# New Markets Venture Capital Program

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A01-12501

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** May 23, 2001
- **Citation:** 66 FR 28602

## Text

SMALL BUSINESS ADMINISTRATION
13 CFR Part 108
RIN 3245-AE40
New Markets Venture Capital Program

AGENCY:

U.S. Small Business Administration.

ACTION:

Final rule; Withdrawal of interim final rule.

SUMMARY:

The U.S. Small Business Administration (“SBA”) adds a new regulation to implement the New Markets Venture Capital Program Act of 2000 (“the Act”). The Act authorizes SBA to issue regulations necessary to implement the program. The regulations set forth the requirements for: Newly-formed venture capital companies to qualify to become New Markets Venture Capital (“NMVC”) companies to make developmental venture capital investments in smaller enterprises located in low-income geographic areas and provide operational assistance to such enterprises receiving such investments; and Existing Specialized Small Business Investment Companies (“SSBICs”) to qualify for grants to provide operational assistance to smaller enterprises located in low-income geographic areas and which such SSBICs have financed or expect to finance.

SBA also withdraws the interim final rule on the New Markets Venture Capital Program originally published on January 22, 2001, the effective date of which subsequently was delayed until June 22, 2001. Because the interim final rule is withdrawn, it will not take effect on June 22, 2001.

DATES:

Effective Date:
This final rule is effective on May 23, 2001.

Applicability Date:
This final rule applies to all applications received no later than the application deadline date and time.

Withdrawal Date:
The interim final rule adding 40 CFR part 108, which was published at 66 FR 7218 and delayed at 66 FR 10811 and 66 FR 20530, is withdrawn as of May 23, 2001.

FOR FURTHER INFORMATION CONTACT:

Austin Belton, Director, Office of New Markets Venture Capital, Investment Division, or Louis Cupp, Policy Analyst, Investment Division, at (202) 205-6510. This is not a toll-free number.

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. Congress recognized that despite the nation's overall economic prosperity, many underserved areas in America have not experienced such prosperity and millions of Americans living in these areas do not have access to jobs or entrepreneurial opportunities. It enacted the New Markets Venture Capital (“NMVC”) program to help create an economic infrastructure in such underserved areas by encouraging business growth through program-supported investment. This type of investing is known in the community development venture capital industry as “double bottom line” investing, because the investments have both an anticipated financial and social return. Social returns include creating sustainable jobs at businesses receiving investments from NMVC companies, and encouraging such businesses to provide much-needed new products and services within underserved areas.

Congress noted that between 1997 and 1998, the median income for the nation's households rose 3.5 percent in real terms, yet 12.7 percent of Americans (34.5 million people) still live below the poverty line. Many of these Americans live in inner city and rural areas, where job opportunities are scarce and there is little to attract small business investors. In rural and urban communities, poverty remains a persistent problem. Job growth is well below the national average, with unemployment at or above 14%. Unemployment is 7.5% in the African American urban community, and is 6.4% in the Hispanic urban population; both are nearly double the national average. Despite these statistics, Congress found that it is not enough to create jobs in these pockets of poverty, rather these communities need a new economic infrastructure to enable them to develop their full potential and participate fully in the economic mainstream. The NMVC program will encourage the growth of such an infrastructure by supporting new equity capital investments by NMVC companies and SSBICs and by providing operational assistance to smaller enterprises located in low-income geographic areas whose growth will foster the creation of wealth and job opportunities in such areas.

SBA will enter into participation agreements with NMVC companies to fulfill these statutory purposes. The Act authorizes SBA to guarantee debentures of NMVC companies. Such debentures leverage the private capital that NMVC companies must raise and enable them to make the equity investments in low-income geographic areas contemplated by the Act. The Act also authorizes SBA to provide grants to NMVC companies to provide operational assistance to smaller enterprises in which they invest. In addition, the Act enhances the ability of existing SSBICs to invest in smaller enterprises in low-income areas by giving them grants to provide operational assistance to such enterprises in connection with such investments.

SBA will enter into participation agreements with NMVC companies that have a solid business plan for making investments in the low-income geographic areas targeted by the Act, and that have the most likelihood of expanding economic opportunities in such areas.

II. Rulemaking History

On January 22, 2001, 66 FR 7218, SBA published in the
Federal Register
an interim final rule with an effective date of February 21, 2001. SBA subsequently published in the
Federal Register
on February 20, 2001, 66 FR 10811, a delay of the effective date of the final rule until April 23, 2001. The delay was for the purpose of giving Administration officials the opportunity for further review and consideration of new regulations, consistent with the Assistant to the President and Chief of Staff memorandum entitled “Regulatory Review Plan,” published in the
Federal Register
on January 24, 2001.

On April 23, 2001, 66 FR 20530, SBA published in the
Federal Register
notice of a further delay of the effective date of the interim final rule, to June 22, 2001. The purpose of this further delay was to give Administration officials additional time for further review and consideration of new regulations, consistent with that “Regulatory Review Plan,” before the interim final rule became effective.

Also on April 23, 2001, 66 FR 20531, SBA published in the
Federal Register
a proposed rule implementing the NMVC program, and a proposed withdrawal of the previously published interim final rule. The proposed rule incorporated substantive changes resulting from the Administration's review of the interim final rule. The deadline for public comments on the proposed rule was May 4, 2001. SBA received one comment, which is addressed in Section IV.A, below.

