the non-rated debt instrument is equivalent in risk to the
issuer's investment grade debt.
Institutional Investor means:
(1) Entities. Any of the following entities if the entity has a net
worth (exclusive of unfunded commitments from investors) of at least $1
million, or such higher amount as is specified in this paragraph (1).
(See also Sec. 108.230(c)(4) for limitations on the amount of an
Institutional Investor's commitment that may be included in Private
Capital.)
(i) A State or National bank, trust company, savings bank, or
savings and loan association.
(ii) An insurance company.
(iii) A 1940 Act Investment Company or Business Development Company
(each as defined in the Investment Company Act of 1940, as amended (15
U.S.C. 8a-1 et seq.).
(iv) A holding company of any entity described in paragraph (l)(i),
(ii) or (iii) of this definition.
(v) An employee benefit or pension plan established for the benefit
of employees of the Federal government, any State or political
subdivision of a State, or any agency or instrumentality of such
government unit.
(vi) An employee benefit or pension plan (as defined in the Employee
Retirement Income Security Act of 1974, as amended (Public Law 93-406,
88 Stat. 829), excluding plans established under section 401(k) of the
Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
(vii) A trust, foundation or endowment exempt from Federal income
taxation under the Internal Revenue Code of 1986, as amended.
(viii) A corporation, partnership or other entity with a net worth
(exclusive of unfunded commitments from investors) of more than $10
million.
(ix) A State, a political subdivision of a State, or an agency or
instrumentality of a State or its political subdivision.
(x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors
described in paragraphs (l)(i) through (l)(ix) of this definition, each
of whom must have at least a 10 percent ownership interest in the
entity.
(xi) Any other entity that SBA determines to be an Institutional
Investor.
(2) Individuals. (i) Any of the following individuals if he/she is
also a permanent resident of the United States:
(A) An individual who is an Accredited Investor (as defined in the
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose
commitment to the NMVC Company is backed by a letter of credit from a
State or National bank acceptable to SBA.
(B) An individual whose personal net worth is at least $2 million
and at least ten times the amount of his or her commitment to the NMVC
Company. The individual's personal net worth must not include the value
of any equity in his or her most valuable residence.
(C) An individual whose personal net worth, not including the value
of any equity in his or her most valuable residence, is at least $10
million.
(ii) Any individual who is not a permanent resident of the United
States but who otherwise satisfies paragraph (2)(i) of this definition
provided such individual has irrevocably appointed an agent within the
United States for the service of process.
Investment Adviser/Manager means any Person who furnishes advice or
assistance with respect to operations of a NMVC Company under a written
contract executed in accordance with the provisions of Sec. 108.510.
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Lending Institution means a concern that is operating under
regulations of a state or Federal licensing, supervising, or examining
body, or whose shares are publicly traded and listed on a recognized
stock exchange or NASDAQ and which has assets in excess of $500 million;
and which, in either case, holds itself out to the public as engaged in
the making of commercial and industrial loans and whose lending
operations are not for the purpose of financing its own or an
Associate's sales or business operations.
Leverage means financial assistance provided to a NMVC Company by
SBA through the guaranty of a NMVC Company's Debentures, and any other
SBA financial assistance evidenced by a security of the NMVC Company.
Leverageable Capital means Regulatory Capital, excluding unfunded
commitments.
LLC NMVC Company. See definition of NMVC Company in this section.
Loan means a transaction evidenced by a debt instrument with no
provision for you to acquire Equity Securities.
Loans and Investments means Portfolio securities, assets acquired in
liquidation of Portfolio securities, operating concerns acquired, and
notes and other securities received, as set forth in the Statement of
Financial Position of SBA Form 468.
Low-Income Enterprise means a Smaller Enterprise that, as of the
time of the initial Financing, has its Principal Office located in a
Low-Income Geographic Area.
Low-Income Geographic Area (``LI Area'') means--
(1) Any population census tract (or in the case of an area that is
not tracted for population census tracts, the equivalent county
division, as defined by the Bureau of the Census of the United States
Department of Commerce for purposes of defining poverty areas), if--
(i) The poverty rate for that census tract is not less than 20
percent;
(ii) In the case of a tract--
(A) That is located within a metropolitan area, 50 percent or more
of the households in that census tract have an income equal to less than
60 percent of the area median gross income; or
(B) That is not located within a metropolitan area, the median
household income for such tract does not exceed 80 percent of the
statewide median household income; or
(C) As determined by the Administrator in accordance with Sec.
108.1940 of this part, a substantial population of Low-Income
Individuals reside, an inadequate access to investment capital exists,
or other indications of economic distress exist in that census tract; or
(2) Any area located within--
(i) A Historically Underutilized Business Zone (``HUBZone'') as
defined in section 3(p) of the Small Business Act and 13 CFR 126.103;
(ii) An Urban Empowerment Zone or Urban Enterprise Community (as
designated by the Secretary of the United States Department of Housing
and Urban Development); or
(iii) A Rural Empowerment Zone or Rural Enterprise Community (as
designated by the Secretary of the United States Department of
Agriculture).
Low-Income Individual means an individual whose income (adjusted for
family size) does not exceed--
(1) For metropolitan areas, 80 percent of the area median income;
and
(2) For nonmetropolitan areas, the greater of--
(i) 80 percent of the area median income, or
(ii) 80 percent of the statewide nonmetropolitan area median income.
Low-Income Investment means an Equity Capital Investment in a Low-
Income Enterprise.
Management Expenses has the meaning set forth in Sec. 108.520.
NAICS Manual means the latest issue of the North American Industrial
Classification System Manual, prepared by the Office of Management and
Budget, and available from the U.S. Government Printing Office,
Superintendent of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-
7954.
New Markets Tax Credit program means the tax credit created by the
Consolidated Appropriations Act of 2001, Public Law 106-554 (114 Stat.
2762A), enacted December 21, 2000, to be implemented by the Internal
Revenue Service, United States Department of Treasury.
New Markets Venture Capital Company or NMVC Company means a
corporation (Corporate NMVC Company), a limited
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partnership organized as required by Sec. 108.160 (Partnership NMVC
Company), or a limited liability company (LLC NMVC Company) that--
(1) Has been granted final approval by SBA under Sec. 108.380, and
(2) Has entered into a Participation Agreement with SBA. For certain
purposes, the Entity General Partner of a Partnership NMVC Company is
treated as if it were a NMVC Company (see Sec. 108.160(a)).
1940 Act Company means a NMVC Company which is registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
1980 Act Company means a NMVC Company which is registered under the
Small Business Investment Incentive Act of 1980 (Public Law 96-447, 94
Stat. 2275).
Operational Assistance means management, marketing, and other
technical assistance that assists a Small Business with its business
development.
Original Issue Price means the price paid by the purchaser for
securities at the time of issuance.
Participation Agreement means an agreement between SBA and a company
to which SBA has granted final approval under Sec. 108.380, that--
(1) Details the company's operating plan and investment criteria;
and
(2) Requires the company to make investments in Smaller Enterprises
at least 80 percent of which Smaller Enterprises are located in LI
Areas.
Partnership NMVC Company. See definition of NMVC Company in this
section.
Person means a natural person or legal entity.
Pool means an aggregation of SBA guaranteed Debentures approved by
SBA.
Portfolio means the securities representing a NMVC Company's total
outstanding Financing of Smaller Enterprises. It does not include idle
funds or assets acquired in liquidation of Portfolio securities.
Portfolio Concern means a Small Business Assisted by a NMVC Company.
Principal Office means the location where the greatest number of the
concern's employees at any one location perform their work. However, for
those concerns whose ``primary industry'' (see 13 CFR 121.107) is
service or construction (see 13 CFR 121.201), the determination of
principal office excludes the concern's employees who perform the
majority of their work at job-site locations to fulfill specific
contract obligations.
Private Capital has the meaning set forth in Sec. 108.230.
Publicly Traded and Marketable means securities that are salable
without restriction or that are salable within 12 months pursuant to
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by
the holder thereof, and are of a class which is traded on a regulated
stock exchange, or is listed in the Automated Quotation System of the
National Association of Securities Dealers (NASDAQ), or has, at a
minimum, at least two market makers as defined in the relevant sections
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et
seq.), and in all cases the quantity of which can be sold over a
reasonable period of time without having an adverse impact upon the
price of the stock.
Regulatory Capital means Private Capital, excluding any portion of
Private Capital that is designated as matching resources in accordance
with Sec. 108.2030(b)(3).
Relevant Venture Capital Finance means Equity Capital Investments in
small businesses in low-income communities or benefiting low-income
communities.
Retained Earnings Available for Distribution means Undistributed Net
Realized Earnings less any Unrealized Depreciation on Loans and
Investments (as reported on SBA Form 468), and represents the amount
that a NMVC Company may distribute to investors (including SBA) as a
profit Distribution, or transfer to Private Capital.
SBA means the Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
Secondary Relative of an individual means:
(1) A grandparent, grandchild, or any other ancestor or lineal
descendent who is not a Close Relative;
(2) An uncle, aunt, nephew, niece, or first cousin; or
[[Page 111]]
(3) A spouse of any person described in paragraph (1) or (2) of this
definition.
Small Business means a small business concern as defined in section
103(5) of the Act (including its Affiliates), and which meets the
criteria applicable to the Small Business Investment Company program as
set forth in part 121 of this chapter.
Small Business Investment Company (SBIC) means a Licensee, as that
term is defined in Sec. 107.50 of this chapter.
Smaller Enterprise means any Small Business that:
(1) Together with its Affiliates has a net worth of not more than
$6.0 million and average net income after Federal income taxes
(excluding any carry-over losses) for the preceding two years no greater
than $2.0 million; or
(2) Both together with its Affiliates, and by itself, meets the size
standard of Sec. 121.201 of this chapter at the time of Financing for
the industry in which it is then primarily engaged.
Specialized Small Business Investment Companies (SSBICs) means any
Small Business Investment Company that--
(1) Invests solely in small business concerns that contribute to a
well-balanced national economy by facilitating ownership in such
concerns by persons whose participation in the free enterprise system is
hampered because of social or economic disadvantages; and
(2) Was licensed under section 301(d) of the Small Business
Investment Act, as in effect before September 30, 1996.
Trust means the legal entity created for the purpose of holding
guaranteed Debentures and the guaranty agreement related thereto,
receiving, holding and making any related payments, and accounting for
such payments.
Trust Certificate Rate means a fixed rate determined at the time
Debentures are pooled.
Trust Certificates (TCs) means certificates issued by SBA, its agent
or Trustee and representing ownership of all or a fractional part of a
Trust or Pool of Debentures.
Trustee means the trustee or trustees of a Trust.
Undistributed Net Realized Earnings means Undistributed Realized
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
Unrealized Appreciation means the amount by which a NMVC Company's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with NMVC
Company's valuation policies, exceeds the cost basis thereof.
Unrealized Depreciation means the amount by which a NMVC Company's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with NMVC
Company's valuation policies, is below the cost basis thereof.
Unrealized Gain (Loss) on Securities Held means the sum of the
Unrealized Appreciation and Unrealized Depreciation on all of a NMVC
Company's Loans and Investments, less estimated future income tax
expense or estimated realizable future income tax benefit, as
appropriate.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]
Subpart C_Qualifications for the NMVC Program
Organizing a NMVC Company
Sec. 108.100 Business form.
A NMVC Company must be a newly formed for-profit entity or, subject
to Sec. 108.150, a newly formed for-profit subsidiary of an existing
entity. It must be organized under State law solely for the purpose of
performing the functions and conducting the activities contemplated
under the Act. It may be organized as a corporation (``Corporate NMVC
Company''), a limited partnership (``Partnership NMVC Company''), or a
limited liability company (``LLC NMVC Company'').
Sec. 108.110 Qualified management.
An Applicant must show, to the satisfaction of SBA, that its current
or proposed management team is qualified and has the knowledge,
experience, and capability in Community Development Finance or Relevant
Venture Capital Finance, necessary for investing in the types of
businesses contemplated by the Act, the regulations in this part and its
business plan. In determining whether an Applicant's
[[Page 112]]
current or proposed management team has sufficient qualifications, SBA
will consider information provided by the Applicant and third parties
concerning the background, capability, education, training and
reputation of its general partners, managers, officers, key personnel,
and investment committee and governing board members. The Applicant must
designate at least one individual as the official responsible for
contact with SBA.
Sec. 108.120 Economic development primary mission.
The primary mission of a NMVC Company must be economic development
of one or more LI Areas.
Sec. 108.130 Identified Low Income Geographic Areas.
A NMVC Company must identify the specific LI Areas in which it
intends to make Developmental Venture Capital investments and provide
Operational Assistance under the NMVC program.
Sec. 108.140 SBA approval of initial Management Expenses.
A NMVC Company must have its Management Expenses approved by SBA at
the time of designation as a NMVC Company. (See Sec. 108.520 for the
definition of Management Expenses.)
Sec. 108.150 Management and ownership diversity requirement.
(a) Diversity requirement. You must have diversity between
management and ownership in order to be a NMVC Company. To establish
diversity, you must meet the requirements in paragraphs (b) and (c) of
this section.
(b) Percentage ownership requirement. No Person or group of Persons
who are Affiliates of one another may own or control, directly or
indirectly, more than 70 percent of your Regulatory Capital or your
Leverageable Capital.
(c) Non-affiliation requirement. At least 30 percent of your
Regulatory Capital and Leverageable Capital must be owned and controlled
by three Persons unaffiliated with your management and unaffiliated with
each other, whose investments are significant in dollar and percentage
terms as determined by SBA. Such Persons must not be your Associates
(except for their status as your shareholders, limited partners or
members) and must not Control, be Controlled by, or be under Common
Control with any of your Associates. A single ``acceptable''
Institutional Investor may be substituted for two or three of the three
investors who are otherwise required. The following Institutional
Investors are ``acceptable'' for this purpose:
(1) Entities whose overall activities are regulated and periodically
examined by state, Federal or other governmental authorities
satisfactory to SBA;
(2) Entities listed on the New York Stock Exchange;
(3) Entities that are publicly-traded and that meet both the minimum
numerical listing standards and the corporate governance listing
standards of the New York Stock Exchange:
(4) Public or private employee pension funds;
(5) Trusts, foundations, or endowments, but only if exempt from
Federal income taxation; and
(6) Other Institutional Investors satisfactory to SBA.
(d) Voting requirement. The investors required for you to satisfy
diversity may not delegate their voting rights to any Person who is your
Associate, or who Controls, is Controlled by, or is under Common Control
with any of your Associates, without prior SBA approval.
