Small Business Investment Companies-Early Stage, 14034-14037 [2015-06182]
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Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Proposed Rules
Gallagher; telephone: 301–415–3463;
email: Carol.Gallagher@nrc.gov. For
technical questions, contact the
individual listed in the FOR FURTHER
INFORMATION CONTACT section of this
document.
• Email comments to:
Rulemaking.Comments@nrc.gov. If you
do not receive an automatic email reply
confirming receipt, then contact us at
301–415–1677.
• Fax comments to: Secretary, U.S.
Nuclear Regulatory Commission at 301–
415–1101.
• Mail comments to: Secretary, U.S.
Nuclear Regulatory Commission,
Washington, DC 20555–0001, ATTN:
Rulemakings and Adjudications Staff.
• Hand deliver comments to: 11555
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20852, between 7:30 a.m. and 4:15 p.m.
(Eastern Time) Federal workdays;
telephone: 301–415–1677.
For additional direction on obtaining
information and submitting comments,
see ‘‘Obtaining Information and
Submitting Comments’’ in the
SUPPLEMENTARY INFORMATION section of
this document.
FOR FURTHER INFORMATION CONTACT:
Cardelia Maupin, Office of Nuclear
Material Safety and Safeguards, U.S.
Nuclear Regulatory Commission,
Washington, DC 20555–0001; telephone:
301–415–2312; email:
Cardelia.Maupin@nrc.gov.
SUPPLEMENTARY INFORMATION:
I. Obtaining Information and
Submitting Comments
wreier-aviles on DSK5TPTVN1PROD with PROPOSALS
A. Obtaining Information
Please refer to Docket ID NRC–2009–
0279 when contacting the NRC about
the availability of information regarding
this document. You may obtain
publicly-available information related to
this document by any of the following
methods:
• Federal Rulemaking Web site: Go to
https://www.regulations.gov and search
for Docket ID NRC–2009–0279.
• NRC’s Agencywide Documents
Access and Management System
(ADAMS): You may obtain publiclyavailable documents online in the
ADAMS Public Documents collection at
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adams.html. To begin the search, select
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select ‘‘Begin Web-based ADAMS
Search.’’ For problems with ADAMS,
please contact the NRC’s Public
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email to pdr.resource@nrc.gov. The
ANPR document is available in ADAMS
under Accession No. ML14183B023.
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• NRC’s PDR: You may examine and
purchase copies of public documents at
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White Flint North, 11555 Rockville
Pike, Rockville, Maryland 20852.
B. Submitting Comments
Please include Docket ID NRC–2009–
0279 in your comment submission.
The NRC cautions you not to include
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The NRC will post all comment
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Your request should state that the NRC
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submissions to remove such information
before making the comment
submissions available to the public or
entering the comment submissions into
ADAMS.
II. Further Information
On July 25, 2014 (79 FR 43284), the
NRC published for comment an ANPR
to obtain input from members of the
public on the development of a draft
regulatory basis. The draft regulatory
basis would identify potential changes
to the NRC’s current radiation
protection regulations. The potential
changes, if implemented, would achieve
a closer alignment between the NRC’s
radiation protection regulations and the
recommendations in ICRP Publication
103 (2007). The ANPR identifies
specific questions and issues with
respect to a possible revision of the
NRC’s radiation protection
requirements. Comments, including
responses to the specific questions, will
be considered by the NRC staff when it
develops the draft regulatory basis.
The Part 20 of Title 10 of the Code of
Federal Regulations (10 CFR) ANPR
public comment period was originally
scheduled to close on November 24,
2014, after a 120-day comment period.
In response to several requests from
members of the public received
throughout November 2014, the NRC
extended the public comment period on
the ANPR, by an additional 120 days, to
March 24, 2015 (79 FR 69065;
November 20, 2014).
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In response to a second request, dated
February 18, 2015, from several
members of the public, the NRC is now
extending the public comment period
by an additional 90 days. The deadline
for submitting comments is now
extended from March 24, 2015, to June
22, 2015.
Dated at Rockville, Maryland, this 11th day
of March 2015.
For the Nuclear Regulatory Commission,
Laura A. Dudes,
Director, Division of Material Safety, State,
Tribal and Rulemaking Programs, Office of
Nuclear Material Safety and Safeguards.
[FR Doc. 2015–06244 Filed 3–17–15; 8:45 am]
BILLING CODE 7590–01–P
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245–AG68
Small Business Investment
Companies—Early Stage
U.S. Small Business
Administration.
ACTION: Advance Notice of Proposed
Rulemaking (ANPRM).
AGENCY:
The U.S. Small Business
Administration (SBA) is seeking input
and comments on its Early Stage Small
Business Investment Company (SBIC)
initiative, promulgated in the final rule
on April 27, 2012. The intent of the
initiative was to license and provide
SBA leverage to SBICs over a 5-year
period (fiscal years 2012 through 2016)
that would focus on making investments
in early stage small businesses.
