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: This final rule implements provisions of the Small Business

Reauthorization Act of 1997, enacted on December 2, 1997, that affect

the Small Business Investment Company (SBIC) program, including

provisions affecting SBICs' minimum capital requirements, leverage

eligibility, and the timing of tax distributions by SBICs that have

issued Participating Securities. Other provisions of the final rule

modify regulations governing the refinancing of real estate by SBICs,

portfolio diversification requirements, takedowns of leverage, and in-

kind distributions by Participating Securities issuers. A proposed

regulation that would have prohibited political contributions by SBICs

is not being finalized at this time.

DATES: This rule is effective on December 20, 1999.

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

at (202) 205-7583.

SUPPLEMENTARY INFORMATION: On April 14, 1999, SBA published a proposed

rule (64 FR 18375) to implement the provisions of Subtitle B of Public

Law 105-135 (December 2, 1997), the Small Business Reauthorization Act

of 1997, which relate to SBICs. The proposed rule also included a

provision prohibiting political contributions by SBICs and

modifications of regulations governing the refinancing of real estate

by SBICs, portfolio diversification requirements, procedures for

drawing down leverage from SBA, and in-kind distributions by SBICs that

have issued leverage in the form of Participating Securities.

SBA received two comments on the proposed rule during the 30-day

comment period. This final rule includes changes based on some of the

comments received, as explained in this preamble.

Private Capital

Proposed Sec. 107.230(b)(3) is adopted as final. The provision

implements a change in the statutory definition of private capital to

include certain funds invested in a Licensee by a Federally chartered

or Government-sponsored corporation established prior to October 1,

1987.

Definition of ``Associate''

The proposed technical correction in the definition of

``Associate'' in Sec. 107.50 is adopted as final. The revised

definition clarifies the applicability of paragraph (8)(i) of the

definition to business concerns organized as partnerships or limited

liability companies.

Leverageable Capital

The proposed change in the definition of Leverageable Capital in

Sec. 107.50 is adopted as final. The definition no longer excludes

Qualified Non-private Funds (as defined in Sec. 107.230(d)) whose

source is Federal funds.

Internet Access and Electronic Mail

Proposed Sec. 107.504 is adopted with one minor change. The

proposed rule would have required all SBICs to have Internet access and

Internet electronic mail no later than June 30, 1999. Because of the

time elapsed since publication of the proposed rule, the final rule

moves the effective date of this requirement to March 31, 2000.

Political Contributions

Proposed Sec. 107.505, which would have prohibited contributions by

SBICs to any political campaign, party, or candidate, or to any

political action committee, is not being finalized at this time. SBA is

continuing to study the issue of political contributions by SBICs.

Financing of Smaller Enterprises

Since April 1994, SBICs have been required to direct a certain

percentage of their investment activity to businesses that fall

significantly below the maximum size permitted for a Small Business.

These businesses are referred to as ``Smaller Enterprises.'' The

proposed rule included minor corrections and clarifications related to

the financing of Smaller Enterprises that are adopted as proposed, and

one substantive change that has been modified in the final rule.

Section 215(b) of Public Law 105-135 increased the maximum amount

of SBA

[[Page 70993]]

leverage for which an SBIC could be eligible (see the section of this

preamble entitled ``Maximum Amount of Leverage''). The statute further

required that 100 percent of any ``financings made in whole or in part

with leverage in excess of $90,000,000'' (the previous limit) be

invested in Smaller Enterprises. SBA's interpretation of this

requirement in proposed Sec. 107.710(d) was that an SBIC must have 100

percent of any outstanding leverage over $90 million invested in

Smaller Enterprises, while also satisfying the requirement in

Sec. 107.710(b) that 20 percent of its total investment activity be

devoted to Smaller Enterprises.

One commenter pointed out that the proposed rule appeared to

prevent any leverage over $90,000,000 from being invested in businesses

that are not Smaller Enterprises, even if an SBIC had already made

Smaller Enterprise investments in an amount far exceeding the basic 20

percent requirement in Sec. 107.710(b). The commenter suggested that

SBA look instead at the composition of an SBIC's portfolio in the

aggregate.