III. Withdrawal of Interim Final Rule

SBA withdraws the interim final rule it published in the
Federal Register
on January 22, 2001 (66 FR 7218). SBA received no comments on its proposed rulemaking action of withdrawing its previously published interim final rule

and implementing the NMVC program instead with this final rule. SBA withdraws the interim final rule before it becomes effective on June 22, 2001, for the purpose of implementing the NMVC program instead with this final rule, which is based on the proposed rule SBA published in the
Federal Register
on April 23, 2001 (66 FR 20531). The purpose of implementing the NMVC program with this final rule instead of the interim final rule is to implement the program with substantive changes resulting from the Administration's review of the interim final rule.

IV. Discussion of Comments on and Changes to the Proposed Rule

A. Public Comments

SBA received one comment in response to the proposed rule. The majority of the commenter's comments concern the ways in which SBA changed various regulations in the proposed rule from the versions of those regulations in the previously published interim final rule. This section focuses on only those comments, and does not discuss those comments that reiterate comments already made and already discussed in the preamble to the proposed rule.

With regard to the proposed definition of “Relevant Venture Capital Finance” in § 108.50, as changed from the version of this definition previously published in the interim final rule, the commenter recommends that SBA implement its earlier version of this definition. The commenter believes that SBA's proposed change will result in SBA not considering the organizational mission of the NMVC company when determining the qualifications of the management team. SBA will implement this regulation as proposed, for the following reasons. First, SBA believes that the proposed definition does not have any effect on the separate regulatory requirement in § 108.120 that in order to be eligible for the program, a NMVC company applicant must have as its primary mission the economic development of one or more low-income areas. Second, the change will allow applicants and SBA to focus on management team members' demonstrable prior equity investment activities in small business in low-income areas, rather than attempting to prove the intent behind such prior activities.

The commenter noted that SBA eliminated from the proposed rule § 108.240, which had been included in the previously published interim final rule, and recommended that SBA put that section back into the final rule. That section concerns the circumstances in which non-cash assets may be included in private capital. The commenter suggested that the NMVC program should not be more stringent than the Small Business Investment Company (“SBIC”) program in this regard. SBA declines to implement this regulation in the final rule. SBA believes that, unlike SBICs, NMVC companies should not be allowed to include non-cash assets in their private capital. First, SBA selects SBICs through a non-competitive process, but will select NMVC companies through a competitive process in which SBA will compare applicants to one another. SBA will not have sufficient time in the selection process to first evaluate an applicant's proposed non-cash assets before that applicant is compared to other applicants. SBA could not ensure the integrity and fairness of the selection process if it were to compare an applicant that proposes to raise all of its capital in the form of cash to an applicant that proposes to have some of its capital be in the form of non-cash assets, without first reviewing and evaluating such non-cash assets. Second, even in the SBIC program, the permitted contribution of non-cash assets for inclusion in private capital is extremely limited. In practice, generally the only non-cash assets SBA approves are “pre-licensing investments,” which are not expected in the NMVC program.

The commenter objected to the change SBA made in the proposed rule to § 108.330, from the version previously published in the interim final rule. SBA revised a $5,000 application fee due in two installments, $2,000 at application submission and $3,000 at the time of final approval, to a $5,000 grant issuance fee due in advance at application submission. The commenter suggested that the only purpose for this change is to deter applicants. On the contrary, SBA desires to encourage professional venture capital funds, committed to participating in the program, to apply for NMVC company designation. SBA believes that asking applicants to pay the grant issuance fee at the time of application will ensure this result. As stated in the preamble to the proposed rule, SBA has determined that the Act authorizes SBA to charge a fee in connection with its issuance of a grant. SBA has decided to collect the entire fee in advance, as opposed to just a portion, in order to avoid the administrative costs of collecting the fee in two installments. SBA continues to believe that the amount of the fee is reasonable, and the fee ultimately will be borne only by successful applicants.

The commenter addressed the requirements in proposed § 108.710 that 80 percent of the businesses receiving financing from a NMVC company be smaller enterprises, be located in low-income areas, and receive equity capital investments, and that 80 percent of the total dollars invested by a NMVC company be in the form of equity capital investments in smaller enterprises located in low-income areas. The commenter makes several recommendations: First, that SBA eliminate the requirement that 80 percent of businesses receive equity capital investments; second, that SBA eliminate the 80 percent of dollars requirement and replace it with a requirement that an NMVC company only must invest 100 percent of its leverage (but none of its regulatory capital) in the form of equity capital investments; and third, that SBA replace the proposed 80 percent of businesses and 80 percent of total investment dollars requirement with only an 80 percent of businesses requirement. Some of these suggestions reiterate comments this commenter made in response to the interim final rule, and some relate to the changes SBA made to this regulation between the version published in the interim final rule and the version published in the proposed rule.

The commenter presents several reasons for its recommendations. First, it believes that the Act does not state that 80 percent of businesses must receive equity capital investments. Second, it states that NMVC companies need to have more investment flexibility to offset the higher risks of investments in low-income areas, including an ability to invest a portion of funds as amortizing debt. SBA has considered the commenter's suggestions and has decided to implement § 108.710 as proposed for the following reasons.

With regard to the requirement that 80 percent of the businesses in which a NMVC company invests must receive equity capital investments, as well as be smaller enterprises located in low-income areas, SBA believes that the Act requires this. This implements the requirement outlined in the definition of “participation agreement” in section 351(6)(B) of the Small Business Investment Act (“SBI Act”), as amended by the Act, that a NMVC company must make investments in smaller enterprises at least 80 percent of which are located in low-income areas. This also implements the legislative purposes stated in section 352 of the SBI Act, as amended by the Act, which include

“encouraging developmental venture capital investments in smaller enterprises primarily located in low-income geographic areas” and “to establish a developmental venture capital program with the mission of addressing the unmet equity investment needs of small enterprises located in low-income geographic areas.” “Developmental venture capital” is defined in section 351(1) of the SBI Act, as amended by the Act, as equity capital investments with the primary objective of fostering economic development in low-income areas. SBA believes that the clear purpose of the Act, read as a whole, is to promote equity capital investments in smaller enterprises in low-income areas. Accordingly, SBA believes § 108.710(a)(1) is required by the Act.

