[Federal Register: November 12, 2002 (Volume 67, Number 218)]
[Rules and Regulations]
[Page 68498-68505]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no02-2]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 108
RIN 3245-AE91
New Markets Venture Capital Program
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (``SBA'') makes several
amendments to the regulations for the New Markets Venture Capital
(``NMVC'') program. The majority of the amendments make technical
changes to the regulations, to correct typographical errors or to
clarify language. SBA also makes five substantive amendments to the
regulations, which SBA believes will result in more efficient and
effective delivery of NMVC program benefits to the targeted geographic
areas. Generally, the five changes will:
Allow a New Markets Venture Capital company (``NMVC company'') to
include in its regulatory capital SBA-approved organizational and
management expenses paid on behalf of the NMVC company before the
company is finally approved;
Allow SBA, in selecting recipients for NMVC program assistance, to
compare grant applications from specialized small business investment
companies (``SSBICs'') with NMVC company applications from the same or
proximate low-income geographic areas (``LI areas'');
Create rules governing fees an NMVC company or its associates may
charge for management services provided to small businesses in which
the NMVC company invests;
Revise the grant application process for SSBICs so as to make it
more parallel with the application process for NMVC companies; and
Add a requirement that NMVC companies must use at least 80 percent
of their grant funds (both funds from SBA and grant matching resources)
to provide operational assistance to smaller enterprises located in an
LI area at the time the operational assistance commenced.
DATES: This rule is effective on December 12, 2002.
FOR FURTHER INFORMATION CONTACT: Austin J. Belton, Director of New
Markets Venture Capital, (202) 205-7027.
SUPPLEMENTARY INFORMATION:
I. Background
The New Markets Venture Capital Program Act of 2000 (``the Act'')
was created by the Consolidated Appropriations Act of 2001, Public Law
106-554, enacted December 21, 2000. SBA published in the Federal
Register a final rule implementing the Act on May 23, 2001 (66 FR
28602) and a technical correction on June 19, 2001 (66 FR 32894).
On May 20, 2002, SBA published in the Federal Register a proposed
rule making amendments to the regulations implementing the Act (67 FR
35449). SBA received one comment on the proposed rule, which SBA
discusses in the following section-by-section analysis. With the
exception of a minor clarifying change to the lead-in phrase in section
108.2005(d), SBA has made no changes to the text of the amendments to
the regulations as published in the proposed rule.
SBA has conducted a first application round for the NMVC program,
and has selected seven companies as conditionally approved NMVC
companies. The amendments in this rule would apply to those seven
companies as well as to applicants for the NMVC program in future
application round(s) and to entities SBA selects for participation in
the NMVC program as a result of any future application round(s).
II. Section-by-Section Analysis
SBA amends three of the definitions in Sec. 108.50. The
definitions of ``New Markets Venture Capital Company'' and
``Participation Agreement'' are amended to correct typographical
errors.
The definition of ``Regulatory Capital'' is amended to simplify it
by consolidating into Sec. 108.230, which addresses private capital,
all the current restrictions on what may be included in regulatory
capital. The definition states that regulatory capital is private
capital, excluding any portion of private capital that the NMVC company
designates as grant matching resources.
SBA amends paragraphs (b), (c), and (d) of Sec. 108.230. In
paragraph (b), SBA makes a technical change. The word ``contributed''
is changed to read ``paid-in,'' to indicate more clearly that only
capital contributions actually made are considered ``contributed
capital'' for purposes of Sec. 108.230.
SBA amends paragraph (c) by adding a new subparagraph (5) to move
to this section language concerning
[[Page 68499]]
questionable commitments that currently is in the definition of
regulatory capital in Sec. 108.50. This is a non-substantive change.
SBA revises paragraph (d) to allow NMVC companies to include in
private capital SBA-approved organizational and management expenses
paid on behalf of an NMVC company prior to SBA's final approval of the
NMVC company. SBA intends to provide guidance on the limitations by
percentage and/or dollar amounts on such expenses that SBA will approve
for inclusion in private capital. Other non-cash assets, such as ``pre-
licensing investments,'' would continue to not be allowed for inclusion
in private capital. SBA previously determined that such other non-cash
assets would not be acceptable for inclusion in regulatory capital.