SBA agrees that an aggregate test is appropriate and has modified

the final rule so that an SBIC's required dollar amount of Smaller

Enterprise investments is determined on that basis. The final rule also

modifies the basic 20 percent investment requirement and the additional

100 percent requirement for leverage over $90,000,000 so that they do

not overlap. In other words, it eliminates the possibility that an SBIC

investing an additional dollar would be required to increase its

Smaller Enterprise investments by $1.20.

In the final rule, Sec. 107.710(b)(1) is revised to exclude

financings made in whole or in part with leverage over $90,000,000 from

the total dollar amount of financing activity that is subject to the 20

percent test. An SBIC that has issued leverage over $90 million then

must determine its total required dollar amount of Smaller Enterprise

financings under Sec. 107.710(d). This amount is determined by adding

the minimum amount necessary to satisfy paragraph (b)(1) to the total

dollar amount of financings made in whole or in part with leverage over

$90,000,000. The source of funding for individual investments in

Smaller Enterprises does not matter; the SBIC is only required to

provide sufficient financing to Smaller Enterprises in the aggregate.

In developing the final rule, SBA considered whether it would be

excessively difficult for SBICs to identify financings made ``in whole

or in part'' with leverage over $90,000,000. SBA believes that this

would not be the case. Since SBA introduced a new interim leverage

funding mechanism in May 1998, SBICs typically draw leverage as needed

to fund specific investments. Thus, there should be a clear link

between the takedown of leverage over $90,000,000 and the closing of a

financing. SBA realizes that SBICs sometimes request leverage to

provide themselves with ``working capital'' for general operating

purposes. If an SBIC requests leverage over $90,000,000 for this

purpose, but the effective use of the leverage is to free or replace

other funds used to complete a financing, SBA will assume that the

financing was made with the leverage proceeds.

Real Estate Refinancing

Proposed Sec. 107.720(c)(2) is adopted as final. The provision

allows an SBIC to provide financing to a Small Business that will use

the proceeds to refinance debt obligations on property that it owns and

occupies, provided the Small Business uses at least 67 percent of the

usable square footage for an eligible business purpose.

Co-Investment With Associates

Proposed Sec. 107.730(d)(3)(iv) is adopted as final. The provision

concerns one set of circumstances under which an SBIC's co-investment

with an Associate is presumed to be on terms that are equitable to the

SBIC, so that no specific demonstration of fairness is required. As

revised, the presumption applies only to an SBIC that intends to

operate permanently as a non-leveraged company, rather than to any SBIC

that is currently non-leveraged.

Portfolio Diversification Requirement (``Overline'' Limit)

Proposed Sec. 107.740(a) is adopted as final. Under the revised

provision, an SBIC's overline limit will be computed based on the sum

of: (1) its Regulatory Capital at the time an investment or commitment

is made; and (2) any distributions permitted under Sec. 107.1570(b)

that were made within the preceding 5 years and reduced Regulatory

Capital. A distribution made within the preceding 5 years under

Sec. 107.585 may also be added back to Regulatory Capital for the

purpose of the overline computation if it reduced Regulatory Capital by

no more than 2 percent. A larger distribution under Sec. 107.585 may be

added back with the approval of SBA.

The final rule also clarifies that the overline limit applies to

SBICs that do not have outstanding leverage, but which intend to issue

leverage in the future.

Leverage Application Procedures and Eligibility

The proposed technical correction in Sec. 107.1100(b) is adopted as

final. The revision reflects recent changes in leverage funding

procedures, under which a Licensee can issue leverage only by first

obtaining a leverage commitment from SBA, and then drawing down funds

against the commitment.

Proposed Sec. 107.1120(d) contained a certification requirement for

Licensees seeking leverage over $90,000,000. In the final rule, this

requirement has been modified to be consistent with the changes made in

Sec. 107.710. These changes are discussed in the section of this

preamble entitled ``Financing of Smaller Enterprises.''

Maximum Amount of Leverage

Proposed Secs. 107.1150(a) and (b)(1) are adopted as final, with

one modification. The leverage eligibility table in Sec. 107.1150(a)(1)

has been updated to reflect changes in the Consumer Price Index (CPI)

through September 1999. In accordance with Sec. 107.1150(a)(2), SBA

will determine the next adjustment of the current leverage ceiling

($105,200,000) after the Bureau of Labor Statistics publishes the CPI

for September 2000. SBA will publish the indexed maximum leverage

amounts each year in a Notice in the Federal Register.