(e) Requirement to maintain diversity. You must maintain management-
ownership diversity while you are a NMVC Company. If, at any time, you
no longer have the required management-ownership diversity, you must:
(1) Notify SBA within 10 days; and
(2) Re-establish diversity within six months.
[66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001]
Sec. 108.160 Special rules for NMVC Companies formed as limited
partnerships.
(a) Entity General Partner. (1) A general partner which is a
corporation, limited liability company or partnership (an ``Entity
General Partner'')
[[Page 113]]
shall be organized under state law solely for the purpose of serving as
the general partner of one or more NMVC companies.
(2) SBA must approve any person who will serve as an officer,
director, manager, or general partner of the Entity General Partner.
This provision must be stated in an Entity General Partner's Certificate
of Incorporation, operating agreement, limited partnership agreement or
other similar governing instrument.
(3) An Entity General Partner is subject to the same examination and
reporting requirements as a NMVC Company under sections 361 and 362 of
the Act. The restrictions and obligations imposed upon a NMVC Company by
Sec. Sec. 108.1810, 108.30, 108.410 through 108.450, 108.470, 108.500,
108.510, 108.585, 108.600, 108.680, 108.690 through 108.692, and
108.1910 apply also to an Entity General Partner of a NMVC Company.
(4) The general partner(s) of your Entity General Partner(s) will be
considered your general partner.
(5) If your Entity General Partner is a limited partnership, its
limited partners may be considered your Control Person(s) if they meet
the definition for Control Person in Sec. 108.50.
(b) Other requirements for Partnership NMVC Companies. If you are a
Partnership NMVC Company:
(1) You must have a minimum duration of 10 years or two years
following the maturity of your last-maturing Leverage security,
whichever is longer. After 10 years, if all Leverage has been repaid or
redeemed and all amounts due SBA, its agent, or Trustee have been paid,
the Partnership NMVC Company may be terminated by a vote of your
partners;
(2) None of your general partner(s) may be removed or replaced by
your limited partners without prior written approval of SBA;
(3) Any transferee of, or successor in interest to, your general
partner shall have only the rights and liabilities of a limited partner
pending SBA's written approval of such transfer or succession; and
(4) You must incorporate all the provisions in this paragraph (b) in
your limited partnership agreement.
(c) Obligations of a Control Person. All Control Persons are bound
by the disciplinary provisions of sections 365 and 366 of the Act and by
the conflict-of-interest rules under Sec. 108.730. The term NMVC
Company, as used in Sec. Sec. 108.30, 108.460, and 108.680, includes
all of the NMVC Company's Control Persons. The conditions specified in
Sec. 108.1810 and Sec. 108.1910 apply to all general partners.
(d) Liability of general partner for partnership debts to SBA.
Subject to section 365 of the Act, your general partner is not liable
solely by reason of its status as a general partner for repayment of any
Leverage or debts you owe to SBA unless SBA, in the exercise of
reasonable investment prudence, and with regard to your financial
soundness, determines otherwise prior to the purchase or guaranty of
your Leverage.
(e) Special Leverage requirement. Before your first issuance of
Leverage, you must furnish SBA with evidence that you qualify as a
partnership for tax purposes, either by a ruling from the Internal
Revenue Service or by an opinion of counsel.
Capitalizing a NMVC Company
Sec. 108.200 Adequate capital for NMVC Companies.
You must meet the requirements of Sec. Sec. 108.200-108.230 in
order to qualify for designation as a NMVC Company and to receive
Leverage.
Sec. 108.210 Minimum capital requirements for NMVC Companies.
You must have Regulatory Capital of at least $5,000,000 and
Leverageable Capital of at least $500,000 to become a NMVC Company.
Sec. 108.230 Private Capital for NMVC Companies.
(a) General. Private Capital means the contributed capital of a NMVC
Company, plus unfunded binding commitments by Institutional Investors
(including commitments evidenced by a promissory note) to contribute
capital to a NMVC Company.
(b) Contributed capital. For purposes of this section, contributed
capital means the paid-in capital and paid-in surplus of a Corporate
NMVC Company, the members' paid-in capital of a
[[Page 114]]
LLC NMVC Company, or the partners' paid-in capital of a Partnership NMVC
Company, in each case subject to the limitations in paragraph (c) of
this section.
(c) Exclusions from Private Capital. Private Capital does not
include:
(1) Funds borrowed by a NMVC Company from any source.
(2) Funds obtained through the issuance of Leverage.
(3) Funds obtained directly from any Federal agency or department.
(4) Any portion of a commitment from an Institutional Investor with
a net worth of less than $10 million that exceeds 10 percent of such
Institutional Investor's net worth.
(5) A commitment from an investor if SBA determines that the
collectability of the commitment is questionable.
(d) Limitations on including non-cash capital contributions in
Private Capital. Private Capital does not include capital contributions
in a form other than cash, except as provided in this paragraph (d).
Subject to SBA's prior approval, Private Capital may include payments
made on behalf of an Applicant or Conditionally Approved NMVC Company
before the Applicant or Conditionally Approved NMVC Company becomes a
NMVC Company for organizational expenses and Management Expenses
incurred by the Applicant or the Conditionally Approved NMVC Company
prior to its becoming a NMVC Company.
(e) Contributions with borrowed funds. You may not accept any
capital contribution made with funds borrowed by a Person seeking to own
an equity interest (whether direct or indirect, beneficial or of record)
of at least 10 percent of your Private Capital. This exclusion does not
apply if:
(1) Such Person's net worth is at least twice the amount borrowed;
or
(2) SBA gives its prior written approval of the capital
contribution.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]
Subpart D_Application and Approval Process for NMVC Company Designation
Sec. 108.300 When and how to apply for designation as a NMVC Company.
(a) Notice of Funds Availability (``NOFA''). SBA will publish a NOFA
in the Federal Register, advising potential applicants of the
availability of funds for the NMVC program. An entity may then submit an
application for designation as a NMVC Company. When submitting its
application, an Applicant must comply with both these regulations and
any requirements specified in the NOFA, including submission deadlines.
The NOFA may specify limitations, special rules, procedures, and
restrictions for a particular funding round.
(b) Application form. An Applicant must apply for designation as a
NMVC Company using the application packet provided by SBA. Upon receipt
of an application, SBA may request clarifying or technical information
on the materials submitted as part of the application.
Sec. 108.310 Contents of application.
Each Applicant must submit a complete application, including the
following:
(a) Amounts. The Applicant must indicate--
(1) The specific amount of Regulatory Capital it proposes to raise
(which amount must be at least $5,000,000); and
(2) The specific amount of binding commitments for contributions in
cash or in-kind it proposes to raise, and/or an annuity it proposes to
purchase, in accordance with the requirements of Sec. 108.2030, as its
matching resources for its Operational Assistance grant award (the
aggregate of which must be not less than $1,500,000 or 30 percent of the
Regulatory Capital it proposes to raise under paragraph (a)(1) of this
section, whichever is greater).
(b) Comprehensive business plan. The Applicant must submit a
comprehensive business plan covering at least a five-year period,
addressing the specific items described in Sec. 108.320, and which
demonstrates that the Applicant has the capacity to operate successfully
as a NMVC Company.
[[Page 115]]
(c) New Markets Tax Credit program. Applicant must address if and to
what extent it intends to conform its activities to the New Markets Tax
Credit laws. If Applicant plans to seek a New Markets Tax Credit,
Applicant also must state the amount of tax credit allocation it intends
to seek.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]
Sec. 108.320 Contents of comprehensive business plan.
(a) Executive summary. The executive summary must include a
description of--
(1) The Applicant;
(2) Its strategy for how it proposes to make successful
Developmental Venture Capital investments in identified LI Areas;
(3) The markets in the LI Areas it proposes to serve; and
(4) How it intends to work with community organizations in and be
accountable to the residents of identified LI Areas in order to
facilitate its Developmental Venture Capital investments.
(b) Capacity, skills, and experience of the management team. An
Applicant must provide information generally as to the background,
capability, education, reputation and training of its general partners,
managers, officers, key personnel, investment committee and governing
board members. The Applicant also must provide information specifically
on these individuals' qualifications and reputation in the areas of
Community Development Finance and/or Relevant Venture Capital Finance,
including the impact of these individuals' activities in these areas.
(c) Market analysis. An Applicant must provide an analysis of the LI
Areas in which it intends to focus its Developmental Venture Capital
investments and Operational Assistance to Smaller Enterprises,
demonstrating that the Applicant understands the market and the unmet
capital needs in such areas and how its activities will meet these unmet
capital needs through Developmental Venture Capital investments and will
have a positive economic impact on those areas. The analysis must
include a description of the extent of the economic distress in the
identified LI Areas. An Applicant also must analyze the extent of the
demand in such areas for Developmental Venture Capital investments and
any factors or trends that may affect the Applicant's ability to make
effective Developmental Venture Capital investments.
(d) Operational capacity and investment strategies. An Applicant
must submit information concerning its policies and procedures for
underwriting and approving its Developmental Venture Capital
investments, monitoring its portfolio, and maintaining internal controls
and operations.
(e) Regulatory Capital. An Applicant must include a detailed
description of how it plans to raise its Regulatory Capital. An
Applicant must discuss its potential sources of Regulatory Capital, the
estimated timing on raising such funds, and the extent of the
expressions of interest to commit such funds to the Applicant.
(f) Plan for providing Operational Assistance. An Applicant must
describe how it plans to use its grant funds to provide Operational
Assistance to Smaller Enterprises in which it will make Developmental
Venture Capital investments. Its plan must address the types of
Operational Assistance it proposes to provide, and how it plans to
provide the Operational Assistance through the use of licensed
professionals, when necessary, either from its own staff or from outside
entities.
(g) Matching resources for Operational Assistance grant. An
Applicant must include a detailed description of how it plans to obtain
binding commitments for cash or in-kind contributions, and/or to
purchase an annuity, to match the funds requested from SBA for the
Applicant's Operational Assistance grant. If it proposes to obtain
commitments for cash and in-kind contributions, it also must estimate
the ratio of cash to in-kind contributions (in no event may in-kind
contributions exceed 50 percent of the total contributions). Applicant
must discuss its potential sources of matching resources, the estimated
timing on raising such funds, and the extent of the expressions of
interest to commit such funds to the
[[Page 116]]
Applicant. Potential sources of matching resources must satisfy the
requirements in Sec. 108.2030(b)(1).
(h) Projected amount of investment in LI Areas. An Applicant must
describe the amount of its total Regulatory Capital and Leverage that it
proposes to invest in Smaller Enterprises located in LI Areas, as
compared to the amount that it proposes to invest in Small Businesses
located outside of LI Areas.
(i) Projected impact. An Applicant must describe the criteria and
economic measurements to be used to evaluate whether and to what extent
it has met the objectives of the NMVC program. It must include:
(1) A description of the extent to which it will concentrate its
Developmental Venture Capital investments and Operational Assistance
activities in identified LI Areas;
(2) An estimate of the social, economic, and community development
benefits to be created within identified LI Areas over the next five
years or more as a result of its activities;
(3) A description of the criteria to be used to measure the benefits
created as a result of its activities;
(4) A discussion about the amount of such benefits created that it
will consider to constitute successfully meeting the objectives of the
NMVC program.
(j) Affiliates and business relationships. Applicant must submit
information regarding the management and financial strength of any
parent or holding entity, affiliated firm or entity, or any other firm
or entity essential to the success of the Applicant's business plan.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]
Sec. 108.330 Grant issuance fee.
An Applicant must pay to SBA a grant issuance fee of $5,000. An
Applicant must submit this fee in advance, at the time of application
submission. If SBA does not select an Applicant as a Conditionally
Approved NMVC Company or designate an Applicant as a NMVC Company, SBA
will refund this fee to the Applicant.
Subpart E_Evaluation and Selection of NMVC Companies
Sec. 108.340 Evaluation and selection--general.
SBA will evaluate and select an Applicant to participate in the NMVC
program solely at SBA's discretion, based on SBA's review of the
Applicant's application materials, interviews or site visits with the
Applicant (if any), and background investigations conducted by SBA and
other Federal agencies. SBA's evaluation and selection process is
intended to--
(a) Ensure that Applicants are evaluated on a competitive basis and
in a fair and consistent manner;
(b) Take into consideration the unique proposals presented by
Applicants;
(c) Ensure that each Applicant that SBA designates as a NMVC Company
can fulfill successfully the goals of its comprehensive business plan;
and
(d) Ensure that SBA selects Applicants in such a way as to promote
Developmental Venture Capital investments nationwide and in both urban
and rural areas.
Sec. 108.350 Eligibility and completeness.
SBA will not consider any application that is not complete or that
is submitted by an Applicant that does not meet the eligibility criteria
described in subpart C of this part. SBA, at its sole discretion, may
request from an Applicant additional information concerning eligibility
criteria or easily completed portions of the application in order to
allow SBA to consider that Applicant's application.
Sec. 108.360 Evaluation criteria.
SBA will evaluate and select an Applicant for participation in the
NMVC program by considering the following criteria--
(a) The quality of the Applicant's comprehensive business plan in
terms of meeting the objectives of the NMVC program;
(b) The likelihood that the Applicant will fulfill the goals
described in its comprehensive business plan;
(c) The capability of the Applicant's management team;
[[Page 117]]
(d) The strength and likelihood for success of the Applicant's
operations and investment strategies;
(e) The need for Developmental Venture Capital investments in the LI
Areas in which the Applicant intends to invest;
(f) The extent to which the Applicant will concentrate its
activities on serving the LI Areas in which it intends to invest,
including the ratio of resources that it proposes to invest in such
areas as compared to other areas;
(g) The Applicant's demonstrated understanding of the markets in the
LI Areas in which it intends to focus its activities;
(h) The likelihood that and the time frame within which the
Applicant will be able to--
(1) Raise the Regulatory Capital it proposes to raise for its
investments, and
(2) Obtain the binding commitments for contributions in cash or in-
kind and/or an annuity it proposes to obtain as its matching resources
for its Operational Assistance grant award;
(i) The strength of the Applicant's proposal to provide Operational
Assistance to Smaller Enterprises in which it plans to invest;
(j) The extent to which the activities proposed by the Applicant
will promote economic development and the creation of wealth and job
opportunities in the LI Areas in which it intends to invest and among
individuals living in LI Areas; and
(k) The strength of the Applicant's application compared to
applications submitted by other Applicants and by SSBICs intending to
invest in the same or proximate LI Areas.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]
Sec. 108.370 Conditional approval.