Although 58 investment funds applied
to the program, to date SBA has only
licensed 5 Early Stage SBICs. SBA is
seeking input from the public to
determine whether existing market
conditions warrant SBA continuing to
license Early Stage SBICs past fiscal
year 2016 on an ongoing basis and, if so,
what changes should be made to the
program to attract qualified early stage
fund managers.
DATES: Comments must be received on
or before May 18, 2015.
ADDRESSES: You may submit comments,
identified by RIN 3245–AG68, by any of
the following methods:
• Federal Rulemaking Portal: https://
www.regulations.gov. Please follow the
instructions for submitting comments.
• Mail, Hand Delivery/Courier: Javier
Saade, Associate Administrator for the
Office of Investment and Innovation,
U.S. Small Business Administration,
409 Third Street SW., Washington, DC
20416.
SUMMARY:
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Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Proposed Rules
SBA will post comments on this
Advance Notice of Proposed
Rulemaking on https://
www.regulations.gov. If you wish to
submit confidential business
information (CBI) as defined in the User
Notice at https://www.regulations.gov,
please submit the information to
Theresa Jamerson, Office of Investment
and Innovation, 409 Third Street SW.,
Washington, DC 20416. Highlight the
information that you consider to be CBI
and explain why you believe this
information should be held confidential.
SBA will review your information and
determine whether it will make the
information public.
FOR FURTHER INFORMATION CONTACT:
Theresa Jamerson, Office of Investment
and Innovation, (202) 205–7563.
SUPPLEMENTARY INFORMATION:
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I. Background Information
Early Stage Small Business
Investment Company Initiative. In the
Small Business Investment Act of 1958
(the Act), Congress created the Small
Business Investment Company (SBIC)
program to ‘‘stimulate and supplement
the flow of private equity capital and
long-term loan funds which smallbusiness concerns need for the sound
financing of their business operations
and for their growth, expansion, and
modernization, and which are not
available in adequate supply. * * *’’ 15
U.S.C. 661. Congress intended that the
program ‘‘be carried out in such manner
as to insure the maximum participation
of private financing sources.’’ Id. In
accordance with that policy, the U.S.
Small Business Administration (SBA),
through the SBIC program, does not
invest directly in small businesses, but
provides leverage to SBICs, privatelyowned and professionally managed forprofit investment funds licensed by
SBA, by guaranteeing the payment of
debentures issued by SBICs
(Debentures). These SBICs in turn make
loans to, and investments in, qualifying
small businesses.
Since Fiscal Year (FY) 2000, the SBIC
Debenture program has operated at zero
subsidy cost, meaning that expected
losses to the program’s portfolio must be
fully recouped through the collection of
SBIC leverage fees in order to keep the
program at zero subsidy cost to the
taxpayer. By statute, SBIC leverage fees
include a 1% commitment fee, a 2%
draw fee, and an annual charge set at
the time of commitment and paid on
outstanding leverage in conjunction
with interest payments. 15 U.S.C. 683(i).
The annual charge is formulated each
year to keep the program at zero subsidy
cost, but may not, by statute, exceed
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1.38%. 15 U.S.C. 683(b). Because the
standard Debenture (Current Pay
Debenture) requires semi-annual
interest payments, most SBICs structure
their investments as loans or mezzanine
debt to finance later stage small
businesses with positive operating cash
flow so that they can meet requisite
interest payments.
On April 27, 2012, SBA published a
final rule (77 FR 25042) to define a new
sub-category of SBICs as part of
President Obama’s Start-up America
initiative. SBA’s intent was to license
over a 5-year period (fiscal years 2012
through 2016) venture funds focused on
early stage businesses and to guarantee
Debentures in an amount up to one-half
of each fund’s total capitalization. SBA
allocated $1 billion of its SBIC
Debenture leverage authorization over
these years to this effort.
Although SBA has received 58
applications to the Early Stage SBIC
program, to date, SBA has only licensed
5 Early Stage SBICs due to the quality
of the application pool and SBA’s
rigorous licensing standards. SBA is
seeking input on whether a market need
for the program remains and, if so, what
changes should SBA consider in order
to attract Early Stage fund managers
with successful track records.
Early Stage SBIC Key Requirements
Summary. Current regulations identify
special requirements for Early Stage
SBICs to manage the risk associated
with these funds investing in seed and
early stage businesses, including the
following:
(1) Licensing Process—§ 107.310: SBA
uses a call process rather than accepting
rolling applications as in the regular
SBIC program.
(2) Required Investments—
§ 107.1120(k): Early Stage SBICs must
invest at least 50% of aggregate
financing dollars into Early Stage
companies, as defined in § 107.50, but
generally defined as companies that
have not yet achieved positive operating
cash flow as of the date of the initial
investment.
(3) Minimum Regulatory Capital—
§ 107.210(3): Early Stage SBICs must
have at least $20 million in Regulatory
Capital (qualifying Private Capital as
defined in § 107.50).
(4) Leverage:
(a) Maximum Leverage—§ 107.1150:
Early Stage SBICs may qualify for
leverage up to 100% of Regulatory
Capital (also called ‘‘one tier of
leverage’’), not to exceed $50 million.
