Small Business Investment Companies

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The Small Business Programs Improvement Act of 1996 made a

number of changes to the Small Business Investment Act of 1958, as

amended. For the Small Business

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Investment Company program, these changes include provisions affecting

capital requirements, Leverage eligibility and fees, and the status of

Section 301(d) Licensees. This final rule implements the statutory

provisions; in addition, it makes various technical corrections and

clarifications, as well as other changes to provide greater fairness

and flexibility in such areas as portfolio diversification

requirements, Cost of Money and distributions by SBICs that have issued

Participating Securities.

DATES: This final rule is effective February 5, 1998.

FOR FURTHER INFORMATION CONTACT: Leonard W. Fagan, Investment Division,

at (202) 205-7583.

SUPPLEMENTARY INFORMATION: On October 14, 1997, SBA published a

proposed rule to implement the provisions of Title II of Public Law

104-208 (September 30, 1996), entitled ``The Small Business Programs

Improvement Act of 1996,'' which relate to small business investment

companies (SBICs). See 62 FR 53253. The proposed rule also included

certain other substantive changes, clarifications and technical

corrections to the regulations governing SBICs, including those

concerning portfolio diversification, Cost of Money, and the

computation of distributions to be made by SBICs that have issued

Participating Securities.

SBA received 10 comment letters on the proposed rule during the 30-

day public comment period. This final rule includes changes based on

some of the comments received. In addition, the final rule incorporates

certain provisions of Public Law 105-135, which was enacted December 2,

1997.

Section 301(d) Licensees

Prior to October 1, 1996, an SBIC program applicant could be

licensed under either section 301(c) or section 301(d) of the Small

Business Investment Act of 1958, as amended (Act). A Section 301(d)

Licensee, also known as a ``specialized SBIC'' or ``SSBIC'', agreed to

invest only in businesses owned and controlled by socially or

economically disadvantaged individuals. In return, a Section 301(d)

Licensee received certain benefits not available to other SBICs, such

as eligibility for certain types of subsidized Leverage (as defined in

Sec. 107.50).

Effective October 1, 1996, section 208(b)(3) of Public Law 104-208

repealed section 301(d) of the Act. However, the repeal provision was

accompanied by the following language: ``The repeal * * * shall not be

construed to require the Administrator to cancel, revoke, withdraw, or

modify any license issued under section 301(d) of the Small Business

Investment Act of 1958 before the date of enactment of this Act.''

At the same time, section 208(d) of Public Law 104-208 amended the

Act to eliminate subsidized SBA Leverage. Such Leverage was previously

available to SSBICs in the form of Debentures with an interest rate

subsidy or Preferred Securities with a 4 percent dividend. Although

subsidized Leverage can no longer be issued, the Act does not require

SSBICs to prepay or redeem such Leverage prior to its scheduled

maturity. In addition, an SSBIC may apply for any type of non-

subsidized Leverage (Debentures or Participating Securities) for which

it is eligible.

To implement these statutory changes, SBA proposed revisions to the

definitions of ``Section 301(d) Licensee'' and ``Preferred Securities''

found in Sec. 107.50, as well as to Secs. 107.120, 107.230(d)(4),

107.1100, 107.1160, 107.1400, 107.1420 and 107.1430; Secs. 107.110 and

107.1110 were proposed to be removed. These sections are finalized with

one modification, as discussed hereafter.

SBA received one comment concerning proposed Sec. 107.120. The

proposed rule would have allowed an existing SSBIC which was licensed

as a subsidiary of another Licensee or group of Licensees to continue

its operations under the same conditions as before; however, an

existing SSBIC that was not already a subsidiary would not have been

permitted to become one. The commenter suggested that Section 301(d)

Licensees should continue to have access to this option. Although the

current provision has rarely been used, SBA has no objection to its

continued availability and has revised the final rule accordingly.

Common Control

SBA proposed to broaden a portion of the defined term ``Common

Control'' in Sec. 107.50. The purpose of the change was to reflect the

way the term is actually used in the regulations. The definition is

adopted as proposed.

Management and Ownership Diversity

Proposed Sec. 107.150 is adopted without change. SBA received one

comment on this section expressing support for the general requirement

that a Licensee which plans to obtain SBA Leverage must have diversity

between management and ownership. Under the revised regulation, the

investors relied upon to satisfy the diversity requirement cannot be

Affiliates of one another. In addition, SBA has discretion to reject

for diversity purposes an investor whose ownership interest is not

significant, either in terms of absolute dollars or percentage of

ownership.

These changes reflect policies which SBA has been developing in its

review of license applications. SBA is continuing to refine these

guidelines and expects to incorporate them into its standard operating

procedures.

Capital Requirements

Under the Act as amended by section 208(c) of Public Law 104-208,

SBICs licensed on or after October 1, 1996 must meet increased minimum

capital requirements. These requirements are implemented in

Sec. 107.210, which is finalized as proposed. Under this section, a

company that does not wish to be eligible to issue Participating

Securities must have Regulatory Capital of at least $5,000,000. As an

exception to this general rule, the regulation provides that SBA can

license an applicant with Regulatory Capital of at least $3,000,000,

but only if the applicant meets certain conditions. As mandated by the

Act, this exception is limited to those instances where ``special

circumstances and good cause'' can be shown.

A company that wishes to be eligible to apply for Participating

Securities must have Regulatory Capital of at least $10,000,000, with a

permitted exception for an applicant which demonstrates to SBA's

satisfaction that it can be financially viable over the long term with

a lower amount (but under no circumstances less than $5,000,000). The

regulation does not permit prospective Participating Securities issuers

to be licensed pursuant to the exception available to other applicants,

under which a license may be granted with Regulatory Capital as low as

$3,000,000. For applicants planning to issue Participating Securities,

SBA believes that the ability to meet the standard minimum capital

requirement is an important indicator of the credibility of management.

SBA also doubts that any such applicant can demonstrate financial

viability with Regulatory Capital of only $3,000,000, even on a

temporary basis.

In addition to the Regulatory Capital requirements described above,

Sec. 107.210(a) also requires any company licensed on or after October

1, 1996, to have Leverageable Capital of at least $2,500,000.

Leverageable Capital is a subset of Regulatory Capital; while both

include capital actually contributed to a Licensee by its private

investors, the major difference between them is that Regulatory Capital

also includes the Licensee's unfunded binding

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commitments from Institutional Investors.

SBICs licensed before October 1, 1996, are not required to increase

their capital. Under Sec. 107.210(b), such companies must continue to

meet the applicable minimum capital requirements under the regulations

in effect on September 30, 1996 (see Secs. 107.210 and 107.220 as in

effect on that date). These requirements vary depending upon the date a

company was licensed and the type of SBA Leverage it has issued or

wants to issue.

See also the section of this preamble entitled ``Eligibility for

Leverage and Leverage Commitments''.

Valuations

Section 208(f)(2) of Public Law 104-208 included one provision

related to the valuation of portfolio securities held by Licensees

which was not already reflected in the regulations. Under this

provision, as part of the annual audit of a Licensee's financial

statements, the independent auditor must provide to SBA a statement

that the Licensee's valuations were performed in accordance with its

SBA-approved valuation policy, as required by section 310(d)(2) of the

Act. SBA included this requirement in proposed Sec. 107.503(e), which

is finalized without change.

Reports To Be Filed With SBA

SBA received one comment on proposed Sec. 107.660(d), which would

have required a Licensee to notify SBA if an officer, director, general

partner or other Control Person is charged with or convicted of any

criminal offense other than a misdemeanor involving a minor motor

vehicle violation. The purpose of the proposed rule was to give SBA a

mechanism for updating information typically provided at the time of

licensing by key personnel associated with a license applicant. The

commenter pointed out that the broad regulatory definition of ``Control

Person'' may cause the notification requirement to apply to persons who

were not required to provide personal history statements to SBA as part

of the licensing process and who have no direct role in the management

of the SBIC.

SBA agrees that the proposed regulation may, under certain

circumstances, unnecessarily include persons who are not involved in

the operations of a Licensee. The final rule is modified accordingly,

so that the notification requirement applies to any officer, director

or general partner of a Licensee, and any other person who was required

to provide a personal history statement to SBA in connection with the

SBIC's license (either at the time of licensing or subsequently, as in

the case of a new investor who acquires a significant interest in an

existing SBIC).

Financing of Smaller Enterprises

Proposed Sec. 107.710 is adopted without change. This section

includes a provision applicable to SBICs licensed on or before

September 30, 1996, which issue Leverage after that date and which do

not meet the current minimum capital requirement (Regulatory Capital of

at least $5,000,000 for Debentures or at least $10,000,000 for

Participating Securities). For such Licensees, at least 50 percent of

the aggregate dollar amount of their Financings extended after

September 30, 1996 must be invested in Smaller Enterprises.

Under Sec. 107.710(e), a Licensee which has not achieved the

required percentage of investments in Smaller Enterprises is allowed

one additional year to bring its portfolio into compliance. However,

such a Licensee is not eligible for additional Leverage until it

reaches the required percentage. See also the section of this preamble

entitled ``Eligibility for Leverage and Leverage Commitments''.

Passive Businesses

SBA received five comments on proposed Sec. 107.720(b), which dealt

with the financing of passive businesses. SBICs are generally

prohibited from investing in passive businesses, but an exception is

provided for holding companies which pass through substantially all of

the financing proceeds to an active subsidiary. The proposed rule would

have modified the existing exception by allowing a holding company to

pass through proceeds to more than one operating company, rather than a

single company, provided that each operating company qualified as a

``subsidiary'' of the holding company. A subsidiary company was defined

as one in which the financed passive business owns at least 50 percent

of the voting securities.

All of the commenters supported the provision allowing proceeds to

be passed through a holding company to more than one operating company.