From among the Applicants submitting eligible and complete
applications, SBA will select a number of Applicants and will
conditionally approve such selected Applicants to participate in the
NMVC program. SBA will give each such Conditionally Approved NMVC
Company a specific period of time, not to exceed two years, to satisfy
the requirements to become a NMVC Company.
Sec. 108.380 Final approval as a NMVC Company.
(a) General rule. With respect to each Conditionally Approved NMVC
Company, SBA will either:
(1) Grant final approval to participate in the NMVC program and
designate such company as a NMVC Company, if such Conditionally Approved
NMVC Company:
(i) Within the specific period of time SBA gave to it when SBA
conditionally approved it for participation in the NMVC program, has
raised:
(A) The amount of Regulatory Capital set forth in its application,
pursuant to Sec. 108.310(a)(1); and
(B) The amount of matching resources for its Operational Assistance
grant award set forth in its application, pursuant to Sec.
108.310(a)(2); and
(ii) Enters into a Participation Agreement with SBA; or
(2) Revoke SBA's conditional approval of the company, at which time
it is no longer a Conditionally Approved NMVC Company and must not
participate in the NMVC program or represent itself as a Conditionally
Approved NMVC Company.
(b) Exception to requirement to raise matching resources--(1)
General. At its discretion and based upon a showing of good cause, SBA
may consider a Conditionally Approved NMVC Company to have satisfied the
requirement in paragraph (a)(1)(i)(B) of this section to raise matching
resources in the amount of at least 30 percent of its Regulatory Capital
if the Conditionally Approved NMVC Company--
(i) Already has raised at least 20 percent of the total amount of
required matching resources; and
(ii) Has a viable plan that reasonably projects its capacity to
raise the remainder of the required amount of matching resources.
(2) Request for exception. Before the expiration of the time period
given to it by SBA to meet the requirements to become a NMVC Company, a
Conditionally Approved NMVC Company may submit to SBA a request that SBA
grant the exception described in paragraph (b)(1) of this section. Such
Conditionally Approved NMVC must present to SBA evidence of good cause
for such request, as well as evidence supporting
[[Page 118]]
the elements of the exception described in paragraph (b)(1) of this
section.
(3) No applicability to Regulatory Capital. The exception described
in this section applies only to matching resources for the Operational
Assistance grant award. Under no circumstances will SBA designate a
Conditionally Approved NMVC Company as a NMVC Company if such
Conditionally Approved NMVC Company does not raise the required amount
of Regulatory Capital within the time period SBA gave it to do so.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]
Subpart F_Changes in Ownership, Structure, or Control
Changes in Control or Ownership of NMVC Company
Sec. 108.400 Changes in ownership of 10 percent or more of NMVC
Company but no change of Control.
You must obtain SBA's prior written approval for any proposed
transfer or issuance of ownership interests that results in the
ownership (beneficial or of record) by any Person, or group of Persons
acting in concert, of at least 10 percent of any class of your stock,
partnership capital or membership interests.
Sec. 108.410 Changes in Control of NMVC Company (through change in
ownership or otherwise).
You must obtain SBA's prior written approval for any proposed
transaction or event that results in Control by any Person(s) not
previously approved by SBA.
Sec. 108.420 Prohibition on exercise of ownership or Control rights in
NMVC Company before SBA approval.
Without prior written SBA approval, no change of ownership or
Control may take effect and no officer, director, employee or other
Person acting on your behalf shall:
(a) Register on your books any transfer of ownership interest to the
proposed new owner(s);
(b) Permit the proposed new owner(s) to exercise voting rights with
respect to such ownership interest (including directly or indirectly
procuring or voting any proxy, consent or authorization as to such
voting rights at any meeting of shareholders, partners or members);
(c) Permit the proposed new owner(s) to participate in any manner in
the conduct of your affairs (including exercising control over your
books, records, funds or other assets; participating directly or
indirectly in any disposition thereof; or serving as an officer,
director, partner, manager, employee or agent); or
(d) Allow ownership or Control to pass to another Person.
Sec. 108.430 Notification to SBA of transactions that may change
ownership or Control.
You must promptly notify SBA as soon as you have knowledge of
transactions or events that may result in a transfer of Control or
ownership of at least 10 percent of your capital. If there is any doubt
as to whether a particular transaction or event will result in such a
change, report the facts to SBA.
Sec. 108.440 Standards governing prior SBA approval for a proposed
transfer of Control.
SBA approval is contingent upon full disclosure of the real parties
in interest, the source of funds for the new owners' interest, and other
data requested by SBA. As a condition of approving a proposed transfer
of control, SBA may:
(a) Require an increase in your Regulatory Capital;
(b) Require the new owners or the transferee's Control Person(s) to
assume, in writing, personal liability for your Leverage, effective only
in the event of their direct or indirect participation in any transfer
of Control not approved by SBA; or
(c) Require compliance with any other conditions set by SBA,
including compliance with the requirements for minimum capital and
management-ownership diversity as in effect at such time for new NMVC
Companies.
[[Page 119]]
Sec. 108.450 Notification to SBA of pledge of NMVC Company's shares.
(a) You must notify SBA in writing, within 30 calendar days, of the
terms of any transaction in which:
(1) Any Person, or group of Persons acting in concert, pledges
shares of your stock (or equivalent ownership interests) as collateral
for indebtedness; and
(2) The shares pledged are at least 10 percent of your Regulatory
Capital.
(b) If the transaction creates a change of ownership or Control, you
must comply with Sec. 108.400 or Sec. 108.410, as appropriate.
Restrictions on Common Control or Ownership of Two or More NMVC
Companies
Sec. 108.460 Restrictions on Common Control or ownership of two (or
more) NMVC Companies.
Without SBA's prior written approval, you must not have an officer,
director, manager, Control Person, or owner (with a direct or indirect
ownership interest of at least 10 percent) who is also:
(a) An officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) of another
NMVC Company; or
(b) An officer or director of any Person that directly or indirectly
controls, or is controlled by, or is under Common Control with, another
NMVC Company.
Change in Structure of NMVC Company
Sec. 108.470 SBA approval of merger, consolidation, or reorganization
of NMVC Company.
You may not merge, consolidate, change form of organization
(corporation or partnership) or reorganize without SBA's prior written
approval. Any such merger or consolidation will be subject to Sec.
108.440.
Subpart G_Managing the Operations of a NMVC Company
General Requirements
Sec. 108.500 Lawful operations under the Act.
You must engage only in the activities contemplated by the Act and
in no other activities.
Sec. 108.502 Representations to the public.
You may not represent or imply to anyone that the SBA, the U.S.
Government or any of its agencies or officers has approved any ownership
interests you have issued or obligations you have incurred. Be certain
to include a statement to this effect in any solicitation to investors.
Example: You may not represent or imply that ``SBA stands behind the
NMVC Company'' or that ``Your capital is safe because SBA's experts
review proposed investments to make sure they are safe for the NMVC
Company.''
Sec. 108.503 NMVC Company's adoption of an approved valuation policy.
(a) Valuation guidelines. You must prepare, document and report the
valuations of your Loans and Investments in accordance with the
Valuation Guidelines for SBICs issued by SBA. These guidelines may be
obtained from SBA's Investment Division.
(b) SBA approval of valuation policy. You must have a written
valuation policy approved by SBA for use in determining the value of
your Loans and Investments. You must either:
(1) Adopt without change the model valuation policy set forth in
section III of the Valuation Guidelines for SBICs; or
(2) Obtain SBA's prior written approval of an alternative valuation
policy.
(c) Responsibility for valuations. Your board of directors, managing
members, or general partner(s) will be solely responsible for adopting
your valuation policy and for using it to prepare valuations of your
Loans and Investments for submission to SBA. If SBA reasonably believes
that your valuations, individually or in the aggregate, are materially
misstated, it reserves the right
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to require you to engage, at your expense, an independent third party
acceptable to SBA to substantiate the valuations.
(d) Frequency of valuations. (1) You must value your Loans and
Investments at the end of the second quarter of your fiscal year, and at
the end of your fiscal year.
(2) On a case-by-case basis, SBA may require you to perform
valuations more frequently.
(3) You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
(e) Review of valuations by independent public accountant. (1) For
valuations performed as of the end of your fiscal year, your independent
public accountant must review your valuation procedures and the
implementation of such procedures, including adequacy of documentation.
(2) The independent public accountant's report on your audited
annual financial statements (SBA Form 468) must include a statement that
your valuations were prepared in accordance with your approved valuation
policy.
Sec. 108.504 Equipment and office requirements.
(a) Computer capability. You must have a personal computer with a
modem, and be able to use this equipment to prepare reports (using SBA
provided software) and transmit them to SBA. In addition, you must have
access to the Internet and the capability to send and receive electronic
mail via the Internet.
(b) Facsimile capability. You must be able to receive facsimile
messages 24 hours per day at your primary office.
(c) Accessible office. You must maintain an office that is
convenient to the public and is open for business during normal working
hours.
Sec. 108.506 Safeguarding the NMVC Company's assets/Internal controls.
You must adopt a plan to safeguard your assets and monitor the
reliability of your financial data, personnel, Portfolio, funds and
equipment. You must provide your bank and custodian with a certified
copy of your resolution or other formal document describing your control
procedures.
Sec. 108.507 Violations based on false filings and nonperformance of
agreements with SBA.
The following shall constitute a violation of this part:
(a) Nonperformance. Nonperformance of any of the requirements of any
Debenture or of any written agreement with SBA.
(b) False statement. In any document submitted to SBA:
(1) Any false statement knowingly made; or
(2) Any misrepresentation of a material fact; or
(3) Any failure to state a material fact. A material fact is any
fact that is necessary to make a statement not misleading in light of
the circumstances under which the statement was made.
Sec. 108.509 Employment of SBA officials.
Without SBA's prior written approval, for a period of two years
after the date of your most recent issuance of Leverage (or the receipt
of any SBA Assistance as defined in part 105 of this chapter), you are
not permitted to employ, offer employment to, or retain for professional
services, any person who:
(a) Served as an officer, attorney, agent, or employee of SBA on or
within one year before such date; and
(b) As such, occupied a position or engaged in activities which, in
SBA's determination, involved discretion with respect to the granting of
SBA Assistance.
Management and Compensation
Sec. 108.510 SBA approval of NMVC Company's Investment Adviser/
Manager.
You may employ an Investment Adviser/Manager who will be subject to
the supervision of your board of directors, managing members, or general
partner. If you have Leverage or plan to seek Leverage, you must obtain
SBA's prior written approval of the management contract. SBA's approval
of an Investment Adviser/Manager for one NMVC Company does not indicate
approval of that manager for any other NMVC Company.
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(a) Management contract. The contract must:
(1) Specify the services the Investment Adviser/Manager will render
to you and to the Small Businesses in your Portfolio; and
(2) Indicate the basis for computing Management Expenses.
(b) Material change to approved management contract. If there is a
material change, both you and SBA must approve such change in advance.
If you are uncertain if the change is material, submit the proposed
revision to SBA.
Sec. 108.520 Management Expenses of a NMVC Company.
SBA must approve your initial Management Expenses and any increases
in your Management Expenses.
(a) Definition of Management Expenses. Management Expenses include:
(1) Salaries;
(2) Office expenses;
(3) Travel;
(4) Business development;
(5) Office and equipment rental;
(6) Bookkeeping; and
(7) Expenses related to developing, investigating and monitoring
investments.
(b) Management Expenses do not include services provided by
specialized outside consultants, outside lawyers and independent public
accountants, if they perform services not generally performed by a
venture capital company.
Cash Management by a NMVC Company
Sec. 108.530 Restrictions on investments of idle funds by NMVC
Companies.
(a) Permitted investments of idle funds. Funds not invested in Small
Businesses must be maintained in:
(1) Direct obligations of, or obligations guaranteed as to principal
and interest by, the United States, which mature within 15 months from
the date of the investment; or
(2) Repurchase agreements with federally insured institutions, with
a maturity of seven days or less. The securities underlying the
repurchase agreements must be direct obligations of, or obligations
guaranteed as to principal and interest by, the United States. The
securities must be maintained in a custodial account at a federally
insured institution; or
(3) Certificates of deposit with a maturity of one year or less,
issued by a federally insured institution; or
(4) A deposit account in a federally insured institution, subject to
a withdrawal restriction of one year or less; or
(5) A checking account in a federally insured institution; or
(6) A reasonable petty cash fund.
(b) Deposit of funds in excess of the insured amount. (1) You are
permitted to deposit funds in a federally insured institution in excess
of the institution's insured amount, but only if the institution is
``well capitalized'' in accordance with the definition set forth in
regulations of the Federal Deposit Insurance Corporation, as amended (12
CFR 325.103).
(2) Exception: You may make a temporary deposit (not to exceed 30
days) in excess of the insured amount, in a transfer account established
to facilitate the receipt and disbursement of funds or to hold funds
necessary to honor Commitments issued.
(c) Deposit of funds in Associate institution. A deposit in, or a
repurchase agreement with, a federally insured institution that is your
Associate is not considered a Financing of such Associate under Sec.
108.730, provided the terms of such deposit or repurchase agreement are
no less favorable than those available to the general public.
Borrowing by NMVC Companies From Non-SBA Sources
Sec. 108.550 Prior approval of secured third-party debt of NMVC
companies.
(a) Definition. In this section, ``secured third-party debt'' means
any non-SBA debt secured by any of your assets, including secured
guarantees and other contingent obligations that you voluntarily assume
and secured lines of credit.
(b) General rule. You must get SBA's written approval before you
incur any secured third-party debt or refinance any debt with secured
third-party debt, including any renewal of a secured line of credit,
increase in the maximum amount available under a secured line of credit,
or expansion of the scope of a
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security interest or lien. For purposes of this paragraph (b),
``expansion of the scope of a security interest or lien'' does not
include the substitution of one asset or group of assets for another,
provided the asset values (as reported on your most recent annual Form
468) are comparable.
(c) Conditions for SBA approval. As a condition of granting its
approval under this section, SBA may impose such restrictions or
limitations as it deems appropriate, taking into account your historical
performance, current financial position, proposed terms of the secured
debt and amount of aggregate debt you will have outstanding (including
Leverage). SBA will not favorably consider any requests for approval
which include a blanket lien on all your assets, or a security interest
in your investor commitments in excess of 125 percent of the proposed
borrowing.
(d) Thirty-day approval. Unless SBA notifies you otherwise within 30
days after it receives your request, you may consider your request
automatically approved if:
(1) You are in regulatory compliance;
(2) The security interest in your assets is limited to either those
assets being acquired with the borrowed funds or an asset coverage ratio
of no more than 2:1;
(3) Your request is for approval of a secured line of credit that
would not cause your total outstanding borrowings (not including
Leverage) to exceed 50 percent of your Leverageable Capital.