(b) SBA Leverage Fees—§ 107.1130:
All SBICs issuing Debentures, including
Early Stage SBICs, must pay 3% in upfront fees (1% at commitment and 2%
at draw) and an additional SBA fee, not
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to exceed 1.38 percent per annum, on
outstanding Debentures paid at the same
time as interest.
(c) Type of Leverage: Early Stage
SBICs may choose from two types of
leverage both with ten year maturities
and subject to Early Stage Distribution
rules:
(i) Early Stage Current Pay Debenture:
Requires quarterly payments for interest
and SBA annual fees. Early Stage SBICs
choosing to use the Current Pay
Debenture are required to maintain a 5year interest reserve per § 107.1181. The
interest reserve may include unfunded
commitments or cash reserves which
could be funded from Debenture
proceeds. The interest reserve is
intended to provide a pool of funds
from which Early Stage SBICs can pay
interest and annual fees while their
investments mature.
(ii) Discounted/Accruing Debenture:
Debenture issued at a discount of 5
years of annual fees and interest
charges, so that the amount owed
accrues over a 5-year period to face
value. After the 5-year period, quarterly
payments for interest and annual fees
must be paid on an ongoing basis.
(5) Distribution Rules—§ 107.1180:
Before an Early Stage SBIC with
outstanding leverage may distribute to
its investors, it must first pay all
required SBA interest and charges and
any leverage principal due at maturity.
After those payments are made, if the
Early Stage SBIC’s capital impairment
percentage, defined in § 107.1840, is 50
percent or more, and the SBIC’s leverage
ratio (defined as outstanding leverage to
Leverageable Capital) exceeds 0.5, it
must repay all outstanding SBIC
Debentures before distributing to private
investors. Otherwise, the Early Stage
SBIC must repay SBA leverage, at a
minimum, pro rata (in proportion) with
any distributions returned to private
investors on a cumulative basis.
(6) Restrictions on Third-Party Debt—
§ 107.565: Early Stage SBICs must seek
SBA’s prior written approval before
incurring any third-party debt, except
for accounts payable from routine
business operations.
(7) Capital Impairment Percentage
(CIP) §§ 107.1830–1850: CIP is the
primary financial metric SBA uses to
evaluate an SBIC’s ability to repay its
leverage. CIP measures the losses
incurred by an SBIC relative to its
Regulatory Capital. If an SBIC exceeds
its maximum allowable CIP, SBA has
the right to, among other things, declare
the entire indebtedness of the SBIC’s
Debentures immediately due and
payable; and institute proceedings for
the appointment of SBA as receiver of
the SBIC. Because Early Stage SBICs are
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limited to one tier of leverage, the
maximum allowable CIP ranges from
45% to 70%, depending on the
percentage of equity. If the percentage of
equity investments at cost exceeds 67%,
the maximum allowable CIP would be
70%.
II. Market Gap
(1) Market Need. According to data
from PricewaterhouseCoopers
Moneytree (https://
www.pwcmoneytree.com/), financings to
seed and early stage companies by
venture funds has grown from $2.16
billion in the first quarter of calendar
year 2012 to over $4 billion in the
second quarter of calendar year 2014,
the highest amount in any quarter since
2000. As a federal credit program, SBA
seeks to direct capital to gaps in the
marketplace. Given the growth in early
stage financings since 2012, SBA is
trying to determine whether it should
continue to license Early Stage SBICs
past 2016. SBA is seeking input from
the public with regard to the following
questions:
(a) Are there barriers preventing
promising early stage small businesses
from being financed, and, if so, what are
the barriers?
(b) Are there gaps in the financial
markets with regard to financing early
stage or seed companies in the United
States? If so, what evidence exists to
identify and verify these gaps?
(c) If there are no or limited gaps in
the financial markets for early stage and
seed companies in the United States,
should SBA continue the Early Stage
SBIC program past 2016, but issue a call
for Early Stage SBIC applications only if
and when identifiable market gaps
occur? If so, what evidence should SBA
use to identify declining market
conditions or gaps in the market?
(2) Targeted Early Stage SBIC
Participants. The Early Stage SBIC
initiative focused on more established
and traditional early stage venture funds
to participate in the program because
these funds’ investment strategy
effectively utilizes SBA’s leverage to
finance small businesses. SBA
recognizes that many early stage and
seed businesses may obtain capital from
other sources than traditional early
stage/seed venture funds. Accelerator
funds, incubators, angel investment
funds or other types of similar funds—
venture capital funds that generally
make a substantial number of relatively
small-dollar equity investments in seed
and early stage businesses—have not
demonstrated significant interest in
SBA’s Early Stage SBIC initiative. Could
these funds effectively utilize Debenture
leverage as part of their investment
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strategy in a way that would not
increase the risk profile of the SBIC
program. What changes to the Early
Stage SBIC program would SBA need to
make in order to attract qualified funds
that use this investment strategy? Would
the minimum regulatory capital need to
be changed? Would the leverage terms
need to be changed? What data is
available to assess the risk associated
with these types of funds?
