Small Business Investment Companies-Early Stage SBICs, 74908-74913 [2012-30431]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 77, Number 243 (Tuesday, December 18, 2012)]
[Notices]
[Pages 74908-74913]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30431]


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SMALL BUSINESS ADMINISTRATION


Small Business Investment Companies--Early Stage SBICs

AGENCY: U.S. Small Business Administration.

ACTION: Call for early stage fund managers.

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SUMMARY: This Call invites experienced early stage fund managers to 
submit the preliminary materials discussed in Section II, in the form 
of the Small Business Investment Company (``SBIC'')

[[Page 74909]]

Management Assessment Questionnaire (``MAQ''), for consideration by the 
Small Business Administration (``SBA'') to be licensed as Early Stage 
Small Business Investment Companies. Licensed Early Stage SBICs may 
receive SBA-guaranteed debenture leverage of up to 100 percent of their 
Regulatory Capital, up to a maximum of $50 million. Early Stage SBICs 
must invest at least 50% of their investment dollars in early stage 
small businesses. For the purposes of this initiative, an ``early 
stage'' business is one that has never achieved positive cash flow from 
operations in any fiscal year. By licensing and providing SBA 
guaranteed leverage to Early Stage SBICs, SBA seeks to expand 
entrepreneurs' access to capital and encourage innovation as part of 
President Obama's Start-Up America Initiative launched on January 31, 
2011. More information on the Early Stage SBIC Initiative and the 
regulations governing these SBICs may be found at www.sba.gov/inv/earlystage.
    In order to expedite licensing of qualified applicants that have 
already raised the required capital, SBA has established two ``tracks'' 
for the Early Stage SBIC Licensing Process as follows:
    [rtrif] Track 1--Applicants with Capital: This includes all 
applicants that have signed commitments for at least $15 million in 
Regulatory Capital and the remaining capital needed to achieve the 
minimum $20 million in Regulatory Capital for Early Stage SBICs ``soft-
circled.'' (This may include drop-down funds.) Track 1 applicants that 
receive a Green Light letter will need signed commitments of at least 
$20 million in Regulatory Capital when they file their Licensing 
Application on or before June 7, 2013. SBA will accept a commitment 
that is conditioned upon issuance of an Early Stage SBIC license and/or 
approval of the applicant's organizational documents, but will not 
accept a commitment that is subject to any other conditions.
    [rtrif] Track 2--All Other Applicants.

DATES: The following table provides the key milestones for the Early 
Stage SBIC Initiative.

------------------------------------------------------------------------
            Milestone             Track 1--due dates  Track 2--due dates
------------------------------------------------------------------------
Initial Review Period:
     Management           5 p.m. EST, March   5 p.m. EST, March
     Assessment Questionnaires     1, 2013.            30, 2013.
     (``MAQs'') Due.
     Interview Period...  March 25, 2013-     June 3, 2013-June
                                   March 29, 2013.     14, 2013.
     Anticipated Green    April 30, 2013....  September 27,
     Light Decision.                                   2013.
Licensing Period:
     For those Licensing  5 p.m. ET June 7,   ..................
     Applicants with at least      2013
     $20 million in Regulatory
     Capital and desiring to be
     licensed by September 30,
     2013.
     All other            ..................  No later than one
     Applicants with Green Light                       year from
     Letters.                                          issuance of Green
                                                       Light Letter.
------------------------------------------------------------------------
Notes:
 SBA reserves the right to extend its interview, due diligence,
  committee, and approval timelines as appropriate. SBA will update its
  Web site at www.sba.gov/inv/earlystage should these dates change.
  Applicants will be notified by email should these dates change.
 SBA expects to issue additional calls for Early Stage SBICs on
  an annual basis.
 SBA will announce these calls via a call notice in the Federal
  Register.