However, four of the commenters were concerned that the proposed 50

percent ownership requirement would foreclose another type of

investment structure which may be important to certain Licensees

organized as limited partnerships. Specifically, for a partnership with

tax exempt investors (such as pension funds), direct investment in an

unincorporated business is considered highly undesirable because of the

possibility that the tax exempt investors will be deemed to have

``unrelated business taxable income'' under section 511 of the Internal

Revenue Code of 1986, as amended. The common solution to this problem

is for the partnership to form a wholly-owned corporate subsidiary

which receives funds from its parent and in turn reinvests these funds

in one or more unincorporated operating companies. If an SBIC creates a

passive corporation for this purpose, it is likely that the corporation

would own less than 50 percent of the voting securities of the financed

Small Business. Therefore, the investment would not qualify for the

exception in proposed Sec. 107.720(b)(2).

SBA does not wish to prevent partnership Licensees from investing

in unincorporated Small Businesses, but it has a number of concerns.

First, SBA believes that when a Licensee makes an investment in a

holding company which is unrelated to the Licensee and is, in fact, a

portfolio company, the requirement that proceeds be passed through only

to 50 percent-owned subsidiaries should remain. This provision ensures

that there is a significant relationship between the financed passive

business and the active businesses which ultimately receive the

proceeds, and that the passive business is not functioning simply as a

reinvestor.

Second, SBA believes that there may be significant credit risks

associated with the formation of corporate subsidiaries by SBICs. For

example, Licensees are prohibited by law from filing for bankruptcy

protection, providing SBA with an important safeguard in its effort to

manage the government's financial risk. However, when a Licensee holds

assets through a subsidiary, the possibility arises that these assets

can be shielded through a bankruptcy filing by the subsidiary.

To accommodate the Agency's concerns as well as those of certain

Licensees, SBA is finalizing Sec. 107.720 as follows: The exception in

proposed Sec. 107.720(b)(2) is adopted without change, and a further

exception is added in a new paragraph (b)(3). Under this new provision,

a partnership Licensee may form one or more wholly-owned corporations

with SBA's prior written approval. Such corporations must be formed for

the sole purpose of providing Financing to one or more eligible,

unincorporated Small Businesses. The formation of such corporations is

limited to situations in which a direct investment in the Small

Business would cause one or more of the Licensee's investors to have

unrelated business taxable income. The regulation resolves

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potential contradictions within part 107 by specifying that ownership

of such a corporation does not violate the limitations on Control in

Sec. 107.865(a) or the conflict of interest prohibitions in

Sec. 107.730(a).

SBA wishes to emphasize that the requirement for prior written

approval to form a subsidiary is consistent with longstanding practice

within the SBIC program. SBA's concern in this regard relates not only

to credit risks associated with the shift of assets from a Licensee to

its subsidiaries, but also to the purpose for which a subsidiary is

formed and whether its proposed function is consistent with the purpose

of an SBIC as set forth in the Act.

Co-Investment With Associates

SBA received two comments in support of proposed

Sec. 107.730(d)(3)(iv), which is finalized without change. Under this

provision, co-investments by a non-leveraged SBIC and its non-SBIC

Associate are presumed to be fair and equitable to the SBIC, so that no

specific demonstration of equity is required.

Portfolio Diversification Requirements (``Overline'' Limit)

SBA received four comments on proposed Sec. 107.740, under which a

leveraged SBIC may not have more than 20 percent of its Regulatory

Capital invested in or committed to a single Small Business or group of

related businesses, unless SBA gives its prior written approval (for

SSBICs, the limit is 30 percent of Regulatory Capital). The proposed

rule was intended to address a problem faced by an SBIC which reduces

its Regulatory Capital in a manner permitted by the regulations (such

as when a Participating Securities issuer returns capital to its

investors), and then finds that one or more of its existing investments

now exceed its reduced overline limitation. SBA's proposed solution was

to base a Licensee's maximum permitted investment in or commitment to a

Small Business on its Regulatory Capital at the time the investment or

commitment is made.

All of the commenters supported this change, but suggested that SBA

go further. One commenter felt that an SBIC should have the ability to

make follow-on investments in a Small Business based on the Licensee's

Regulatory Capital at the time the initial investment was made. The

other commenters argued more broadly that an SBIC, particularly a

limited life partnership which expects to return capital to investors

as investments are harvested, should be permitted to base its overline

limit on its initial Regulatory Capital (assuming no further

increases), with no reduction for any subsequent decreases in

Regulatory Capital. The commenters all suggested that an SBIC should

not be forced to reduce the intended investment size reflected in its

business plan because of an early return of capital; one commenter

pointed out that this imposes a penalty which is particularly

unjustified in the case of an SBIC which makes a distribution resulting

from a profitable realization of a portfolio company investment.

SBA understands these concerns, particularly with respect to an

SBIC organized as a limited life partnership which does not reinvest

capital. However, SBA believes that the suggested changes are

prohibited by section 306(a) of the Act. Therefore, the proposed rule

is finalized without change.

Cost of Money

SBA proposed three revisions to Sec. 107.855, which sets forth

limits on interest rates and other charges that SBICs may impose on

Small Businesses, generally referred to as ``Cost of Money''. These

provisions are finalized as proposed. Two of the changes dealt with the

computation of the Cost of Money ceiling, mainly the circumstances

under which Licensees may include in the computation the 1 percent

additional charge on Leverage which is payable to SBA. The other change

involved the treatment of detachable stock purchase warrants.

The four comments received on this section all strongly supported

proposed Sec. 107.855(g)(1), which contained an exclusion from Cost of

Money for a discount on the loan portion of a Debt Security, if the

discount results solely from the allocation of fair value to detachable

stock purchase warrants as required by generally accepted accounting

principles. One commenter suggested that the exclusion be extended to

any discount resulting from the allocation of fair value to an equity

feature of a Debt Security, without regard to whether the equity

feature was in the form of a warrant, common stock or other equity

equivalent. SBA did not expand the proposed language because it has not

encountered this type of Cost of Money issue with equity features other

than warrants; if such an issue arises in the future, the Agency will

consider whether further change is desirable.

Control

Proposed Sec. 107.865 contained two clarifications to the existing

regulation concerning Control of a Small Business by an SBIC, which are

finalized without change. SBA received one comment concerning proposed

Sec. 107.865(c), which set forth the circumstances under which a

Licensee can rebut a presumption of Control. The comment did not

specifically relate to the proposed change, which was merely an

editorial clarification. It concerned the interpretation of the

rebuttal condition in Sec. 107.865(c)(2) which states, in part, that

``[m]anagement of the Small Business can elect at least 40 percent of

the board members of a corporation, general partners of a limited

partnership, or managers of a limited liability company, as

appropriate, and the Investor Group can elect no more than 40

percent.''

The commenter provided the following scenario: There are five seats

on the Small Business's board of directors, three to be filled by

management and two by the Investor Group. One of the seats controlled

by management is vacant, so the actual board composition represents a

50-50 split between management and the Investor Group. The commenter

suggested that these circumstances satisfy the rebuttal condition in

Sec. 107.865(c)(2) because management can fill three of the five board

seats (60 percent), while the Investor Group can fill the remaining two

(40 percent). The vacant seat should not affect the rebuttal, because

the management of the Small Business can exercise its right to fill the

seat and assert control of the board at any time. As long as there are

no restrictions on management's ability to do so, SBA agrees with this

interpretation of the regulation and does not believe that any further

clarification is needed.

Eligibility for Leverage and Leverage Commitments

Section 208 of Public Law 104-208 established certain requirements

which an SBIC must satisfy in order to obtain SBA Leverage. These

requirements are implemented by Sec. 107.1120 (c) and (d), which are

adopted without change from the proposed rule. Under these provisions,

an SBIC licensed after September 30, 1996, with Regulatory Capital of

less than $5,000,000 is ineligible for Leverage until it reaches the

$5,000,000 level. An SBIC licensed on or before September 30, 1996, is

not required to increase its capital in order to obtain additional

Leverage; however, if its Regulatory Capital is less than $5,000,000

($10,000,000 for a company seeking to issue Participating Securities),

it must certify in writing that at least 50 percent of the aggregate

dollar amount of its Financings

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extended after September 30, 1996 will be provided to Smaller

Enterprises (see also Sec. 107.710(c)). Finally, any Licensee seeking

Leverage must certify in writing that it is in compliance with the

general requirement to provide 20 percent of its total Financings to

Smaller Enterprises under Sec. 107.710(b).

SBA is also finalizing without change the revisions proposed in

Secs. 107.1200, 107.1230 and 107.1240 to eliminate unnecessary

limitations on the amounts of Leverage commitments and draws and to

facilitate the interim Leverage funding mechanism which SBA is now

developing.

Leverage Fees

SBA proposed changes in Secs. 107.1130 and 107.1210 to implement

provisions of section 208(d)(6) of Public Law 104-208 which affect the

fees SBICs must pay in order to obtain SBA Leverage. Proposed

Sec. 107.1130 is adopted without change; however, Sec. 107.1210 has

been revised as a result of legislation enacted after publication of

the proposed rule.

Under Sec. 107.1130(a), a Licensee must pay a nonrefundable

``leverage fee'' to SBA when Debentures or Participating Securities are

issued. The fee is 3 percent of the face amount of the Leverage issued,

replacing the 2 percent user fee and the 1 percent commitment fee

previously in effect. Section 107.1130(d) requires a Licensee to pay to

SBA an additional ``Charge'' on Debentures and Participating Securities

(see also Sec. 107.50 for the definition of this new term). For both

types of Leverage, the Charge is 1 percent per annum. The Charge is

payable under the same terms and conditions as the interest on

Debentures or the Prioritized Payments on Participating Securities, as

applicable. Thus, a Debenture issuer would pay the Charge in two semi-

annual installments together with its interest payments. In contrast, a

Participating Securities issuer would pay the Charge only when it had

profits and was distributing Prioritized Payments under Sec. 107.1540.

The Charge does not apply to Leverage drawn down against a commitment

obtained from SBA on or before September 30, 1996.