(See discussion on this subject in the preamble to the proposed rule
implementing the Act, 66 FR 20536, April 23, 2001, and the preamble to
the final rule implementing the Act, 66 FR 28603, May 23, 2001.)
SBA makes technical changes to Sec. 108.310 to more clearly
articulate what an NMVC company applicant must state in its application
regarding the amounts of regulatory capital and grant matching
resources it proposes to raise. The amendment requires an applicant to
state specific amounts of regulatory capital and grant matching
resources, both of which must comply with the statutory minimums
established by the Act. SBA also makes a minor technical change to
Sec. 108.320.
SBA amends Sec. 108.360(k) to allow SBA, when making selections as
to which applicants will receive conditional approval, to compare the
applications submitted by NMVC company applicants to the applications
submitted by SSBICs that intend to invest in the same or proximate LI
areas. This change will allow SBA to more effectively utilize limited
NMVC program appropriations. This change also will increase the
potential for achieving the nationwide distribution of the NMVC
program's benefits that the Act directs.
SBA makes three technical changes to Sec. 108.380. As amended,
subsections (a)(1)(i)(A) and (a)(1)(i)(B) more clearly state that the
amounts of regulatory capital and grant match that applicants must
raise before they can be finally approved are the exact same amounts
that they said they would raise in their applications. SBA amends
subsection (b)(3) to correct a typographical error.
SBA adds new Sec. 108.900, based in part on Sec. 107.900 for the
small business investment company (SBIC) program, governing fees for
management services and similar services (for example, negotiating bank
debt, sale of the company, or a lease, or structuring an employee stock
ownership plan) charged by an NMVC company or its associates to small
businesses that the NMVC company finances. The regulation requires
SBA's prior written approval of all such fees charged. The regulation
states that it does not apply to operational assistance that an NMVC
company or its associate provides to a business that the NMVC company
has financed or in which it expects to make a financing, and that the
NMVC company may not charge the business a fee for such operational
assistance. SBA expects an NMVC company to use its grant funds (both
SBA funds and grant matching resources) to cover the costs of providing
such operational assistance.
This regulation also requires that at least 50 percent of all such
fees paid to an associate (as defined in 13 CFR 108.50) of an NMVC
company by a small business must be allocated back to the NMVC company
for its benefit. SBA understands that an NMVC company or its associate
(for example, its management company) may want to provide management
and other services to the NMVC company's portfolio companies and charge
a fee for such services. It may be in the best interests of the small
business that the NMVC company or its associate provide such services
rather than an outside third party. However, SBA believes that the NMVC
company's manager should share equally with the NMVC company the
financial benefit (i.e., fees) of providing those services, since that
relationship (of the manager to the NMVC company) is what brought about
the opportunity for the manager to obtain that financial benefit. In
addition, SBA believes that neither the NMVC company itself nor the
NMVC program in general is well served if the focus of the NMVC
company's manager is on fee generation rather than managing the NMVC
company. SBA believes that a 50-50 allocation of such fees between the
NMVC company manager and the NMVC company itself strikes an appropriate
balance between these objectives and reflects what knowledgeable
private investors often require in commercial equity venture capital
funds.
The commenter disagreed with the approach SBA takes in this section
108.900. The commenter stated that a prior approval requirement would
place an excessive burden on the NMVC company's management of small
businesses in which it invests and that the 50-50 allocation of the
fees would not appreciably change the economics or incentives of the
NMVC program. The commenter suggests that NMVC companies are likely to
want to charge their portfolio companies two types of management
services fees, (1) regular fees of up to $2,000 per quarter per
portfolio company, to be paid to the managers of the NMVC company for
managing the portfolio company, and (2) more substantial fees that will
arise ``in the ordinary course of business.'' SBA notes that while the
commenter characterizes the amount of the first type of fee as
``modest,'' an NMVC company could earn up to $80,000 per year from such
fees, if one assumes the company has 10 portfolio companies paying
$2,000 per quarter. This would allow the NMVC company to receive more
than a third again as much as the typical annual management fee earned
by an NMVC company (assuming it is a $5 million regulatory capital
fund).