III. Early Stage SBIC Program Structure
(1) Fund-Level Debt Versus Equity.
Based on discussions with early stage
fund managers and limited partners,
SBA understands that most early stage
funds would prefer equity rather than
fund-level debt. However, SBA is only
authorized to guarantee SBIC
Debentures for its licensed funds. SBA
also recognizes the potential mismatch
between Debenture leverage and early
stage portfolio company cash flows.
Because most early stage portfolio
companies do not have the cash flow to
service debt, most early stage financings
are structured as equity. SBA tried to
compensate for this in the Early Stage
SBIC program by implementing a
discounted debenture in which leverage
is issued at a discount and interest and
charges accrue for 5 years before the
fund would be required to make
payments on a quarterly basis.
Alternatively, Early Stage SBICs could
use the Current Pay Debenture and pay
interest and charges on a quarterly basis
using the required interest reserve.
SBA has heard from members of the
venture capital industry that many early
stage funds are not interested in
leverage. SBA seeks input from the
public on whether fund-level debt is of
use to early stage fund managers or
whether concerns exist with regard to
current SBIC Early Stage Debenture
leverage terms.
(2) Early Stage SBIC Leverage Terms.
Early Stage SBICs are expected to have
significantly higher losses than regular
SBICs, due to the risk associated with
their portfolios. SBA structured the
Early Stage SBIC program so that it
could be run with minimum impact to
the regular SBIC Debenture program.
This includes limiting the amount of
Early Stage leverage as a percentage of
the overall SBIC portfolio. Key Early
Stage SBIC requirements are
summarized in Section I of this
ANPRM. SBA seeks input from the
public to identify how Early Stage SBIC
requirements could be improved
without increasing SBA’s credit risk. In
particular, SBA has the following
questions:
(a) Minimum Regulatory Capital:
Currently, Early Stage SBICs must have
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at least $20 million in Regulatory
Capital. Should SBA modify this
Regulatory Capital requirement in order
to improve the number of qualified
applicants to the program?
(b) Maximum Leverage: SBA set the
maximum leverage for Early Stage SBICs
at $50 million based on its overall
allocation of $200 million per year, in
order to provide some level of portfolio
diversification. Should SBA increase the
maximum leverage available to Early
Stage SBICs, for example, to $100
million, approximately half of any
year’s allocation?
(c) Maximum Leverage Ratio:
Currently, SBA provides up to one tier
of leverage, not to exceed the maximum,
in order to limit its credit risk. Should
SBA lower the maximum leverage ratio
to help further reduce its credit risk?
What maximum leverage ratio is
appropriate?
(d) Interest Reserve: If Early Stage
SBICs use the Current Pay Debenture,
they must maintain a 5-year interest
reserve to make interest and annual
charge payments. SBA set this interest
reserve to make sure that Early Stage
SBICs would have sufficient funds to
make required interest payments for the
first 5 years and to lower the overall loss
rate. Would removing the interest
reserve attract more qualified
applicants? If so, since the interest
reserve was put in place to mitigate
SBA’s risk and limit the increase to the
SBIC Debenture annual charge, what
actions should SBA consider to help
mitigate SBA’s risk?
(3) Other Early Stage SBIC
Regulations. SBA invites comments on
other aspects of Early Stage regulations,
including the following:
(a) Licensing Process: Would a rolling
licensing process (where SBA accepts
applications throughout the year) versus
the Early Stage Call process, identified
in § 107.310, be preferred and/or attract
more qualified applicants to the
program?
(b) Third-Party Debt: Do third-party
debt restrictions identified in § 107.565
detract from the program and what
changes could be made to achieve the
same credit risks for SBA?
(4) Other SBIC Regulations and
Guidelines. SBA also invites comments
on other SBIC regulatory requirements
as identified in 13 CFR part 107 that
may be of particular concern to Early
Stage SBIC applicants. For example,
some Early Stage SBICs and potential
applicants have indicated concerns with
SBA’s Valuation Guidelines (https://
www.sba.gov/content/valuationguidelines-sbics). SBA is interested in
feedback as to what those concerns are
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and what changes industry members
would recommend.
Dated: March 11, 2015.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2015–06182 Filed 3–17–15; 8:45 am]
BILLING CODE 8025–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 70
[EPA–R03–OAR–2015–0119; FRL–9924–56–
Region 3]
Clean Air Act Title V Operating Permit
Program Revision; Pennsylvania
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:
EPA is proposing to approve
a revision to the Pennsylvania Title V
Operating Permit Program submitted by
the Commonwealth of Pennsylvania on
February 11, 2014. The Pennsylvania
Operating Permit Program is
implemented through its Title V
Operating Permits Rule, codified at
Subchapter G of Chapter 127 of Title 25
of the Pennsylvania Code. The February
11, 2014 revision amends the title V fee
program that funds the Pennsylvania
Title V Operating Permit Program.