ADDRESSES: Email MAQrequest@sba.gov to obtain a copy of the Management 
Assessment Questionnaire (``MAQ'') for your proposal as discussed in 
Section II. MAQ documents may be submitted in two distinct ways: (1) 
MAQ documents may be submitted via express or next day delivery service 
to the following address: Scott Schaefer, Senior Investment Officer, 
Office of Investment, U.S. Small Business, Administration, 409 3rd St. 
SW., Suite 6300, Washington, DC 20416.
    In this instance, MAQ documents must be contained on a CD-ROM and 
all files must be in either MS Word or Excel formats (not pdf). (2) 
Alternatively, MAQ documents may be submitted via email to 
scott.schaefer@sba.gov. In this instance as well, MAQ documents must be 
in MS Word and Excel formats (not pdf). In both instances, alternative 
(1) and alternative (2), original hard copy signature pages must be 
sent to the above-referenced physical address via express or next day 
delivery service.
    The applicant bears responsibility for ensuring the timely delivery 
of the MAQ to the correct address.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    SBA invites early stage fund managers to submit the preliminary 
materials, as discussed in Section II, in the form of a Management 
Assessment Questionnaire (``MAQ'') for the formation and management of 
an Early Stage SBIC. In 2011, SBA introduced the Early Stage 
Initiative. Early Stage SBICs represent a new sub-category of SBICs 
that will focus on making investments in early stage small businesses. 
Go to www.sba.gov/inv/earlystage for information on the Early Stage 
Initiative and links to the Early Stage SBIC Final Rule (``Final 
Rule''). This initiative is part of President Obama's ``Start-Up 
America Initiative'' to promote American innovation and job creation by 
encouraging private sector investment in job-creating startups and 
small firms, accelerating research, and addressing barriers to success 
for entrepreneurs and small businesses.

II. Management Assessment Questionnaire/License Application Materials

    The first required submission in the Early Stage Licensing process 
is SBA's MAQ. The MAQ consists of two forms that cover qualitative and 
quantitative information on the management team, the proposed strategy 
for the SBIC, the principals' investment track record, and the proposed 
fund structure and economics. The MAQ consists of SBA Form 2181 and the 
exhibits in SBA Form 2183.
    If you are a Track 1 applicant and you are invited to be 
interviewed (see paragraph III.B.2), you will be required to bring to 
the interview a completed Exhibit N from SBA Form 2182, consisting of 
your financial forecast and a written narrative which identifies how 
you will manage SBA leverage as part of your business plan. Whether you 
choose discounted leverage or standard leverage with a 5 year interest 
reserve, each as described in the Final Rule, your plan must address 
how you will meet interest payments after 5 years from the date of 
debenture issue.
    If SBA issues you a ``Green Light letter'' (described in paragraph 
III.B.5), you must submit the SBIC License Application, consisting of 
SBA Form 2181 (updated as needed) and SBA Form 2182, for the final 
licensing phase (paragraph III.D). Exhibit Q in SBA Form 2182 includes 
the fund's limited

[[Page 74910]]

partnership agreement (``LPA''). Applicants should review Section IV of 
this notice for special instructions associated with the LPA for Early 
Stage SBICs.
    To obtain a copy of the most recent versions of these forms, please 
send an email to MAQrequest@sba.gov. Read only examples of these forms 
may be found at www.sba.gov/content/application-forms.