Draws Against SBA Leverage Commitments

Proposed Secs. 107.1220 and 107.1230(d) are adopted as final. The

procedural requirements in these sections have been updated to be

consistent with the interim leverage funding mechanism, sometimes

described as ``just-in-time'' funding, that SBA introduced in May 1998.

The final rule makes four changes in these procedures that are

discussed in greater detail in the preamble to the proposed rule.

First, it eliminates the requirement that draw requests submitted

within 30 days of the end of a Licensee's fiscal quarter be accompanied

by updated quarterly financial statements. Second, it clarifies that

every draw request must be accompanied by a statement certifying that

there has been no material adverse change in the Licensee's financial

condition since its last filing of SBA Form 468. Third, it requires a

Licensee to provide preliminary unaudited year end financial statements

when it submits a draw request more than 30 days

[[Page 70994]]

following the end of its fiscal year if the Licensee has not yet filed

its audited annual financial statements. Fourth, it allows a Licensee

to apply for a leverage draw based on operating liquidity needs, on

specific financings it expects to close, or on a combination of the

two.

Tax Distributions

Section 215(c) of Public Law 105-135 amended provisions of the Act

governing the timing of ``tax distributions'' that SBICs with

outstanding Participating Securities may make to their private

investors and SBA. Previously, such distributions could be made once a

year, based on the income allocated by a Licensee to its investors for

Federal income tax purposes for the fiscal year immediately preceding

the distribution. The statutory change now gives a Licensee the option

of making a tax distribution at the end of any calendar quarter based

on a quarterly estimate of tax liability. However, if the aggregate

quarterly distributions made during any fiscal year exceed the amount

that the Licensee would have been permitted to make based on a single

computation performed for the entire year, future tax distributions

must be reduced by the amount of the excess.

The statutory changes are implemented in Secs. 107.1550 and

107.1575 and are finalized as proposed. The timing of tax distributions

is addressed in Secs. 107.1550(d) and 107.1575(a). The final rule

permits interim tax distributions to be made on the last day of a

calendar quarter or on any succeeding day through the first Payment

Date following the end of the quarter (Payment Dates are February 1,

May 1, August 1, and November 1 of each year). As before, Licensees may

make annual tax distributions as late as the second Payment Date

following the end of their fiscal year. If the distribution is not made

on a Payment Date, SBA's prior approval is required.

Section 107.1550(e) implements the statutory provision concerning

excess tax distributions. A detailed example of how the excess amount

is computed appears in the preamble to the proposed rule.

Distributions on Other Than Payment Dates

Proposed Sec. 107.1575 is adopted as final. The section

incorporates a technical change to accommodate quarterly tax

distributions by SBICs, as discussed in the section of this preamble

entitled ``Tax Distributions.'' It also clarifies that while

distributions on dates other than Payment Dates must normally be

computed as of the distribution date, this requirement does not apply

to ``annual'' distributions (i.e., those computed as of the end of an

SBIC's fiscal year end).

In-Kind Distributions

SBA proposed two substantive changes in Sec. 107.1580, which

governs in-kind distributions by SBICs that have issued Participating

Securities. First, under proposed Sec. 107.1580(a)(2), only

``Distributable Securities'' could be distributed in kind. This new

term, which was defined in proposed Sec. 107.50, would replace the term

``Publicly Traded and Marketable'' in Sec. 107.1580. Although the two

terms are technically different, SBA did not expect the change to have

a major effect on Licensees' ability to distribute securities.

SBA received one comment on paragraph (3) of the definition, which

requires that the quantity of securities distributed to SBA must be

able to be sold ``over a reasonable period of time without having an

adverse impact upon the price of the security.'' The commenter felt

that because of the subjective nature of this provision, SBICs might

find it difficult to determine whether a particular security will meet

the requirement. SBA acknowledges that the requirement involves the

application of judgment, but is finalizing paragraph (3) of the

definition as proposed. The identical language appeared in the

definition of ``Publicly Traded and Marketable,'' which has been in use

with respect to in-kind distributions since the inception of the

Participating Securities program. Based on its experience so far, SBA

is satisfied that the requirement is workable and appropriate.