Under proposed Sec. 107.1210(a), if a Licensee received a Leverage

commitment from SBA, it would have been required to prepay the 3

percent leverage fee at the time it received the commitment. However,

section 215(d) of Public Law 105-135, enacted December 2, 1997,

dividend payment of the leverage fee into two stages for Licensees

which receive a Leverage commitment: A nonrefundable fee equal to 1

percent of the committed amount must be paid when the commitment is

received, and 2 percent of the amount of each draw must be paid when

funds are drawn down. To implement this statutory mandate, the final

rule is modified accordingly.

Participating Securities--General

Proposed Sec. 107.1500 is adopted without change. This section

contains clarifications and minor revisions concerning the redemption

and priority in liquidation of Participating Securities, and eliminates

the requirement for a Licensee to maintain a specified level of Equity

Capital Investments.

Liquidity Requirements for Participating Securities

The proposed rule included two minor changes to the liquidity

requirements in Sec. 107.1505. The section is finalized as proposed.

SBA received two comments in support of the revised computation of the

liquidity ratio in Sec. 107.1505(b). Both commenters stated that the

change in the weighting of publicly traded securities will simplify the

computation and also will eliminate the ``double discounting'' of such

securities.

Earmarked Profit (Loss)

Section 107.1510 is adopted as proposed. This section contains

minor technical revisions intended to simplify the computation of

Earmarked Profit (Loss) by Participating Securities issuers.

Prioritized Payments

Section 107.1520 tells a Licensee how to compute Prioritized

Payments and how to determine whether it has profits which will cause

Prioritized Payments to become ``earned'' and therefore payable to SBA.

Four revisions to this section were proposed and are adopted without

change.

First, the regulation implements a provision of Public Law 104-208

by including ``Charges'' (the 1 percent annual fee discussed in this

preamble under the heading ``Leverage Fees'') on outstanding

Participating Securities in the required computations. Although Charges

are not part of Prioritized Payments, they are payable under the same

terms and conditions.

Second, Sec. 107.1520(a) incorporates a technical change intended

to facilitate the interim Leverage funding mechanism currently under

consideration by SBA.

Third, the computation of profit for the purposes of Sec. 107.1520

is revised under Sec. 107.1520(d). Under the previous regulation, a

Licensee's ``profit'' was its cumulative Earmarked Profit minus its

cumulative Earned Prioritized Payments from prior periods. This

computation ignored the fact that some or all of the profit computed in

this manner may have already been distributed under other sections of

the regulations, either to SBA as Profit Participation or to the

Licensee's private investors. The revised rule takes prior profit

distributions into account in determining whether a Licensee has

profits which can be used to pay Prioritized Payments. SBA received two

comments in support of this change.

Finally, Sec. 107.1520(f) provides additional detail concerning the

computation of Adjustments, a type of compounding of unpaid Prioritized

Payments.

Profit Participation

Section 107.1530 is adopted as proposed. SBA received two comments

in support of the proposed regulation. The section contains several

changes affecting the computation of Profit Participation, which must

be allocated to SBA by a Participating Securities issuer when it has

earned profits over and above the amount necessary to pay its

Prioritized Payments in full. Profit Participation is determined by

computing a ``Base'' and a ``Profit Participation Rate'', and

multiplying the Base by the Rate. The rule revises the computation of

the Base with respect to certain losses incurred by a Licensee in prior

periods and provides a simpler method of computing the ``PLC ratio'',

which is one of the variables in the Profit Participation Rate formula.

The rationale for these changes is discussed in detail in the preamble

to the proposed rule.

Tax Distributions

Proposed Sec. 107.1550, which dealt with tax distributions by

Participating Securities issuers organized as limited partnerships or

similar flow-through entities, is adopted as final with one

modification. The proposed changes consisted of clarifications and a

minor technical revision, as discussed in the preamble to the proposed

rule. In the final rule, SBA is incorporating one additional change to

correct an error in Sec. 107.1550(c)(3). The previous regulation stated

that SBA would apply its share of any tax distribution to the Profit

Participation owed by a Licensee under Sec. 107.1530. However, there

are certain circumstances under which SBA's share of a tax distribution

may exceed the Profit Participation owed. In such cases, SBA will apply

its share first to any Profit Participation, and then generally as a

redemption of Participating Securities in order of issue

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(in rare cases, a Licensee may owe other amounts which will be

considered in the application of the distribution). The final rule

incorporates this correction by indicating that SBA will apply its

share of tax distributions in the same order specified for other

profit-based distributions in Sec. 107.1560(g).

Distributions Based on ``Retained Earnings Available for

Distribution''

SBA proposed minor revisions in Sec. 107.1560(a)(1), (a)(4), (b)

and (e) which are finalized without change. These provisions clarify

various aspects of the calculation of distributions by Participating

Securities issuers who have Retained Earnings Available for

Distribution remaining after paying Prioritized Payments and tax

distributions.

Optional Distributions Not Based on READ

Proposed Sec. 107.1570(b) is adopted without change. SBA received

two comments in support of the proposed section, which dealt with

conditions under which a Licensee which has no Retained Earnings

Available for Distribution can make optional distributions to its

private investors and SBA. Both commenters agreed with SBA that the

change in Sec. 107.1570(b)(1)(ii) removes an unintended limitation on

Licensees' ability to make such distributions.

Notice of Participating Securities Distributions

The proposed rule included a prior notice requirement for all

distributions by SBICs which have issued Participating Securities. SBA

is finalizing as proposed the language establishing this requirement in

Secs. 107.1540 through 107.1570, which govern the various types of

distributions. A Licensee must notify SBA 10 business days before any

planned distribution, unless the Agency permits otherwise. SBA received

one comment agreeing that such notification is appropriate given the

complexity of the distribution rules. The commenter did not believe

that the requirement would unreasonably constrain a Licensee's freedom

of action.

Timing of Participating Securities Distributions

Section 107.1575 is adopted as proposed. SBA received three

comments on the proposed rule, all of which supported the additional

flexibility given to Participating Securities issuers wishing to make

distributions on dates other than the established quarterly ``Payment

Dates'' (February 1, May 1, August 1 and November 1 of each year).

All of the commenters raised one issue which may arise when a

Licensee makes a distribution to SBA which includes a redemption of

Participating Securities. The proposed rule specified that in such

cases, the effective date of the redemption would be the next Payment

Date following the distribution date; therefore, a Licensee would be

responsible for Prioritized Payments through the next Payment Date on

the amount of Participating Securities to be redeemed. SBA felt this

provision was necessary because Participating Securities are funded

through the purchase by investors of Trust Certificates, under which

principal can be returned only on Payment Dates.

The commenters understood why SBA must continue to ``charge'' the

Prioritized Payment on Participating Securities up to the next Payment

Date, but asked whether SBA could provide a mechanism (such as an

escrow provision) which would allow a Licensee to earn interest on any

redemption payment that it distributes to SBA, from the date of

distribution until the next Payment Date. SBA is sympathetic to this

request and believes that the result would be fair both to Licensees

and to the Agency. To facilitate such an arrangement, SBA is exploring

the possibility of allowing SBICs to establish individual escrow

accounts at a designated financial institution to hold the proceeds of

distributions made on dates other than Payment Dates. The accounts

would be for the benefit of SBA, but any interest income would inure to

the benefit of the Licensee. Each SBIC would be responsible for any

expenses incurred in establishing and maintaining its account. The use

of an escrow account would be an option available to SBICs, but would

not be required. SBA does not believe that such an arrangement requires

a change in the regulations. SBA will provide further information to

Licensees as soon as possible.

In-Kind Distributions by Licensees

SBA received three comments on proposed Sec. 107.1580. The section

sets forth the conditions under which a Participating Securities issuer

can make distributions in the form of securities rather than cash. All

of the commenters supported the proposed revision permitting a Licensee

to pay Prioritized Payments under Sec. 107.1540 via an in-kind

distribution. Two of the commenters suggested that SBA also consider

allowing SBICs to make tax distributions under Sec. 107.1550 in the

form of securities. SBA feels strongly that tax distributions should be

made on a cash-only basis. As stated in the preamble to the proposed

rule, the intent of such distributions is to provide investors in flow-

through entities with sufficient cash to pay their anticipated tax

liabilities, and an in-kind distribution does not satisfy this purpose.

Therefore, the proposed rule is finalized without change.

Exchange of Debentures for Participating Securities

Proposed Secs. 107.1585 and 107.1590 are finalized without change.

In these sections, references to the retirement of Debentures through

the issuance of Preferred Securities are eliminated, and provisions

governing the retirement of Debentures through the issuance of

Participating Securities are reorganized and reworded without

substantive change.

Characteristics of SBA's Leverage Guarantee

Section 107.1720 is adopted as proposed. The section restores

language setting forth the unconditional nature and other

characteristics of SBA's guarantee which was inadvertently dropped in a

previous regulatory revision.

Capital Impairment

Proposed Sec. 107.1830(a) is finalized without change. The

provision clarifies that SBA Leverage is subject to the Capital

Impairment regulations in effect on the date the Leverage is issued. In

addition, it requires a Licensee to comply with any specific conditions

to which it has agreed by contract with SBA.

Miscellaneous Corrections and Editorial Changes

The proposed definition of ``Commitment'' in Sec. 107.50 is

finalized without change. The definition is reworded in the third

person (i.e., to refer to ``a Licensee'' instead of ``you'') to conform

to the style in which the other definitions are written.

The proposed correction of the SIC code for Operative Builders in

Sec. 107.720(c) is adopted as final.

Proposed Sec. 107.1600(a) is adopted as final. Under this

provision, references to section 321 of the Act are changed to section

319, reflecting the amendment of the Act by Public Law 104-208. In

addition, to implement section 215(e) of Public Law 105-135,

Sec. 107.1600(b) is revised to state that SBA will issue guarantees of

Leverage and of Trust Certificates at intervals of not more than six

months, rather than three months.

[[Page 5865]]

The proposed definition of Trust Certificate Rate is adopted as

final. The definition incorporates certain technical changes to

facilitate the interim funding mechanism currently under consideration

by SBA.