 III. Early Stage Licensing Process

    There are four stages in SBA's Early Stage Licensing Process: (A) 
Call Period; (B) Initial Review; (C) Applicant Fundraising and Document 
Preparation; and (D) Licensing. Each of these stages is discussed 
below.
    A. Call Period. This notice signals the start of the Fiscal Year 
2013 Early Stage SBIC call period. SBA intends to hold no more than one 
Early Stage SBIC call period for accepting MAQs per fiscal year and SBA 
will issue a new notice in the Federal Register for the next call 
period. Interested parties should request a MAQ from SBA by emailing 
MAQrequest@sba.gov. Please take time to read the instructions included 
with each form identified in Section II. You should also review the 
information at www.sba.gov/inv/earlystage which includes a list of 
frequently asked questions (``FAQs'') regarding the Early Stage 
Initiative. If you still have questions regarding the Early Stage 
process, please email your questions to startupamerica@sba.gov. SBA 
will endeavor to respond to your question within three business days, 
depending on volume. SBA may not be able to respond to fund specific 
questions or questions that require a legal opinion.
    B. Initial Review. At the end of the Initial Review phase, SBA will 
issue Green Light letters to those applicants it believes preliminarily 
meet the evaluation criteria for an Early Stage SBIC, including the 
vintage year and geographic diversification criteria. Section V of this 
notice describes the criteria by which SBA will evaluate applicants. 
The process for SBA's Initial Review is as follows:
    1. Submit MAQ. SBA must receive your completed MAQ no later than 
the date and time specified under the Dates section of this notice. SBA 
will send a confirmation that it has received your MAQ within 3 
business days of your submission. If you have not fully completed all 
sections of the MAQ or provided sufficient information to allow SBA to 
evaluate your management team, you may be ineligible for this call 
period. If so, SBA will notify you by email.
    2. Pre-Screen. SBA will review all MAQs against the evaluation 
criteria identified in Section V. SBA may engage a contractor to assist 
in evaluating MAQs received in response to this Call. The Investment 
Committee (composed of senior managers from the Office of Investment) 
will consider each MAQ, and if the Investment Committee concludes that 
the management team may be qualified for an Early Stage SBIC license, 
the entire team will be invited to SBA Headquarters in Washington, DC 
for an interview. Those applicants not invited for interviews will be 
notified. Upon request, SBA will provide feedback to applicants not 
selected for an interview.
    3. Interview Period. SBA's invitation for an interview will 
identify a 1 hour time block during the Interview Period identified in 
the Dates Section. SBA will conduct interviews at SBA Headquarters, at 
409 Third Street SW., Washington, DC. At the interview, Track 1 
applicants must bring their financial forecast as described under 
Section II of this notice. Track 1 applicants are also encouraged to 
bring the following completed exhibits from SBA Form 2182 to the 
Interview:
    a. Exhibit B--Fingerprint cards and
    b. Exhibit C--Statements of Personal History.
    If a Track 1 applicant receives a Green Light letter, SBA will 
forward the fingerprint cards and Statements of Personal History to 
SBA's Office of Inspector General for processing by the FBI. (Note: 
applicants may wait until the licensing stage to submit these 
documents. However, you will not be able to draw SBA leverage until 
your FBI checks are complete.)
    4. Due Diligence. SBA will conduct due diligence on all applicants 
that successfully pass the Interview process. SBA may be assisted in 
this process by a contractor engaged by SBA.
    5. Green Light Letter. Following the interview, the SBA will issue 
a Green Light letter to all applicants that preliminarily meet the 
criteria identified in Section V, as preliminarily determined by the 
Investment Committee. Applicants approved by the Investment Committee 
can expect to receive the Green Light letter via email within a few 
days of the Investment Committee's decision. The Green Light letter 
formally invites an applicant to submit its application for an SBIC 
License. The Green Light letter is only an invitation to proceed to the 
next stage in the process, not a guarantee that you will be issued an 
Early Stage SBIC license. Those applicants that do not receive a Green 
Light letter will also be notified by email within a few days of the 
Investment Committee's decision. SBA will provide feedback upon request 
to those applicants that do not receive a Green Light letter.
    C. Fundraising and Document Preparation. If you receive a Green 
Light letter and desire to be licensed this fiscal year (ends September 
30, 2013), you must submit your completed license application by June 
7, 2013 and abide by all the conditions in Section IV of this notice. 
All other recipients of a Green Light letter must submit their 
completed application within one year from the date of the Green Light 
letter.
    1. Raise Regulatory Capital. All Early Stage SBIC applicants must 
have signed capital commitments for the minimum Regulatory Capital 
needed to execute their strategy, but no less than $20 million in 
Regulatory Capital prior to filing their license application.
    2. SBIC Education. All principals of an Early Stage SBIC applicant 
that has received a Green Light letter must attend a one-day SBIC 
Regulations training class. This training is normally held several 
times per year in Washington, DC. The purpose of this class is to 
familiarize SBIC principals with the SBIC rules, regulations and 
compliance procedures. Classes are normally limited in size. Although 
an applicant may receive a license before all principals have completed 
the training, a majority of principals must do so before licensing and 
all must do so before a licensed Early Stage SBIC will be permitted to 
draw leverage. Information concerning registration for classes can be 
obtained at www.sbia.org. Certain non-principals such as members of a 
board of directors may also be required to take the class. In addition, 
any employees or consultants whom you have assigned to handle 
regulatory matters or to interact with the Office of Investment should 
attend the class.
    3. Finalize Documents & Perform Checklist. The following items must 
be completed and submitted in order to proceed to the Licensing phase:

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                                  Item
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Updated SBA Form 2181 (See Section II for more information.)
SBA Form 2182 (See Section II for more information.)
At least $20 million in Regulatory Capital evidenced by signed Capital
 Certificate in Form 2182 (Exhibit M)
$25,000 Non-refundable licensing fee
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    D. Licensing. During this stage, SBA will review your completed 
application, perform further due diligence and analysis, and make the 
final licensing decision. If you filed under Track 1 and were issued a 
Green Light letter and

[[Page 74911]]

wish to be licensed in Fiscal Year 2013, SBA must receive your 
completed license application no later than 5 p.m. ET on June 7, 2013. 
All other applications must be filed within one year of receipt of the 
Green Light Letter. In addition, you must follow all guidance 
identified in Section IV. The process for Licensing is detailed below.
    1. Submit License application. To proceed to the Licensing stage, 
applicants that have received a Green Light letter will need to submit 
all items listed in the Checklist above to the address indicated in 
your Green Light Letter. Upon receipt of the application, SBA will 
acknowledge receipt by email. Within three business days, SBA will 
determine whether the application is complete, meets the minimum 
capital requirements and satisfies management ownership diversity 
requirements. If so, SBA will formally accept the application. 
Submission of a complete application by the June 7, 2013 deadline does 
not guarantee that an applicant will be licensed by September 30, 2013. 
SBA's goal is to license all Track 1 applicants before September 30, 
2013. However, applications that do not follow the guidance in Section 
IV may require extended processing time.
    2. Background and Documentation Review. Once the application has 
been formally accepted, SBA will forward the fingerprint cards and 
Statements of Personal History to SBA's Office of Inspector General for 
processing by the FBI if the applicant did not previously submit such 
information during or after the Interview. Following a review of the 
application and legal documents, SBA will provide the applicant with a 
``comment letter.'' Applicants must respond in writing to the comment 
letter, via mail, fax or email within 30 days after the date SBA sends 
the comment letter (or within one week in order to be licensed in 
Fiscal Year 2013). Applicants that do not address, to SBA's 
satisfaction, all of the comments contained in SBA's comment letter may 
experience a delay in their licensing cycle in order to provide SBA and 
the applicant with sufficient time to resolve outstanding issues. 
Through this process, SBA hopes to resolve all issues specified in 
SBA's comment letter as expeditiously as possible. Promptness and 
responsiveness in responding to SBA's comment letter are important.
    3. Divisional Licensing Committee. Once the applicant has 
satisfactorily addressed all issues and SBA has completed its review 
and any due diligence, if necessary, and the Office of General Counsel 
has signed off on legal sufficiency of the application (including the 
final form of the organizational and other legal documents), the 
license application is presented to the Divisional Licensing Committee. 
This committee is composed of the senior managers of the Office of 
Investment. If approved by the Divisional Licensing Committee, the 
application is forwarded to the Agency Licensing Committee which is 
comprised of certain senior managers of the SBA. Prior to consideration 
by the Agency Licensing Committee, an applicant must provide a signed, 
up-to-date capital certificate showing that it has at least $2.5 
million in Leverageable Capital, consisting of cash on deposit, 
approved pre-licensing investments as permitted by this Notice, and/or 
approved organizational and operational expenses paid out of partners' 
contributed capital, and at least $20 million in Regulatory Capital. 
The applicant's selected bank must certify that the requisite funds are 
in the applicant's account and unencumbered. An applicant must also 
submit a commitment request for the amount of leverage it is seeking.
    4. Agency Licensing Committee and Administrator Approval. If the 
Agency Licensing Committee approves your license application, it will 
be forwarded to the SBA Administrator or her designee for final action 
as soon as you submit fully executed copies of all legal documents. 
(Please note that the executed documents must be identical to the 
``final form'' of the documents approved by SBA.) If the Administrator 
or her designee approves your application, your Early Stage SBIC 
license is issued.
    5. Leverage Commitments. SBA has allocated $200 million in Fiscal 
Year (``FY'') 2013 for Early Stage SBICs. SBA expects to allocate 
another $200 million in each of FY 2014 and FY 2015, and $250 million 
in FY 2016. If total leverage commitments requested for the FY 2013 
licensing cycle exceed the amount available in FY 2013, SBA will 
allocate available leverage across all FY 2013 Early Stage SBICs on a 
pro rata basis. Early Stage SBICs licensed in FY 2013 will be eligible 
to request the remainder of their uncommitted leverage request in 
subsequent fiscal years and will be given priority consideration as a 
fund with prior year leverage commitments. SBA expects to be able to 
commit the full amount of leverage that an Early Stage SBIC requests. 
However, those commitments may be approved in multiple years, depending 
on availability in each year. Early Stage SBICs that raise additional 
private capital after licensing may request leverage commitments 
against that capital. However, such requests are subject to leverage 
availability and will not be considered until all other licensee 
requests are satisfied.