The second change involved proposed Sec. 107.1580(a)(1), under

which all in-kind distributions would have required SBA's prior

approval. In SBA's view, this change represented a minor expansion of

the current requirement in Sec. 107.1570(a) that SBA approve all

distributions made on dates other than one of the quarterly Payment

Dates (February 1, May 1, August 1, and November 1). However, SBA

received a comment, from a trade association representing a significant

number of SBICs, expressing concern that ``SBA would substitute its

judgment for that of the private experts managing SBICs as to when [an

in-kind] distribution should take place or whether it might take place

at all.''

SBA did not intend to create a fundamental change in the conditions

under which in-kind distributions can be made. SBA proposed the rule

change to ensure that it would have sufficient opportunity to ascertain

whether a proposed distribution satisfies the regulatory definition of

``Distributable Securities.'' This type of review is an essential part

of SBA's regulatory oversight responsibilities. Nevertheless, SBA does

not wish to create a perception that it will readily overrule business

decisions made by SBIC managers. Therefore, in the final rule, the

requirement for prior approval of all in-kind distributions has been

eliminated from Sec. 107.1580. All distributions on dates other than

Payment Dates, whether in cash or in kind, will continue to require

prior approval under Sec. 107.1575(b)(1).

To further clarify its role in reviewing in-kind distributions, SBA

has also modified the introductory text of the definition of

Distributable Securities. The final rule states that SBA determines

whether securities qualify as Distributable Securities, but in so doing

obtains the advice of a third party with expertise in the marketing of

securities. This provision has a dual purpose. First, it emphasizes

SBA's responsibility to ensure that a proposed distribution is

consistent with regulatory requirements. Second, it formalizes SBA's

current practice of seeking the advice of appropriate experts as it

conducts its regulatory review. SBA is willing to commit itself to this

procedure as a means of assuring the SBIC industry that it will not

arbitrarily or capriciously reject proposed in-kind distributions.

The final rule also adopts a non-substantive change in

Sec. 107.1580(a)(4), which deals with SBA's use of agents to dispose of

the securities it receives. This provision appeared in the proposed

rule as Sec. 107.1580(a)(5).

Compliance With Executive Orders 12866, 12988, and 13132, the

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

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

SBA has determined that this final rule does not constitute a

significant rule within the meaning of Executive Order 12866 since it

will not have an annual effect on the economy of $100 million or more,

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

final rule is to implement provisions of Public Law 105-135 which

relate to small business investment companies, and to make certain

other changes, primarily technical corrections and clarifications, to

the regulations governing SBICs. There are 352 SBICs, not all of which

are small businesses. In addition, the changes will have little or no

effect on

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small businesses seeking funding from SBICs; rather they would only

affect definitions for and activities of the SBICs.

For purposes of Executive Order 12988, SBA has determined that this

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

the standards set forth in Section 3 of that Order.

For purposes of Executive Order 13132, SBA has determined that this

final rule has no federalism implications.

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

has determined that this final rule contains no new reporting or

recordkeeping requirements.

List of Subjects in 13 CFR Part 107

Investment companies, Loan programs--business, Reporting and

recordkeeping requirements, Small businesses.

For the reasons set forth in the preamble, SBA amends 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. In Sec. 107.50, revise paragraph (8)(i) of the definition of

Associate, revise the definition of Leverageable Capital, and add, in

alphabetical order, a new definition of Distributable Securities to

read as follows:

Sec. 107.50 Definitions of terms.

* * * * *

Associate of a Licensee means any of the following:

* * * * *

(8) * * *

(i) Any person described in paragraphs (1) through (6) of this

definition is an officer, general partner, or managing member; or

* * * * *

Distributable Securities means equity securities that are

determined by SBA (with the advice of a third party expert in the

marketing of securities) to meet each of the following requirements:

(1) The securities (which may include securities that are salable

pursuant to the provisions of Rule 144 (17 CFR 230.144) under the

Securities Act of 1933, as amended) are salable immediately without

restriction under Federal and state securities laws;

(2) The securities are of a class:

(i) Which is listed and registered on a national securities

exchange, or

(ii) For which quotation information is disseminated in the

National Association of Securities Dealers Automated Quotation System

and as to which transaction reports and last sale data are disseminated

pursuant to Rule 11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities

Exchange Act of 1934, as amended; and

(3) The quantity of such securities to be distributed to SBA can be

sold over a reasonable period of time without having an adverse impact

upon the price of the security.