Voluntary Decrease in Regulatory Capital
Sec. 108.585 Voluntary decrease in NMVC Company's Regulatory Capital.
You must obtain SBA's prior written approval to reduce your
Regulatory Capital by more than two percent in any fiscal year. At all
times, you must retain sufficient Regulatory Capital to meet the minimum
capital requirements in the Act and Sec. 108.210, and sufficient
Leverageable Capital to avoid having excess Leverage in violation of
section 355(d) of the Act.
Subpart H_Recordkeeping, Reporting, and Examination Requirements for
NMVC Companies
Recordkeeping Requirements for NMVC Companies
Sec. 108.600 General requirement for NMVC Company to maintain and
preserve records.
(a) Maintaining your accounting records. You must establish and
maintain your accounting records using SBA's standard chart of accounts
for SBICs, unless SBA approves otherwise. You may obtain this chart of
accounts from SBA.
(b) Location of records. You must keep the following records at your
principal place of business or, in the case of paragraph (b)(3) of this
section, at the branch office that is primarily responsible for the
transaction:
(1) All your accounting and other financial records;
(2) All minutes of meetings of directors, stockholders, executive
committees, partners, or other officials; and
(3) All documents and supporting materials related to your business
transactions, except for any items held by a custodian under a written
agreement between you and a Portfolio Concern or non-SBA lender, or any
securities held in a safe deposit box, or by a licensed securities
broker in an amount not exceeding the broker's per-account insurance
coverage.
(c) Preservation of records. You must retain all the records that
are the basis for your financial reports. Such records must be preserved
for the periods specified in this paragraph (c), and must remain
accessible for the first two years of the preservation period.
(1) You must preserve for at least 15 years or, in the case of a
Partnership NMVC Company or LLC NMVC Company, at least two years beyond
the date of liquidation:
(i) All your accounting ledgers and journals, and any other records
of assets, asset valuations, liabilities, equity, income, and expenses.
(ii) Your Articles, bylaws, minute books, and NMVC Company
application.
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(iii) All documents evidencing ownership of the NMVC Company
including ownership ledgers, and ownership transfer registers.
(2) You must preserve for at least six years all supporting
documentation (such as vouchers, bank statements, or canceled checks)
for the records listed in paragraph (b)(1) of this section.
(3) After final disposition of any item in your Portfolio, you must
preserve for at least six years:
(i) Financing applications and Financing instruments.
(ii) All loan, participation, and escrow agreements.
(iii) Size status declarations (SBA Form 480).
(iv) Any capital stock certificates and warrants of the Portfolio
Concern that you did not surrender or exercise.
(v) All other documents and supporting material relating to the
Portfolio Concern, including correspondence.
(4) You may substitute a microfilm or computer-scanned or generated
copy for the original of any record covered by this paragraph (c).
(d) Additional requirement. You must comply with the recordkeeping
and record retention requirements set forth in Circular A-110 of the
Office of Management and Budget. (OMB circulars are available from the
addresses in 5 CFR 1310.3.)
Sec. 108.610 Required certifications for Loans and Investments.
For each of your Loans and Investments, you must have the documents
listed in this section. You must keep these documents in your files and
make them available to SBA upon request.
(a) SBA Form 480, the Size Status Declaration, executed both by you
and by the concern you are financing. By executing this document, both
parties certify that the concern is a Small Business. For securities
purchased from an underwriter in a public offering, you may substitute a
prospectus showing that the concern is a Small Business.
(b) SBA Form 652, a certification by the concern you are financing
that it will not illegally discriminate (see part 112 of this chapter).
(c) A certification by the concern you are financing of the intended
use of the proceeds. For securities purchased from an underwriter in a
public offering, you may substitute a prospectus indicating the intended
use of proceeds.
(d) For each Low-Income Investment, a certification by the concern
you are financing as to the basis for its qualification as a Low-Income
Enterprise.
Sec. 108.620 Requirements to obtain information from Portfolio
Concerns.
All the information required by this section is subject to the
requirements of Sec. 108.600 and must be in English.
(a) Information for initial Financing decision. Before extending any
Financing, you must require the applicant to submit such financial
statements, plans of operation (including intended use of financing
proceeds), cash flow analyses, projections, and such community economic
development information about the company, as are necessary to support
your investment decision. The information submitted must be consistent
with the size and type of the business and the amount of the proposed
Financing.
(b) Updated financial and community economic development
information. (1) The terms of each Financing must require the Portfolio
Concern to provide, at least annually, sufficient financial and
community economic development information to enable you to perform the
following required procedures:
(i) Evaluate the financial condition of the Portfolio Concern for
the purpose of valuing your investment;
(ii) Determine the continued eligibility of the Portfolio Concern;
(iii) Verify the use of Financing proceeds; and
(iv) Evaluate the community economic development impact of the
Financing.
(2) The president, chief executive officer, treasurer, chief
financial officer, general partner, or proprietor of the Portfolio
Concern must certify the information submitted to you.
(3) For financial and valuation purposes, you may accept a complete
copy of the Federal income tax return filed by the Portfolio Concern (or
its proprietor) in lieu of financial statements,
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but only if appropriate for the size and type of the business involved.
(4) The requirements in this paragraph (b) do not apply when you
acquire securities from an underwriter in a public offering (see Sec.
108.825). In that case, you must keep copies of all reports furnished by
the Portfolio Concern to the holders of its securities.
(c) Information required for examination purposes. You must obtain
any information requested by SBA's examiners for the purpose of
verifying the certifications made by a Portfolio Concern under Sec.
108.610. In this regard, your Financing documents must contain
provisions requiring the Portfolio Concern to give you and/or SBA's
examiners access to its books and records for such purpose.
Reporting Requirements for NMVC Companies
Sec. 108.630 Requirement for NMVC companies to file financial
statements and supplementary information with SBA (SBA Form
468).
(a) Annual filing of Form 468. For each fiscal year, you must submit
to SBA financial statements and supplementary information prepared on
SBA Form 468. You must file Form 468 on or before the last day of the
third month following the end of your fiscal year, except for the
information required under paragraphs (e) and (f) of this section, which
must be filed on or before the last day of the fifth month following the
end of your fiscal year.
(1) Audit of Form 468. An independent public accountant acceptable
to SBA must audit the annual Form 468.
(2) Insurance requirement for public accountant. Unless SBA approves
otherwise, your independent public accountant must carry at least
$1,000,000 of Errors and Omissions insurance, or be self-insured and
have a net worth of at least $1,000,000.
(b) Interim filings of Form 468. When requested by SBA, you must
file interim reports on Form 468. SBA may require you to file the entire
form or only certain statements and schedules. You must file such
reports on or before the last day of the month following the end of the
reporting period. When you submit a request for a draw under an SBA
Leverage commitment, you must also comply with any applicable filing
requirements set forth in Sec. 108.1220.
(c) Standards for preparation of Form 468. You must prepare SBA Form
468 in accordance with SBA's Accounting Standards and Financial
Reporting Requirements for Small Business Investment Companies, which
you may obtain from SBA.
(d) Where to file Form 468. Submit all filings of Form 468 to the
Office of New Markets Venture Capital in the Investment Division of SBA.
(e) Reporting of social, economic, or community development impact
information on Form 468. Your annual filing of SBA Form 468 must include
an assessment of the social, economic, or community development impact
of each Financing. This assessment must specify the fulltime equivalent
jobs created, the impact of the Financing on the revenues and profits of
the business and on taxes paid by the business and its employees, and a
listing of the number and percentage of employees who reside in LI
Areas.
(f) Reporting of community development information. For each
Financing of a Low-Income Enterprise, your Form 468 must include an
assessment of such Financing with respect to:
(1) The social, economic or community development benefits achieved
as a result of the Financing;
(2) How and to what extent such benefits fulfilled the goals of your
comprehensive business plan and Participation Agreement;
(3) Whether you consider the Financing or the results of the
Financing to have fulfilled the objectives of the NMVC program; and
(4) Whether, and if so, how you achieved accountability to the
residents of the LI Area in connection with that Financing.
Sec. 108.640 Requirement to file portfolio financing reports (SBA Form
1031).
For each Financing you make (excluding guarantees), you must submit
a Portfolio Financing Report on SBA Form 1031 within 30 days of the
closing date.
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Sec. 108.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 108.503. You must report such valuations to SBA
within 90 days of the end of the fiscal year in the case of annual
valuations, and within 30 days following the close of other reporting
periods. You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
Sec. 108.660 Other items required to be filed by NMVC Company with
SBA.
(a) Reports to owners. You must give SBA a copy of any report you
furnish to your investors, including any prospectus, letter, or other
publication concerning your financial operations or those of any
Portfolio Concern.
(b) Documents filed with SEC. You must give SBA a copy of any
report, application or document you file with the Securities and
Exchange Commission.
(c) Litigation reports. When you become a party to litigation or
other proceedings, you must give SBA a report within 30 days that
describes the proceedings and identifies the other parties involved and
your relationship to them.
(1) The proceedings covered by this paragraph (c) include any action
by you, or by your security holder(s) in a personal or derivative
capacity, against an officer, director, Investment Adviser or other
Associate of yours for alleged breach of official duty.
(2) SBA may require you to submit copies of the pleadings and other
documents SBA may specify.
(3) Where proceedings have been terminated by settlement or final
judgment, you must promptly advise SBA of the terms.
(4) This paragraph (c) does not apply to collection actions or
proceedings to enforce your ordinary creditors' rights.
(d) Notification of criminal charges. If any officer, director, or
general partner of the NMVC Company, or any other person who was
required by SBA to complete a personal history statement, is charged
with or convicted of any criminal offense other than a misdemeanor
involving a minor motor vehicle violation, you must report the incident
to SBA within 5 calendar days. Such report must fully describe the facts
that pertain to the incident.
(e) Reports concerning Operational Assistance grant funds. You must
comply with all reporting requirements set forth in Circular A-110 of
the Office of Management and Budget and any grant award document
executed between you and SBA.
(f) Other reports. You must file any other reports SBA may require
in writing.
Sec. 108.680 Reporting changes in NMVC Company not subject to prior
SBA approval.
(a) Changes to be reported for post-approval. This section applies
to any changes in your Articles, ownership, capitalization, management,
operating area, or investment policies that do not require SBA's prior
approval. You must report such changes to SBA within 30 days for post
approval.
(b) Approval by SBA. You may consider any change submitted under
this section to be approved unless SBA notifies you to the contrary
within 90 days after receiving it. SBA's approval is contingent upon
your full disclosure of all relevant facts and is subject to any
conditions SBA may prescribe.
Examinations of NMVC Companies by SBA for Regulatory Compliance
Sec. 108.690 Examinations.
All NMVC companies must submit to annual examinations by or at the
direction of SBA for the purpose of evaluating regulatory compliance.
Sec. 108.691 Responsibilities of NMVC Company during examination.
You must make all books, records and other pertinent documents and
materials available for the examination, including any information
required by the examiner under Sec. 108.620(c). In addition, the
agreement between you and the independent public accountant performing
your audit must provide that any information in the accountant's working
papers be made available to SBA upon request.
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Sec. 108.692 Examination fees.
(a) General. SBA will assess fees for examinations in accordance
with this section. Unless SBA determines otherwise on a case by case
basis, SBA will not assess fees for special examinations to obtain
specific information.
(b) Base fee. A base fee of $3,500 will be assessed, subject to
adjustment in accordance with paragraph (c) of this section.
(c) Adjustments to base fee. The base fee will be decreased based on
the following criteria:
(1) If you have no outstanding regulatory violations at the time of
the commencement of the examination and SBA did not identify any
violations as a result of the most recent prior examination, you will
receive a 15% discount on your base fee; and
(2) If you were fully responsive to the letter of notification of
examination (that is, you provided all requested documents and
information within the time period stipulated in the notification letter
in a complete and accurate manner, and you prepared and had available
all information requested by the examiner for on-site review), you will
receive a 10% discount on your base fee.
(d) Delay fee. If, in the judgment of SBA, the time required to
complete your examination is delayed due to your lack of cooperation or
the condition of your records, SBA may assess an additional fee of up to
$500 per day.
Subpart I_Financing of Small Businesses by NMVC Companies
Determining the Eligibility of a Small Business for NMVC Financing
Sec. 108.700 Compliance with size standards in part 121 of this
chapter as a condition of Assistance.
You are permitted to provide financial assistance and management
services only to a Small Business. To determine whether an applicant
meets the size standards for a Small Business, you may use either the
financial size standards in Sec. 121.301(c)(1) of this chapter or the
industry standard covering the industry in which the applicant is
primarily engaged, as set forth in Sec. 121.301(c)(2) of this chapter.
Sec. 108.710 Requirement to finance Low-Income Enterprises.
(a) Low-Income Enterprise Financings. At the close of each of your
fiscal years--
(1) At least 80 percent of your Portfolio Concerns must be Low-
Income Enterprises in which you have an Equity Capital Investment; and
(2) For all Financings you have extended, you must have invested at
least 80 percent (in total dollars) in Equity Capital Investments in
Low-Income Enterprises.
(b) Non-compliance with this section. If you have not reached the
percentages required in paragraph (a) of this section at the end of any
fiscal year, then you must be in compliance by the end of the following
fiscal year. However, you will not be eligible for additional Leverage
until such time as you reach the required percentages (see Sec.
108.1120).
Sec. 108.720 Small Businesses that may be ineligible for financing.
(a) Relenders or reinvestors. You are not permitted to finance any
business that is a relender or reinvestor. Relenders or reinvestors are
businesses whose primary business activity involves, directly or
indirectly, providing funds to others, purchasing debt obligations,
factoring, or long-term leasing of equipment with no provision for
maintenance or repair.
(b) Passive Businesses. You are not permitted to finance a passive
business.
(1) Definition. A business is passive if:
(i) It is not engaged in a regular and continuous business operation
(for purposes of this paragraph (b), the mere receipt of payments such
as dividends, rents, lease payments, or royalties is not considered a
regular and continuous business operation); or
(ii) Its employees are not carrying on the majority of day to day
operations, and the company does not provide effective control and
supervision, on a day to day basis, over persons employed under
contract; or
(iii) It passes through substantially all of the proceeds of the
Financing to another entity.
(2) Exception for pass-through of proceeds to subsidiary. With the
prior written approval of SBA, you may finance
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a passive business if it is a Small Business and it passes substantially
all the proceeds through to one or more subsidiary companies, each of
which is an eligible Small Business that is not passive. For the purpose
of this paragraph (b) (2), ``subsidiary company'' means a company in
which at least 50 percent of the outstanding voting securities are owned
by the Financed passive business.