These changes resulted in substantial
revisions to Pennsylvania’s Title V
Operating Permit Program. EPA is
proposing to approve these revisions.
The intended effect of this action is to
improve the Commonwealth’s title V
operating permit program.
DATES: Written comments must be
received on or before April 17, 2015.
ADDRESSES: Submit your comments,
identified by Docket ID Number EPA–
R03–OAR–2015–0119 by one of the
following methods:
A. www.regulations.gov. Follow the
on-line instructions for submitting
comments.
B. Email: Campbell.Dave@epa.gov.
C. Mail: EPA–R03–OAR–2015–0119,
David Campbell, Associate Director,
Office of Permits and Air Toxics,
Mailcode 3AP10, U.S. Environmental
Protection Agency, Region III, 1650
Arch Street, Philadelphia, Pennsylvania
19103.
D. Hand Delivery: At the previouslylisted EPA Region III address. Such
deliveries are only accepted during the
Docket’s normal hours of operation, and
special arrangements should be made
for deliveries of boxed information.
Instructions: Direct your comments to
Docket ID No. EPA–R03–OAR–2015–
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SUMMARY:
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0119. EPA’s policy is that all comments
received will be included in the public
docket without change, and may be
made available online at
www.regulations.gov, including any
personal information provided, unless
the comment includes information
claimed to be Confidential Business
Information (CBI) or other information
whose disclosure is restricted by statute.
Do not submit information that you
consider to be CBI, or otherwise
protected, through www.regulations.gov
or email. The www.regulations.gov Web
site is an ‘‘anonymous access’’ system,
which means EPA will not know your
identity or contact information unless
you provide it in the body of your
comment. If you send an email
comment directly to EPA without going
through www.regulations.gov, your
email address will be automatically
captured and included as part of the
comment that is placed in the public
docket and made available on the
Internet. If you submit an electronic
comment, EPA recommends that you
include your name and other contact
information in the body of your
comment and with any disk or CD–ROM
you submit. If EPA cannot read your
comment due to technical difficulties
and cannot contact you for clarification,
EPA may not be able to consider your
comment. Electronic files should avoid
the use of special characters, any form
of encryption, and be free of any defects
or viruses.
Docket: All documents in the
electronic docket are listed in the
www.regulations.gov index. Although
listed in the index, some information is
not publicly available, i.e., CBI or other
information whose disclosure is
restricted by statute. Certain other
material, such as copyrighted material,
is not placed on the Internet and will be
publicly available only in hard copy
form. Publicly available docket
materials are available either
electronically in www.regulations.gov or
in hard copy during normal business
hours at the Air Protection Division,
U.S. Environmental Protection Agency,
Region III, 1650 Arch Street,
Philadelphia, Pennsylvania 19103.
Copies of the State submittal are
available at the Pennsylvania
Department of Environmental
Protection, Bureau of Air Quality
Control, P.O. Box 8468, 400 Market
Street, Harrisburg, Pennsylvania 17105.
FOR FURTHER INFORMATION CONTACT:
Gerallyn Duke, (215) 814–2084, or by
email at Duke.Gerallyn@epa.gov.
SUPPLEMENTARY INFORMATION:
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I. Background
EPA granted full approval of the
Pennsylvania Title V Operating Permits
Program on July 30, 1996. See 61 FR
39597. Under 40 CFR 70.9(a) and (b), an
approved state title V operating permits
program must require that the owners or
operators of part 70 sources pay annual
fees, or the equivalent over some other
period, that are sufficient to cover the
permit program costs and ensure that
any fee required under 40 CFR 70.9 is
used solely for permit program costs.
The fee schedule must result in the
collection and retention of revenues
sufficient to cover the permit program
costs.
Pennsylvania’s initial title V permit
emission fee, established in 1994 at 25
PA Code 127.705, was $37 per ton of
regulated pollutant per title V facility.
Pennsylvania’s fee has been increased
each year since 1994 by the percentage,
if any, by which the Consumer Price
Index (CPI) for the most recent calendar
year exceeded the CPI for the previous
calendar year. Under that regulatory
framework, the annual emission fee for
emissions occurring in calendar year
2012 was $57.50 per ton of regulated
pollutant for emissions of up to 4,000
tons of each regulated pollutant. The fee
structure has not been revised since
1994.
Pennsylvania has determined that
title V annual emission fee revenues
collected are no longer sufficient to
cover title V program costs. Installation
of air pollution control technology over
the past two decades on major
stationary sources, the retirement or
curtailment of operations by major
sources, and the conversion at many
major facilities from burning coal or oil
to burning natural gas have resulted in
decreased emission of regulated
pollutants that are subject to annual
emission fees, and revenues collected
have been decreasing as a result. The
decline in interest rates paid on savings
account balances used by the
Commonwealth to manage permit fees
collected also has affected the funds
available to Pennsylvania, as the
investments earn less interest in the
current economy compared to the early
years of the title V program. Pursuant to
40 CFR 70.4(i)(2), when EPA receives a
title V program revision, EPA will
publish its proposed approval or
disapproval in the Federal Register and
provide opportunity for comment.