Limited Liability Companies

Section 208(b)(1) of Public Law 104-208 amended the Act to permit

SBICs to organize as limited liability companies (LLCs). SBA is

studying the legal and administrative issues which may arise in

connection with LLCs, and will publish a proposed rule to implement

this form of organization by SBICs at a later date.

Although SBA regulations do not yet provide for LLC Licensees, SBA

has the statutory authority to license such companies. SBA's current

policy is to accept a license application from an LLC only if the LLC

is organized under Delaware's Limited Liability Company Act and does

not intend to issue Participating Securities, which SBA has not yet

developed in a form suitable for use by an LLC. SBA may reconsider

these limitations as SBA acquires greater familiarity with the LLC form

of organization and as a body of case law is created under the various

state LLC laws. The adoption of a Uniform LLC Act by a significant

number of states also would induce SBA to reexamine its current

preference for Delaware law.

Until SBA regulations are revised to accommodate LLC Licensees,

such Licensees should understand that SBA regards the members of the

LLC to be equivalent to the general partners in a partnership Licensee

unless the LLC's operating agreement clearly indicates otherwise. Thus,

all members of an LLC Licensee will automatically be considered Control

Persons and Associates of the Licensee unless the LLC's operating

agreement vests management authority only in certain members of the

company.

Compliance With Executive Orders, 12612, 12778, and 12866, the

Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork

Reduction Act (44 U.S.C. Ch. 35)

SBA certifies that this final rule will not be a significant

regulatory action for purposes of Executive Order 12866 because it will

not have an annual effect on the economy of more than $100 million, and

that it will not have a significant economic impact on a substantial

number of small entities within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601, et seq. The purpose of the rule is to

implement provisions of Public Law 104-208 which relate to small

business investment companies, and to make certain other changes,

primarily technical corrections and clarifications, to the regulations

governing SBICs.

For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA

certifies that this final rule will contain no new reporting or

recordkeeping requirements.

For purposes of Executive Order 12612, SBA certifies that this

final rule will not have any federalism implications warranting the

preparation of a Federalism Assessment.

For purposes of Executive Order 12778, SBA certifies that this

final rule is drafted, to the extent practicable, in accordance with

the standards set forth in Section 2 of that Order.

List of Subjects in 13 CFR Part 107

Investment companies, Loan programs--business, Reporting and

recordkeeping requirements, Small businesses.

For the reasons set forth above, part 107 of title 13 of the Code

of Federal Regulations is amended as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

1. The authority citation for part 107 is revised to read as

follows:

Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g

and 687m.

2. Section 107.50 is amended by revising the definitions for

Commitment, Common Control, Preferred Securities, Section 301(d)

Licensee, and Trust Certificate Rate, and adding in alphabetical order

a definition of Charge, to read as follows:

Sec. 107.50 Definitions of terms.

* * * * *

Charge means an annual fee on Leverage issued on or after October

1, 1996 (except for Leverage issued pursuant to a commitment made by

SBA before October 1, 1996), which is payable to SBA by Licensees,

subject to the terms and conditions set forth in Sec. 107.1130(d).

* * * * *

Commitment means a written agreement between a Licensee and an

eligible Small Business that obligates the Licensee to provide

Financing (except a guarantee) to that Small Business in a fixed or

determinable sum, by a fixed or determinable future date. In this

context the term ``agreement'' means that there has been agreement on

the principal economic terms of the Financing. The agreement may

include reasonable conditions precedent to the Licensee's obligation to

fund the commitment, but these conditions must be outside the

Licensee's control.

Common Control means a condition where two or more Persons, either

through ownership, management, contract, or otherwise, are under the

Control of one group or Person. Two or more Licensees are presumed to

be under Common Control if they are Affiliates of each other by reason

of common ownership or common officers, directors, or general partners;

or if they are managed or their investments are significantly directed

either by a common independent investment advisor or managerial

contractor, or by two or more such advisors or contractors that are

Affiliates of each other. This presumption may be rebutted by evidence

satisfactory to SBA.

* * * * *

Preferred Securities means nonvoting preferred stock or nonvoting

limited partnership interests issued to SBA prior to October 1, 1996,

by a Section 301(d) Licensee. Such securities were issued at par value

in the case of preferred stock, or at face value in the case of

preferred limited partnership interests.

* * * * *

Section 301(d) Licensee means a company licensed prior to October

1, 1996 under section 301(d) of the Act as in effect on the date of

licensing, that may provide Assistance only to Disadvantaged

Businesses. A Section 301(d) Licensee may be organized as a for-profit

corporation, as a non-profit corporation, or as a limited partnership.

* * * * *

Trust Certificate Rate means a fixed rate determined by the

Secretary of the Treasury at the time Participating Securities or

Debentures are pooled, taking into consideration the current average

market yield on outstanding marketable obligations of the United States

with maturities comparable to the maturities of the Trust Certificates

being guaranteed by SBA, adjusted to the nearest one-eighth of one

percent.

* * * * *

Sec. 107.110 [Removed]

3. Section 107.110 is removed.

4. Section 107.120 is revised to read as follows:

Sec. 107.120 Special rules for a Section 301(d) Licensee owned by

another Licensee.

With SBA's prior written approval, a Section 301(d) Licensee may

operate as the subsidiary of one or more Licensees (participant

Licensees), subject to the following:

[[Page 5866]]

(a) Each participant Licensee must own at least 20 percent of the

voting securities of the Section 301(d) Licensee.

(b) A participant Licensee must treat its entire capital

contribution to the subsidiary as a reduction of its Leverageable

Capital. The participant Licensee's remaining Leverageable Capital must

be sufficient to support its outstanding Leverage.

(c) A participant Licensee may not transfer its Leverage to a

subsidiary Section 301(d) Licensee.

5. In Sec. 107.150, the introductory text of paragraph (a)(1) is

revised to read as follows:

Sec. 107.150 Management and ownership diversity requirement.

* * * * *

(a) Requirement one. * * *

(1) At least 30 percent of your Regulatory Capital and Leverageable

Capital must be owned by Persons unrelated to management. To satisfy

this requirement, such Persons must not be your Associates (except for

their status as your shareholders or limited partners) and must not

Control, be Controlled by, or be under Common Control with any of your

Associates. You must have as investors at least three such Persons who

are not Affiliates of one another and whose investments are significant

in both dollar and percentage terms, as determined by SBA. As an

alternative, you may substitute one investor who is an acceptable

Institutional Investor for the three investors who are otherwise

required. For purposes of this paragraph (a)(1), the following

Institutional Investors are acceptable:

* * * * *

6. Section 107.210 is revised to read as follows:

Sec. 107.210 Minimum capital requirements for Licensees.

(a) Companies licensed on or after October 1, 1996. A company

licensed on or after October 1, 1996 must have Leverageable Capital of

at least $2,500,000 and must meet the applicable minimum Regulatory

Capital requirement:

(1) Licensees other than Participating Securities issuers. A

Licensee that does not wish to be eligible to apply for Participating

Securities must have Regulatory Capital of at least $5,000,000. As an

exception to this general rule, SBA in its sole discretion and based on

a showing of special circumstances and good cause may license an

applicant with Regulatory Capital of at least $3,000,000, but only if

the applicant:

(i) Has satisfied all licensing standards and requirements except

the minimum capital requirement, as determined solely by SBA;

(ii) Has a viable business plan reasonably projecting profitable

operations; and

(iii) Has a reasonable timetable for achieving Regulatory Capital

of at least $5,000,000.

(2) Participating Securities issuers. A Licensee that wishes to be

eligible to apply for Participating Securities must have Regulatory

Capital of at least $10,000,000, unless it demonstrates to SBA's

satisfaction that it can be financially viable over the long term with

a lower amount. Under no circumstances can the Licensee have Regulatory

Capital of less than $5,000,000.

(b) Companies licensed before October 1, 1996. A company licensed

before October 1, 1996 must meet the minimum capital requirements

applicable to such company, as required by the regulations in effect on

September 30, 1996. See Sec. 107.1120(c)(2) for Leverage eligibility

requirements.

Sec. 107.220 [Removed]

7. Section 107.220 is removed.

8. Section 107.230 is amended by revising the introductory text of

paragraph (d)(4) to read as follows:

Sec. 107.230 Permitted sources of Private Capital for Licensees.

* * * * *

(d) Qualified Non-private Funds. * * *

(4) Funds invested in or committed in writing to any Section 301(d)

Licensee prior to October 1, 1996, from the following sources:

* * * * *

9. In Sec. 107.503, paragraphs (a), (b) and (e), and the heading

and first sentence of paragraph (c), are revised to read as follows:

Sec. 107.503 Licensee's adoption of an approved valuation policy.

(a) Valuation guidelines. You must prepare, document and report the

valuations of your Loans and Investments in accordance with the

Valuation Guidelines for SBICs issued by SBA. These guidelines may be

obtained from SBA's Investment Division.

(b) SBA approval of valuation policy. You must have a written

valuation policy approved by SBA for use in determining the value of

your Loans and Investments. You must either:

(1) Adopt without change the model valuation policy set forth in

section III of the Valuation Guidelines for SBICs; or

(2) Obtain SBA's prior written approval of an alternative valuation

policy.

(c) Responsibility for valuations. Your board of directors or

general partner(s) will be solely responsible for adopting your

valuation policy and for using it to prepare valuations of your Loans

and Investments for submission to SBA. * * *

* * * * *

(e) Review of valuations by independent public accountant. (1) For

valuations performed as of the end of your fiscal year, your

independent public accountant must review your valuation procedures and

the implementation of such procedures, including adequacy of

documentation.

(2) The independent public accountant's report on your audited

annual financial statements (SBA Form 468) must include a statement

that your valuations were prepared in accordance with your approved

valuation policy established in accordance with section 310(d)(2) of

the Act.

10. Section 107.660 is amended by redesignating paragraph (d) as

paragraph (e) and by adding a new paragraph (d) to read as follows:

Sec. 107.660 Other items required to be filed by Licensee with SBA.