SBA also believes that the additional requirement SBA proposed in § 108.710(a)(2), that 80 percent of the total dollars a NMVC company has invested also must be in the form of equity capital investments in smaller enterprises located in low-income areas, fulfills the purposes of the Act, discussed above. SBA believes that the Act as a whole encourages NMVC companies to take a proactive posture with respect to the companies in which they invest, and to take reasonable risks in making investments in such companies. Several features of the NMVC program already offset the expectation of higher risk and lower rate of return to a NMVC company in making equity capital investments in smaller enterprises located in low-income areas. First, a NMVC company does not have to repay interest on its guaranteed debentures during the first five years after issuance, which gives the company time patiently to allow the businesses in which it invests to grow and, thus, for its investments to generate returns. Second, there is no limitation on the amount of ownership interest a NMVC company can take in a business in which it invests, thus giving the company the ability to act to reduce the risk of the business' failure. Third, the program includes a grant component, which gives a NMVC company additional resources to help increase the potential for a return on its investment in a business.

The commenter commented on the change SBA made in proposed § 108.2030, from the version previously published in the interim final rule, regarding the acceptable length of time within which commitments or annuities for grant matching resources may be payable. The commenter suggested that SBA allow NMVC companies to expend their grant matching resources over a period of 10 years as originally stated, rather than five years as stated in the proposed rule. The commenter suggested that doing so is not specifically prohibited by statute and would give NMVC companies the ability to provide operational assistance throughout the term of their investments.

SBA considered the consequences of implementing this suggestion, including the fact that it could result in a NMVC company expending all of its SBA grant funds before it expends any of its grant matching resources. After deliberation SBA has decided to implement the regulation as proposed, for several reasons.

First, SBA believes that implicit in the Act is a requirement that SBA's grant funds and a NMVC company's or SSBIC's grant matching resources be expended simultaneously within the same period of time. Since SBA believes that by law it can make its grants funds available for expenditure only for a period of time not exceeding five years, SBA believes it also should place the same time restriction on the expenditure of grant matching resources.

Second, from a grant administration perspective, it would not be the most efficient use of SBA's resources to continue to monitor grants to SSBICs and NMVC companies for a 10-year period when SBA's grant funds have been fully expended within the first five years. Pursuant to paragraph .71 of Circular A-110 of the Office of Management and Budget (“OMB”), SBA must not perform a close-out on such grants until the grant project is complete. Pursuant to the Act, the purpose of the grant is providing operational assistance to small businesses in connection with investments, and the grant project would not be complete until both the SBA grant funds and the NMVC company's or SSBIC's grant matching resources had been expended for this purpose.

Third, SBA believes that simultaneous expenditure by SSBICs and NMVC companies of both grant funds and grant matching resources will give SBA the best ability to ensure proper implementation of the NMVC program. If SBA monitors the use of both resources simultaneously, SBA can ensure that grants are being used for purposes that are authorized by the Act and that best fulfill the objectives of the NMVC program. If SBA finds that such funds and resources are not being used properly, or if a NMVC company or SSBIC is not complying with other grant requirements, pursuant to paragraph .22(h) of OMB Circular A-110, SBA can withhold payment of further grant funds until the situation is remedied.

B. Other Changes to the Proposed Rule

SBA made substantive changes to §§ 108.380(a)(1)(i)(A) and (B) concerning the amounts of regulatory capital and operational assistance grant matching resources a conditionally approved NMVC company must raise in order to receive from SBA final approval as a NMVC company. These changes implement a solution to a problem raised by a comment SBA received in response to the interim final rule, and already discussed in the preamble to SBA's proposed rule.

The commenter had advised that if SBA over-commits its grant funds, it could result in SBA giving applicants less than the 30 percent “grant-to-private-capital ratio” contemplated by the Act, due to the pro rata reduction in the amount of grant award each applicant would receive. The commenter suggested that SBA revise § 108.380(a)(1)(i)(B) to limit the amount of grant matching resources a conditionally approved NMVC company must raise in order to receive final approval. The commenter suggested this limit should be an amount not more than the amount of operational assistance grant that SBA has “conditionally designated for that NMVC company.” In essence, the commenter suggested that SBA place a limit on the amount of grant funds SBA would award to an applicant.

SBA proposed not to implement this suggestion for several reasons discussed in the preamble to the proposed rule (66 FR 20532-20533). However, SBA recognized that the possibility remained that an applicant might raise more regulatory capital and grant matching resources than it proposed to raise in its application, and more than SBA anticipated when SBA evaluated the applicant's application and made conditional approvals based on its selection process and the amount of appropriated funds available.

SBA continues to believe that the solution suggested by the commenter, placing a limit on the amount of grant funds SBA will award, is not allowable under § 358(a)(4) of the SBI Act, as amended by the Act. Under that section, SBA must award a grant in an amount equal to the amount of grant matching resources an applicant actually raises. Upon further deliberation, however, SBA believes it does have the discretion under the statutory scheme to place a limit on the amount of regulatory capital and grant matching resources an applicant is allowed to raise after filing its application. SBA believes that this

solution will achieve the result sought by the commenter but using a different approach.