IV. Early Stage SBIC LPA and Organizational Instructions

    A. Early Stage SBIC Model LPA. In order to expedite the review of 
Early Stage SBIC license applications, SBA has adopted a Model Early 
Stage SBIC Limited Partnership Agreement (``Model LPA'') that 
incorporates in Bold Arial type those provisions required by SBA. You 
must download the Model LPA at www.sba.gov/content/earlystage-model-partnership-agreement. Applicants must use the Model LPA as a template 
and follow the organizational structure of the Model LPA. Further, 
Applicants must include in their limited partnership agreements all of 
those provisions of the Model LPA that appear in Bold Arial type in the 
Model LPA. Additions, deletions and other changes or modifications to 
any of those provisions of the Model LPA that appear in Bold Arial type 
will not be accepted. Applicants are required to submit a copy of their 
limited partnership agreement black-lined against the Model LPA, with 
all of the provisions of the Model LPA in Bold Arial type retained in 
Bold Arial type, as explained in the instructions provided at the 
beginning of the Model LPA. Deviations from the guidance in this 
Section IV will add time to the licensing process. SBA provides the 
following further guidance on limited partnership agreements:
    1. SBA encourages applicants to adhere to the Model LPA to the 
maximum extent possible. All deviations from those provisions of the 
Model LPA that do not appear in Bold Arial type must be accompanied by 
a narrative explanation for those deviations. Please note that any 
deviations must have a substantive basis and may be deemed unacceptable 
by SBA.
    2. There must be no conditions or restrictions on the ability of 
the general partner to call private capital commitments except under 
the ``no fault termination of the investment period'' or ``key person'' 
provisions included in the Model LPA.
    3. Withdrawal rights are limited to those permitted by the Model 
LPA.
    4. Applicants must adhere to SBA's management fee policies 
available at www.sba.gov/content/sbic-technotes-number-7a-revised-april-2008. This policy sets a maximum allowable management fee only. 
The actual management fee will be set by negotiation between the 
management team and the limited partners and may be less than the 
maximum. Early Stage SBIC applicants should be aware that

[[Page 74912]]