The first type of fee presumes that the manager of an NMVC company
also will be managing the day-to-day operations of the companies in
which an NMVC company invests. SBA does not believe that this would be
an appropriate role for an NMVC company's managers to play in most
cases. First of all, the fact that such managers have the expertise to
manage a venture capital fund does not mean that such managers have the
necessary skills and ability to manage an operating business concern.
In any event, the appropriate role of an NMVC company's managers is to
actively oversee the affairs of the portfolio concerns, which implies a
degree of counseling and advising as a board member or otherwise,
usually delivered in the form of a close, informal working
relationship. Those activities usually are compensated by an NMVC
company's annual management fee and any profit participation received
from its investment in the business. In addition, an NMVC company has
the opportunity to provide management expertise, at no cost to the
business or to the NMVC company's investors, through the expenditure of
operational assistance grant resources. For these reasons, SBA believes
that the first type of fees will require scrutiny and, therefore, it is
critical that SBA have the opportunity to review in advance any such
fees that an NMVC company proposes to charge.
The commenter characterizes the second type of fee as for
management services that are occasional and opportunistic, and states
that requiring SBA's advance approval might result in an NMVC company
losing significant opportunities to provide such services and earn such
fees. SBA intends to require NMVC companies to complete one form (SBA
Form 2217) requesting
[[Page 68500]]
prior approval of such fees, which SBA does not believe constitutes
``extensive reporting.'' SBA believes that it will be sensitive to any
time constraints on a potential deal or on an NMVC company, and be able
to provide a timely response to such requests.
SBA removes Sec. 108.2000 and replaces it with several smaller,
more easily readable sections, Sec. Sec. 108.2000-108.2007. Section
108.2000 (currently Sec. 108.2000(a)) provides a more comprehensive
list of the regulations applicable to operational assistance grants to
NMVC companies and to SSBICs. Section 108.2001 (currently Sec.
108.2000(b)(1) and (b)(3)(i)) is unchanged in content.
Section 108.2002 (currently Sec. 108.2000(b)(2)) includes several
technical corrections. First, the term ``Developmental Venture Capital
Investments'' is replaced with ``Low-Income Investments'' in new
subsections (a) and (c). The term ``Low-Income Investments'' already is
defined in Sec. 108.50, and more accurately reflects the statutory
requirement that an SSBIC must use all of its new capital raised for
the NMVC program, to make equity capital investments in smaller
enterprises located in LI areas. Second, the phrase ``after December
21, 2000'' is added to the end of new subsection (c), to incorporate
the NMVC program statutory effective date and make more clear that an
SSBIC may use operational assistance grant funds only in connection
with investments it makes after such date.
Section 108.2003 (currently Sec. 108.2000(b)(3)(ii)) is unchanged
in content. Section 108.2004 (currently Sec. 108.2000(b)(4)(i) and
(ii)) makes technical changes to more clearly articulate what an SSBIC
must state in its application regarding the amounts of regulatory
capital and grant matching resources it proposes to raise. The
regulation requires that an SSBIC state specific amounts of regulatory
capital and grant matching resources, and that the amount of grant
matching resources comply with the statutory minimum established by the
Act.
Section 108.2005 (currently Sec. 108.2000(b)(4)(ii)(A) through
(G)) replaces the term ``Developmental Venture Capital Investments''
with ``Low-Income Investments'' in new subsections (a), (c), (d) and
(f), for the reasons described above. Subsections (a) and (d) adds new
requirements that an SSBIC identify specific LI areas in which it
intends to make investments and provide operational assistance, and
specify how much of its investments it will make in each of the
specified LI areas. These requirements parallel the information
required from NMVC company applicants, and will allow SBA to better
determine the potential impact on specific LI areas, when making
selections as to recipients of NMVC program benefits.