(3) Exception for certain Partnership NMVC companies. With the prior
written approval of SBA, if you are a Partnership NMVC Company, you may
form one or more wholly owned corporations in accordance with this
paragraph (b) (3). The sole purpose of such corporation(s) must be to
provide Financing to one or more eligible, unincorporated Small
Businesses. You may form such corporation(s) only if a direct Financing
to such Small Businesses would cause any of your investors to incur
unrelated business taxable income under section 511 of the Internal
Revenue Code of 1986, as amended (26 U.S.C. 511). Your investment of
funds in such corporation(s) will not constitute a violation of Sec.
108.730(a).
(c) Real Estate Businesses. (1) You are not permitted to finance:
(i) Any business classified under subsector 5311 (Lessors of Real
Estate) of the NAICS Manual; or
(ii) Any business listed under subsector 5312 (Offices of Real
Estate Agents and Brokers) unless at least 80 percent of the revenue is
derived from non-Affiliate sources.
(2) You are not permitted to finance a business, regardless of NAICS
classification, if the Financing is to be used to acquire or refinance
real property, unless the Small Business:
(i) Is acquiring an existing property and will use at least 51
percent of the usable square footage for an eligible business purpose;
or
(ii) Is building or renovating a building and will use at least 67
percent of the usable square footage for an eligible business purpose;
or
(iii) Occupies the subject property and uses at least 67 percent of
the usable square footage for an eligible business purpose.
(d) Project Financing. You are not permitted to finance a business
if:
(1) The assets of the business are to be reduced or consumed,
generally without replacement, as the life of the business progresses,
and the nature of the business requires that a stream of cash payments
be made to the business's financing sources, on a basis associated with
the continuing sale of assets. Examples include real estate development
projects and oil and gas wells; or
(2) The primary purpose of the Financing is to fund production of a
single item or defined limited number of items, generally over a defined
production period, and such production will constitute the majority of
the activities of the Small Business. Examples include motion pictures
and electric generating plants.
(e) Farm land purchases. You are not permitted to finance the
acquisition of farmland. Farmland means land, which is or is intended to
be used for agricultural or forestry purposes, such as the production of
food, fiber, or wood, or is so taxed or zoned.
(f) Public interest. You are not permitted to finance any business
if the proceeds are to be used for purposes contrary to the public
interest, including but not limited to activities which are in violation
of law, or inconsistent with free competitive enterprise.
(g) Foreign investment--(1) General rule. You are not permitted to
finance a business if:
(i) The funds will be used substantially for a foreign operation; or
(ii) At the time of the Financing or within one year thereafter,
more than 49 percent of the employees or tangible assets of the Small
Business are located outside the United States (unless you can show, to
SBA's satisfaction, that the Financing was used for a specific domestic
purpose).
(2) Exception. This paragraph (g) does not prohibit a Financing used
to acquire foreign materials and equipment or foreign property rights
for use or sale in the United States.
(h) Financing NMVC companies or SBICs. You are not permitted to
provide funds, directly or indirectly, that the Small Business will use:
(1) To purchase stock in or provide capital to a NMVC Company or
SBIC; or
[[Page 128]]
(2) To repay an indebtedness incurred for the purpose of investing
in a NMVC Company or SBIC.
Sec. 108.730 Financings which constitute conflicts of interest.
(a) General rule. You must not self-deal to the prejudice of a Small
Business, the NMVC Company, its shareholders or partners, or SBA. Unless
you obtain a prior written exemption from SBA for special instances in
which a Financing may further the purposes of the Act despite presenting
a conflict of interest, you must not directly or indirectly:
(1) Provide Financing to any of your Associates, except for a Small
Business that satisfies all of the following conditions:
(i) Your Associate relationship with the Small Business is described
by paragraph (8) or (9) of the definition of Associate in Sec. 108.50;
(ii) No Person triggering the Associate relationship identified in
paragraph (a)(1)(i) of this section is a Close Relative or Secondary
Relative of any Person described in paragraph (1), (2), (4), or (5) of
the definition of Associate in Sec. 108.50; and
(iii) No single Associate of yours has either a voting interest or
an economic interest in the Small Business exceeding 20 percent, and no
two or more of your Associates have either a voting interest or an
economic interest exceeding 33 percent. Economic interests shall be
computed on a fully diluted basis, and both voting and economic
interests shall exclude any interest owned through the NMVC Company.
(2) Provide Financing to an Associate of another NMVC Company if one
of your Associates has received or will receive any direct or indirect
Financing or a Commitment from that NMVC Company or a third NMVC Company
(including Financing or Commitments received under any understanding,
agreement, or cross dealing, reciprocal or circular arrangement).
(3) Borrow money from:
(i) A Small Business Financed by you;
(ii) An officer, director, or owner of at least a 10 percent equity
interest in such business; or
(iii) A Close Relative of any such officer, director, or equity
owner.
(4) Provide Financing to a Small Business to discharge an obligation
to your Associate or free other funds to pay such obligation. This
paragraph (a)(4) does not apply if the obligation is to an Associate
Lending Institution and is a line of credit or other obligation incurred
in the normal course of business.
(b) Rules applicable to Associates. Without SBA' s prior written
approval, your Associates must not, directly or indirectly:
(1) Borrow money from any Person described in paragraph (a)(3) of
this section.
(2) Receive from a Small Business any compensation in connection
with Assistance you provide (except as permitted under Sec.
108.825(c)), or anything of value for procuring, attempting to procure,
or influencing your action with respect to such Assistance.
(c) Applicability of other laws. You are also bound by any
restrictions in Federal or State laws governing conflicts of interest
and fiduciary obligations.
(d) Financings with Associates--(1) Financings with Associates
requiring prior approval. Without SBA's prior written approval, you may
not Finance any business in which your Associate has either a voting
equity interest or total equity interests (including potential
interests) of at least five percent, except as otherwise permitted under
paragraph (a)(1) of this section.
(2) Other Financings with Associates. If you and an Associate
provide Financing to the same Small Business, either at the same time or
at different times, you must be able to demonstrate to SBA's
satisfaction that the terms and conditions are (or were) fair and
equitable to you, taking into account any differences in the timing of
each party's financing transactions.
(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A
Financing that falls into one of the following categories is exempt from
the prior approval requirement in paragraph (d)(1) of this section or is
presumed to be fair and equitable to you for the purposes of paragraph
(d)(2) of this section, as appropriate:
[[Page 129]]
(i) Your Associate is a Lending Institution that is providing
financing under a credit facility in order to meet the operational needs
of the Small Business, and the terms of such financing are usual and
customary.
(ii) Your Associate invests in the Small Business on the same terms
and conditions and at the same time as you.
(iii) Both you and your Associate are NMVC companies.
(e) Use of Associates to manage Portfolio Concerns. To protect your
investment, you may designate an Associate to serve as an officer,
director, or other participant in the management of a Small Business.
You must identify any such Associate in your records available for SBA's
review under Sec. 108.600. Without SBA's prior written approval, the
Associate must not:
(1) Have any other direct or indirect financial interest in the
Portfolio Concern that exceeds, or has the potential to exceed, the
percentages of the Portfolio Concern's equity set forth in paragraph
(a)(1) of this section.
(2) Receive any income or anything of value from the Portfolio
Concern unless it is for your benefit, with the exception of director's
fees, expenses, and distributions based upon the Associate's ownership
interest in the Concern.
(f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940
or 1980 Act Company and you receive an exemption from the Securities and
Exchange Commission for a transaction described in this section, you
need not obtain SBA's approval of the transaction. However, you must
promptly notify SBA of the transaction.
(g) Restriction on options obtained by NMVC Company's management and
employees. Your employees, officers, directors, managing members or
general partners, or the general partners of the management company that
is providing services to you or to your general partner, may obtain
options in a Financed Small Business only if:
(1) They participate in the Financing on a pari passu basis with
you; or
(2) SBA gives its prior written approval; or
(3) The options received are compensation for service as a member of
the board of directors of the Small Business, and such compensation does
not exceed that paid to other outside directors. In the absence of such
directors, fees must be reasonable when compared with amounts paid to
outside directors of similar companies.
Sec. 108.740 Portfolio diversification (``overline'' limitation).
(a) Without SBA's prior written approval, you may provide Financing
or a Commitment to a Small Business only if the resulting amount of your
aggregate outstanding Financings and Commitments to such Small Business
and its Affiliates does not exceed 20 percent of the sum of:
(1) Your Regulatory Capital as of the date of the Financing or
Commitment; plus
(2) Any permitted Distribution(s) you made during the five years
preceding the date of the Financing or Commitment which reduced your
Regulatory Capital.
(b) For the purposes of paragraph (a) of this section, you must
measure each outstanding Financing at its current cost plus any amount
of the Financing that was previously written off.
Sec. 108.760 How a change in size or activity of a Portfolio Concern
affects the NMVC Company and the Portfolio Concern.
(a) Effect on NMVC Company of a change in size of a Portfolio
Concern. If a Portfolio Concern no longer qualifies as a Small Business
you may keep your investment in the concern and:
(1) Subject to the overline limitations of Sec. 108.740, you may
provide additional Financing to the concern up to the time it makes a
public offering of its securities.
(2) Even after the concern makes a public offering, you may exercise
any stock options, warrants, or other rights to purchase Equity
Securities which you acquired before the public offering, or fund
Commitments you made before the public offering.
(b) Effect of a change in business activity occurring within one
year of NMVC Company's initial Financing--(1) Retention of Investment.
Unless you receive SBA's written approval, you may not keep your
investment in a Portfolio
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Concern, small or otherwise, which becomes ineligible by reason of a
change in its business activity within one year of your initial
investment.
(2) Request for SBA 's approval to retain investment. If you request
that SBA approve the retention of your investment, your request must
include sufficient evidence to demonstrate that the change in business
activity was caused by an unforeseen change in circumstances and was not
contemplated at the time the Financing was made.
(3) Additional Financing. If SBA approves your request to retain an
investment under paragraph (b)(2) of this section, you may provide
additional Financing to the Portfolio Concern to the extent necessary to
protect against the loss of the amount of your original investment,
subject to the overline limitations of Sec. 108.740.
(c) Effect of a change in business activity occurring more than one
year after the initial Financing. If a Portfolio Concern becomes
ineligible because of a change in business activity more than one year
after your initial Financing you may:
(1) Retain your investment; and
(2) Provide additional Financing to the Portfolio Concern to the
extent necessary to protect against the loss of the amount of your
original investment, subject to the overline limitations of Sec.
108.740.
Structuring NMVC Company's Financing of Eligible Small Businesses
Sec. 108.800 Financings in the form of equity interests.
You may not, inadvertently or otherwise:
(a) Become a general partner in any unincorporated business; or
(b) Become jointly or severally liable for any obligations of an
unincorporated business.
Sec. 108.820 Financings in the form of guarantees.
(a) General rule. At the request of a Small Business or where
necessary to protect your existing investment, you may guarantee the
monetary obligation of a Small Business to any non-Associate creditor.
(b) Exception. You may not issue a guaranty if:
(1) You would become subject to State regulation as an insurance,
guaranty or surety business; or
(2) The amount of the guaranty plus any direct Financings to the
Small Business exceed the overline limitations of Sec. 108.740, except
that a pledge of the Equity Securities of the issuer or a subordination
of your lien or creditor position does not count toward your overline.
(c) Pledge of NMVC Company's assets as guaranty. For purposes of
this section, a guaranty with recourse only to specific asset(s) you
have pledged is equal to the fair market value of such asset(s) or the
amount of the debt guaranteed, whichever is less.
Sec. 108.825 Purchasing securities from an underwriter or other third
party.
(a) Securities purchased through or from an underwriter. You may
purchase the securities of a Small Business through or from an
underwriter if:
(1) You purchase such securities within 90 days of the date the
public offering is first made;
(2) Your purchase price is no more than the original public offering
price; and
(3) The amount paid by you for the securities (less ordinary and
reasonable underwriting charges and commissions) has been, or will be,
paid to the Small Business, and the underwriter certifies in writing
that this requirement has been met.
(b) Recordkeeping requirements. You must keep records available for
SBA's inspection which show the relevant details of the transaction,
including, but not limited to, date, price, commissions, and the
underwriter's certifications required under paragraphs (a)(3) and (c) of
this section.
(c) Underwriter's requirements. The underwriter must certify whether
it is your Associate. You may pay reasonable and customary commissions
and expenses to an Associate underwriter for the portion of an offering
that you purchase.
(d) Securities purchased from another NMVC Company or from SBA. You
may
[[Page 131]]
purchase from, or exchange with, another NMVC Company, Portfolio
securities (or any interest therein). Such purchase or exchange may only
be made on a non-recourse basis. You may not have more than one-third of
your total assets (valued at cost) invested in such securities. If you
have previously sold Portfolio securities (or any interest therein) on a
recourse basis, you shall include the amount for which you may be
contingently liable in your overline computation.
(e) Purchases of securities from other non-issuers. You may purchase
securities of a Small Business from a non-issuer not previously
described in this section if such acquisition is a reasonably necessary
part of the overall sound Financing of the Small Business.
Limitations on Disposition of Assets
Sec. 108.885 Disposition of assets to NMVC Company's Associates.
Except with SBA's prior written approval, you are not permitted to
dispose of assets (including assets acquired in liquidation) to any
Associate. As a prerequisite to such approval, you must demonstrate that
the proposed terms of disposal are at least as favorable to you as the
terms obtainable elsewhere.
Management Services and Fees
Sec. 108.900 Fees for management services provided to a Small Business
by a NMVC Company or its Associate.
(a) General. This section applies to management services that you or
your Associate provide to a Small Business during the term of a
Financing or prior to a Financing. It does not apply to management
services that your Associate provides to a Small Business that you do
not finance. It also does not apply to Operational Assistance that you
or your Associate provide to a Smaller Enterprise that you have Financed
or in which you expect to make a Financing, for which neither you nor
your Associate may charge the Smaller Enterprise.
(b) SBA approval. You must obtain SBA's prior written approval of
any management services fees and other fees described in this section
that you or your Associate charge.
(c) Permitted management services fees. You or your Associate may
provide management services to a Small Business financed by you if:
(1) You or your Associate have entered into a written contract with
the Small Business;
(2) The fees charged are for services actually performed;
(3) Services are provided on an hourly fee, project fee, or other
reasonable basis;
(4) You can demonstrate to SBA, upon request, that the rate does not
exceed the prevailing rate charged for comparable services by other
organizations in the geographic area of the Small Business; and
(5) At least 50 percent of any management services fees paid to your
Associate by a Small Business for management services provided by the
Associate is allocated back to you for your benefit.