SBA's selection process will include an evaluation of the proposals submitted by applicants, which will include specific amounts of capital and grant matching resources the applicants propose to raise. SBA will evaluate, among other things, the extent to which an applicant will concentrate its resources in particular low-income geographic areas, and the extent to which the applicant's proposed activities will promote economic development and the creation of wealth and job opportunities in such areas. This evaluation necessarily will include an assessment of the amounts of capital and grant matching resources an applicant intends to raise and to concentrate in particular low-income areas, in relation to the impact those resources might have on those areas.

SBA also will be selecting applicants for conditional approval so as to achieve the greatest extent of potential nationwide and rural/urban impact of the program. This process necessarily will include an assessment of the amounts of capital and grant matching resources an applicant intends to raise, in relation of the number of particular low-income areas toward which the applicant proposes to direct its activities.

For these reasons, a key factor in SBA's selection of applicants for conditional approval will be the amounts of capital and grant matching resources an applicant proposes in its application. In order to preserve both the integrity of the competitive selection process and the delicate balance between the various aspects of the applications SBA selects for conditional approval, SBA believes it must hold the selected applicants to fulfilling the plans as they have proposed in their applications and upon which SBA based its decision to select them. Accordingly, SBA has changed §§ 108.380(a)(1)(i)(A) and (B) to state that in order to receive final approval from SBA, a conditionally approved applicant must raise amounts of capital and grant matching resources equal to the amounts it set forth in its application to SBA. An applicant must not raise more or less than such amounts.

For these same reasons, SBA also has made similar substantive changes to §§ 108.2000(b)(6) and 108.2030(d)(2) regarding the amount of capital and grant matching resources that SSBIC applicants must raise.

SBA has made technical corrections to §§ 108.720(c)(1)(i) and (ii), concerning real estate businesses that are ineligible to receive financings from NMVC companies. SBA modeled this regulation on § 107.720(c), concerning real estate businesses that are ineligible to receive financings from SBICs. This SBIC regulation refers to particular major group and industry numbers contained in the Standard Industrial Classification (“SIC”) Manual. In promulgating a similar regulation for the NMVC program, SBA attempted to translate the SIC Manual references into equivalent references to the North American Industrial Classification System (NAICS) Manual, which is SBA's current size standard classification system. SBA re-examined this proposed regulation as a result of a question received by an interested member of the public and realized that SBA had not correctly translated the SIC Manual references into NAICS Manual references. This final rule corrects this technical error and conforms this regulation to the parallel regulation applicable to SBICs.

V. Section by Section Analysis

The following is a section by section analysis of SBA's regulations to add a new part 108 to title 13 of the Code of Federal Regulations to implement the Act.

A. General Information About the Regulations

As you read through the section by section analysis of particular regulations, you will see that SBA models many of these regulations on similar regulations governing SBA's SBIC program, found in part 107 of this title. In addressing the challenge of implementing the NMVC program, SBA is able to draw upon the experience that it has gained over the last 43 years in administering the SBIC program.

The SBIC program was created by the Small Business Investment Act of 1958 in response to a Federal Reserve study finding that small businesses in general were unable to obtain the long-term debt and equity funds that they needed for success. The basic objective of the program is to attract and supplement private capital, managed by private investment managers, to meet that need. SBA licenses such companies as SBICs, regulates their activities to ensure that they are financially sound and serve the program's public policy objectives, and supplements their private capital by guaranteeing debentures or other securities that they issue.

The SBIC program has been extraordinarily successful in recent years and today represents a major factor in small business financing. It is estimated that 34 percent of all companies receiving institutional venture capital in 1999 obtained it from an SBIC. In fiscal year 2000, SBICs invested a record $5.5 billion in more than 3,000 small growth companies. This was accomplished with a budget appropriation of just $24.3 million.

A key strength of the SBIC program lies in the fact that all investment decisions are made by private individuals with their own money at first risk. However, this also represents a limitation in that such investment activities are profit driven and generally are not targeted to small businesses located in low-income areas. Low-income investments typically are smaller and more costly to make, and they require significantly more assistance over the investment period than most SBIC investments. At the same time, they generally offer a more limited profit potential to the investor. The NMVC program addresses these factors by adding to the SBIC structure an operational assistance grant subsidy and by recruiting managers and investors that have an economic development objective in addition to their financial one.

Because of these many similarities between SBICs and NMVC companies and between these two venture capital programs, SBA incorporates into the NMVC program many of the SBIC regulations that SBA believes are fundamental to the safety and soundness of the SBIC program.

B. Section by Section Analysis

Sections 108.10 through 108.50 briefly describe the NMVC program, state the legal basis for the program, definitions, and provide guidance on how to read part 108. Most of the definitions come directly from 13 CFR part 107, which governs the SBIC program. Most of the newly defined terms come directly from the Act, and SBA does not supplement or modify them. SBA also adds several new definitions, including the terms “Low-Income Enterprise” and “Low-Income Investment,” as a shorter way to describe equity capital investments in a smaller enterprise that, at the time of the initial financing, has its principal office located in a low-income geographic area.

Sections 108.100 through 108.160 describe the qualifications for the NMVC program. Under the Act, NMVC companies must be newly formed for-profit entities. SBA requires that NMVC companies be organized under state law and be either corporations, limited liability companies, or limited partnerships. SBA requires that they

have qualified management, have economic development as their primary mission, and identify particular low-income geographic areas in which they propose to focus their investment activities. SBA models these regulations on the SBIC program, including the requirements that NMVC companies must have management and ownership diversity and that SBA will require pre-approval of all management expenses of a NMVC company (see 13 CFR 107.100 through 107.160).