the calculation of an SBIC's capital impairment percentage is affected 
by all fund expenses, including management fees. SBA will consider the 
management fee in its licensing evaluation criteria as part of fund 
economics. SBA believes that the primary incentive for fund managers 
should be carried interest rather than fees.
    5. The designation of fund expenses and expenses to be paid out of 
the management fee must be consistent with SBIC program regulations 
(see 13 CFR Sec.  107.520).
    a. Organizational costs, expenses incurred in applying for a 
license and forming the SBIC and its entity general partner (but not 
its parent fund or any other affiliate), are considered a partnership 
expense. Organizational expenses typically include items such as the 
licensing fee, cost of legal and other professional and consulting 
services, travel and other fundraising expenses, costs of preparing, 
printing and distributing the private placement memorandum or other 
offering materials, and other related expenses such as telephone and 
supply costs. SBA strongly encourages applicants to include in the LP 
agreement a reasonable cap on the total organizational costs to be paid 
by the applicant. Costs deemed excessive can be paid by the general 
partner or management company or deducted from the applicant's 
Regulatory Capital prior to licensing.
    b. Unreimbursed expenses on deals that do not close may be 
designated as a partnership expense but must be capped at a reasonable 
level.
    6. Right of limited partners to remove general partner--Provisions 
allowing removal of the general partner without cause (``no-fault 
divorce'' provisions) are permitted only after the Early Stage SBIC has 
repaid all outstanding leverage and any other amounts payable to SBA 
and has surrendered its SBIC license.
    7. SBA will not consider amendments to an Early Stage SBIC's LPA 
for a minimum of six months after licensing.
    B. Organization. Early Stage SBIC applicants must adhere to the 
following rules regarding organizational structure:
    1. Applicant cannot be a BDC or other public entity or a subsidiary 
of any such entity.
    2. All provisions governing the operation of the SBIC should be 
included in the limited partnership agreement to the maximum extent 
possible. Side letters may materially delay your processing time.
    3. Applicant must adopt SBA Model Valuation Guidelines.
    4. Drop-down SBICs
    a. The drop-down structure should be used only when it has a clear 
business purpose:
    i. Example 1--Parent fund has already raised capital and begun 
operating and wants to commit a portion of its capital to an Early 
Stage SBIC.
    ii. Example 2--Substantial capital will be retained for investment 
at the parent level. (Managers might also consider the alternative of 
structuring a non-SBIC fund side by side with the SBIC.)
    b. Drop-down funds must have one parent fund only and the parent 
fund must be a U.S. entity.
    c. Parent must qualify as a traditional investment company based on 
established SBA precedent.
    d. Parent must disclose the identity of all of its investors.
    e. All of the investors in the parent fund (the SBIC's ``Class A'' 
limited partner) must agree to be ``Class B'' limited partners of the 
SBIC with an obligation to fund the Early Stage SBIC capital calls if 
the Class A limited partner does not. The obligation of the Class B 
limited partners to the Early Stage SBIC is reduced dollar for dollar 
as the Parent Fund contributes capital to the SBIC. The Model LPA 
contains required provisions for drop-down funds.
    f. The Class B limited partners' commitments to the SBIC applicant 
must be expressed as a specific dollar amount (not just as the 
``proportionate share'' of parent fund's commitment).
    g. The total dollar amount of Class B commitments must be equal to 
the Class A limited partner's unfunded commitment to the SBIC. SBA will 
not require Class B commitments if the SBIC's Regulatory Capital will 
not include any unfunded commitments from the Class A limited partner.
    C. Capitalization. Applicants must raise the minimum $20 million in 
Regulatory Capital by the time the license application is submitted.
    1. Capital commitments from limited partners must be made directly 
to the SBIC (and its parent fund, in the case of a drop-down) with no 
intermediaries involved.
    2. The Early Stage SBIC applicant must have the unconditional 
ability to legally enforce collection of each capital commitment.
    3. Capital Certificate. Capital commitments must be documented in 
the capital certificate (Section M of SBA Form 2182) and comply with 
the following:
    a. A signed Capital Certificate must be submitted with the license 
application.
    b. The only permitted conditions on private capital commitments 
are:
    i. Receipt of Early Stage SBIC license.
    ii. Approval of limited partnership agreement.
    c. Individual investors must list primary residence address, not a 
business address.
    d. Street addresses are required (no P.O. Box addresses).
    4. A dual commitment may be obtained to back up the commitment of 
any direct investor in the SBIC who is not an Institutional Investor.
    5. Capital commitments by the principals, general partner, or their 
affiliates must be payable in cash when called (cannot be satisfied 
with notes or management fee waivers).