Section 108.2006 (currently Sec. 108.2000(b)(5)) would replace the
term ``Developmental Venture Capital Investments'' with ``Low-Income
Investments'' in new subsection (d), for the reasons described above.
The regulation also allows SBA to add an interview component to its
selection process, paralleling SBA's current authority to require an
interview with NMVC company applicants (see 13 CFR 108.340). SBA is
considering interviewing applicants in future application rounds. New
subsection (h), as amended, allows SBA, when making selections as to
which SSBICs conditionally will receive an operational assistance
grant, to compare the applications submitted by SSBICs to the
applications submitted by NMVC company applicants that intend to invest
in the same or proximate LI areas. This change allows SBA to more
effectively utilize limited NMVC program appropriations. This change
also increases the potential for achieving the nationwide distribution
of the NMVC program's benefits contemplated by the Act.
Section 108.2007 (currently Sec. 108.2000(b)(6)) is unchanged in
content.
Section 108.2010 adds a new paragraph (b) (and redesignates
paragraph (b) as paragraph (c)) requiring that an NMVC company must use
at least 80 percent of its grant funds (both funds from SBA and grant
matching resources) to provide operational assistance to smaller
enterprises whose principal office is located in an LI area at the time
the operational assistance commences.
The Act explicitly requires that all operational assistance funded
by the NMVC program go only to smaller enterprises. The regulation
imposes an additional requirement that a specific percentage, 80
percent, of such operational assistance provided by NMVC companies go
to businesses located in LI areas. This requirement serves to maximize
the impact of the operational assistance funded by SBA on the LI areas
targeted for assistance through the NMVC program. This 80 percent
requirement also parallels the existing regulatory requirement (see 13
CFR 108.710(a)) that NMVC companies must use at least 80 percent of its
capital (both funds from SBA and private capital) to make equity
capital investments in smaller enterprises located in an LI area at the
time the investment is made.
The commenter recommended that SBA determine whether the
operational assistance provided by an NMVC company falls within the 80
percent basket of assistance to smaller enterprises located in LI areas
or the 20 percent basket of assistance to businesses outside those
areas, based on the ultimate location of the business, not its location
when the assistance commenced. In other words, consider OA provided by
a NMVC company to a business not located in an LI area to fall within
the 80 percent basket as long as the business moved into the LI area
``within a reasonable period of time'' after the start of the
assistance.
SBA declines to implement this suggestion. As in the context of 13
CFR 108.710(a) concerning the required percentage of capital that must
be invested in businesses located in LI areas, SBA intends that NMVC
companies will determine the status of the business's location at the
time the operational assistance commences, not at some later date. SBA
intends that NMVC companies make an assessment of the business at the
time operational assistance commences (or at the time of its initial
financing to the business, in the case of financial assistance) and
determine whether its principal office is located in an LI area at that
moment in time. The assessment of the business is set at that point in
time, and becomes the basis to determine whether the NMVC company may
count the assistance given to that business toward the 80 percent
requirement. SBA considered and rejected alternative approaches when it
developed the requirements in 13 CFR 108.710. SBA believes that this
``snapshot'' approach is the most efficient and workable means of
tracking both investments and operational assistance, as well as
achieving the statutory mission of directing the majority of the
program's resources to smaller enterprises located in LI areas. SBA
believes that an NMVC company will have some flexibility in the way it
structures its financial and operational assistance. For example, an
NMVC company might provide a small amount of operational assistance to
a business located outside an LI area (which would fall within the 20
percent basket of assistance) and advise the business that more
assistance will be forthcoming once the business relocates into an LI
area.
SBA revises redesignated paragraph (c) to correct the title of the
part of the Federal Acquisition Regulations containing the definition
of G&A expense.