* * * * *

(d) Notification of criminal charges. If any officer, director, or

general partner of the Licensee, or any other person who was required

by SBA to complete a personal history statement in connection with your

license, is charged with or convicted of any criminal offense other

than a misdemeanor involving a minor motor vehicle violation, you must

report the incident to SBA within 5 calendar days. Such report must

fully describe the facts which pertain to the incident.

* * * * *

11. Section 107.710 is amended by adding a sentence at the end of

paragraph (e) and by revising paragraphs (b) and (c) to read as

follows:

Sec. 107.710 Requirement to Finance Smaller Enterprises.

* * * * *

(b) Smaller Enterprise Financings.--(1) General rule. At the close

of each of your fiscal years, at least 20 percent of the total dollar

amount of the Financings you extended since April 25, 1994 must have

been invested in Smaller Enterprises. If you were licensed after April

25, 1994, the 20 percent requirement applies to the total dollar amount

of the Financings you

[[Page 5867]]

extended since you were licensed plus any pre-licensing investments

approved by SBA for inclusion in your Regulatory Capital.

(2) Phase-in for new Licensees. At the close of your first full

fiscal year after licensing, at least 10 percent of the total dollar

amount of the Financings you extended, including any pre-licensing

investments approved by SBA for inclusion in your Regulatory Capital,

must have been invested in Smaller Enterprises. At the close of each

fiscal year thereafter, you must meet the requirement in paragraph

(b)(1) of this section.

(c) Special requirement for certain leveraged Licensees.--(1) This

paragraph (c) applies if you were licensed on or before September 30,

1996, and you issued Leverage after that date, and you have Regulatory

Capital of:

(i) Less than $10,000,000 if such Leverage was Participating

Securities; or

(ii) Less than $5,000,000 if such Leverage was Debentures.

(2) At the close of each of your fiscal years, at least 50 percent

of the total dollar amount of the Financings you extended after

September 30, 1996 must have been invested in Smaller Enterprises.

* * * * *

(e) Non-compliance with this section. * * * However, you will not

be eligible for additional Leverage until you reach the required

percentage (see Sec. 107.1120(c) and (d)).

12. In Sec. 107.720, paragraph (b)(2) is revised, paragraph (b)(3)

is added, and the introductory text of paragraph (c)(1) is revised to

read as follows:

Sec. 107.720 Small Businesses that may be ineligible for Financing.

* * * * *

(b) Passive Businesses. * * *

(2) Exception for pass-through of proceeds to subsidiary. You may

finance a passive business if it is a Small Business and it passes

substantially all the proceeds through to one or more subsidiary

companies, each of which is an eligible Small Business that is not

passive. For the purpose of this paragraph (b)(2), ``subsidiary

company'' means a company in which at least 50 percent of the

outstanding voting securities are owned by the Financed passive

business.

(3) Exception for certain Partnership Licensees. With the prior

written approval of SBA, if you are a Partnership Licensee, you may

form one or more wholly-owned corporations in accordance with this

paragraph (b)(3). The sole purpose of such corporation(s) must be to

provide Financing to one or more eligible, unincorporated Small

Businesses. You may form such corporation(s) only if a direct Financing

to such Small Businesses would cause any of your investors to incur

unrelated business taxable income under section 511 of the Internal

Revenue Code of 1986, as amended (26 U.S.C. 511). Your ownership of

such corporation(s) will not constitute a violation of Sec. 107.865(a)

and your investment of funds in such corporation(s) will not constitute

a violation of Sec. 107.730(a).

(c) Real Estate Businesses. (1) You are not permitted to finance

any business classified under Major Group 65 (Real Estate) or Industry

No. 1531 (Operative Builders) of the SIC Manual, with the following

exceptions:

* * * * *

13. In Sec. 107.730, paragraph (d)(3)(iv) is revised to read as

follows:

Sec. 107.730 Financings which constitute conflicts of interest.

* * * * *

(d) Financings with Associates. * * *

(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. * *

*

(iv) Both you and your Associate are non-leveraged Licensees, or

you are a non-leveraged Licensee and your Associate is not a Licensee.

* * * * *

14. In Sec. 107.740, paragraph (a) is revised to read as follows:

Sec. 107.740 Portfolio diversification (``overline'' limitation).

(a) General rule. This Sec. 107.740 applies if you have outstanding

Leverage or want to be eligible for Leverage. Without SBA's prior

written approval, you may provide Financing or a Commitment to a Small

Business only if the resulting amount of your aggregate outstanding

Financings and Commitments to such Small Business and its Affiliates

does not exceed:

(1) 20 percent of your Regulatory Capital as of the date of the

Financing or Commitment if you are a Section 301(c) Licensee; or

(2) 30 percent of your Regulatory Capital as of the date of the

Financing or Commitment if you are a Section 301(d) Licensee.

* * * * *

15. Section 107.855 is amended by revising paragraphs (c)(1),

(c)(4)(i) and (d)(4), redesignating paragraphs (g)(1) through (g)(10)

as paragraphs (g)(2) through (g)(11), and adding a new paragraph (g)(1)

to read as follows:

Sec. 107.855 Interest rate ceiling and limitations on fees charged to

Small Businesses (``Cost of Money'').

* * * * *

(c) How to determine the Cost of Money ceiling for a Financing. * *

*

(1) Choose a base rate for your Cost of Money computation. The base

rate may be either the Debenture Rate currently in effect plus the

applicable Charge determined under Sec. 107.1130(d)(1), or your own

``Cost of Capital'' as determined under paragraph (d) of this section.

* * * * *

(4) * * *

(i) The current Debenture Rate plus the applicable Charge

determined under Sec. 107.1130(d)(1);

* * * * *

(d) How to determine your Cost of Capital. * * *

(4) For all qualified borrowings outstanding at your last fiscal

year or fiscal quarter end, determine the aggregate interest expense

for the past four fiscal quarters, excluding amortization of loan fees.

For the purposes of this paragraph (d)(4):

(i) Interest expense on Debentures includes the 1 percent Charge

paid by a Licensee under Sec. 107.1130(d)(1); and

(ii) Section 301(d) Licensees with outstanding subsidized

Debentures are presumed to have paid interest at the rate stated on the

face of such Debentures, without regard to any subsidy paid by SBA.

* * * * *

(g) Charges excluded from the Cost of Money. * * *

(1) Discount on the loan portion of a Debt Security, if such

discount exists solely as the result of the allocation of value to

detachable stock purchase warrants in accordance with generally

accepted accounting principles.

* * * * *

16. In Sec. 107.865, the first sentence of paragraph (c)(2) and

paragraph (d)(1) are revised to read as follows:

Sec. 107.865 Restrictions on Control of a Small Business by a

Licensee.

* * * * *

(c) Rebuttals to presumption of Control. * * *

(2) The management of the Small Business can elect at least 40

percent of the board members of a corporation, general partners of a

limited partnership, or managers of a limited liability company, as

appropriate, and the Investor Group can elect no more than 40 percent.

* * *

* * * * *

(d) Temporary Control permitted. * * *

(1) Where reasonably necessary for the protection of your existing

investment;

* * * * *

[[Page 5868]]

17. Section 107.1100 is revised to read as follows:

Sec. 107.1100 Types of Leverage and application forms.

(a) Types of Leverageable available. You may apply for Leverage

from SBA in one or both of the following forms:

(1) The purchase or guarantee of your Debentures.

(2) The purchase or guarantee of your Participating Securities.

(b) Application forms. Use SBA Form 1022 to apply for Debentures

and SBA Form 1022B to apply for Participating Securities.

(c) Where to send your application. Send all Leverage applications

to SBA, Investment Division, 409 Third Street, S.W., Washington, DC

20416.

Sec. 107.1110 [Removed]

18. Section 107.1110 is removed.

19. Section 107.1120 is amended by revising paragraph (c),

redesignating paragraphs (d) through (f) as paragraphs (e) through (g),

and adding a new paragraph (d) to read as follows:

Sec. 107.1120 General eligibility requirements for Leverage.

* * * * *

(c) Meet the minimum capital requirements of Sec. 107.210, subject

to the following additional conditions:

(1) If you were licensed after September 30, 1996 under the

exception in Sec. 107.210(a)(1), you will not be eligible for Leverage

until you have Regulatory Capital of at least $5,000,000.

(2) If you were licensed on or before September 30, 1996, and have

Regulatory Capital of less than $5,000,000 (less than $10,000,000 if

you wish to issue Participating Securities):

(i) You must certify in writing that at least 50 percent of the

aggregate dollar amount of your Financings extended after September 30,

1996 will be provided to Smaller Enterprises (as defined in

Sec. 107.710(a)); and

(ii) You must demonstrate to SBA's satisfaction that the approval

of Leverage will not create or contribute to an unreasonable risk of

default or loss to the United States government, based on such

measurements of profitability and financial viability as SBA deems

appropriate.

(d) Certify in writing that you are in compliance with the

requirement to finance Smaller Enterprises in Sec. 107.710(b).

* * * * *

20. Section 107.1130 is amended by revising the section heading and

paragraphs (a) through (c), redesignating paragraph (d) as paragraph

(e), and adding a new paragraph (d) to read as follows:

Sec. 107.1130 Leverage fees and additional charges payable by

Licensee.

(a) Leverage fee. You must pay a leverage fee to SBA for each

issuance of a Debenture or Participating Security. The fee is 3 percent

of the face amount of the Leverage issued.

(b) Payment of leverage fee. (1) If you issue a Debenture or

Participating Security to repay or redeem existing Leverage, you must

pay the leverage fee before SBA will guarantee or purchase the new

Leverage security.

(2) If you issue a Debenture or Participating Security that is not

used to repay or redeem existing Leverage, SBA will deduct the leverage

fee from the proceeds remitted to you, unless you prepaid the fee under

Sec. 107.1210.

(c) Refundability. The leverage fee is not refundable under any

circumstances.