II. Summary of Program Revision
In the February 11, 2014 program
revision, Pennsylvania has included
revised 25 PA Code 127.705 which
Pennsylvania has amended to increase
E:\FR\FM\18MRP1.SGM
18MRP1
]]>Agencies
[Federal Register Volume 80, Number 52 (Wednesday, March 18, 2015)]
[Proposed Rules]
[Pages 14034-14037]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06182]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245-AG68
Small Business Investment Companies--Early Stage
AGENCY: U.S. Small Business Administration.
ACTION: Advance Notice of Proposed Rulemaking (ANPRM).
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SUMMARY: The U.S. Small Business Administration (SBA) is seeking input
and comments on its Early Stage Small Business Investment Company
(SBIC) initiative, promulgated in the final rule on April 27, 2012. The
intent of the initiative was to license and provide SBA leverage to
SBICs over a 5-year period (fiscal years 2012 through 2016) that would
focus on making investments in early stage small businesses. Although
58 investment funds applied to the program, to date SBA has only
licensed 5 Early Stage SBICs. SBA is seeking input from the public to
determine whether existing market conditions warrant SBA continuing to
license Early Stage SBICs past fiscal year 2016 on an ongoing basis
and, if so, what changes should be made to the program to attract
qualified early stage fund managers.
DATES: Comments must be received on or before May 18, 2015.
ADDRESSES: You may submit comments, identified by RIN 3245-AG68, by any
of the following methods:
Federal Rulemaking Portal: https://www.regulations.gov.
Please follow the instructions for submitting comments.
Mail, Hand Delivery/Courier: Javier Saade, Associate
Administrator for the Office of Investment and Innovation, U.S. Small
Business Administration, 409 Third Street SW., Washington, DC 20416.
[[Page 14035]]
SBA will post comments on this Advance Notice of Proposed
Rulemaking on https://www.regulations.gov. If you wish to submit
confidential business information (CBI) as defined in the User Notice
at https://www.regulations.gov, please submit the information to Theresa
Jamerson, Office of Investment and Innovation, 409 Third Street SW.,
Washington, DC 20416. Highlight the information that you consider to be
CBI and explain why you believe this information should be held
confidential. SBA will review your information and determine whether it
will make the information public.
FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment
and Innovation, (202) 205-7563.
SUPPLEMENTARY INFORMATION:
I. Background Information
Early Stage Small Business Investment Company Initiative. In the
Small Business Investment Act of 1958 (the Act), Congress created the
Small Business Investment Company (SBIC) program to ``stimulate and
supplement the flow of private equity capital and long-term loan funds
which small-business concerns need for the sound financing of their
business operations and for their growth, expansion, and modernization,
and which are not available in adequate supply. * * *'' 15 U.S.C. 661.
Congress intended that the program ``be carried out in such manner as
to insure the maximum participation of private financing sources.'' Id.
In accordance with that policy, the U.S. Small Business Administration
(SBA), through the SBIC program, does not invest directly in small
businesses, but provides leverage to SBICs, privately-owned and
professionally managed for-profit investment funds licensed by SBA, by
guaranteeing the payment of debentures issued by SBICs (Debentures).
These SBICs in turn make loans to, and investments in, qualifying small
businesses.
Since Fiscal Year (FY) 2000, the SBIC Debenture program has
operated at zero subsidy cost, meaning that expected losses to the
program's portfolio must be fully recouped through the collection of
SBIC leverage fees in order to keep the program at zero subsidy cost to
the taxpayer. By statute, SBIC leverage fees include a 1% commitment
fee, a 2% draw fee, and an annual charge set at the time of commitment
and paid on outstanding leverage in conjunction with interest payments.
15 U.S.C. 683(i). The annual charge is formulated each year to keep the
program at zero subsidy cost, but may not, by statute, exceed 1.38%. 15
U.S.C. 683(b). Because the standard Debenture (Current Pay Debenture)
requires semi-annual interest payments, most SBICs structure their
investments as loans or mezzanine debt to finance later stage small
businesses with positive operating cash flow so that they can meet
requisite interest payments.
On April 27, 2012, SBA published a final rule (77 FR 25042) to
define a new sub-category of SBICs as part of President Obama's Start-
up America initiative. SBA's intent was to license over a 5-year period
(fiscal years 2012 through 2016) venture funds focused on early stage
businesses and to guarantee Debentures in an amount up to one-half of
each fund's total capitalization. SBA allocated $1 billion of its SBIC
Debenture leverage authorization over these years to this effort.
Although SBA has received 58 applications to the Early Stage SBIC
program, to date, SBA has only licensed 5 Early Stage SBICs due to the
quality of the application pool and SBA's rigorous licensing standards.
SBA is seeking input on whether a market need for the program remains
and, if so, what changes should SBA consider in order to attract Early
Stage fund managers with successful track records.