(d) Fees for service as a board member. You or your Associate may
charge a Small Business Financed by you for services provided as members
of the Small Business' board of directors. The fees must not exceed
those paid to other outside board members. In the absence of such board
members, fees must be reasonable when compared with amounts paid to
outside directors of similar companies. Fees may be in the form of cash,
warrants, or other payments. At least 50 percent of any such fees paid
to your Associate by a Small Business for service by the Associate as a
board member must be allocated back to you for your benefit.
(e) Transaction fees. (1) You or your Associate may charge
reasonable transaction fees for work performed such as preparing a Small
Business for a public offering, private offering, or sale of all or part
of the business, and for assisting with the transaction. Fees may be in
the form of cash, notes, stock, and/or options. At least 50 percent of
any such fees paid to your Associate by a Small Business for
transactions work done by the Associate must be allocated back to you
for your benefit.
(2) Your Associate may charge market rate investment banking fees to
a
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Small Business on that portion of a Financing that you do not provide.
(f) Recordkeeping requirements. You must keep a record of hours
spent and amounts charged to the Small Business, including expenses
charged.
[67 FR 68503, Nov. 12, 2002]
Subpart J_SBA Financial Assistance for NMVC Companies (Leverage)
General Information About Obtaining Leverage
Sec. 108.1100 Type of Leverage and application procedures.
(a) Type of Leverage available. You may apply for Leverage from SBA
in the form of a guarantee of your Debentures.
(b) Applying for Leverage. The Leverage application process has two
parts. You must first apply for SBA's conditional commitment to reserve
a specific amount of Leverage for your future use. You may then apply to
draw down Leverage against the commitment. See Sec. Sec. 108.1200
through 108.1240.
(c) Where to send your application. Send all Leverage applications
to SBA, Investment Division Office of New Markets Venture Capital, 409
Third Street, SW., Washington, DC 20416.
Sec. 108.1120 General eligibility requirement for Leverage.
To be eligible for Leverage, you must be in compliance with the Act,
the regulations in this part, and your Participation Agreement.
Sec. 108.1130 Leverage fees payable by NMVC Company.
There is no fee for the issuance of Debentures by a NMVC Company.
Sec. 108.1140 NMVC Company's acceptance of SBA remedies under Sec.
108.1810.
If you issue Leverage, you automatically agree to the terms and
conditions in Sec. 108.1810 as it exists at the time of issuance. The
effect of these terms and conditions is the same as if they were fully
incorporated in the terms of your Leverage.
Maximum Amount of Leverage for Which a NMVC Company Is Eligible
Sec. 108.1150 Maximum amount of Leverage for a NMVC Company.
The face amount of a NMVC Company's outstanding Debentures may not
exceed 150 percent of its Leverageable Capital.
Conditional Commitments by SBA To Reserve Leverage for a NMVC Company
Sec. 108.1200 SBA's Leverage commitment to a NMVC Company--application
procedure, amount, and term.
(a) General. Under the provisions in Sec. Sec. 108.1200 through
108.1240, you may apply for SBA's conditional commitment to reserve a
specific amount and type of Leverage for your future use. You may then
apply to draw down Leverage against the commitment.
(b) Applying for a Leverage commitment. SBA will notify you when it
is accepting requests for Leverage commitments. Upon receipt of your
request, SBA will send you a complete application package.
(c) Limitations on the amount of a Leverage commitment. The amount
of a Leverage commitment must be a multiple of $5,000. SBA, in its
discretion, may determine a minimum dollar amount for Leverage
commitments. Any such minimum amounts will be published in Notices in
the Federal Register from time to time.
(d) Term of Leverage commitment. SBA's Leverage commitment will
automatically lapse on the expiration date stated in the commitment
letter issued to you by SBA.
Sec. 108.1220 Requirement for NMVC Company to file financial
statements at the time of request for a draw.
(a) If you submit a request for a draw against SBA's Leverage
commitment more than 90 days since your submission of an annual Form 468
or a Form 468 (Short Form), you must:
(1) Give SBA a financial statement on Form 468 (Short Form); and
(2) File a statement of no material adverse change in your financial
condition since your last filing of Form 468.
[[Page 133]]
(b) You will not be eligible for a draw if you are not in compliance
with this section.
Sec. 108.1230 Draw-downs by NMVC Company under SBA's Leverage
commitment.
(a) NMVC Company's authorization of SBA to guarantee securities. By
submitting a request for a draw against SBA's Leverage commitment, you
authorize SBA, or any agent or trustee SBA designates, to guarantee your
Debenture and to sell it with SBA's guarantee.
(b) Limitations on amount of draw. The amount of a draw must be a
multiple of $5,000. SBA, in its discretion, may determine a minimum
dollar amount for draws against SBA's Leverage commitments. Any such
minimum amounts will be published in Notices in the Federal Register
from time to time.
(c) Effect of regulatory violations on NMVC Company's eligibility
for draws--(1) General rule. You are eligible to make a draw against
SBA's Leverage commitment only if you are in compliance with all
applicable provisions of the Act and SBA regulations (i.e., no
unresolved statutory or regulatory violations) and your Participation
Agreement.
(2) Exception to general rule. If you are not in compliance, you may
still be eligible for draws if:
(i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations or your Participation
Agreement and that you have not repeatedly violated any non-substantive
provisions; or
(ii) You have agreed with SBA on a course of action to resolve your
violations and such agreement does not prevent you from issuing
Leverage.
(d) Procedures for funding draws. You may request a draw at any time
during the term of the commitment. With each request, submit the
following documentation:
(1) A statement certifying that there has been no material adverse
change in your financial condition since your last filing of SBA Form
468 (see also Sec. 108.1220 for SBA Form 468 filing requirements).
(2) If your request is submitted more than 30 days following the end
of your fiscal year, but before you have submitted your annual filing of
SBA Form 468 (Long Form) in accordance with Sec. 108.630(a), a
preliminary unaudited annual financial statement on SBA Form 468 (Short
Form).
(3) A statement certifying that to the best of your knowledge and
belief, you are in compliance with all provisions of the Act and SBA
regulations (i.e., no unresolved regulatory or statutory violations) and
your Participation Agreement, or a statement listing any specific
violations you are aware of. Either statement must be executed by one of
the following:
(i) An officer of the NMVC Company;
(ii) An officer of a corporate general partner of the NMVC Company;
(iii) An individual who is authorized to act as or for a general
partner of the NMVC Company; or
(iv) An individual who is authorized to act as or for a member-
manager of the NMVC Company.
(4) A statement that the proceeds are needed to fund one or more
particular Small Businesses or to provide liquidity for your operations.
If required by SBA, the statement must include the name and address of
each Small Business, and the amount and anticipated closing date of each
proposed Financing.
(e) Reporting requirements after drawing funds. (1) Within 30
calendar days after the actual closing date of each Financing funded
with the proceeds of your draw, you must file an SBA Form 1031
confirming the closing of the transaction.
(2) If SBA required you to provide information concerning a specific
planned Financing under paragraph (d)(4) of this section, and such
Financing has not closed within 60 calendar days after the anticipated
closing date, you must give SBA a written explanation of the failure to
close.
(3) If you do not comply with this paragraph (e), you will not be
eligible for additional draws. SBA may also determine that you are not
in compliance with the terms of your Leverage under Sec. 108.1810.
[[Page 134]]
Sec. 108.1240 Funding of NMVC Company's draw request through sale to
third-party.
(a) NMVC Company's authorization of SBA to arrange sale of
securities to third-party. By submitting a request for a draw of
Debenture Leverage, you authorize SBA, or any agent or trustee SBA
designates, to enter into any agreements (and to bind you to such
agreements) necessary to accomplish:
(1) The sale of your Debenture to a third-party at a rate approved
by SBA; and
(2) The purchase of your security from the third-party and the
pooling of your security with other securities with the same maturity
date.
(b) Sale of Debentures to a third-party. If SBA arranges for the
sale of your Debenture to a third-party, the sale price may be an amount
discounted from the face amount of the Debenture.
Funding Leverage by use of SBA Guaranteed Trust Certificates (``TCs'')
Sec. 108.1600 SBA authority to issue and guarantee Trust Certificates.
(a) Authorization. Section 356 of the Act authorizes SBA to issue
TCs and to guarantee the timely payment of the principal and interest
thereon. Any guarantee by SBA of such TC is limited to the principal and
interest due on the Debentures in any Trust or Pool backing such TC. The
full faith and credit of the United States is pledged to the payment of
all amounts due under the guarantee of any TC.
(b) SBA authority to arrange public or private fundings of Leverage.
SBA in its discretion may arrange for public or private financing under
its guarantee authority. Such financing arranged by SBA may be
accomplished by the sale of individual Debentures, aggregations of
Debentures, or Pools or Trusts of Debentures.
(c) Pass-through provisions. TCs shall provide for a pass-through to
their holders of all amounts of principal and interest paid on the
Debentures in the Pool or Trust against which they are issued.
(d) Formation of a Pool or Trust holding Leverage Securities. SBA
shall approve the formation of each Pool or Trust. SBA may, in its
discretion, establish the size of the Pools and their composition, the
interest rate on the TCs issued against Trusts or Pools, fees,
discounts, premiums and other charges made in connection with the Pools,
Trusts, and TCs, and any other characteristics of a Pool or Trust it
deems appropriate.
Sec. 108.1610 Effect of prepayment or early redemption of Leverage on
a Trust Certificate.
(a) The rights, if any, of a NMVC Company to prepay any Debenture is
established by the terms of such security, and no such right is created
or denied by the regulations in this part.
(b) SBA's rights to purchase or prepay any Debenture without premium
are established by the terms of the Guaranty Agreement relating to the
Debenture.
(c) Any prepayment of a Debenture pursuant to the terms of the
Guaranty Agreement relating to such security shall reduce the SBA
guarantee of timely payment of principal and interest on a TC in
proportion to the amount of principal that such prepaid Debenture
represents in the Trust or Pool backing such TC.
(d) SBA shall be discharged from its guarantee obligation to the
holder or holders of any TC, or any successor or transferee of such
holder, to the extent of any such prepayment. whether or not such
successor or transferee shall have notice of any such prepayment.
(e) Interest on prepaid Debentures shall accrue only through the
date of prepayment.
(f) In the event that all Debentures constituting a Trust or Pool
are prepaid, the TCs backed by such Trust or Pool shall be redeemed by
payment of the unpaid principal and interest on the TCs; provided,
however, that in the case of the prepayment of a Debenture pursuant to
the provisions of the Guaranty Agreement relating to the Debenture, the
CRA shall pass through pro rata to the holders of the TCs any such
prepayments including any prepayment penalty paid by the obligor NMVC
Company pursuant to the terms of the Debenture.
[[Page 135]]
Sec. 108.1620 Functions of agents, including Central Registration
Agent, Selling Agent and Fiscal Agent.
(a) Agents. SBA may appoint or cause to be appointed agent(s) to
perform functions necessary to market and service Debentures or TCs
pursuant to this part.
(1) Selling Agent. As a condition of guaranteeing a Debenture, SBA
may cause each NMVC Company to appoint a Selling Agent to perform
functions that include, but are not limited to:
(i) Selecting qualified entities to become pool or Trust assemblers
(``Poolers'').
(ii) Receiving guaranteed Debentures as well as negotiating the
terms and conditions of sales or periodic offerings of Debentures and/or
TCs on behalf of NMVC companies.
(iii) Directing and coordinating periodic sales of Debentures and/or
TCs.
(iv) Arranging for the production of Offering Circulars,
certificates, and such other documents as may be required from time to
time.
(2) Fiscal Agent. SBA shall appoint a Fiscal Agent to:
(i) Establish performance criteria for Poolers.
(ii) Monitor and evaluate the financial markets to determine those
factors that will minimize or reduce the cost of funding Debentures.
(iii) Monitor the performance of the Selling Agent, Poolers, CRA,
and the Trustee.
(iv) Perform such other functions as SBA, from time to time, may
prescribe.
(3) Central Registration Agent. Pursuant to a contract entered into
with SBA, the CRA, as SBA's agent, will do the following with respect to
the Pools or Trust Certificates for the Debentures:
(i) Form an SBA-approved Pool or Trust;
(ii) Issue the TCs in the form prescribed by SBA;
(iii) Transfer the TCs upon the sale of original issue TCs in any
secondary market transaction;
(iv) Receive payments from NMVC companies;
(v) Make periodic payments as scheduled or required by the terms of
the TCs, and pay all amounts required to be paid upon prepayment of
Debentures;
(vi) Hold, safeguard, and release all Debentures constituting Trusts
or Pools upon instructions from SBA;
(vii) Remain custodian of such other documentation as SBA shall
direct by written instructions;
(viii) Provide for the registration of all pooled Debentures, all
Pools and Trusts, and all TCs;
(ix) Perform such other functions as SBA may deem necessary to
implement the provisions of this section.
(b) Functions. Either SBA or an agent appointed by SBA may perform
the function of locating purchasers, and negotiating and closing the
sale of Debentures and TCs. Nothing in the regulations in this part
shall be interpreted to prevent the CRA from acting as SBA's agent for
this purpose.
Sec. 108.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
(a) Brokers and Dealers. Each broker, dealer, and Pool or Trust
assembler approved by SBA pursuant to these regulations shall either be
regulated by a Federal financial regulatory agency, or be a member of
the National Association of Securities Dealers (NASD), and shall be in
good standing in respect to compliance with the financial, ethical, and
reporting requirements of such body. They also shall be in good standing
with SBA as determined by the SBA Associate Administrator for Investment
(see paragraph (c) of this section) and shall provide a fidelity bond or
insurance in such amount as SBA may require.
(b) Suspension and/or termination of Broker or Dealer. SBA shall
exclude from the sale and all other dealings in Debentures or TCs any
broker or dealer:
(1) If such broker's or dealer's authority to engage in the
securities business has been revoked or suspended by a supervisory
agency. When such authority has been suspended, SBA will suspend such
broker or dealer for the duration of such suspension by the supervisory
agency.
(2) If such broker or dealer has been indicted or otherwise formally
charged
[[Page 136]]
with a misdemeanor or felony bearing on its fitness, such broker or
dealer may be suspended while the charge is pending. Upon conviction,
participation may be terminated.
(3) If such broker or dealer has suffered an adverse final civil
judgment holding that such broker or dealer has committed a breach of
trust or violation of law or regulation protecting the integrity of
business transactions or relationships, participation in the market for
Debentures or TCs may be terminated.
