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: In order to encourage small business investment companies

(SBICs) to invest in inner cities and rural areas and in businesses

that serve such areas, the Small Business Administration (SBA) is

introducing a new SBIC investment category called low and moderate

income investments (LMI

[[Page 52642]]

Investments). For each SBIC financing that qualifies as an LMI

Investment, SBA is modifying its regulations on control of the small

business, ``cost of money'' of the financing, and term of the

financing. SBA also will make available a patient form of debenture

leverage that may be issued only by SBICs that make LMI Investments.

DATES: Effective Date: This final rule is effective September 30, 1999.

Applicability Date: The regulatory and financial incentives

described in this rule will apply only to investments made after

September 30, 1999.

FOR FURTHER INFORMATION CONTACT: Saunders Miller, Investment Division,

at (202) 205-3646.

SUPPLEMENTARY INFORMATION: On February 9, 1999, SBA proposed a program

of narrowly-tailored regulatory and financial incentives to encourage

SBICs to expand their investment activity into inner cities and rural

areas. See 64 FR 6256. The incentives were proposed to be available to

any SBIC making qualified investments (LMI Investments) in qualified

small businesses (LMI Enterprises) located in or providing employment

for economically distressed inner cities and rural areas (LMI Zones).

The incentives fell into two categories. First, SBA proposed to allow

SBICs greater regulatory flexibility when structuring and making LMI

Investments. Second, SBA proposed to make available a deferred-interest

debenture exclusively for the financing of LMI Investments.

SBA received four comment letters on the proposed rule during the

30-day public comment period. Overall, the four letters were supportive

of SBA's initiative, although all of the letters contained suggestions

for improving the proposal. This final rule incorporates certain of the

changes recommended in those comment letters.

Defining Low and Moderate Income Zones (LMI Zones)

SBA received two comments on the definition of the markets targeted

by the proposed LMI initiative. The proposed rule defined those markets

as small businesses that are located in certain distressed geographic

areas or that have 35 percent of their full time employees residing in

those areas.

One of the two comments suggested that the final rule target

historically underserved entrepreneurs, regardless of their business

location, instead of underserved geographic areas. The other comment

suggested expanding the geographic areas identified in the proposed

rule to include some or all of the markets targeted for economic

development by the Federal Home Loan Banks. Those markets are set forth

in the Community Investment Cash Advance regulation of the Federal

Housing Finance Board. They include any project that provides jobs or

services for individuals with income levels at or below certain levels,

as well as projects located in geographic areas broader than the

locations specified in SBA's proposed rule.

SBA considered the comments, but has decided to adopt the proposed

definition of LMI Zone without change. SBA's proposal was designed to

bring investment dollars into distressed urban and rural areas to help

revitalize those communities and bring jobs to their residents. Given

the finite resources available to the LMI initiative, any expansion of

the proposal to include groups of individuals without regard to their

business locations or their residences would dilute the impact of the

benefits SBA hopes will inure to the targeted communities.

SBA also believes that, in order to be successful, the definition

of the targeted markets must be easy for SBICs and SBA examiners to

use. SBA therefore selected only those geographic areas that are not

only distressed, but are also found on a government-operated electronic

address-database. Through the use of these user-friendly databases,

SBICs and SBA examiners should be able to quickly and easily determine

whether a given address is located in an ``LMI Zone''.

If SBA learns that other severely distressed areas are also capable

of identification through a Government electronic address-database, it

might consider expanding the targeted markets of the LMI initiative at

a later date.

As mentioned in the proposed rule, SBA is exploring the possibility

of consolidating the various Government databases into a single

electronic database at SBA. While that possibility still exists, any

such consolidation is unlikely to be accomplished this calendar year.

Until SBICs are notified otherwise, they should research addresses

through the various databases referenced in this rule, and should

document their files accordingly.

As was stated in the proposed rule, any address located in a

HUBZone, an Empowerment Zone, an Enterprise Community, a Low or

Moderate Income area, or a Persistent Poverty county will be considered

to be located in an LMI Zone. The government databases for those five

areas are:

1. HUBZones: www.sba.gov/hubzone/hubqual.html

2. Empowerment Zones: www.hud.gov/ezec/locator/

3. Enterprise Communities: same as for Empowerment Zones

4. Low and Moderate Income areas: www.ffiec.gov/geocode

5. Persistent Poverty counties: www.econ.ag.gov/epubs/other/typolog

Defining LMI Enterprise

SBA received one comment on the proposed definition of LMI

Enterprise. Under the proposal, a small business's qualification as an

LMI Enterprise would be determined as of the time the business applies

for SBIC financing. This would be true whether the business were

qualifying under the ``principal place of business'' test or the

``percentage of employees'' test.