Sections 108.200 through 108.240 address capitalization of a NMVC company, including minimum capital requirements, permitted sources of capital, and limitations on non-cash contributions to capital. These regulations also are modeled on similar regulations in the SBIC program (see 13 CFR 107.200 through 107.250).

Sections 108.300 through 108.330 set forth policies and procedures for application for designation as a NMVC company. SBA will allow submission of applications for participation in the NMVC program only during a specific application period, to be set forth in a Notice of Funds Availability published in the
Federal Register
, as opposed to a rolling admissions process. SBA will use this method of selecting applicants for three reasons. First, SBA believes this method will enable SBA to achieve the statutory directive of ensuring, to the extent possible and given the applications received, nationwide availability of developmental venture capital. SBA will compare applications both for quality and other criteria described in the regulations, and for the geographic areas they intend to cover so as to choose the best applications for each geographic area and avoid duplication within specific geographic areas. Second, SBA has received one-year appropriated funds for operational assistance grants, and the statute requires SBA to distribute available appropriated funds pro rata among NMVC companies and SSBICs that apply for such grants. (See discussion of §§ 108.2000 through 108.2040 for more information about how SBA proposes to administer the operational assistance grant program.) Submission of all applications for these grant funds at the same time will allow SBA to distribute these funds among all eligible and qualified recipients. Third, SBA believes this procedure will allow SBA to orderly administer appropriated funds it may receive in subsequent fiscal years, by allowing SBA to open up the NMVC program to new rounds of applicants.

SBA will require applicants for participation in the NMVC program to submit an application, similar to the application for the SBIC program but which also includes the requirement for a comprehensive business plan. Many of the topics SBA will require applicants to include in their business plans are outlined in section 354(b) of the SBI Act, as amended by the Act, regarding application for the NMVC program. In addition, SBA will use the following additional topics: market analysis of the specific low-income areas towards which the applicant proposes to target its investments and other activities, operational capacity and investment strategies, plans for raising capital and matching funds for operational assistance grants, and projected amount of investment in low-income areas as opposed to outside those areas. Based in part on the experience of other Federal agencies with similar economic development programs, SBA believes these additional topics will allow SBA to ensure that applicants understand the objectives of the NMVC program and have a good plan for accomplishing those objectives and for creating and maintaining a viable investment fund.

SBA also will assess a fee for receiving a grant under the NMVC program to ensure that applicants are professional venture capital firms committed to participate in the program.

Sections 108.340 through 108.395 describe SBA's evaluation criteria and selection process for participation in the NMVC program. SBA will consider ten criteria in its evaluation and selection of applicants for participation in the NVMC program. Most of the specified criteria are set forth in the Act. SBA will use the following additional selection criteria not specifically described in the Act: the quality of the applicant's business plan in terms of meeting the objectives of the program; the strength and likelihood for success of the applicant's operations and investment strategies; the need for developmental venture capital investments in the geographic areas in which the applicant proposes to concentrate its activities; and the extent of the applicant's understanding of the markets in such geographic areas. Based in part on the experience of other Federal agencies with similar economic development programs, SBA believes these additional evaluation criteria are effective indicators of whether the objectives of the NMVC program will be met.

The Act provides for SBA to conditionally approve companies for participation in the NMVC program, based on SBA's evaluation of their applications. Conditionally approved companies must raise the required amounts of capital and of matching funds for the operational assistance grant award from SBA within a time period specified by SBA. As provided in the Act, SBA will finally approve as NMVC companies all conditionally approved NMVC companies that raise the required amount of capital within the time period specified by SBA and sign a participation agreement with SBA. Section 108.380(b) also sets forth procedures under which SBA may grant to conditionally approved companies, as provided in the Act, an exception to the requirement to raise all of their required matching funds for their operational assistance grants before SBA designates them as finally approved NMVC companies.

Sections 108.400 through 108.470 describe SBA's requirements for changes in ownership, control, or structure of a NMVC company. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.400 through 107.475).

Sections 108.500 through 108.585 describe SBA's requirements for managing the operations of a NMVC company. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.500 through 107.590).

Sections 108.600 through 108.680 describe SBA's record keeping, record retention, and reporting requirements for NMVC companies. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.600 through 107.680). SBA also will require each NMVC company to provide reports concerning the community development impact of each investment it makes, as well as reports on its administration and use of grant funds as required by Circular A-110 of the Office of Management and Budget, “Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and other Non-Profit Organizations.” SBA anticipates that to the extent not inconsistent with SBA's regulations for the NMVC program, NMVC companies' administration and use of grant funds will be subject to OMB Circular A-110 and to Part 31 of the Federal Acquisition Regulations, 48 CFR part 31, “Contract Cost Principles and Procedures.” OMB Circular A-110 is optional for use in connection with grants to commercial organizations. SBA will apply it to NMVC companies in order to take advantage of existing and well-known grant administrative procedures and policies to facilitate SBA's orderly administration of grants to NMVC companies. (See the discussion of §§ 108.2000 through 108.2040 concerning applicability of these same

procedures and policies to grants to SSBICs.)

Sections 108.690 through 108.692 describe SBA's requirements for SBA's examinations of NMVC companies. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.690 through 107.692).

Sections 108.700 through 108.885 describe SBA's requirements for determining the eligibility of financings of small businesses by NMVC companies, and regarding types of allowable financings. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.700 through 107.885).