(c) Termination/suspension proceedings. A broker's or dealer's
participation in the market for Debentures or TCs will be conducted in
accordance with part 134 of this chapter. SBA may, for any of the
reasons stated in paragraphs (b)(1) through (b)(3) of this section,
suspend the privilege of any broker or dealer to participate in this
market. SBA shall give written notice at least ten (10) business days
prior to the effective date of such suspension. Such notice shall inform
the broker or dealer of the opportunity for a hearing pursuant to part
134 of this chapter.
Sec. 108.1640 SBA access to records of the CRA, Brokers, Dealers and
Pool or Trust assemblers.
The CRA and any broker, dealer and Pool or Trust assembler operating
under the regulations in this part shall make all books, records and
related materials associated with Debentures and TCs available to SBA
for review and copying purposes. Such access shall be at such party's
primary place of business during normal business hours.
Miscellaneous
Sec. 108.1700 Transfer by SBA of its interest in a NMVC Company's
Leverage security.
Upon such conditions and for such consideration as it deems
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any
Debenture held by or on behalf of SBA. Upon notice by SBA, a NMVC
Company will make all payments of principal and interest as shall be
directed by SBA. A NMVC Company will be liable for all damage or loss
which SBA may sustain by reason of such disposal, up to the amount of
the NMVC Company's liability under such security, plus court costs and
reasonable attorney's fees incurred by SBA.
Sec. 108.1710 SBA authority to collect or compromise its claims.
SBA may, upon such conditions and for such consideration as it deems
reasonable, collect or compromise all claims relating to obligations
held or guaranteed by SBA, and all legal or equitable rights accruing to
SBA.
Sec. 108.1720 Characteristics of SBA's guarantee.
If SBA agrees to guarantee a NMVC Company's Debentures, such
guarantee will be unconditional, irrespective of the validity,
regularity or enforceability of the Debentures or any other
circumstances that might constitute a legal or equitable discharge or
defense of a guarantor. Pursuant to its guarantee, SBA will make timely
payments of principal and interest on the Debentures.
Subpart K_NMVC Company's Noncompliance With Terms of Leverage
Sec. 108.1810 Events of default and SBA's remedies for NMVC Company's
noncompliance with terms of Debentures.
(a) Applicability of this section. By issuing Debentures, you
automatically agree to the terms, conditions and remedies in this
section, as in effect at the time of issuance and as if fully set forth
in the Debentures.
(b) Automatic events of default. The occurrence of one or more of
the events in this paragraph (b) causes the remedies in paragraph (c) of
this section to take effect immediately.
(1) Insolvency. You become equitably or legally insolvent.
(2) Voluntary assignment. You make a voluntary assignment for the
benefit of creditors without SBA's prior written approval.
(3) Bankruptcy. You file a petition to begin any bankruptcy or
reorganization proceeding, receivership, dissolution or other similar
creditors' rights proceeding, or such action is initiated
[[Page 137]]
against you and is not dismissed within 60 days.
(c) SBA remedies for automatic events of default. Upon the
occurrence of one or more of the events in paragraph (b) of this
section:
(1) Without notice, presentation or demand, the entire indebtedness
evidenced by your Debentures, including accrued interest, and any other
amounts owed SBA with respect to your Debentures, is immediately due and
payable; and
(2) You automatically consent to the appointment of SBA or its
designee as your receiver under section 363(c) of the Act.
(d) Events of default with notice. For any occurrence (as determined
by SBA) of one or more of the events in this paragraph (d), SBA may
avail itself of one or more of the remedies in paragraph (e) of this
section.
(1) Fraud. You commit a fraudulent act that causes detriment to
SBA's position as a creditor or guarantor.
(2) Fraudulent transfers. You make any transfer or incur any
obligation that is fraudulent under the terms of 11 U.S.C. 548.
(3) Willful conflicts of interest. You willfully violate Sec.
108.730.
(4) Willful non-compliance. You willfully violate one or more of the
substantive provisions of the Act or any substantive regulation
promulgated under the Act or any substantive provision of your
Participation Agreement.
(5) Repeated Events of Default. At any time after being notified by
SBA of the occurrence of an event of default under paragraph (f) of this
section, you engage in similar behavior that results in another
occurrence of the same event of default.
(6) Transfer of Control. You willfully violate Sec. 108.410, and as
a result of such violation you undergo a transfer of Control.
(7) Non-cooperation under paragraph (h) of this section. You fail to
take appropriate steps, satisfactory to SBA, to accomplish any action
SBA may have required under paragraph (h) of this section.
(8) Non-notification of Events of Default. You fail to notify SBA as
soon as you know or reasonably should have known that any event of
default exists under this section.
(9) Non-notification of defaults to others. You fail to notify SBA
in writing within ten days from the date of a declaration of an event of
default or nonperformance under any note, debenture or indebtedness of
yours, issued to or held by anyone other than SBA.
(e) SBA remedies for events of default with notice. Upon written
notice to you of the occurrence (as determined by SBA) of one or more of
the events in paragraph (d) of this section:
(1) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest. and/or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(2) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment of
SBA or its designee as your receiver under section 363 (c) of the Act.
(f) Events of default with opportunity to cure. For any occurrence
(as determined by SBA) of one or more of the events in this paragraph
(f), SBA may avail itself of one or more of the remedies in paragraph
(g) of this section.
(1) Excessive Management Expenses. Without the prior written consent
of SBA, you incur Management Expenses in excess of those permitted under
Sec. Sec. 108.510 and 108.520.
(2) Improper Distributions. You make any Distribution to your
shareholders or partners, except with the prior written consent of SBA,
other than:
(i) Distributions permitted under Sec. 108.585; and
(ii) Payments from Retained Earnings Available for Distribution
based on either the shareholders' or members' pro-rata interests or the
provisions for profit distributions in your partnership agreement, as
appropriate.
(3) Failure to make payment. Unless otherwise approved by SBA, you
fail to make timely payment of any amount due under any security or
obligation of yours that is issued to, held or guaranteed by SBA.
(4) Failure to maintain Regulatory Capital. You fail to maintain the
minimum Regulatory Capital required under these regulations or, without
the prior
[[Page 138]]
written consent of SBA, you reduce your Regulatory Capital except as
permitted by Sec. 108.585.
(5) Capital Impairment. You have a condition of Capital Impairment
as determined under Sec. 108.1830.
(6) Cross-default. An obligation of yours that is greater than
$100,000 becomes due or payable (with or without notice) before its
stated maturity date, for any reason including your failure to pay any
amount when due. This provision does not apply if you pay the amount due
within any applicable grace period or contest the payment of the
obligation in good faith by appropriate proceedings.
(7) Nonperformance. You violate or fail to perform one or more of
the terms and conditions of any security or obligation of yours that is
issued to, held or guaranteed by SBA, or of any agreement (including
your Participation Agreement) with or conditions imposed by SBA in its
administration of the Act and the regulations promulgated under the Act.
(8) Noncompliance. Except as otherwise provided in paragraph (d) (5)
of this section, SBA determines that you have violated one or more of
the substantive provisions of the Act or any substantive regulation
promulgated under the Act.
(9) Failure to maintain diversity. You fail to maintain diversity
between management and ownership as required by Sec. 108.150.
(g) SBA remedies for events of default with opportunity to cure. (1)
Upon written notice to you of the occurrence (as determined by SBA) of
one or more of the events of default in paragraph (f) of this section,
and subject to the conditions in paragraph (g)(2) of this section:
(i) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest, and/ or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(ii) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment of
SBA or its designee as your receiver under section 363(c) of the Act.
(2) SBA may invoke the remedies in paragraph (g)(l) of this section
only if:
(i) It has given you at least 15 days to cure the default(s); and
(ii) You fail to cure the default(s) to SBA's satisfaction within
the allotted time.
(h) Repeated non-substantive violations. If you repeatedly fail to
comply with one or more of the non-substantive provisions of the Act or
any non-substantive regulation promulgated under the Act, SBA, after
written notification to you and until you cure such condition to SBA's
satisfaction, may deny you additional Leverage and/or require you to
take such actions as SBA may determine to be appropriate under the
circumstances.
(i) Consent to removal of officers, directors, or general partners
and/or appointment of receiver. The Articles of each NMVC Company must
include the following provisions as a condition to the purchase or
guarantee by SBA of Leverage. Upon the occurrence of any of the events
specified in paragraphs (d)(1) through (d)(6) or (f)(1) through (f)(3)
of this section as determined by SBA, SBA shall have the right, and you
consent to SBA's exercise of such right:
(1) With respect to a Corporate NMVC Company, upon written notice,
to require you to replace, with individuals approved by SBA, one or more
of your officers and/or such number of directors of your board of
directors as is sufficient to constitute a majority of such board; or
(2) With respect to a Partnership NMVC Company or an LLC NMVC
Company, upon written notice, to require you to remove the person(s)
responsible for such occurrence and/or to remove the general partner or
manager of the NMVC Company, which general partner or manager shall then
be replaced in accordance with NMVC Company's Articles by a new general
partner or manager approved by SBA; and/or
(3) With respect to a Corporate or Partnership or LLC NMVC Company,
to obtain the appointment of SBA or its designee as your receiver under
section 363(c) of the Act for the purpose of continuing your operations.
The appointment of a receiver to liquidate a NMVC Company is not within
such
[[Page 139]]
consent, but is governed instead by the relevant provisions of the Act.
Computation of NMVC Company's Capital Impairment
Sec. 108.1830 NMVC Company's Capital Impairment definition and general
requirements.
(a) Significance of Capital Impairment condition. If you have a
condition of Capital Impairment, you are not in compliance with the
terms of your Leverage. As a result, SBA has the right to impose the
applicable remedies for noncompliance in Sec. 108.1810(g).
(b) Definition of Capital Impairment condition. You have a condition
of Capital Impairment if your Capital Impairment Percentage, as computed
in Sec. 108.1840, exceeds 70 percent.
(c) Quarterly computation requirement and procedure. You must
determine whether you have a condition of Capital Impairment as of the
end of each fiscal quarter. You must notify SBA promptly if you are
capitally impaired.
(d) SBA's right to determine NMVC Company's Capital Impairment
condition. SBA may make its own determination of your Capital Impairment
condition at any time.
Sec. 108.1840 Computation of NMVC Company's Capital Impairment
Percentage.
(a) General. This section contains the procedures you must use to
determine your Capital Impairment Percentage. You must compare your
Capital Impairment Percentage to the maximum permitted under Sec.
108.1830(b) to determine whether you have a condition of Capital
Impairment.
(b) Preliminary impairment test. If you satisfy the preliminary
impairment test, your Capital Impairment Percentage is zero and you do
not have to perform any more procedures in this section. Otherwise, you
must continue with paragraph (c) of this section. You satisfy the test
if the following amounts are both zero or greater:
(1) The sum of Undistributed Net Realized Earnings, as reported on
SBA Form 468, and Includible Non-Cash Gains.
(2) Unrealized Gain (Loss) on Securities Held.
(c) How to compute your Capital Impairment Percentage. (1) If you
have an Unrealized Gain on Securities Held, compute your Adjusted
Unrealized Gain using paragraph (d) of this section. If you have an
Unrealized Loss on Securities Held, continue with paragraph (c)(2) of
this section.
(2) Add together your Undistributed Net Realized Earnings, your
Includible Non-cash Gains, and either your Unrealized Loss on Securities
Held or your Adjusted Unrealized Gain.
(3) If the sum in paragraph (c)(2) of this section is zero or
greater, your Capital Impairment Percentage is zero.
(4) If the sum in paragraph (c)(2) of this section is less than
zero, drop the negative sign, divide by your Regulatory Capital
(excluding Treasury Stock), and multiply by 100. The result is your
Capital Impairment Percentage.
(d) How to compute your Adjusted Unrealized Gain. (1) Subtract
Unrealized Depreciation from Unrealized Appreciation. This is your ``Net
Appreciation''.
(2) Determine your Unrealized Appreciation on Publicly Traded and
Marketable securities. This is your ''Class I Appreciation''.
(3) Determine your Unrealized Appreciation on securities that are
not Publicly Traded and Marketable and meet the following criteria,
which must be substantiated to the satisfaction of SBA (this is your
``Class 2 Appreciation''):
(i) The Small Business that issued the security received a
significant subsequent equity financing by an investor whose objectives
were not primarily strategic and at a price that conclusively supports
the Unrealized Appreciation;
(ii) Such financing represents a substantial investment in the form
of an arm's length transaction by a sophisticated new investor in the
issuer's securities; and
(iii) Such financing occurred within 24 months of the date of the
Capital Impairment computation, or the Small Business' pre-tax cash flow
from operations for its most recent fiscal year was at least 10 percent
of the Small Business' average contributed capital for such fiscal year.
[[Page 140]]
(4) Perform the appropriate computation from the table in Sec.
107.1840(d)(4) of this chapter.
(5) Reduce the gain computed in paragraph (d) (4) of this section by
your estimate of related future income tax expense. Subject to any
adjustment required by paragraph (d)(6) of this section, the result is
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this
section.
(6) If any securities that are the source of either Class 1 or Class
2 Appreciation are pledged or encumbered in any way, you must reduce the
Adjusted Unrealized Gain computed in paragraph (d)(5) of this section by
the amount of the related borrowing or other obligation, up to the
amount of the Unrealized Appreciation on the securities.
Subpart L_Ending Operations as a NMVC Company
Sec. 108.1900 Termination of participation as a NMVC Company.
You may not terminate your participation as a NMVC Company without
SBA's prior written approval. Your request for approval must be
accompanied by an offer of immediate repayment of all of your
outstanding Leverage (including any prepayment penalties thereon), or by
a plan satisfactory to SBA for the orderly liquidation of the NMVC
Company.
Subpart M_Miscellaneous
Sec. 108.1910 Non-waiver of SBA's rights or terms of Leverage
security.
SBA's failure to exercise or delay in exercising any right or remedy
under the Act or the regulations in this part does not constitute a
waiver of such right or remedy. SBA's failure to require you to perform
any term or provision of your Leverage does not affect SBA's right to
enforce such term or provision. Similarly, SBA's waiver of, or failure
to enforce, any term or provision of your Leverage or of any event or
condition set forth in Sec. 108.1810 does not constitute a waiver of
any succeeding breach of such term or provision or condition.
Sec. 108.1920 NMVC Company's application for exemption from a
regulation in this part 108.
(a) General. You may file an application in writing with SBA to have
a proposed action exempted from any procedural or substantive
requirement, restriction, or prohibition to which it is subject under
this part, unless the provision is mandated by the Act. SBA may grant an
exemption for such applicant, conditionally or unconditionally, provided
the exemption would not be contrary to the purposes of the Act.