The commenter pointed out that determining a small business's

qualification under the principal place of business test ``as of the

time of application for SBIC financing'' would exclude those small

businesses that would use the proceeds of the SBIC financing to move

into an LMI Zone. That is true. Similarly, determining a small

business's qualification under the percentage of employees test ``as of

the time of application for SBIC financing'' would exclude those small

business that would use the proceeds of the SBIC financing to expand

their business and hire new employees from LMI Zones. SBA had thought

that determining a business's qualification based only on its intention

to locate into or hire from eligible areas would introduce too much

uncertainty into the program.

Upon reconsideration of the issue, however, SBA believes that the

rule can be modified in a manner that will encourage businesses to use

SBIC financing to locate in LMI Zones or to hire residents of LMI

Zones, while minimizing the risk that the incentives in this LMI

initiative will be misused. SBA believes this can be accomplished by

allowing companies that intend either to locate in or to hire from an

LMI Zone a fixed period of time after closing on their SBIC financing

to do so. During that time, the business would be considered an LMI

Enterprise. At the end of the period, though, the business would lose

its LMI status if it had not located in an LMI Zone or qualified as an

LMI Enterprise under the percentage of employees test.

SBA believes that a company should be able to establish its

principal place of business in an LMI Zone or hire employees from an

LMI Zone within 180 days from the date the SBIC financing closes. Six

months should be ample time for a company to resolve any zoning or

other issues that might delay the opening of the business in an LMI

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Zone or the hiring of residents from an LMI Zone.

Accordingly, the final rule allows a company to temporarily qualify

as an LMI Enterprise if, at the time of application for SBIC financing,

the company certifies as to its intent to locate its principal place of

business in an LMI Zone or its intent to hire the required number of

residents of LMI Zones, in either case within 180 days after the SBIC

financing closes. At the end of the 180-day period, if the company does

not have its principal place of business in an LMI Zone or 35 percent

of its employees residing in LMI Zones, it will no longer qualify as an

LMI Enterprise. This means that the SBIC's financing of the company

will no longer qualify as an LMI Investment.

SBA has considered whether the SBIC or the small business should

bear the risk of the small business' loss of qualification as an LMI

Enterprise and the financing's loss of qualification as an LMI

Investment. If the loss of LMI qualification constitutes a default by

the small business under the financing and the SBIC can demand

repayment or redemption of the financing, the small business bears most

of the risk. If loss of LMI qualification does not constitute a

default, the SBIC must continue to hold its investment in the company

and must revise the terms of the financing to conform to standard (non-

LMI) SBA regulations (e.g., minimum term, control restrictions). In

that event, the SBIC alone bears the risk since the small business gets

the benefit of SBIC financing on standard (non-LMI) terms.

SBA has concluded that the parties themselves (the SBIC and the

small business) should determine who is to bear the risk of the loss of

LMI qualification. The terms of the financing agreement negotiated

between the small business and the SBIC should specify whether the loss

of qualification as an LMI Enterprise constitutes a default by the

small business under the financing. If the loss of qualification as an

LMI Enterprise does not constitute a default under the financing

agreement, the SBIC must be sure that the terms of the financing, going

forward, satisfy SBA requirements for non-LMI financings (e.g., minimum

term; control restrictions). If the loss of qualification as an LMI

Enterprise does constitute a default under the financing agreement, the

SBIC will be entitled to whatever remedies are available to it for the

default.

The proposed version of Sec. 107.610(e) required each LMI

Enterprise to certify to the investing SBIC as to the location of

either its principal place of business or the primary residences of all

of its full-time employees. The certification was to be dated no

earlier than the date the small business applied for the SBIC financing

and was to be kept in the SBIC's files, along with the SBIC's own

certification that the small business qualifies as an LMI Enterprise

and the basis for such qualification.

The final version of Sec. 107.610(e) still requires certifications

from both the small business and the SBIC, but allows a small business

that is intending to locate into an LMI Zone or to hire residents of

LMI Zones to so certify. Any small business that qualifies as an LMI

Enterprise based on its intention to locate in an LMI Zone or to hire

residents of LMI Zones must also provide the SBIC with a later

certification, dated within the 180 day period discussed above,

certifying that its principal place of business is located in an LMI

Zone or that it has 35 percent of its employees residing in LMI Zones.