[[Page 68501]]
Technical amendments are made to Sec. Sec. 108.2020(b),
108.2030(c)(2)(iii), 108.2030(c)(2)(iv), 108.2030(d)(2), and
108.2040(a) to correct cross-references to other sections in this part
and to clarify requirements. The changes to Sec. 108.2030(c) allow
grant matching resources to be payable over a multiyear period not to
exceed the term of the grant from SBA, and in no event more than 10
years. This change provides support for SBA to allow an applicant to
request a specific grant term within a range acceptable to SBA and as
long as it did not exceed the 10 year limit set forth in the Act,
rather than having SBA establish one allowable grant term for all
applicants. This gives each NMVC company and selected SSBIC greater
flexibility to determine how best to use operational assistance funds
from SBA to accomplish its mission. This change is made possible by a
change in the law governing SBA's appropriation for the NMVC program.
On July 24, 2001, Congress passed a supplemental appropriations bill
(Pub. L. 107-20) that extended the availability of the funds
appropriated to SBA for the NMVC program.
III. Regulatory Compliance Section--Compliance With Executive Orders
12866, 12988, and 13132; With the Paperwork Reduction Act (44 U.S.C.
Ch. 35); and With the Regulatory Flexibility Act (5 U.S.C. 601-612)
Compliance With Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
rule is a ``significant regulatory action'' under Executive Order
12866. A regulatory assessment of the potential costs and benefits of
the regulatory action follows. Because this is a new program and only
one NMVC Company is operational as yet, SBA does not have relevant data
to estimate actual dollar values for these amendments.
The NMVC program is an equity venture capital program designed to
promote the economic development of, and address the unmet equity
capital needs of smaller enterprises located in, LI areas. The program
has a one-time no-year appropriation of $52 million to fund newly
formed NMVC companies. To date, SBA has selected seven applicants as
conditionally approved NMVC companies, and has finally approved one of
those conditionally approved NMVC companies as an NMVC company. SBA
anticipates a second application round, and the amendments concerning
the application process will affect applicants in the second round. The
amendments that concern participation in the program apply to all NMVC
companies selected through both application rounds and SSBICs applying
under the second application round.
This rule makes several amendments to the existing regulations
implementing the program. Most of the amendments are technical changes
that have no impact on the costs associated with the program to the
Government or to the program beneficiaries. After SBA's first year of
experience in creating and administering this new program, SBA also
makes a few substantive changes which SBA believes will result in more
efficient and effective delivery of NMVC program benefits to the
targeted LI areas and businesses. SBA believes that these changes will
result in reduced operational costs for the program to both the
government, the NMVC companies, and to the beneficiary small businesses
financed by the NMVC companies with SBA leverage.
The most significant change SBA makes is to add a requirement that
NMVC companies must use at least 80 percent of the SBA grant funds (and
the required match funding from non-SBA sources) to assist smaller
enterprises whose principal office is in an LI area. This is consistent
with the existing requirement on the use of an NMVC company's capital.
This change ensures that the primary impact of the grant will be on the
LI areas targeted by the NMVC program. It also will have the effect of
enabling smaller enterprises in LI areas to qualify for equity
investment, or otherwise assisting such enterprises to grow at no cost
to such businesses.
SBA's experience over the past year indicates that some NMVC
companies may charge management services fees to smaller enterprises in
connection with investments made by the NMVC company, but SBA's
existing regulations are silent in this area. SBA believes that adding
a regulation governing such fees will give SBA the necessary tools to
ensure that smaller enterprises are not being charged too much for such
services and that an NMVC company's management is not motivated solely
by fee generation. SBA adds section 108.900 which places limits on such
fees, requires SBA's advance approval, and requires that at least 50
percent of any fees charged by the fund manager be for the benefit of
the NMVC company.
SBA also makes several changes to clarify the application
requirements for SSBICs to participate in the NMVC program and to do so
on a parallel basis as NMVC companies. For example, one change requires
SSBICs to identify specific LI areas they intend to target, thereby
allowing comparison with any NMVC applicant for the same LI area and
avoiding duplicative coverage of a LI area. The overall results of
these changes are to ensure even-handed treatment of SSBICs and NMVC
companies, maximize the nationwide impact of the NMVC program, and
achieve greater administrative efficiency in program administration.