(b) Contents of application. Your application must be accompanied by
supporting evidence that demonstrates to SBA's satisfaction that:
(1) The proposed action is fair and equitable; and
(2) The exemption requested is reasonably calculated to advance the
best interests of the NMVC program in a manner consistent with the
policy objectives of the Act and the regulations in this part.
Sec. 108.1930 Effect of changes in this part 108 on transactions
previously consummated.
The legality of a transaction covered by the regulations in this
part is governed by the regulations in this part in effect at the time
the transaction was consummated, regardless of later changes. Nothing in
this part bars SBA enforcement action with respect to any transaction
consummated in violation of provisions applicable at the time, but no
longer in effect.
Sec. 108.1940 Procedures for designation of additional Low-Income
Geographic Areas
(a) General. On its own initiative or upon written request by a
Person which addresses the relevant factor(s) set forth in paragraph (b)
of this section, SBA may consider whether to designate additional census
tracts (or equivalent county divisions) as LI Areas.
(b) Criteria. SBA will consider one or more of the following factors
in determining whether to designate a particular census tract (or
equivalent county division) as an additional LI Area:
[[Page 141]]
(1) A substantial number of Low-Income Individuals reside in that
census tract (or equivalent county division).
(2) As adequately supported by studies or other analyses or reliable
data, that census tract (or equivalent county division) has a pattern of
unmet needs for investment capital.
(3) As adequately supported by studies or other analyses or reliable
data, that census tract (or equivalent county division) has indications
of economic distress.
(c) Procedure for designation. (1) If SBA decides to consider the
designation of an additional LI Area, SBA will publish in the Federal
Register a notice that it is considering such designation. SBA will
advise the public that it will consider any comments supporting or
opposing the designation, submitted within a specified time period.
(2) In making a final decision on whether to designate a particular
census tract (or equivalent county division) as an additional LI Area,
SBA will consider evidence submitted by any requester, SBA's own
research, any public comments submitted, and any other information
deemed relevant by SBA.
(3) If SBA designates a particular census tract (or equivalent
county division) as an additional LI Area, SBA will publish a notice in
the Federal Register and, if appropriate, will amend this part to
include the additional LI Area.
Subpart N_Requirements and Procedures for Operational Assistance Grants
to NMVC Companies and SSBICs
Sec. 108.2000 Operational Assistance Grants to NMVC Companies and
SSBICs.
(a) NMVC Companies. Regulations governing Operational Assistance
grants to NMVC Companies may be found in subparts D and E of this part
108, and in Sec. Sec. 108.2010 through 108.2040.
(b) SSBICs. Regulations governing Operational Assistance grants to
SSBICs may be found in Sec. Sec. 108.2001 through 108.2040.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2001 When and how SSBICs may apply for Operational Assistance
grants.
(a) Notice of Funds Availability (``NOFA''). SBA will publish a NOFA
in the Federal Register, advising SSBICs of the availability of funds
for Operational Assistance grants to SSBICs. This NOFA will be the same
NOFA described in Sec. 108.300(a), or will be published simultaneously
with that NOFA. An SSBIC may submit an application for an Operational
Assistance grant only during the time period specified for such purpose
in the NOFA.
(b) Application form. An SSBIC must apply for an Operational
Assistance grant using the application packet provided by SBA. Upon
receipt of an application, SBA may request clarifying or technical
information on the materials submitted as part of the application.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2002 Eligibility of SSBICs to apply for Operational
Assistance grants.
An SSBIC is eligible to apply for an Operational Assistance grant
if:
(a) It intends to increase its Regulatory Capital, as in effect on
December 21, 2000, and to make Low-Income Investments in the amount of
such increase;
(b) It intends to raise binding commitments for contributions in
cash or in-kind, and/or to purchase an annuity, in an amount not less
than 30 percent of the intended increase in its Regulatory Capital
described in paragraph (a) of this section; and
(c) It has a plan describing how it intends to use the requested
grant funds to provide Operational Assistance to Smaller Enterprises in
which it has made or expects to make Low-Income Investments after
December 21, 2000.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2003 Grant issuance fee for SSBICs.
An SSBIC must pay to SBA a grant issuance fee of $5,000. An SSBIC
must submit this fee in advance, at the time of application submission.
If SBA does not award a grant to the SSBIC, SBA will refund this fee to
the SSBIC.
[67 FR 68503, Nov. 12, 2002]
[[Page 142]]
Sec. 108.2004 Contents of application submitted by SSBICs.
Each application submitted by an SSBIC for an Operational Assistance
grant must contain the information specified in the application packet
provided by SBA, including the following information:
(a) Amounts. An SSBIC must specify the amount of Regulatory Capital
it intends to raise after December 21, 2000, and the amount of
Operational Assistance grant funds it seeks from SBA, which must be at
least 30 percent of its intended increase in its Regulatory Capital
since December 21, 2000.
(b) Plan. An SSBIC must submit a plan addressing the specific items
described in Sec. 108.2005.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2005 Contents of plan submitted by SSBICs.
(a) Plan for providing Operational Assistance. The SSBIC must
describe how it plans to use its grant funds to provide Operational
Assistance to Smaller Enterprises in which it will make Low-Income
Investments. Its plan must address the types of Operational Assistance
it proposes to provide, and how it plans to provide the Operational
Assistance through the use of licensed professionals, when necessary,
either from its own staff or from outside entities.
(b) Matching resources for Operational Assistance grant. The SSBIC
must include a detailed description of how it plans to obtain binding
commitments for contributions in cash or in-kind, and/or to purchase an
annuity, to match the funds requested from SBA for the SSBIC's
Operational Assistance grant. If it proposes to obtain commitments for
cash and in-kind contributions, it also must estimate the ratio of cash
to in-kind contributions (in no event may in-kind contributions exceed
50 percent of the total contributions). The SSBIC must discuss its
potential sources of matching resources, the estimated timing on raising
such match, and the extent of the expressions of interest to commit such
match to the SSBIC.
(c) Identification of LI Areas. The SSBIC must identify the specific
LI Areas in which it intends to make Low-Income Investments and provide
Operational Assistance under the NMVC program.
(d) Projected allocation of investments among identified LI Areas.
The SSBIC must describe the amount of Low-Income Investments it intends
to make in each of the identified LI Areas.
(e) Track record of management team in obtaining public policy
results through investments. The SSBIC must provide information
concerning the past track record of the SSBIC in making investments that
have had a demonstrable impact on the socially or economically
disadvantaged businesses targeted by the SSBIC program (for example, new
businesses created, jobs created, or wealth created). Such information
might include case studies or examples of the SSBIC's successful
Financings.
(f) Market analysis. The SSBIC must provide an analysis of the LI
Areas in which it intends to makes its Low-Income Investments and
provide its Operational Assistance to Smaller Enterprises, demonstrating
that the SSBIC understands the market and the unmet capital needs in
such areas and how its activities will meet these unmet capital needs
through Low-Income Investments and have a positive economic impact on
those areas. The analysis must include a description of the extent of
the economic distress in the identified LI Areas. The SSBIC also must
analyze the extent of the demand in such areas for Low-Income
Investments and any factors or trends that may affect the SSBIC's
ability to make effective Low-Income Investments.
(g) Regulatory Capital. The SSBIC must include a detailed
description of how it plans to raise its Regulatory Capital. The SSBIC
must discuss its potential sources of Regulatory Capital, the estimated
timing on raising such funds, and the extent of the expressions of
interest to commit such funds to the SSBIC.
(h) Projected impact. The SSBIC must describe the criteria and
economic measurements to be used to evaluate whether and to what extent
it has met the objectives of the NMVC program. It must include:
(1) An estimate of the social, economic, and community development
[[Page 143]]
benefits to be created within identified LI Areas over the next five
years or more as a result of its activities;
(2) A description of the criteria to be used to measure the benefits
created as a result of its activities; and
(3) A discussion about the amount of such benefits created that it
will consider to constitute successfully meeting the objectives of the
NMVC program.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2006 Evaluation and selection of SSBICs.
SBA will evaluate and select an SSBIC for an Operational Assistance
grant award under the NMVC program solely at SBA's discretion, based on
SBA's review of the SSBIC's application materials, interviews or site
visits with the SSBIC (if any), and information in SBA's records
relating to the SSBIC's regulatory compliance status and track record as
an SSBIC. SBA's evaluation and selection process is intended to ensure
that SSBIC requests are evaluated on a competitive basis and in a fair
and consistent manner. SBA will evaluate and select SSBICs for an
Operational Assistance grant award by considering the following
criteria:
(a) The strength of the SSBIC's application, including the strength
of its proposal to provide Operational Assistance to Smaller Enterprises
in which it intends to invest;
(b) The SSBIC's regulatory compliance status and past track record
in being able to accomplish program goals through its investment
activity;
(c) The likelihood that and the time frame within which the SSBIC
will be able to raise the Regulatory Capital it intends to raise and
obtain the matching resources described in Sec. 108.2005(b) and (g);
(d) The need for Low-Income Investments in the LI Areas in which the
SSBIC intends to invest;
(e) The SSBIC's demonstrated understanding of the markets in the LI
Areas in which it intends to invest;
(f) The extent to which the activities proposed by the SSBIC will
promote economic development and the creation of wealth and job
opportunities in the LI Areas in which it intends to invest and among
individuals living in LI Areas;
(g) The likelihood that the SSBIC will fulfill the goals described
in its application and meet the objectives of the NMVC program; and
(h) The strength of the SSBIC's application compared to applications
submitted by other SSBICs and by Applicants intending to invest in the
same or proximate LI Areas.
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2007 Grant award to SSBICs.
An SSBIC selected for an Operational Assistance grant award will
receive a grant award only if, by a date established by SBA, it
increases its Regulatory Capital in the specific amount set forth in its
application, pursuant to Sec. 108.2004(a), and raises matching
resources for the grant in the amount required by Sec. 108.2030(d)(2).
[67 FR 68503, Nov. 12, 2002]
Sec. 108.2010 Restrictions on use of Operational Assistance grant
funds.
(a) Restrictions applicable only to SSBICs. An SSBIC that receives
an Operational Assistance grant must use both grant funds awarded by SBA
and its matching resources only to provide Operational Assistance in
connection with a Low-Income Investment made by the SSBIC with
Regulatory Capital raised after December 21, 2000.
(b) Restrictions applicable only to NMVC Companies. A NMVC Company
must use at least 80 percent of both grant funds awarded by SBA and its
matching resources to provide Operational Assistance to Smaller
Enterprises whose Principal Office at the time the Operational
Assistance commences is located in an LI Area.
(c) Restrictions applicable to NMVC Companies and SSBICs. A NMVC
Company or a SSBIC that receives an Operational Assistance grant must
not use either grant funds awarded by SBA or its matching resources for
``general and administrative expense,'' as defined in the Federal
Acquisition Regulations, ``Definitions of Words and Terms,'' 48 CFR
2.101.
[66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001, as amended at 67
FR 68505, Nov. 12, 2002]
[[Page 144]]
Sec. 108.2020 Amount of Operational Assistance grant.
(a) Amount of grant to NMVC Company. NMVC Companies are eligible for
an Operational Assistance grant award equal to the amount of matching
resources raised by the NMVC Company in accordance with Sec. Sec.
108.380(a)(1)(i)(B) and 108.2030.
(b) Amount of grant to SSBIC. SSBICs are eligible for an Operational
Assistance grant award equal to the amount of matching resources raised
by the SSBIC in accordance with Sec. Sec. 108.2007 and 108.2030.
(c) Pro rata reductions. In the event that the total amount of funds
available to SBA for purposes of making Operational Assistance grant
awards to NMVC Companies and SSBICs is not sufficient to award grants in
the amounts described in paragraphs (a) and (b) of this section, SBA
will make pro rata reductions in the amounts otherwise awarded to each
such NMVC Company and SSBIC.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]
Sec. 108.2030 Matching requirements.
(a) General. All Operational Assistance grant funds SBA awards to an
NMVC Company or a SSBIC must be matched on a dollar for dollar basis
with funds or other resources raised by the NMVC Company or SSBIC.
(b) Allowable sources. (1) Any source other than SBA is an allowable
source of matching resources for an Operational Assistance grant award.
(2) Neither a NMVC Company nor a SSBIC may use funds or other
resources that it has used to satisfy a legal requirement for obtaining
funds under any other Federal program, to satisfy the matching resources
requirements described in this part.
(3) A portion of Private Capital may be designated as matching
resources if the designated funds are used to purchase an annuity
pursuant to paragraph (c)(2)(iv) of this section or are otherwise
segregated in a manner acceptable to SBA.
(c) Type and form of matching resources. (1) Matching resources may
come from cash contributions or in-kind contributions. In-kind
contributions cannot exceed 50 percent of the total amount of match
raised by the NMVC Company or SSBIC.
(2) Matching resources may be in the form of:
(i) Cash;
(ii) In-kind contributions;
(iii) Binding commitments for cash or in-kind contributions that may
be payable over a multiyear period acceptable to SBA (but not to exceed
the term of the Operational Assistance grant from SBA and in no event
more than 10 years); and/or
(iv) An annuity, purchased with funds other than Regulatory Capital,
from an insurance company acceptable to SBA and that may be payable over
a multiyear period acceptable to SBA (but not to exceed the term of the
Operational Assistance grant from SBA and in no event more than 10
years).
(d) Amount of matching resources--(1) NMVC Companies. The amount of
matching resources required of an NMVC Company is set forth in Sec.
108.380(a)(1)(i)(B).
(2) SSBICs. The amount of matching resources required of an SSBIC is
equal to the amount of Operational Assistance grant funds requested by
the SSBIC, as set forth in its application pursuant to Sec.
108.2004(a).
[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]
Sec. 108.2040 Reporting and recordkeeping requirements.
(a) NMVC Companies. Policies governing reporting, record retention,
and recordkeeping requirements applicable to NMVC Companies may be found
in subpart H of this part. NMVC Companies also must comply with all
reporting, record retention, and recordkeeping requirements set forth in
Circular A-110 of the Office of Management and Budget (for availability,
see 5 CFR 1310.3) and any grant award document executed between SBA and
the NMVC Company.
(b) SSBICs. An SSBIC receiving an Operational Assistance grant award
must comply with all reporting, record retention and recordkeeping
requirements set forth in Circular A-110 of the Office of Management and
Budget and any grant award document executed between SBA and the SSBIC,
as well as
[[Page 145]]
the reporting requirements in Sec. 108.630(f) and the filing
requirement in Sec. 108.640.
[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]