(d) Additional charge for Leverage.--(1) Debentures. You must pay

to SBA a Charge of 1 percent per annum on the outstanding amount of

your Debentures issued on or after October 1, 1996, payable under the

same terms and conditions as the interest on the Debentures. This

Charge does not apply to Debentures issued pursuant to a Leverage

commitment obtained from SBA on or before September 30, 1996.

(2) Participating Securities. You must pay to SBA a Charge of 1

percent per annum on the outstanding amount of your Participating

Securities issued on or after October 1, 1996, payable under the same

terms and conditions as the Prioritized Payments on the Participating

Securities. This Charge does not apply to Participating Securities

issued pursuant to a Leverage commitment obtained from SBA on or before

September 30, 1996.

* * * * *

21. Section 107.1160 is amended by adding introductory text to read

as follows:

Sec. 107.1160 Maximum amount of Leverage for a Section 301(d)

Licensee.

This section applies to Leverage issued by a Section 301(d)

Licensee on or before September 30, 1996. Effective October 1, 1996, a

Section 301(d) Licensee may apply to issue new Leverage, or refinance

existing Leverage, only on the same terms permitted under

Sec. 107.1150.

* * * * *

22. Section 107.1200 is amended by revising paragraphs (c) and (d)

to read as follows:

Sec. 107.1200 SBA's Leverage commitment to a Licensee--application

procedure, amount, and term.

* * * * *

(c) Limitations on the amount of a Leverage commitment. The amount

of a Leverage commitment must be a multiple of $5,000.

(d) Term of Leverage commitment. SBA's Leverage commitment will

automatically lapse on the expiration date stated in the commitment

letter issued to you by SBA.

23. Section 107.1210 is revised to read as follows:

Sec. 107.1210 Payment of leverage fee upon receipt of commitment.

(a) Partial prepayment of leverage fee. As a condition of SBA's

Leverage commitment, and before you draw any Leverage under such

commitment, you must pay to SBA a non-refundable fee equal to 1 percent

of the face amount of the Debentures or Participating Securities

reserved under the commitment. This amount represents a partial

prepayment of the 3 percent leverage fee established under

Sec. 107.1130(a).

(b) Automatic cancellation of commitment. Unless you pay the fee

required under paragraph (a) of this section by 5:00 P.M. Eastern Time

on the 30th calendar day following the issuance of SBA's Leverage

commitment, the commitment will be automatically canceled.

24. In Sec. 107.1230, paragraphs (a) and (b) are revised to read as

follows:

Sec. 107.1230 Draw-downs by Licensee under SBA's Leverage commitment.

(a) Licensee's authorization of SBA to purchase or guarantee

securities. By submitting a request for a draw against SBA's Leverage

commitment, you authorize SBA, or any agent or trustee SBA designates,

to guarantee your Debenture or Participating Security and to sell it

with SBA's guarantee.

(b) Limitations on amount of draw. The amount of a draw must be a

multiple of $5,000. SBA, in its discretion, may determine a minimum

dollar amount for draws against SBA's Leverage commitments. Any such

minimum amounts will be published in Notices in the Federal Register

from time to time.

* * * * *

25. Section 107.1240 is amended by revising paragraphs (a)(1), (b),

(c) and (d) to read as follows:

Sec. 107.1240 Funding of Licensee's draw request through sale to

short-term investor.

(a) Licensee's authorization of SBA to arrange sale of securities

to short-term investor. * * *

[[Page 5869]]

(1) The sale of your Debenture or Participating Security to a

short-term investor at a rate that may be different from the Trust

Certificate Rate which will be established at the time of the pooling

of your security;

* * * * *

(b) Sale of Debentures to a short-term investor. If SBA sells your

Debenture to a short-term investor:

(1) The sale price will be the face amount.

(2) At the next scheduled date for the sale of Debenture Trust

Certificates, whether or not the sale actually occurs, you must pay

interest to the short-term investor for the short-term period. If the

actual sale of Trust Certificates takes place after the scheduled date,

you must pay the short-term investor interest from the scheduled sale

date to the actual sale date. This additional interest is due on the

actual sale date.

(3) Failure to pay the interest constitutes noncompliance with the

terms of your Leverage (see Sec. 107.1810).

(c) Sale of Participating Securities to a short-term investor. If

SBA sells your Participating Security to a short-term investor, the

sale price will be the face amount.

(d) Licensee's right to repurchase its Debentures before pooling.

You may repurchase your Debentures from the short-term investor before

they are pooled. To do so, you must:

(1) Give SBA written notice at least 10 days before the cut-off

date for the pool in which your Debenture is to be included; and

(2) Pay the face amount of the Debenture, plus interest, to the

short-term investor.

Sec. 107.1350 [Redesignated as Sec. 107.1585]

26. Subpart I of Part 107 is amended by removing the undesignated

center heading ``Exchange of Outstanding Debentures for Participating

or Preferred Securities--Section 301(d) Licensees'' preceding

Sec. 107.1350, by redesignating Sec. 107.1350 as Sec. 107.1585 and

revising it to read as follows:

Sec. 107.1585 Exchange of Debentures for Participating Securities.

You may, in SBA's discretion, retire a Debenture through the

issuance of Participating Securities. To do so, you must:

(a) Obtain SBA's approval to issue Participating Securities;

(b) Pay all unpaid accrued interest on the Debenture, plus any

applicable prepayment penalties, fees, and other charges;

(c) Have outstanding Equity Capital Investments (at cost) equal to

the amount of the Debenture being refinanced; and

(d) Classify all your existing Loans and Investments as Earmarked

Assets.

27. In Sec. 107.1400, the section heading and introductory text are

revised to read as follows:

Sec. 107.1400 Dividends or partnership distributions on 4 percent

Preferred Securities.

If you issued Preferred Securities to SBA on or after November 21,

1989, you must pay SBA a dividend or partnership distribution of 4

percent per year, from the date you issued Preferred Securities to the

date you repay them, both inclusive. The dividend or partnership

distribution is:

* * * * *

28. Section 107.1420 is revised to read as follows:

Sec. 107.1420 Articles requirements for 4 percent Preferred

Securities.

If you have outstanding 4 percent Preferred Securities, your

Articles must contain all the provisions in Secs. 107.1400 and

107.1410.

Sec. 107.1430 [Amended]

29. Section Sec. 107.1430 is amended by removing the last sentence.

30. In Sec. 107.1500, paragraphs (b)(1) and (b)(4), the last

sentence of paragraph (e), and paragraph (f)(2) are revised to read as

follows:

Sec. 107.1500 General description of Participating Securities.

* * * * *

(b) Special eligibility requirements for Participating Securities.

* * *

(1) Minimum capital (see Sec. 107.210).

* * * * *

(4) Equity investing, as set forth in this paragraph (b)(4). If you

issue Participating Securities, you must invest an amount equal to the

Original Issue Price of such securities solely in Equity Capital

Investments, as defined in Sec. 107.50.

* * * * *

(e) Mandatory redemption of Participating Securities. * * * You

must pay the Redemption Price plus any unpaid Earned Prioritized

Payments and any earned Adjustments and earned Charges (see

Sec. 107.1520).

(f) Priority of Participating Securities in liquidation of

Licensee. * * *

(2) Any Earned Prioritized Payments and any earned Adjustments and

earned Charges (see Sec. 107.1520); and

* * * * *

31. In Sec. 107.1505, paragraphs (a)(1) through (a)(3) are added

and the last sentence of paragraph (a) introductory text and paragraph

(b) are revised to read as follows:

Sec. 107.1505 Liquidity requirements for Licensees issuing

Participating Securities.

* * * * *

(a) Definition of Liquidity Impairment. * * * You are responsible

for calculating whether you have a condition of Liquidity Impairment:

(1) As of the close of your fiscal year;

(2) At the time you apply for Leverage, unless SBA permits

otherwise; and

(3) At such time as you contemplate making any Distribution.

(b) Computation of Liquidity Ratio. Your Liquidity Ratio equals

your Total Current Funds Available (A) divided by your Total Current

Funds Required (B), as determined in the following table:

Calculation of Liquidity Ratio

----------------------------------------------------------------------------------------------------------------

Amount

Financial account reported on Weight Weighted

SBA form 468 amount

----------------------------------------------------------------------------------------------------------------

(1) Cash and invested idle funds................................ .............. x 1.00 ..............

(2) Commitments from investors.................................. .............. x 1.00 ..............

(3) Current maturities.......................................... .............. x 0.50 ..............

(4) Other current assets........................................ .............. x 1.00 ..............

(5) Publicly Traded and Marketable Securities................... .............. x 1.00 ..............

(6) Anticipated operating revenue for next 12 months............ (1) x 1.00 ..............

(7) Total Current Funds Available............................... .............. .............. A

(8) Current liabilities......................................... .............. x 1.00 ..............

(9) Commitments to Small Businesses............................. .............. x 0.75 ..............

(10) Anticipated operating expense for next 12 months........... (1) x 1.00 ..............

[[Page 5870]]

(11) Anticipated interest expense for next 12 months............ (1) x 1.00 ..............

(12) Contingent liabilities (guarantees)........................ .............. x 0.25 ..............

(13) Total Current Funds Required............................... .............. .............. B

----------------------------------------------------------------------------------------------------------------

\1\ As determined by Licensee's management under its business plan.

32. In Sec. 107.1510, the introductory text, the last sentence of

paragraph (c) introductory text, the formula in paragraph (c), and

paragraph (d)(1)(ii) are revised to read as follows:

Sec. 107.1510 How a Licensee computes Earmarked Profit (Loss).

Computing your Earmarked Profit (Loss) is the first step in

determining your obligations to pay Prioritized Payments, Adjustments

and Charges under Sec. 107.1520 and Profit Participation under

Sec. 107.1530.

* * * * *

(c) How to compute your Earmarked Asset Ratio. * * * Otherwise,

compute your Earmarked Asset Ratio using the following formula:

EAR = (EA LI) x 100

where:

EAR = Earmarked Asset Ratio.