Early Stage SBIC Key Requirements Summary. Current regulations
identify special requirements for Early Stage SBICs to manage the risk
associated with these funds investing in seed and early stage
businesses, including the following:
(1) Licensing Process--Sec. 107.310: SBA uses a call process
rather than accepting rolling applications as in the regular SBIC
program.
(2) Required Investments--Sec. 107.1120(k): Early Stage SBICs must
invest at least 50% of aggregate financing dollars into Early Stage
companies, as defined in Sec. 107.50, but generally defined as
companies that have not yet achieved positive operating cash flow as of
the date of the initial investment.
(3) Minimum Regulatory Capital--Sec. 107.210(3): Early Stage SBICs
must have at least $20 million in Regulatory Capital (qualifying
Private Capital as defined in Sec. 107.50).
(4) Leverage:
(a) Maximum Leverage--Sec. 107.1150: Early Stage SBICs may qualify
for leverage up to 100% of Regulatory Capital (also called ``one tier
of leverage''), not to exceed $50 million.
(b) SBA Leverage Fees--Sec. 107.1130: All SBICs issuing
Debentures, including Early Stage SBICs, must pay 3% in up-front fees
(1% at commitment and 2% at draw) and an additional SBA fee, not to
exceed 1.38 percent per annum, on outstanding Debentures paid at the
same time as interest.
(c) Type of Leverage: Early Stage SBICs may choose from two types
of leverage both with ten year maturities and subject to Early Stage
Distribution rules:
(i) Early Stage Current Pay Debenture: Requires quarterly payments
for interest and SBA annual fees. Early Stage SBICs choosing to use the
Current Pay Debenture are required to maintain a 5-year interest
reserve per Sec. 107.1181. The interest reserve may include unfunded
commitments or cash reserves which could be funded from Debenture
proceeds. The interest reserve is intended to provide a pool of funds
from which Early Stage SBICs can pay interest and annual fees while
their investments mature.
(ii) Discounted/Accruing Debenture: Debenture issued at a discount
of 5 years of annual fees and interest charges, so that the amount owed
accrues over a 5-year period to face value. After the 5-year period,
quarterly payments for interest and annual fees must be paid on an
ongoing basis.
(5) Distribution Rules--Sec. 107.1180: Before an Early Stage SBIC
with outstanding leverage may distribute to its investors, it must
first pay all required SBA interest and charges and any leverage
principal due at maturity. After those payments are made, if the Early
Stage SBIC's capital impairment percentage, defined in Sec. 107.1840,
is 50 percent or more, and the SBIC's leverage ratio (defined as
outstanding leverage to Leverageable Capital) exceeds 0.5, it must
repay all outstanding SBIC Debentures before distributing to private
investors. Otherwise, the Early Stage SBIC must repay SBA leverage, at
a minimum, pro rata (in proportion) with any distributions returned to
private investors on a cumulative basis.
(6) Restrictions on Third-Party Debt--Sec. 107.565: Early Stage
SBICs must seek SBA's prior written approval before incurring any
third-party debt, except for accounts payable from routine business
operations.
(7) Capital Impairment Percentage (CIP) Sec. Sec. 107.1830-1850:
CIP is the primary financial metric SBA uses to evaluate an SBIC's
ability to repay its leverage. CIP measures the losses incurred by an
SBIC relative to its Regulatory Capital. If an SBIC exceeds its maximum
allowable CIP, SBA has the right to, among other things, declare the
entire indebtedness of the SBIC's Debentures immediately due and
payable; and institute proceedings for the appointment of SBA as
receiver of the SBIC. Because Early Stage SBICs are
[[Page 14036]]
limited to one tier of leverage, the maximum allowable CIP ranges from
45% to 70%, depending on the percentage of equity. If the percentage of
equity investments at cost exceeds 67%, the maximum allowable CIP would
be 70%.
II. Market Gap
(1) Market Need. According to data from PricewaterhouseCoopers
Moneytree (https://www.pwcmoneytree.com/), financings to seed and early
stage companies by venture funds has grown from $2.16 billion in the
first quarter of calendar year 2012 to over $4 billion in the second
quarter of calendar year 2014, the highest amount in any quarter since
2000. As a federal credit program, SBA seeks to direct capital to gaps
in the marketplace. Given the growth in early stage financings since
2012, SBA is trying to determine whether it should continue to license
Early Stage SBICs past 2016. SBA is seeking input from the public with
regard to the following questions:
(a) Are there barriers preventing promising early stage small
businesses from being financed, and, if so, what are the barriers?
(b) Are there gaps in the financial markets with regard to
financing early stage or seed companies in the United States? If so,
what evidence exists to identify and verify these gaps?
(c) If there are no or limited gaps in the financial markets for
early stage and seed companies in the United States, should SBA
continue the Early Stage SBIC program past 2016, but issue a call for
Early Stage SBIC applications only if and when identifiable market gaps
occur? If so, what evidence should SBA use to identify declining market
conditions or gaps in the market?