Section 108.710 sets forth the requirement that at the close of each year, 80 percent of the concerns that NMVC companies have financed must be smaller enterprises that, as of the time of the initial financing, had their principal office in a low-income geographic area and in which the NMVC companies have made equity capital investments as defined in the regulations (see proposed § 108.50). This regulation implements the requirement outlined in the definition of “participation agreement” in section 351(6)(B) of the SBI Act. SBA interprets this statutory section to refer to 80 percent of the businesses in which a NMVC company invests. Section 108.710 also requires that for all financings extended by a NMVC company, the NMVC company must have invested at least 80 percent (in total dollars) in low-income investments. In other words, 80 percent of the dollars used to finance business concerns must be invested in equity capital investments in smaller enterprises located in low-income areas. This provision will require that a substantial portion of a NMVC company's capital and leverage go toward making equity investments in smaller enterprises located in low-income areas. SBA believes that this will fulfill one of the Act's purposes—to address the unmet equity investment needs of businesses located in low-income areas.

Sections 108.1100 through 108.1720 describe SBA's requirements and procedures for NMVC companies to obtain leverage from SBA and the procedures governing how SBA will fund leverage. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.1100 through 107.1720).

Sections 108.1810 through 108.1840 describe defaults by NMVC companies on the terms and conditions governing their participation in the NMVC program, and SBA's remedies upon such defaults. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.1810 through 107.1840).

Section 108.1900 concerns termination by a NMVC company of its participation in the NMVC program. This regulation is modeled after a similar regulation for the SBIC program (see 13 CFR 107.1900).

Sections 108.1910 through 108.1930 address miscellaneous issues, including application for an exemption from regulatory requirements and the effect of regulation changes on transactions previously consummated. These regulations are modeled after similar regulations for the SBIC program (see 13 CFR 107.1910 through 107.1930).

Section 108.1940 sets forth procedures under which SBA may designate additional census tracts or equivalent county divisions as low-income geographic areas. This regulation implements the authority given to SBA's Administrator in section 351(3)(A)(iii) of the SBI Act, as amended by the Act. SBA has designed these procedures to allow for maximum opportunity by interested members of the public to ask SBA to designate specific census tracts or equivalent county divisions as additional low-income geographic areas.

Sections 108.2000 through 108.2040 set forth requirements and procedures for operational assistance grants to both NMVC companies and to SSBICs. SBA will award such grants only after receiving and evaluating applications in response to a Notice of Funds Availability published in the
Federal Register
. SBA will award grants to SSBICs and to NMVC companies in such a way as to promote developmental venture capital investments nationwide and in both urban and rural areas.

SBA also will require SSBICs to provide reports on its administration and use of grant funds as required by OMB Circular A-110, “Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and other Non-Profit Organizations.” SBA anticipates that to the extent not inconsistent with these regulations, SSBICs' administration and use of grant funds will be subject to OMB Circular A-110 and to part 31 of the Federal Acquisition Regulations, 48 CFR part 31, “Contract Cost Principles and Procedures.” OMB Circular A-110 is optional for use in connection with grants to commercial organizations (some SSBICs are for-profit, others are non-profit). SBA will apply it to SSBICs in order to take advantage of existing and well-known grant administrative procedures and policies to facilitate SBA's orderly administration of grants to SSBICs.

VI. Justification for Immediate Effective Date of Final Rule

The Administrative Procedures Act (“APA”) requires that “publication or service of a substantive rule shall be made not less than 30 days before its effective date, except * * * as otherwise provided by the agency for good cause found and published with the rule.” 5 U.S.C. 553(d)(3). SBA finds that good cause exists to make this final rule become effective immediately the same day it is published in the
Federal Register
.

The purpose of this APA provision is to provide interested and affected members of the public sufficient time to adjust their behavior before the rule takes effect. Potential NMVC company and SSBIC applicants have had since January 22, 2001 to consider, digest, and understand these regulations, the vast majority of which have not changed from the form in which they were published on January 22, 2001. Potential applicants and other interested parties also have had two opportunities to participate in notice and comment proceedings concerning these regulations. For these reasons, SBA believes that potential applicants and other interested parties have had ample time to adjust their behavior to comply with these regulations. In addition, SBA believes that potential applicants have a strong interest in seeing this rule get implemented in final form so that they may apply for the benefits of the NMVC program and so that SBA may select applicants and award appropriated funds before such funds expire at the end of this fiscal year.

SBA first published these regulations in the
Federal Register
on January 22, 2001, in the form of an interim final rule. On that same date, SBA made available to the public, via its web site, the application forms for NMVC company designation. SBA has made available to potential SSBIC applicants the appropriate application forms upon request.

Despite the fact that the regulations originally were promulgated as an interim final rule, SBA offered a 60-day comment period that expired on March 23, 2001. SBA received three public comments.

SBA republished these regulations, with several limited substantive and technical changes, as a proposed rule in the
Federal Register
on April 23, 2001. Some of the changes SBA made were the result of its consideration of

comments received on the interim final rule. Again, SBA provided an opportunity for public comment, and SBA received one comment. This final rule implements the regulations as proposed, with the exception of one technical change that arose from a question received from an interested member of the public, and one substantive change that arose from a public comment. Accordingly, SBA believes that interested members of the public have had ample opportunity to participate formally in SBA's rulemaking process as well as to influence informally SBA's development of these governing regulations and administrative procedures.

In addition to the four months since January 22, 2001, when these regulations first were published, potential applicants also will have an additional time period of approximately one week between the effective date of the final rule and SBA's anticipated application deadline. This will allow potential applicants to review their behavior and applications and determine whether they wish or need to make any adjustments before submitting their applications.