SBA also clarifies that SBA will permit SBA-approved organizational
and management expenses incurred prior to SBA's final approval of the
NMVC company to be credited in whole or part against the regulatory
capital the NMVC company is required to raise. This credit is in lieu
of an NMVC company being required to pay out cash at its outset for the
same pre-approved costs. This change will improve the efficiency of an
NMVC company's operations and prevent unnecessary paperwork on the part
of the NMVC company, which will streamline the program. This change
also will bring the NMVC program in line with the SBIC program and with
best practices of the private venture fund industry in this area.
In sum, the changes will result in more NMVC program funds going to
smaller enterprises in LI areas, in line with the legislative intent,
and greater cost-effectiveness and efficiency in SBA's administration
of the NMVC program to execute the congressional mandate.
Compliance with Executive Order 12988
For purposes of Executive Order 12988, SBA has determined that this
rule is drafted, to the extent practicable, in accordance with the
standards set forth in section 3 of that order.
Compliance With Executive Order 13132
For purposes of Executive Order 13132, SBA has determined that this
rule has no federalism implications because the legislation authorizing
it addresses private, for-profit concerns (NMVC companies) working
directly with entrepreneurs. The regulation will not have substantial
direct effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore,
under Executive Order 13132, SBA determines that this rule does not
have sufficient federalism implications warranting the preparation of a
Federalism Assessment.
Compliance With Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this rule imposes new information
collection
[[Page 68502]]
requirements that require approval by OMB under the Paperwork Reduction
Act, 44 U.S.C. 3501-3520. The rule includes two new collections of
information: (1) A request for prior SBA approval of management
services fees and other fees and (2) concerning the application process
for SSBICs, an additional component to the plan for use of the
operational assistance grant, and an interview component. These
information collections were described in more detail in the preamble
to the proposed rule SBA published in the Federal Register on May 20,
2002 (67 FR 35449).
SBA already has provided the public with a 60-day comment period on
this collection (67 FR 35449). SBA received no comments on the
collection. On July 29, 2002, OMB approved, without change, the
collection under OMB number 3245-0338.
You may request a copy of the collections by calling Louis Cupp at
(202) 619-0511 or writing to him at Office of New Markets Venture
Capital, Investment Division, U.S. Small Business Administration, 409
Third Street, SW., 6th Floor, Washington, DC 20416.
Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-602
Under the Regulatory Flexibility Act (RFA), SBA has determined that
this rule does not have a significant economic impact on a substantial
number of small entities, within the meaning of the RFA, for the
following reasons.
The NMVC program is expected to result in the creation of fewer
than 20 NMVC companies. The program's impact will be felt to a greater
extent on the small businesses that the NMVC companies invest in and
assist through this program. The Act authorizes $150 million to
guarantee debentures to NMVC companies, which will result in a
discounted amount of approximately $100 million with which NMVC
companies can make investments, and $30 million for operational
assistance grants to NMVC companies and SSBICs. In addition, NMVC
companies must raise capital totaling $100 million, and NMVC companies
and SSBICs must raise grant matching resources totaling $30 million.
Thus, the total net funding for the NMVC program, including matching
funds raised by NMVC companies and SSBICs, is $260 million. Based upon
industry practices, it is likely that the funds will be disbursed over
a five to seven year period. A NMVC company's minimum life is 10 years
and NMVC companies' investments are typically made during their first
five to seven years of existence. Generally, a NMVC company will fund
three or at most four businesses in one year out of the 20 to 30
businesses it will fund over its life. Therefore, NMVC program funds
will flow out to businesses at a rate of approximately $50 million per
year.
The average size of an investment by a community development
company is approximately $300,000. Based upon total funding of $260
million and an average investment in a small business of $300,000,
approximately 867 small businesses will be affected by this program
during the lives of the NMVC companies authorized by the Act. SBA
estimates that there are approximately 22.4 million small businesses in
the United States and 867 constitutes less than \1/10\ percent of those
businesses.