* * * * *

Leverageable Capital means Regulatory Capital, excluding unfunded

commitments.

* * * * *

3. In Sec. 107.230, revise paragraph (b)(3) to read as follows:

Sec. 107.230 Permitted sources of Private Capital for Licensees.

* * * * *

(b) Exclusions from Private Capital. * * *

(3) Funds obtained directly or indirectly from any Federal, State,

or local government agency or instrumentality, except for:

(i) Funds invested by a public pension fund;

(ii) Funds obtained from the business revenues (excluding any

governmental appropriation) of any federally chartered or government-

sponsored corporation established before October 1, 1987, to the extent

that such revenues are reflected in the retained earnings of the

corporation; and

(iii) ``Qualified Non-private Funds'' as defined in paragraph (d)

of this section.

* * * * *

4. Revise Sec. 107.504 to read as follows:

Sec. 107.504 Equipment and office requirements.

(a) Computer capability. You must have a personal computer with a

modem, and be able to use this equipment to prepare reports (using SBA-

provided software) and transmit them to SBA. In addition, by March 31,

2000, you must have access to the Internet and the capability to send

and receive electronic mail via the Internet.

(b) Facsimile capability. You must be able to receive facsimile

messages 24 hours per day at your primary office.

(c) Accessible office. You must maintain an office that is

convenient to the public and is open for business during normal working

hours.

5. Remove Sec. 107.508.

Sec. 107.508 [Removed]

6. In Sec. 107.710, revise paragraphs (b)(1), (c)(1)(i), and

(c)(1)(ii), redesignate paragraphs (d) and (e) as paragraphs (e) and

(f), revise the last sentence of redesignated paragraph (f), and add a

new paragraph (d) to read as follows:

Sec. 107.710 Requirement to Finance Smaller Enterprises.

* * * * *

(b) * * *

(1) General rule. At the close of each of your fiscal years, for

all Financings you extended since April 25, 1994, excluding Financings

made in whole or in part with Leverage in excess of $90,000,000, at

least 20 percent (in total dollars) must have been invested in Smaller

Enterprises. If you were licensed after April 25, 1994, the 20 percent

requirement applies to the Financings you extended since you were

licensed, excluding Financings made in whole or in part with Leverage

in excess of $90,000,000, plus any pre-licensing investments approved

by SBA for inclusion in your Regulatory Capital. For purposes of this

paragraph (b)(1), Leverage in excess of $90,000,000 includes aggregate

Leverage over $90,000,000 issued by two or more Licensees under Common

Control. See also paragraph (d) of this section.

* * * * *

(c) * * *

(1) * * *

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

Securities; or

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

* * * * *

(d) Special requirement for Leverage over $90,000,000. If you have

issued Leverage over $90,000,000 (including aggregate Leverage over

$90,000,000 issued by two or more Licensees under Common Control), at

the end of each of your fiscal years the cumulative Financings you

extended to Smaller Enterprises must equal at least:

(1) The dollar amount necessary to satisfy paragraph (b) of this

section; plus

(2) 100 percent of the amount of all Financings made in whole or in

part with Leverage over $90,000,000.

* * * * *

(f) 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) through (e)).

7. In Sec. 107.720, revise paragraph (c)(2) to read as follows:

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

* * * * *

(c) * * *

(2) You are not permitted to finance a business, regardless of SIC

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classification, if the Financing is to be used to acquire or refinance

real property, unless the Small Business:

(i) Is acquiring an existing property and will use at least 51

percent of the usable square footage for an eligible business purpose;

or

(ii) Is building or renovating a building and will use at least 67

percent of the usable square footage for an eligible business purpose;

or

(iii) Occupies the subject property and uses at least 67 percent of

the usable square footage for an eligible business purpose.

* * * * *

8. In Sec. 107.730, revise paragraph (d)(3)(iv) to read as follows:

Sec. 107.730 Financing which constitute conflicts of interest.