SBA also believes, based on its contacts with interested members of the public, that there is stronger interest in the immediate implementation of the NMVC program, than in a further 30-day delay in program implementation. In addition to its formal rulemaking activities, over the past three months SBA officials have talked and met with many potential applicants, investors, and donors of grant matching resources, and other interested parties, to explain the application forms, the regulations, and SBA's proposed administration of the NMVC program. SBA is aware of many potential applicants that have been putting together their application packages, contacting and obtaining commitments from potential investors and donors, and working with counsel on legal documentation, since January 22, 2001.

SBA also believes that interested members of the public are fully aware of the time constraints upon its implementation of the NMVC program during this fiscal year. SBA posted on its web site on January 22, 2001, a preliminary overview of the NMVC program. The overview describes the NMVC program generally and its implementation during SBA's fiscal year 2001 specifically. As a result of this overview and of the many contacts SBA staff have had with interested members of the public, potential applicants are fully aware of the fact that SBA believes its funds for operational assistance grant awards, appropriated to SBA for fiscal year 2001, expire on September 30, 2001. SBA believes that potential applicants are fully aware of the implication of this limitation on SBA's appropriated funds. SBA must evaluate and select applicants for conditional approval, provide time for conditionally approved applicants to raise capital and grant matching resources, and finalize legal documentation and agreements with finally selected applicants, in the time period between the application deadline and September 30, 2001. An additional 30-day delay will only shorten this extremely tight time frame. For these reasons, SBA believes that potential applicants have a stronger interest in the immediate implementation of the NMVC program, than in a further 30-day delay in program implementation.

VII. Regulatory Compliance Section—Compliance With Executive Orders 12866, 12988 and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C. Ch. 35)

Compliance With Executive Order 12866

The Office of Management and Budget (OMB) has reviewed this rule as a “significant” regulatory action under Executive Order 12866. A regulatory assessment is set forth below.

Low-income communities in the United States face multiple and varied barriers to sustainable growth. But a common obstacle for virtually all such communities is that they are unable to attract sufficient equity capital and technical assistance for starting and expanding businesses. Federal Reserve Board Chair Alan Greenspan has observed that equity capital is crucial to the existence of an innovative and productive business community, especially in lower-income communities. Yet the existing private venture capital industry is heavily concentrated in affluent, high technology regions located in only a handful of states.

In order to promote economic development and address the unmet equity needs of smaller businesses located in low-income areas, Congress passed and President Clinton signed into law the legislation creating the NMVC program. SBA will use these regulations to implement and administer the NMVC program. NMVC companies will be newly formed for-profit investment companies with private management. Their objective will be to create an economic infrastructure in underserved areas. NMVC companies will accomplish this by making equity investments in smaller enterprises, primarily located in low-income geographic areas. SBA anticipates that this type of investing will generate both financial and social returns. The social returns can include creating sustainable jobs at businesses receiving investments from NMVC companies, and encouraging such businesses to provide much-needed new products and services within underserved areas.

SBA estimates that the NMVC program will cost approximately $1 million annually to administer. The cost to the government includes the costs of staff (including benefits) and all other overhead expenses. SBA proposes to select participants for the NMVC program and regulate NMVC operations to ensure that public policy objectives are being met. Toward that end, SBA proposes to require NMVC companies to provide regular performance reports and take part in annual financial examinations.

SBA estimates that it will cost a NMVC company approximately $6,000 to apply for designation as a NMVC company, not including a $5,000 grant issuance fee due in advance at the time of application. This includes the cost of one staff person at a level comparable to a Federal employee at a GS-13 grade level spending 160 hours to complete the application. After receiving designation as a NMVC company, the annual cost to the NMVC company will be based on compliance with the reporting requirements of the program. SBA anticipates that compliance with the reporting requirements of the program will cost approximately $1,500. This includes the cost of one staff person at a level comparable to a Federal employee at a GS-13 grade level spending approximately 40 hours preparing the required performance and financial reports. The costs to NMVC companies and SSBICs that choose to participate in the grant aspect of the program include approximately $1,500 to prepare the initial grant application (approximately 40 hours of work), and approximately $600 annually thereafter to prepare the required quarterly status reports (approximately 16 hours of work). Again, these costs are estimated based upon one staff person at a level comparable to a Federal employee at a GS-13 grade level. There also is a fee payable by the NMVC company each time SBA examines the company. This rule sets forth a base fee for the examination of $3,500.

SBA believes that there are no alternatives to this regulatory action that

could more adequately address the equity needs of the nation's low-income areas. In developing the regulations, application package and reporting materials SBA purposefully followed proven industry practices. Based upon the foregoing, SBA believes that its rule implements the congressionally mandated NMVC program in the most cost effective and efficient manner.

Compliance With Executive Order 12988

SBA certifies that this rule is drafted, to the extent practicable, in accordance with the standards set forth in section 3 of Executive Order 12988.

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.

Compliance With Regulatory Flexibility Act, 5 U.S.C. 601-612

The NMVC program is expected to result in the creation of approximately 15-20 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. However, SBA has determined that this rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612.

The legislation creating the NMVC program authorizes $100 million to guarantee debentures to NMVC companies 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 funding allocation for the NMVC program, including matching funds raised by NMVC companies and SSBICs, is $260 million. These funds have been authorized for use over a period of five years. Based upon industry practices, it is highly unlikely that the funds will be disbursed in total in one year. 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.

The average size of an investment by a community development company is approximately $300,000. Based upon a total funding allocation 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 with this legislation. Based upon 1997 Economic Census data, SBA estimates that there are approximately 5 million small businesses in the United States and 867 constitutes less than 1% 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% of the business's net worth. A 5% investment is not likely to have a significant effect on a small business. 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% of the business's net worth.