EA = Average Earmarked Assets (at cost) for the fiscal year or

interim period.

LI = Average Loans and Investments (at cost) for the fiscal year or

interim period.

(d) How to compute your Earmarked Profit (Loss) if Earmarked Asset

Ratio is 100 percent.

(1) * * *

(ii) For the purpose of determining Net Income (Loss), leverage

fees paid to SBA and partnership syndication costs that you incur must

be capitalized and amortized on a straight-line basis over not less

than five years.

* * * * *

33. Section 107.1520 is revised to read as follows:

Sec. 107.1520 How a Licensee computes and allocates Prioritized

Payments to SBA.

This section tells you how to compute Prioritized Payments,

Adjustments and Charges on Participating Securities and determine the

amounts you must pay. To distribute these amounts, see Sec. 107.1540.

(a) How to compute Prioritized Payments and Adjustments--(1)

Prioritized Payments. For a full fiscal year, the Prioritized Payment

on an outstanding Participating Security equals the Redemption Price

times the related Trust Certificate Rate. For an interim period, you

must prorate the annual Prioritized Payment. If your Participating

Security was sold to a short-term investor in accordance with

Sec. 107.1240, the Prioritized Payment for the short-term period equals

the Redemption Price times the short-term rate.

(2) Adjustments. Compute Adjustments using paragraph (f) of this

section.

(3) Charges. Compute Charges in accordance with

Sec. 107.1130(d)(2).

(b) Licensee's obligation to pay Prioritized Payments, Adjustments

and Charges. You are obligated to pay Prioritized Payments, Adjustments

and Charges only if you have profit as determined in paragraph (d) of

this section.

(1) Prioritized Payments that you must pay (or have already paid)

because you have sufficient profit are ``Earned Prioritized Payments''.

(2) Prioritized Payments that have not become payable because you

lack sufficient profit are ``Accumulated Prioritized Payments''. Treat

all Prioritized Payments as ``Accumulated'' until they become

``Earned'' under this section.

(3) Adjustments (computed under paragraph (f) of this section) and

Charges (computed under Sec. 107.1130(d)(2)) are ``earned'' according

to the same criteria applied to Prioritized Payments.

(c) How to keep track of Prioritized Payments. You must establish

three accounts to record your Accumulated and Earned Prioritized

Payments:

(1) Accumulation Account. The Accumulation Account is a memorandum

account. Its balance represents your Accumulated Prioritized Payments,

unearned Adjustments and unearned Charges.

(2) Distribution Account. The Distribution Account is a liability

account. Its balance represents your unpaid Earned Prioritized

Payments, earned Adjustments and earned Charges.

(3) Earned Payments Account. The Earned Payments Account is a

memorandum account. Each time you add to the Distribution Account

balance, add the same amount to the Earned Payments Account. Its

balance represents your total (paid and unpaid) Earned Prioritized

Payments, earned Adjustments and earned Charges.

(d) How to determine your profit for Prioritized Payment purposes.

As of the end of each fiscal year and any interim period for which you

want to make a Distribution:

(1) Bring the Accumulation Account up to date by adding to it all

Prioritized Payments and Charges through the end of the appropriate

fiscal period.

(2) Determine whether you have profit for the purposes of this

section by doing the following computation:

(i) Cumulative Earmarked Profit (Loss) under Sec. 107.1510(f);

minus

(ii) The Earned Payments Account balance; minus

(iii) All Distributions previously made under Secs. 107.1550,

107.1560 and 107.1570(a); minus

(iv) Any Profit Participation previously allocated to SBA under

Sec. 107.1530, but not yet distributed.

(3) The amount computed in paragraph (d)(2) of this section, if

greater than zero, is your profit. If the amount is zero or less, you

have no profit.

(4) If you have a profit, continue with paragraph (e) of this

section. Otherwise, continue with paragraph (f) of this section.

(e) Allocating Prioritized Payments to the Distribution Account.

(1) If you have a profit under paragraph (d) of this section, determine

the lesser of:

(i) Your profit; or

(ii) The balance in your Accumulation Account.

(2) Subtract the result in paragraph (e)(1) of this section from

the Accumulation Account and add it to the Distribution Account and the

Earned Payments Account.

(f) How to compute Adjustments. You must compute Adjustments as of

the end of each fiscal year if you have a balance greater than zero in

either your Accumulation Account or your Distribution Account, after

giving effect to any Distribution that will be made no

[[Page 5871]]

later than the second Payment Date following the fiscal year end.

(1) Determine the combined average Accumulation Account and

Distribution Account balances for the fiscal year, assuming that

Prioritized Payments accumulate on a daily basis without compounding.

(2) Multiply the average balance computed in paragraph (f)(1) of

this section by the average of the Trust Certificate Rates for all the

Participating Securities poolings during the fiscal year.

(3) Add the amounts computed in this paragraph (f) to your

Accumulation Account.

(g) Licensee's obligation to pay Prioritized Payments after

redeeming Participating Securities. This paragraph (g) applies if you

have redeemed all your Participating Securities, but you still hold

Earmarked Assets and still have a balance in your Accumulation Account.

(1) You must continue to perform all the procedures in this section

as of the end of each fiscal quarter and prior to making any

Distribution. You must distribute any Earned Prioritized Payments,

earned Adjustments and earned Charges in accordance with Sec. 107.1540.

(2) After you dispose of all your Earmarked Assets and make any

required Distributions in accordance with Sec. 107.1540, your

obligation to pay any remaining Accumulated Prioritized Payments,

unearned Adjustments and unearned Charges will be extinguished.

34. Section 107.1530 is amended by removing paragraphs (e)(3) and

(e)(4) and revising paragraphs (c), (e)(2) and (h) to read as follows:

Sec. 107.1530 How a Licensee computes SBA's Profit Participation.

* * * * *

(c) How to compute the Base. As of the end of each fiscal year and

any year-to-date interim period for which you want to make a

Distribution, compute your Base using the following formula:

B = EP-PPA-UL

where:

B = Base.

EP = Earmarked Profit (Loss) for the period from Sec. 107.1510.

PPA = Prioritized Payments for the period from Sec. 107.1520(a)(1),

Adjustments (if applicable) from Sec. 107.1520(f), and Charges (if

applicable) from Sec. 107.1130(d)(2).

UL = ``Unused Loss'' from prior periods as determined in this

paragraph (c).

(1) If the Base computed as of the end of your previous fiscal year

(your ``Previous Base'') was less than zero, your Unused Loss equals

your Previous Base.

(2) If your Previous Base was zero or greater, your Unused Loss

equals zero, with the following exception: If you made an interim

Distribution of Profit Participation during your previous fiscal year,

and your Previous Base was lower than the interim Base on which your

Distribution was computed, then your Unused Loss equals the difference

between the interim Base and the Previous Base. For example, assume you

are computing your Base as of December 31, 1997, your fiscal year end.

Your Previous Base, computed as of December 31, 1996, was $3,000,000.

During 1996, you made an interim Distribution which was computed on a

Base of $3,500,000 as of June 30, 1996. The $500,000 difference between

the 1996 interim and year-end Bases would be carried forward as Unused

Loss in the computation of your Base as of December 31, 1997.

(3) If you had no Participating Securities outstanding as of the

end of your last fiscal year, you may request SBA's approval to treat

your Undistributed Net Realized Loss, as reported on SBA Form 468 for

that year, as Unused Loss. If you did not file SBA Form 468 because you

were not yet licensed as of the end of your last fiscal year, you may

request SBA's approval to treat pre-licensing losses as Unused Loss.

* * * * *

(e) Compute the ``PLC ratio''. * * *

(2) Exception. You may reduce the ratio computed under paragraph

(e)(1) of this section if you have increased your Leverageable Capital

above its highest previous level. The increase must have taken place at

least 120 days before the date as of which your Base is computed. In

addition, the increase must have been expressly provided for in a plan

of operations submitted to and approved by SBA in writing, or must be

the result of the takedown of commitments or the conversion of non-cash

assets that were included in your Private Capital. If these conditions

are satisfied, compute your reduced PLC ratio as follows:

(i) Divide the highest dollar amount of Participating Securities

you have ever had outstanding by your increased Leverageable Capital.

(ii) If the result in paragraph (e)(2)(i) of this section is lower

than your PLC ratio currently in effect, such result will become your

new PLC ratio.

* * * * *

(h) Computing SBA's Profit Participation. If the Base from

paragraph (c) of this section is greater than zero, you must compute

SBA's Profit Participation as follows:

(1) Multiply the Base from paragraph (c) of this section by the

Profit Participation Rate from paragraph (g) of this section.

(2) If your last Profit Participation computation was for an

interim period during the same fiscal year and used a higher Profit

Participation Rate than the Rate you just used in paragraph (h)(1) of

this section, you must adjust the amount computed in paragraph (h)(1)

of this section as follows:

(i) Determine the difference between the Profit Participation Rate

you just used in paragraph (h)(1) of this section and the Rate used in

your previous computation;

(ii) Multiply the difference by the Base from your last Profit

Participation computation; and

(iii) Add the result to the amount you computed in paragraph (h)(1)

of this section.

(3) Reduce the Profit Participation computed in paragraphs (h)(1)

and (h)(2) of this section by any amounts of Profit Participation that

you distributed or reserved for distribution to SBA, or its designated

agent or Trustee, for any previous interim period(s) during the fiscal

year. The result is SBA's Profit Participation (unless it is less than

zero, in which case SBA's Profit Participation is zero).

* * * * *

35. Section 107.1540 is amended by adding a sentence at the end of

the introductory text to read as follows:

Sec. 107.1540 Distributions by Licensee--Prioritized Payment and

Adjustments.

* * * You must notify SBA of any planned distribution under this

section 10 business days before the distribution date, unless SBA

permits otherwise.

* * * * *

36. Section 107.1550 is amended by adding a sentence at the end of

the introductory text and by revising paragraphs (a)(1), (b) and (c)(3)

to read as follows:

Sec. 107.1550 Distributions by Licensee--permitted ``tax

Distributions'' to private investors and SBA.