* * * * *

(d) * * *

(3) * * *

(iv) You have no outstanding Leverage and do not intend to issue

Leverage in the future, and your Associate either is not a Licensee or

has no outstanding Leverage and does not intend to issue Leverage in

the future.

* * * * *

9. In Sec. 107.740, revise paragraph (a) 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 intend to issue Leverage in the future.

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) For a Section 301(c) Licensee, 20 percent of the sum of:

(i) Your Regulatory Capital as of the date of the Financing or

Commitment; plus

(ii) Any Distribution(s) you made under Sec. 107.1570(b), during

the five years preceding the date of the Financing or Commitment, which

reduced your Regulatory Capital; plus

(iii) Any Distribution(s) you made under Sec. 107.585, during the

five years preceding the date of the Financing or Commitment, which

reduced your Regulatory Capital by no more than two percent or which

SBA approves for inclusion in the sum determined in this paragraph

(a)(1).

(2) For a Section 301(d) Licensee, 30 percent of a sum determined

in the manner set forth in paragraph (a)(1)(i) through (iii) of this

section.

* * * * *

10. In Sec. 107.1100, revise the section heading and paragraph (b)

to read as follows:

Sec. 107.1100 Types of Leverage and application procedures.

* * * * *

(b) Applying for Leverage. The Leverage application process has two

parts. You must first apply for SBA's conditional commitment to reserve

a specific amount of Leverage for your future use. You may then apply

to draw down Leverage against the commitment. See Secs. 107.1200

through 107.1240.

* * * * *

11. In Sec. 107.1120, redesignate paragraphs (d) through (g) as

paragraphs (e) through (h) and add a new paragraph (d) to read as

follows:

Sec. 107.1120 General eligibility requirements for Leverage.

* * * * *

(d) Certify, if applicable, that you will satisfy the requirement

in Sec. 107.710(d) to provide Financing to Smaller Enterprises.

* * * * *

12. In Sec. 107.1150, revise paragraph (a) and the first sentence

of paragraph (b)(1) to read as follows:

Sec. 107.1150 Maximum amount of Leverage for a Section 301(c)

Licensee.

(a) Maximum amount of Leverage. (1) Amounts before indexing. If you

are a Section 301(c) Licensee, the following table shows the maximum

amount of Leverage you may have outstanding at any time, subject to the

indexing adjustment set forth in paragraph (a)(2) of this section:

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

Then your maximum leverage

If your leverageable capital is: is:

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

(1) Not over $17,500,000.................. 300 percent of Leverageable

Capital

(2) Over $17,500,000 but not over $52,500,000 + [2 x

$35,100,000. (Leverageable Capital -

$17,500,000)]

(3) Over $35,100,000 but not over $87,700,000 + (Leverageable

$52,600,000. Capital -$35,100,000)

(4) Over $52,600,000...................... $105,200,000

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

(2) Indexing of maximum amount of Leverage. SBA will adjust the

amounts in paragraph (a) of this section annually to reflect increases

through September in the Consumer Price Index published by the Bureau

of Labor Statistics. SBA will publish the indexed maximum Leverage

amounts each year in a Notice in the Federal Register.

(b) Exceptions to maximum Leverage provisions. (1) Licensees under

Common Control. Two or more Licensees under Common Control may have

aggregate outstanding Leverage over $105,200,000 (subject to indexing

as set forth in paragraph (a)(2) of this section) only if SBA gives

them permission to do so. * * *

* * * * *

13. Revise Sec. 107.1220 to read as follows:

Sec. 107.1220 Requirement for Licensee to file quarterly financial

statements.

As long as any part of SBA's Leverage commitment is outstanding,

you must give SBA a Financial Statement on SBA Form 468 (Short Form) as

of the close of each quarter of your fiscal year (other than the fourth

quarter, which is covered by your annual filing of Form 468 under

Sec. 107.630(a)). You must file this form within 30 days after the

close of the quarter. You will not be eligible for a draw if you are

not in compliance with this Sec. 107.1220.

14. In Sec. 107.1230, revise paragraph (d)(1), redesignate

paragraphs (d)(2) and (d)(3) as paragraphs (d)(3) and (d)(4), add a new

paragraph (d)(2), and revise the first sentence of redesignated

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

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

* * * * *

(d) * * *

(1) A statement certifying that there has been no material adverse

change in your financial condition since your last filing of SBA Form

468 (see also Sec. 107.1220 for SBA Form 468 filing requirements).