Compliance with Paperwork Reduction Act, 44 U.S.C. Ch. 35

For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, the collection of information (“collection”) for this program includes the NMVC program application package and reporting and recordkeeping requirements. SBA previously requested from the Office of Management and Budget (“OMB”) an emergency clearance of this collection. OMB reviewed and approved the collection and assigned OMB control number 3245-0332.

SBA has made the collection available to the public on SBA's web site at http://www.sba.gov/inv and by calling Terri Dennin at (202) 205-6234. SBA already has provided the public with a 60-day comment period on this collection (66 FR 7218). SBA received no comments on the collection.

List of Subjects in 13 CFR Part 108

Community development, Government securities, Grant programs—business, Reporting and recordkeeping requirements, Securities, Small businesses.

For the reasons stated in the preamble, the Small Business Administration adds 13 CFR part 108 to read as follows:

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.
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.

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 § 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.
108.2010
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 and Pub. L. 106-554, 114 Stat. 2762A.

Subpart A—Introduction to Part 108

§ 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 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.

§ 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.

§ 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.

§ 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 § 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

§ 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 § 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 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 § 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 § 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 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 § 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 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 § 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 § 108.510.

Lending Institution
means a concern that is operating under regulations of a state or Federal licensing, supervising, or examining body, or whose shares are publicly traded and listed on a recognized stock exchange or NASDAQ and which has assets in excess of $500 million; and which, in either case, holds itself out to the public as engaged in the making of commercial and industrial loans and whose lending operations are not for the purpose of financing its own or an 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 § 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 § 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 partnership organized as required by § 108.160 (Partnership NMVC Company), or a limited liability company (LLC NMVC Company) that—

(1) Has been granted final approval by SBA under § 108.390, 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 § 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 § 108.390, 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 § 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:

(1)
General.
Regulatory Capital means Private Capital, excluding non-cash assets contributed to a NMVC Company, a Conditionally Approved NMVC Company, or an Applicant, and non-cash assets purchased by a Conditionally Approved NMVC Company or an Applicant, unless such assets have been converted to cash or have been approved by SBA for inclusion in Regulatory Capital. For purposes of this definition, sales of contributed non-cash assets with recourse or borrowing against such assets shall not constitute a conversion to cash.

(2)
Exclusion of questionable commitments.
An investor's commitment to a NMVC Company, Conditionally Approved NMVC Company, or Applicant is excluded from Regulatory Capital if SBA determines that the collectability of the commitment is questionable.

(3)
Exclusion of amounts designated for Operational Assistance match.
Regulatory Capital excludes any portion of Private Capital that is designated as matching resources in accordance with § 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

(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 § 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 § 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.

Subpart C—Qualifications for the NMVC Program

Organizing a NMVC Company

§ 108.100
Business form.
A NMVC Company must be a newly formed for-profit entity or, subject to § 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”).

§ 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 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.

§ 108.120
Economic development primary mission.
The primary mission of a NMVC Company must be economic development of one or more LI Areas.

§ 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.

§ 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 § 108.520 for the definition of Management Expenses.)

§ 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 Persons unaffiliated with your management and unaffiliated with each other, and whose investments are significant in dollar and percentage terms as determined by SBA. Such Persons must not be your Associates (except for their status as your shareholders, limited partners or members) and must not Control, be Controlled by, or be under Common Control with any of your Associates. A single “acceptable” Institutional Investor may be substituted for two or three of the three 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.

§ 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”) 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 §§ 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 § 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 § 108.730. The term NMVC Company, as used in §§ 108.30, 108.460, and 108.680, includes all of the NMVC Company's Control Persons. The conditions

specified in § 108.1810 and § 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

§ 108.200
Adequate capital for NMVC Companies.
You must meet the requirements of §§ 108.200-108.230 in order to qualify for designation as a NMVC Company and to receive Leverage.

§ 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.

§ 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' contributed capital of a LLC NMVC Company, or the partners' contributed 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.

(d)
Non-cash capital contributions.
Capital contributions in a form other than cash are excluded from Private Capital.

(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.

Subpart D—Application and Approval Process for NMVC Company Designation

§ 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.

§ 108.310
Contents of application.
Each Applicant must submit a complete application, including the following:

(a)
Amounts.
The Applicant must indicate the amounts of—

(1) Regulatory Capital it proposes to raise;

(2) 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 § 108.2030, as its matching resources for its Operational Assistance grant award (the aggregate of which must be not less than 30 percent of the Regulatory Capital it proposes to raise under paragraph (a)(1) of this section).

(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 § 108.320, and which demonstrates that the Applicant has the capacity to operate successfully as a NMVC Company.

(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.

§ 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 or 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 Applicant. Potential sources of matching resources must satisfy the requirements in § 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.

§ 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

§ 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.

§ 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.

§ 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;

(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

intending to invest in the same or proximate LI Areas.

§ 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.

§ 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 § 108.310(a)(1), which must be at least $5,000,000; and

(B) The amount of matching resources for its Operational Assistance grant award set forth in its application, pursuant to § 108.310(a)(2), which must be at least $1,500,000 or 30 percent of the Regulatory Capital it raised, whichever is greater; 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 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 minimum amount of Regulatory Capital within the time period SBA gave it to do so.

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.
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.

§ 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.

§ 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.

§ 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.

§ 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.

§ 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 § 108.400 or § 108.410, as appropriate.

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.
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

§ 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 § 108.440.

Subpart G—Managing the Operations of a NMVC Company

General Requirements

§ 108.500
Lawful operations under the Act.
You must engage only in the activities contemplated by the Act and in no other activities.

§ 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.”

§ 108.503
NMVC Company's adoption of an approved valuation policy.

(a)
Valuation guide

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A01-12501. Public record. Not legal advice.