(2) Targeted Early Stage SBIC Participants. The Early Stage SBIC
initiative focused on more established and traditional early stage
venture funds to participate in the program because these funds'
investment strategy effectively utilizes SBA's leverage to finance
small businesses. SBA recognizes that many early stage and seed
businesses may obtain capital from other sources than traditional early
stage/seed venture funds. Accelerator funds, incubators, angel
investment funds or other types of similar funds--venture capital funds
that generally make a substantial number of relatively small-dollar
equity investments in seed and early stage businesses--have not
demonstrated significant interest in SBA's Early Stage SBIC initiative.
Could these funds effectively utilize Debenture leverage as part of
their investment strategy in a way that would not increase the risk
profile of the SBIC program. What changes to the Early Stage SBIC
program would SBA need to make in order to attract qualified funds that
use this investment strategy? Would the minimum regulatory capital need
to be changed? Would the leverage terms need to be changed? What data
is available to assess the risk associated with these types of funds?
III. Early Stage SBIC Program Structure
(1) Fund-Level Debt Versus Equity. Based on discussions with early
stage fund managers and limited partners, SBA understands that most
early stage funds would prefer equity rather than fund-level debt.
However, SBA is only authorized to guarantee SBIC Debentures for its
licensed funds. SBA also recognizes the potential mismatch between
Debenture leverage and early stage portfolio company cash flows.
Because most early stage portfolio companies do not have the cash flow
to service debt, most early stage financings are structured as equity.
SBA tried to compensate for this in the Early Stage SBIC program by
implementing a discounted debenture in which leverage is issued at a
discount and interest and charges accrue for 5 years before the fund
would be required to make payments on a quarterly basis. Alternatively,
Early Stage SBICs could use the Current Pay Debenture and pay interest
and charges on a quarterly basis using the required interest reserve.
SBA has heard from members of the venture capital industry that
many early stage funds are not interested in leverage. SBA seeks input
from the public on whether fund-level debt is of use to early stage
fund managers or whether concerns exist with regard to current SBIC
Early Stage Debenture leverage terms.
(2) Early Stage SBIC Leverage Terms. Early Stage SBICs are expected
to have significantly higher losses than regular SBICs, due to the risk
associated with their portfolios. SBA structured the Early Stage SBIC
program so that it could be run with minimum impact to the regular SBIC
Debenture program. This includes limiting the amount of Early Stage
leverage as a percentage of the overall SBIC portfolio. Key Early Stage
SBIC requirements are summarized in Section I of this ANPRM. SBA seeks
input from the public to identify how Early Stage SBIC requirements
could be improved without increasing SBA's credit risk. In particular,
SBA has the following questions:
(a) Minimum Regulatory Capital: Currently, Early Stage SBICs must
have at least $20 million in Regulatory Capital. Should SBA modify this
Regulatory Capital requirement in order to improve the number of
qualified applicants to the program?
(b) Maximum Leverage: SBA set the maximum leverage for Early Stage
SBICs at $50 million based on its overall allocation of $200 million
per year, in order to provide some level of portfolio diversification.
Should SBA increase the maximum leverage available to Early Stage
SBICs, for example, to $100 million, approximately half of any year's
allocation?
(c) Maximum Leverage Ratio: Currently, SBA provides up to one tier
of leverage, not to exceed the maximum, in order to limit its credit
risk. Should SBA lower the maximum leverage ratio to help further
reduce its credit risk? What maximum leverage ratio is appropriate?
(d) Interest Reserve: If Early Stage SBICs use the Current Pay
Debenture, they must maintain a 5-year interest reserve to make
interest and annual charge payments. SBA set this interest reserve to
make sure that Early Stage SBICs would have sufficient funds to make
required interest payments for the first 5 years and to lower the
overall loss rate. Would removing the interest reserve attract more
qualified applicants? If so, since the interest reserve was put in
place to mitigate SBA's risk and limit the increase to the SBIC
Debenture annual charge, what actions should SBA consider to help
mitigate SBA's risk?
(3) Other Early Stage SBIC Regulations. SBA invites comments on
other aspects of Early Stage regulations, including the following:
(a) Licensing Process: Would a rolling licensing process (where SBA
accepts applications throughout the year) versus the Early Stage Call
process, identified in Sec. 107.310, be preferred and/or attract more
qualified applicants to the program?
(b) Third-Party Debt: Do third-party debt restrictions identified
in Sec. 107.565 detract from the program and what changes could be
made to achieve the same credit risks for SBA?
(4) Other SBIC Regulations and Guidelines. SBA also invites
comments on other SBIC regulatory requirements as identified in 13 CFR
part 107 that may be of particular concern to Early Stage SBIC
applicants. For example, some Early Stage SBICs and potential
applicants have indicated concerns with SBA's Valuation Guidelines
(https://www.sba.gov/content/valuation-guidelines-sbics). SBA is
interested in feedback as to what those concerns are
[[Page 14037]]
and what changes industry members would recommend.
Dated: March 11, 2015.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2015-06182 Filed 3-17-15; 8:45 am]
BILLING CODE 8025-01-P