Further, NMVC companies must invest in ``smaller enterprises''
which are defined as businesses with a net worth not greater than $6
million and average net income of not greater than $2 million. Based
upon an average investment of $300,000, an investment in a business
with a net worth of $6 million would equate to 5 percent of the
business's net worth. Additionally, industry practices indicate that
while the average investment in a particular business is $300,000, this
amount may not be disbursed all at once. The average investment per
round in the industry is approximately $185,000, which is only 3
percent of the business's net worth.
List of Subjects in 13 CFR Part 108
Community development, Government securities, Grant programs--
business, Securities, Small businesses.
For the reasons stated in the preamble, the Small Business
Administration amends 13 CFR part 108 as follows.
PART 108--NEW MARKETS VENTURE CAPITAL PROGRAM
1. The authority citation for part 108 continues to read as
follows:
Authority: 15 U.S.C. 689--689q.
2. Amend Sec. 108.50 by:
a. Revising the citation in paragraph (1) of the definition of New
Markets Venture Capital Company or NMVC Company from ``Sec. 108.390''
to ``Sec. 108.380'';
b. Revising the citation in the first sentence of the definition of
Participation Agreement from ``Sec. 108.390'' to ``Sec. 108.380'';
and
c. Revising the definition of Regulatory Capital; to read as
follows:
Sec. 108.50 Definition of terms.
* * * * *
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).
* * * * *
3. Amend Sec. 108.230 by:
a. Revising paragraph (b);
b. Adding paragraph (c)(5); and
c. Revising paragraph (d); to read as follows:
Sec. 108.230 Private Capital for NMVC Companies.
* * * * *
(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 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) * * *
(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.
* * * * *
4. Revise Sec. 108.310(a) to read as follows:
Sec. 108.310 Contents of application.
* * * * *
(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
[[Page 68503]]
Regulatory Capital it proposes to raise under paragraph (a)(1) of this
section, whichever is greater).
* * * * *
5. Revise the second sentence of Sec. 108.320(g) to read as
follows:
Sec. 108.320 Contents of comprehensive business plan.
* * * * *
(g) * * * 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). * * *
* * * * *
6. Revise Sec. 108.360(k) to read as follows:
Sec. 108.360 Evaluation criteria.
* * * * *
(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.
7. Revise Sec. 108.380(a)(1)(i)(A), (a)(1)(i)(B), and the second
sentence in (b)(3) to read as follows:
Sec. 108.380 Final approval as a NMVC Company.
(a) * * *
(1) * * *
(i) * * *
(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
* * * * *
(b) * * *
(3) * * * 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.
8. Add an undesignated centerhead and a new Sec. 108.900 to read
as follows:
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 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.
9.-10. Revise Sec. 108.2000 and add Sec. Sec. 108.2001 through
108.2007 as follows:
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.
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.
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.
[[Page 68504]]
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.
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.
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
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.
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.
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).
11. Amend Sec. 108.2010 by redesignating paragraph (b) as
paragraph
[[Page 68505]]
(c), adding a new paragraph (b), and revising redesignated paragraph
(c), to read as follows:
Sec. 108.2010 Restrictions of use of Operational Assistance grant
funds.
* * * * *
(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.
12. Revise the citation in Sec. 108.2020(b) from ``Sec. Sec.
108.2000 and 108.2030'' to ``Sec. Sec. 108.2007 and 108.2030''.
13. Revise Sec. 108.2030(c)(2)(iii), (c)(2)(iv), and (d)(2) to
read as follows:
Sec. 108.2030 Matching requirements.
* * * * *
(c) * * *
(2) * * *
(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) * * *
(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).
14. Revise Sec. 108.2040(a) to read as follows:
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.
* * * * *
Dated: September 3, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-28204 Filed 11-8-02; 8:45 am]
BILLING CODE 8025-01-P