The SBIC must make its own certification(s) contemporaneously with the

certification(s) of the small business.

SBA has made one final modification to the definition of LMI

Enterprise and to Sec. 107.610(e). Since the term ``principal place of

business'' is susceptible to more than one interpretation, SBA has

decided to specify precisely what is intended by the term as it relates

to LMI Enterprises. SBA believes that an LMI Enterprise's principal

place of business should be determined by reference to the location of

its employees or tangible assets, not its books and records or its

corporate headquarters. This approach is similar to the one used in

Sec. 107.720(g)(1)(ii)--SBA's criteria for determining whether a

business is a non-U.S. business for purposes of the prohibition on

foreign investments in the SBIC Program.

Under the final rule, SBA will consider an LMI Enterprise to be

located where at least 50 percent of its employees or tangible assets

are located. SBA realizes, though, that the use of the term ``principal

place of business'' may, itself, cause confusion since that term has

already been defined differently in other SBA programs. Accordingly,

the final rule replaces the term ``principal place of business'' with

the ``50% of employees or tangible assets'' test in the definition of

LMI Enterprise and in Sec. 107.610(e).

Defining LMI Investment

As discussed in the proposed rule, SBA wants to ensure that the

SBIC Program is used to promote true venture capital financing in LMI

Zones, not just high-interest lending. SBA is also concerned that LMI

Enterprises that receive SBIC financing not be precluded from using

their assets to secure third-party debt. SBA therefore proposed that

LMI Investments be defined to include only those SBIC financings that

are in the form of equity securities (as defined in Sec. 107.800) or

debt securities (as defined in Sec. 107.815) which are subordinated to

all borrowings of the business from financial institutions. The

proposed rule also required that LMI Investments in the form of debt

securities be unsecured, although the SBIC would have been permitted to

accept a guarantee of the debt security if the guarantee were itself

unsecured.

SBA received two comments on the proposed definition of an LMI

Investment. Both comments argued in favor of expanding the definition

to include debt securities that are secured by the assets of the small

business if the security interest is junior to any other secured debt

of the business. The commenters argued that excluding secured financing

of LMI Enterprises would discourage SBIC support of those businesses.

One commenter further argued that an SBIC holding an unsecured position

in a company might take more precipitous action to protect its interest

than if the SBIC had collateral to protect its position.

SBA concurs with the suggested change to the definition. SBA

expects that allowing SBICs to take a junior secured position in the

assets of an LMI Enterprise will not prevent the LMI Enterprise from

obtaining secured debt from other sources.

This change would place SBICs ahead of any unsecured debt of the

LMI Enterprise. SBA believes, though, that unsecured debt is generally

unavailable to most LMI Enterprises, except from the principals of the

enterprise. Even under the proposed rule, LMI Investments were not

required to subordinate in favor of borrowings from the principals of

the enterprise. Accordingly, the final definition of LMI Investment

includes debt securities that are secured by the assets of the small

business provided the SBIC's security interest is junior to any other

existing or future secured debt of the business.

Regulatory and Financial Incentives

Under the proposed rule, SBA proposed to modify the regulations

governing three subject matters, as they would apply to LMI

Investments--control of the small business, the treatment of royalties

in the calculation of cost of money, and minimum term of investment.

SBA also discussed its intention to create a new form of debenture for

use by SBICs that make LMI Investments.

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1. Temporary Control of the LMI Enterprise

SBA proposed to permit SBICs to take temporary control of each

business in which they make an LMI Investment. No comments were

received on this portion of the proposal. Accordingly, Sec. 107.865(d)

is finalized as proposed.

2. Royalties and Cost of Money

SBA proposed to exclude royalty payments on LMI Investments from

the calculation of ``Cost of Money'' under Sec. 107.855. Cost of Money

is the term for the sum of the interest rate and other charges that an

SBIC imposes on a small business. The Cost of Money to the small

business must not exceed the SBIC's Cost of Money ceiling, as computed

under Sec. 107.855(c).

To qualify for the proposed exclusion, the royalty would have to be

based on improvement in the performance of the LMI Enterprise after the

date of the financing. The proposed rule explained that the royalty

might be expressed, for example, as a percentage of any increase in an

underlying unit of measurement (e.g., revenue or sales) after the date

of the financing.