(2) If your request is submitted more than 30 days following the

end of your fiscal year, but before you have submitted your annual

filing of SBA Form 468 (Long Form) in accordance with Sec. 107.630(a),

a preliminary unaudited annual financial statement on SBA Form 468

(Short Form).

* * * * *

(4) A statement that the proceeds are needed to fund one or more

particular Small Businesses or to provide liquidity for your

operations. * * *

* * * * *

15. In Sec. 107.1550, revise the first sentence of the introductory

text, paragraph (b)(1), and paragraph (d), and add a new paragraph (e)

to read as follows:

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

Distributions'' to private investors and SBA.

If you have outstanding Participating Securities or Earmarked

Assets, and you

[[Page 70997]]

are a limited partnership, ``S Corporation,'' or equivalent pass-

through entity for tax purposes, you may make ``tax Distributions'' to

your investors in accordance with this Sec. 107.1550, whether or not

they have an actual tax liability. * * *

* * * * *

(b) How to compute the Maximum Tax Liability. (1) You may compute

your Maximum Tax Liability for a full fiscal year or for any calendar

quarter. 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 or calendar quarter

for which the Distribution is being made, 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 or calendar quarter for

which the Distribution is being made, 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.

* * * * *

(d) Paying a tax Distribution. You may make an annual tax

Distribution on the first or second Payment Date following the end of

your fiscal year. You may make a quarterly tax Distribution on the

first Payment Date following the end of the calendar quarter for which

the Distribution is being made. See also Sec. 107.1575(a).

(e) Excess tax Distributions. (1) As of the end of your fiscal

year, you must determine whether you made any excess tax Distributions

for the year in accordance with paragraph (e)(2) of this section. Any

tax Distributions that you make for a subsequent period must be reduced

by the excess amount distributed.

(2) Determine your excess tax Distributions by adding together all

your quarterly tax Distributions for the year (ignoring any required

reductions for excess tax Distributions made in prior years), and

subtracting the maximum tax Distribution that you would have been

permitted to make based upon a single computation performed for the

entire fiscal year. The result, if greater than zero, is your excess

tax Distribution for the year.

16. In Sec. 107.1575, revise paragraphs (a)(1) and (b)(2) and add a

new paragraph (a)(4) to read as follows:

Sec. 107.1575 Distributions on other than Payment Dates.

(a) * * *

(1) Required annual Distributions under Sec. 107.1540(a)(1), annual

Distributions under Sec. 107.1550, and any Distributions under

Sec. 107.1560 must be made no later than the second Payment Date

following the end of your fiscal year.

* * * * *

(4) Quarterly Distributions under Sec. 107.1550 must be made no

earlier than the last day of the calendar quarter for which the

Distribution is being made and no later than the first Payment Date

following the end of such calendar quarter.

(b) * * *

* * * * *

(2) 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, must be:

(i) The distribution date, or

(ii) If your Distribution includes annual Distributions under

Secs. 107.1540(a)(1), 107.1550 and/or 107.1560, your most recent fiscal

year end;

* * * * *

17. In Sec. 107.1580, revise the heading for paragraph (a)

introductory text, and revise paragraphs (a)(1), (a)(4), and (b)(2) to

read as follows:

Sec. 107.1580 Special rules for In-Kind Distributions by Licensees.

(a) In-Kind Distributions while Licensee has outstanding

Participating Securities. * * *

(1) You may distribute only Distributable Securities.

* * * * *

(4) You must deposit SBA's share of securities being distributed

with a disposition agent designated by SBA. As an alternative, if you

agree, SBA may direct you to dispose of its shares. In this case, you

must promptly remit the proceeds to SBA.

(b) * * *

(2) You must obtain SBA's prior written approval of any In-Kind

Distribution of Earmarked Assets that are not Distributable Securities,

specifically including approval of the valuation of the assets.

Dated: December 10, 1999.

Fred P. Hochberg,

Acting Administrator.

[FR Doc. 99-32689 Filed 12-17-99; 8:45 am]

BILLING CODE 8025-01-P