* * * You must notify SBA of any planned distribution under this

section 10 business days before the distribution date, unless SBA

permits otherwise.

(a) Conditions for making a tax Distribution. * * *

(1) You have paid all your Prioritized Payments, Adjustments, and

Charges, so that the balance in both your Distribution Account and your

[[Page 5872]]

Accumulation Account is zero (see Sec. 107.1520).

* * * * *

(b) How to compute the Maximum Tax Liability. (1) Compute your

Maximum Tax Liability for a full fiscal year only. Use the following

formula:

M=(TOI x HRO) + (TCG x HRC)

where:

M=Maximum Tax Liability.

TOI=Net ordinary income allocated to your partners or other owners

for Federal income tax purposes for the fiscal year immediately

preceding the Distribution, excluding Prioritized Payments allocated to

SBA.

HRO=The highest combined marginal Federal and State income tax rate

for corporations or individuals on ordinary income, determined in

accordance with paragraphs (b)(2) through (b)(4) of this section.

TCG=Net capital gains allocated to your partners or other owners

for Federal income tax purposes for the fiscal year immediately

preceding the Distribution, excluding Prioritized Payments allocated to

SBA.

HRC=The highest combined marginal Federal and State income tax rate

for corporations or individuals on capital gains, determined in

accordance with paragraphs (b)(2) through (b)(4) of this section.

(2) You may compute the highest combined marginal Federal and State

income tax rate on ordinary income and capital gains using either

individual or corporate rates. However, you must apply the same type of

rate, either individual or corporate, to both ordinary income and

capital gains.

(3) In determining the combined Federal and State income tax rate,

you must assume that State income taxes are deductible from Federal

income taxes. For example, if the Federal tax rate was 35 percent and

the State tax rate was 5 percent, the combined tax rate would be [35%

x (1-.05)] + 5% = 38.25%.

(4) For purposes of this paragraph (b), the ``State income tax'' is

that of the State where your principal place of business is located,

and does not include any local income taxes.

(c) SBA's share of the tax Distribution.

* * * * *

(3) SBA will apply its share of the tax Distribution in the order

set forth in Sec. 107.1560(g).

* * * * *

37. In Sec. 107.1560, in the first column of the table in paragraph

(e), the column heading is revised to read ``If your ratio of Leverage

to Leverageable Capital as of the fiscal period end is:'', a sentence

is added at the end of the introductory text, and paragraphs (a)(1),

(a)(4) and (b) are revised to read as follows:

Sec. 107.1560 Distributions by Licensee--required Distributions to

private investors and SBA.

* * * You must notify SBA of any planned distribution under this

section 10 business days before the distribution date, unless SBA

permits otherwise.

(a) Conditions for making Distributions.

* * * * *

(1) You must have paid all Prioritized Payments, Adjustments and

Charges, so that the balance in both your Distribution Account and your

Accumulation Account is zero (see Secs. 107.1520 and 107.1540).

* * * * *

(4) The amount you distribute under this section must not exceed

your remaining Retained Earnings Available for Distribution.

(b) Total amount you must distribute. Unless SBA permits otherwise,

the total amount you must distribute equals the result (if greater than

zero) of the following computation:

(1) Your Retained Earnings Available for Distribution as of the end

of your fiscal year, after giving effect to any Distribution under

Secs. 107.1540 and 107.1550; minus

(2) All previous Distributions under this section and

Sec. 107.1570(a) that were applied as redemptions or repayments of

Leverage; plus

(3) All previous Distributions under Sec. 107.1570(b) that reduced

your Retained Earnings Available for Distribution.

* * * * *

38. Section 107.1570 is amended by adding a sentence at the end of

the introductory text and by revising the heading of paragraph (b)(1)

and paragraphs (b)(1)(i) and (b)(1)(ii) to read as follows:

Sec. 107.1570 Distributions by Licensee--optional Distributions to

private investors and SBA.

* * * You must notify SBA of any planned distribution under this

section 10 business days before the distribution date, unless SBA

permits otherwise.

* * * * *

(b) Other optional Distributions. * * *

(1) Conditions for making a Distribution. * * *

(i) You have distributed all Earned Prioritized Payments, earned

Adjustments, and earned Charges, so that the balance in your

Distribution Account is zero (see Sec. 107.1520).

(ii) You have distributed all Profit Participation computed under

Sec. 107.1530 which you are required to distribute under Sec. 107.1560

or permitted to distribute under paragraph (a) of this section, as

appropriate, and you have made all required Distributions under

Sec. 107.1560.

* * * * *

39. Section 107.1575 is added to subpart I to read as follows:

Sec. 107.1575 Distributions on other than Payment Dates.

(a) Permitted Distributions on other than Payment Dates.

Notwithstanding any provisions to the contrary in Secs. 107.1540

through 107.1570, you may make Distributions on dates other than

Payment Dates as follows:

(1) Required annual Distributions under Secs. 107.1540(a)(1), and

any Distributions under Secs. 107.1550 and 107.1560, must be made no

later than the second Payment Date following the end of your fiscal

year;

(2) Required Distributions under Sec. 107.1540(b) must be made no

later than the first Payment Date following the end of the applicable

fiscal quarter;

(3) Optional Distributions under Sec. 107.1540(a)(2) and

Sec. 107.1570 may be made on any date.

(b) Conditions for making Distribution. All Distributions under

this section are subject to the following conditions:

(1) You must obtain SBA's written approval before the distribution

date;

(2) You must use the distribution date as the ending date of the

period for which you compute your Earmarked Profits, Prioritized

Payments, Adjustments, Charges, Profit Participation, Retained Earnings

Available for Distribution, liquidity ratio, Capital Impairment, and

any other applicable computations required under Secs. 107.1500 through

107.1570;

(3) If your Distribution includes an amount which SBA will apply as

a redemption of Participating Securities, the effective date of such

redemption, for all purposes including future computations of

Prioritized Payments, will be the next Payment Date following the

distribution date.

40. In Sec. 107.1580, the heading and introductory text of

paragraph (a) are revised to read as follows:

Sec. 107.1580 Special rules for In-Kind Distributions by Licensees.

(a) In-Kind Distributions. A Distribution under Secs. 107.1540,

107.1560 or 107.1570 may consist of securities (an ``In-Kind

Distribution'').

[[Page 5873]]

Such a Distribution must satisfy the conditions in this paragraph (a).

* * * * *

41. Section 107.1590 is amended by removing paragraph (c),

redesignating paragraph (d) as paragraph (c), and revising paragraph

(a)(1) to read as follows:

Sec. 107.1590 Special rules for companies licensed on or before March

31, 1993.

* * * * *

(a) Election to exclude pre-existing portfolio. * * *

(1) The proceeds of your first issuance of Participating Securities

are not used to refinance outstanding Debentures (see

Sec. 107.1585(a)). SBA will consider payment or prepayment of any

outstanding Debenture to be a refinancing unless you demonstrate to

SBA's satisfaction that you can pay the Debenture principal without

relying on the proceeds of the Participating Securities.

* * * * *

42. In Sec. 107.1600, the first sentence of paragraph (a) and

paragraph (b) are revised to read as follows:

Sec. 107.1600 SBA authority to issue and guarantee Trust Certificates.

(a) Authorization. Sections 319(a) and (b) of the Act authorize SBA

or its CRA to issue TCs, and SBA to guarantee the timely payment of the

principal and interest thereon. * * *

(b) Periodic exercise of authority. SBA will issue guarantees of

Debentures and Participating Securities under section 303 and of TCs

under section 319 of the Act at six month intervals, or at shorter

intervals, taking into account the amount and number of such guarantees

or TCs.

* * * * *

43. Section 107.1720 is added to subpart I to read as follows:

Sec. 107.1720 Characteristics of SBA's guarantee.

If SBA agrees to guarantee a Licensee's Debentures or Participating

Securities, such guarantee will be unconditional, irrespective of the

validity, regularity or enforceability of the Debentures or

Participating Securities or any other circumstances which might

constitute a legal or equitable discharge or defense of a guarantor.

Pursuant to its guarantee, SBA will make timely payments of principal

and interest on the Debentures or the Redemption Price of and

Prioritized Payments on the Participating Securities.

44. In Sec. 107.1820, paragraph (e)(9) is revised to read as

follows:

Sec. 107.1820 Conditions affecting issuers of Preferred Securities

and/or Participating Securities.

* * * * *

(e) Restricted Operations Conditions. * * *

(9) Failure to meet investment requirements. You fail to make the

amount of Equity Capital Investments required for Participating

Securities (Sec. 107.1500(b)(4)), if applicable to you; or you fail to

maintain as of the end of each fiscal year the investment ratios or

amounts required for Leverage in excess of 300 percent of Leverageable

Capital (Sec. 107.1160(c)) or Preferred Securities in excess of 100

percent of Leverageable Capital (Sec. 107.1160(d)), if applicable to

you. In determining whether you have met the maintenance requirements

in Sec. 107.1160(c) or (d), SBA will disregard any prepayment, sale, or

disposition of Venture Capital Financings, any increase in Leverageable

Capital, and any receipt of additional Leverage, within 120 days prior

to the end of your fiscal year.

* * * * *

45. In Sec. 107.1830, paragraph (a) is revised to read as follows:

Sec. 107.1830 Licensee's Capital Impairment--definition and general

requirements.

(a) Applicability of this section. This section applies to Leverage

issued on or after April 25, 1994. For Leverage issued before April 25,

1994, you must comply with paragraphs (e) and (f) of this section and

the Capital Impairment regulations in this part in effect when you

issued your Leverage. For all Leverage issued, you must also comply

with any contractual provisions to which you have agreed.

* * * * *

Dated: January 28, 1998.

Aida Alvarez,

Administrator.

[FR Doc. 98-2556 Filed 2-4-98; 8:45 am]

BILLING CODE 8025-01-P