SBA received one comment on this provision. The comment asked for

clarification as to whether a royalty could be based on an increase in

more than one unit of measurement and still be excluded from the Cost

of Money calculation. For example, could a royalty provide for payment

to the SBIC if either the revenues or the profits of the small business

increased?

SBA was not intending to restrict royalties to increases in a

single underlying unit of measurement. To do so would force SBICs to

determine in advance which performance measurement would be most likely

to reflect the improved performance of the small business. A business

might have higher profits but steady or even declining revenues, or it

might have increased revenues but steady profits. Either circumstance

could constitute improvement in the performance of the business.

If an SBIC and a small business agree to a royalty that is

expressed as a percentage of increases in alternative performance

measurements (e.g., profits or revenues), the royalty will be excluded

from Cost of Money. SBA believes that the text of proposed Sec. 107.855

is sufficiently broad to cover this possibility. Accordingly, proposed

Sec. 107.855 is finalized without change.

SBA would also like to clarify the application of the royalty

provision to any LMI Investments that an SBIC makes through a holding

company or an investment vehicle, as permitted under Sec. 107.720(b).

In determining whether a business's performance has improved, SBA will

look through any holding company or investment vehicle to the

performance of the operating business itself. It is the improvement in

the operating business's performance, not the improvement in the

performance of a holding company or investment vehicle, which would

serve as the basis for the calculation of the royalty payment to the

SBIC.

Since the publication of the proposed rule, the President signed

the Small Business Investment Improvement Act of 1999. See Public Law

106-9, 113 Stat. 17, April 5, 1999. Section 2(a) of the new law

excludes certain royalty payments from the calculation of Cost of Money

for all investments made by SBICs. SBA will be publishing a proposed

rule to implement this change in the near future.

3. Minimum Term of LMI Investment

SBA received no comments on its proposal to set a one-year minimum

term for LMI Investments. The proposed changes to Secs. 107.835 and

107.850(a) are, therefore, adopted without change.

4. Deferred Interest Debenture

SBA proposed to allow SBICs to finance LMI Investments with a more

patient-type of debenture (called an LMI Debenture). No regulatory

changes are necessary to create the new debenture, but SBA is

continuing to work on its design and method of funding.

The LMI Debenture under development would be a non-amortizing

debenture with a term of up to 10 years, issued at a discount so as to

be, in effect, ``zero coupon'' for the first five years. It would

require semi-annual interest payments on the face amount for the

remainder of the term. SBA leverage fees would not be deferred; they

would be paid as required under Sec. 107.1130.

The proposed rule explained that an SBIC's eligibility for LMI

Debentures would be based solely on the SBIC's outstanding LMI

Investments (made after the effective date of the final rule). SBA has

come to the conclusion that this approach might discourage SBICs from

making LMI Investments since the LMI Debenture funds would only be

available after the investment had already been made.

Instead, SBA has decided to determine an SBIC's eligibility for LMI

Debentures based on the sum of its outstanding LMI Investments (made

after the effective date of the final rule) plus any LMI Investments

the SBIC intends to make with the proceeds of the LMI Debenture. If an

SBIC with no outstanding LMI Investments applies for a draw down of

debenture leverage and intends to use the leverage to make an LMI

Investment, SBA can approve the issuance of an LMI Debenture.

As stated in the proposed rule, an SBIC's overall eligibility for

an LMI Debenture will still be determined in two ways. First, the SBIC

will have to be eligible to issue leverage in an amount equal to the

face amount of the LMI Debenture. Eligibility for this purpose is

determined under Secs. 107.1120-107.1160.

Second, the face amount of the SBIC's requested LMI Debenture, plus

the face amount of the SBIC's outstanding LMI Debenture(s), cannot

exceed 1.5 times the sum of the SBIC's outstanding LMI Investments plus

the proposed LMI Investment. In other words, under this second test an

SBIC would be eligible for an LMI Debenture with a face amount equal to

(a) 1.5 times the sum of the SBIC's existing and planned LMI

Investments at the time of application, minus (b) the face amount of

any outstanding LMI Debentures. The 1.5 multiple takes into

consideration the zero-coupon feature of the LMI Debenture and allows

for an approximate matching of net proceeds of LMI Debentures with

funds invested in LMI Investments.