D. General Partner

    1. All principals must:
    a. Hold direct ownership interests in and be the direct individual 
managers of the general partner, with no intervening entities.
    b. Receive carried interest directly from the general partner; for 
drop-down SBICs, carried interest may be received from the parent 
fund's general partner.
    2. A maximum of 25% of the carried interest may be allocated to 
non-principals.
    3. Any provision to remove or terminate a principal must be spelled 
out within the general partner's organizational document and must not 
be tied to events occurring under other agreements (e.g., a principal's 
employment agreement with the management company).
    E. Investment Advisor (``Management Company''). Ownership of the 
Management Company that is highly disproportionate to the ownership of 
the general partner (e.g., one principal is the 100% owner) is not 
viewed favorably by SBA, but may be acceptable if there are adequate 
checks and balances on the powers of the dominant owner. Areas that 
cannot be subject to unilateral decision-making include the following:
    1. Power to remove or terminate other principals.
    2. Power to change the composition of the Early Stage SBIC's 
investment committee.

V. Early Stage SBIC Licensing Evaluation Criteria

    A. General Criteria. SBA will evaluate an Early Stage SBIC license 
applicant based on the submitted application materials, Investment 
Committee interview with the applicant's management team, and the 
results of background investigations, public record searches, and other 
due diligence conducted by SBA and other Federal agencies. SBA will 
evaluate an Early Stage SBIC license applicant based on

[[Page 74913]]

the same factors applicable to other license applicants, as set forth 
in 13 CFR Sec.  107.305, with particular emphasis on managers' skills 
and experience in evaluating and investing in early stage companies. As 
discussed in the Final Rule, evaluation criteria fall into four areas: 
(A) Management Team; (B) Track Record; (C) Proposed Investment 
Strategy; and (D) Organizational Structure and Fund Economics. You 
should review these regulations prior to completing your MAQ.
    B. Managing SBA Leverage. SBA will pay particular attention to how 
a team's investment strategy works with proposed SBA leverage. Early 
Stage Debenture leverage either requires a 5 year interest and annual 
charge reserve from the date of issue or is structured with an original 
issue discount that covers the interest and annual charges for the 
first 5 years. In either case, Early Stage SBICs must identify how 
quarterly interest payments beginning in the 6th year from Debenture 
issue will be met. Sources of liquidity to make interest payments may 
include (a) private capital; (b) realizations; or (c) current income. 
As part of your plan of operations, you should carefully consider how 
your investment strategy will work with SBA leverage and make 
appropriate suggestions to manage risk. Risk mitigation strategies 
might include making some investments in current pay instruments; 
taking down less than a full tier of leverage, (i.e., leverage less 
than 100% of Regulatory Capital); taking leverage down later in the 
fund's life; lowering management expenses; and reserving more private 
capital. The strategies you choose to employ should be appropriate for 
your management team's track record and investment strategy.
    C. SBA Diversification Rights. Per 13 CFR 107.320, SBA reserves the 
right to maintain diversification among Early Stage SBICs with respect 
to (i) the year in which they commence operations (``vintage year'') 
and (ii) geographic location.
    1. Vintage Year Diversification. Vintage year has a major impact on 
the return expectations of a fund and excessive concentration in a 
single year could substantially increase program risk. Therefore, SBA 
reserves the right, when licensing Early Stage SBICs, to maintain 
diversification across vintage years. SBA believes that it will be able 
to manage vintage year diversification through its call process. For 
example, if SBA approves a significant number of applicants in FY 2013, 
it may not hold a call in FY 2014. This will also help facilitate the 
allocation of early stage debenture leverage. As such, potential 
applicants should not assume that SBA will hold calls for new MAQs each 
year. SBA will announce all new calls through the Federal Register.
    2. Geographic Diversification. All Early Stage SBICs must first 
meet SBA's basic licensing criteria. After those criteria are met, SBA 
reserves the right to maintain diversification among Early Stage SBICs 
with respect to the geographic location in which the Early Stage SBIC 
expects to invest.

    Dated: December 13, 2012.
Sean Greene,
Associate Administrator, For Investment and Special Advisor for 
Innovation.
[FR Doc. 2012-30431 Filed 12-17-12; 8:45 am]
BILLING CODE 8025-01-P