SBA will notify all SBICs when LMI Debentures are ready for use.

The regulatory and financial incentives described in this final

rule will apply only to investments made after the effective date of

this rule.

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 may constitute a significant

regulatory action within the meaning of Executive Order 12866, since it

raises a new policy issue reflecting the President's priorities.

One of the purposes of the SBIC Program is to encourage the flow of

equity-type investments into small businesses. For the first 35 years

of the SBIC Program, however, the only type of leverage available to

SBICs (other than Specialized SBICs) was debt leverage with interest

payable every six months.

Congress recognized this mismatch of source and use of funds and

created Participating Securities leverage in 1992. Participating

Securities leverage is a type of ``patient capital'' and helps to

promote equity investing by SBICs. However, because required payments

on Participating Securities are a function of an SBIC's profits, SBA

makes such leverage available only to larger SBICs

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that can reasonably project returns-on-investments greater than 20

percent.

While the Participating Securities program has been very successful

at encouraging SBICs to do equity investing in general, SBA wishes to

encourage more equity-type investments in underserved areas or ``New

Markets''--urban and rural areas that have severe shortages of equity

capital. Unfortunately, investments in these areas often are of a type

that will not have the potential for yielding returns that are high

enough to justify the use of Participating Securities.

The LMI Debenture is being created to fill this gap. It is another

type of patient capital, with interest deferred for the first 5 years.

An SBIC utilizing the LMI Debenture will not be expected to achieve the

high returns expected of Participating Securities users. Thus, the

availability of the LMI Debenture is expected to increase the flow of

equity-type capital to New Markets.

Some of this increase will come from existing SBICs which find that

the LMI Debentures, together with the regulatory incentives in this

final rule, will encourage them to make investments that they may

perceive as having greater risk than their typical investments. SBA

expects these SBICs to make investments in businesses which lie in

areas that they have previously overlooked.

While it is expected that existing SBICs will participate to some

degree in the LMI program, SBA anticipates that most of the LMI program

benefits will derive from new SBICs that are currently being formed and

which will be created in the future. Already, SBA is seeing an increase

in the number of venture capitalists who are working to form new SBICs

with an LMI orientation.

SBA also believes that an increasing number of banks will actively

seek to invest in SBICs since a bank's investment in an SBIC is now

presumed to satisfy one of the tests under the Community Reinvestment

Act (CRA) regulations. SBA expects that many banks will find LMI-

oriented SBICs to be especially attractive. This should be true not

only because the banks can receive CRA credit for their investment, but

also because they will find that (1) such investments expand their

urban and rural markets, and (2) with equity infusions of capital,

small businesses can become less risky borrowers.

The LMI Debentures have the same subsidy rate as do regular

debentures and will carry interest rates similar to those of regular

debentures. They present no additional cost either to the government or

to the SBICs. Regarding reporting requirements (further discussed

below), an SBIC must ascertain that the company in which it is

investing meets the LMI standards, and must report this to SBA on its

usual financing report (form 1031). The cost to the SBIC to obtain this

information is nominal.

SBA certifies that this final rule does 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. This

final rule will change some requirements to encourage SBICs to make

additional qualified investments in low and moderate income zones. In

FY 1998, SBICs invested in 2700 small businesses. While the final rule

may increase the number of small businesses receiving SBIC investments

because SBICs may make investments in smaller increments, the number of

small businesses eligible for SBIC investments would not change.

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

has requested approval to require participating SBICs to report the

information they are required to maintain by the final rule. The final

rule requires SBICs that make LMI Investments to keep track of their

LMI Investments and report them to SBA in connection with applications

for LMI Debentures. To determine whether an SBIC is making an LMI

Investment, the SBIC will have to verify the location of the LMI

Enterprise or its employees using the databases discussed in this rule.

SBA estimates that the time necessary to verify the location of an LMI

Enterprise or its employees will average less than one hour per LMI

Investment. The reporting requirements are de minimis since current

forms will only be changed to reflect LMI Investments. SBA further

estimates that SBICs may make approximately 500 LMI Investments per

year. SBA believes this information is necessary for the proper

performance of the function of the agency.

For purposes of Executive Order 12612, SBA certifies that this rule

will not have any federalism implications warranting the preparation of

a Federalism Assessment.

For purposes of Executive Order 12778, SBA certifies that this 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, SBA is amending 13 CFR part 107 as

follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

1. The authority citation for part 107 continues to read as

follows:

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

and 687m.

2. Amend Sec. 107.50 to add definitions of LMI Enterprise, LMI

Investment, and LMI Zone, to read as follows:

Sec. 107.50 Definitions of terms.

* * * * *

LMI Enterprise means:

(1) A Small Business that has at least 50% of its employees or

tangible assets located in LMI Zone(s) or in which at least 35% of the

full-time employees have primary residences in LMI Zone(s), in either

case determined as of the time of application for SBIC financing; or

(2) A Small Business that does not meet the requirements of

paragraph (1) of this definition as of the time of application for SBIC

financing but that certifies at such time that it intends to meet the

requirements within 180 days after the closing of the SBIC financing. A

Small Business qualifying under this paragraph (2) will no longer be an

LMI Enterprise as of the 180th day after the closing of the SBIC

financing unless, on or before such date, at least 50% of its employees

or tangible assets are located in LMI Zones or at least 35% of its

full-time employees have primary residences in LMI Zones.

LMI Investment means a financing of an LMI Enterprise, made after

September 30, 1999, in the form of equity securities or debt securities

that are junior to all existing or future secured borrowings of the

business. The debt securities may be guaranteed and may be secured by

the assets of the LMI Enterprise, but the guarantee may not be

collateralized or otherwise secured.

LMI Zone means any area located within a HUBZone (as defined in 13

CFR 126.103), an Urban Empowerment Zone or Urban Enterprise Community

(as designated by the Secretary of the Department of Housing and Urban

Development), a Rural Empowerment Zone or Rural Enterprise Community

(as designated by the Secretary of the Department of Agriculture), an

area of Low Income or Moderate Income (as recognized by the Federal

Financial Institutions Examination Council), or a county with

Persistent Poverty (as classified by the Economic Research Service of

the Department of Agriculture).

* * * * *

[[Page 52646]]

3. In Sec. 107.610, add paragraph (e) to read as follows:

Sec. 107.610 Required Certifications for Loans and Investments.

* * * * *

(e) For each LMI Investment:

(1) A certification by the concern, dated as of the date of

application for SBIC financing, as to the basis for its qualification

as an LMI Enterprise,

(2) If the concern qualifies as an LMI Enterprise as defined in

paragraph (2) of the definition of LMI Enterprise in Sec. 107.50, an

additional certification dated no later than the date 180 days after

the closing of the LMI Investment, as to the location of the concern's

employees or tangible assets or the principal residences of its full-

time employees as of the date of such certification, and

(3) Certification(s) by the SBIC, made contemporaneously with the

certification(s) of the concern, that the concern qualifies as an LMI

Enterprise as of the date(s) of the concern's certification(s) and the

basis for such qualification.

4. In Sec. 107.835, redesignate paragraph (d) as paragraph (e) and

add paragraph (d) to read as follows:

Sec. 107.835 Exceptions to minimum duration/term of Financing.

* * * * *

(d) An LMI Investment with a term of at least one year; or

* * * * *

5. In Sec. 107.850, revise the introductory text of paragraph (a)

to read as follows:

Sec. 107.850 Restrictions on redemption of Equity Securities.

(a) A Portfolio Concern cannot be required to redeem Equity

Securities earlier than five years (or one year in the case of an LMI

Investment) from the date of the first closing unless:

* * * * *

6. In Sec. 107.855, add paragraph (g)(12) to read as follows:

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

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

* * * * *

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

(12) Royalty payments received under any LMI Investment if the

royalty is based on improvement in the performance of the Small

Business after the date of the financing.

7. In Sec. 107.865, remove the ``or'' at the end of paragraph

(d)(3), replace the period at the end of paragraph (d)(4) with ``;

or'', add paragraph (d)(5), and revise paragraph (e)(3) to read as

follows:

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

Licensee.

* * * * *

(d) Temporary Control permitted. * * *

(5) If your financing of the Small Business is an LMI Investment.

(e) Control certification. * * *

(3) Your agreement to relinquish Control within five years

(although you may, under extraordinary circumstances, request SBA's

approval of an extension beyond five years). In the case of an LMI

Investment with a term of less than five years, you must agree to

relinquish Control within the term of the financing.

* * * * *

Dated: May 27, 1999.

Aida Alvarez,

Administrator.

[FR Doc. 99-25244 Filed 9-29-99; 8:45 am]

BILLING CODE 8025-01-U