Small Business Investment Companies: Passive Business Expansion and Technical Clarifications, 95419-95425 [2016-31291]
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Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Rules and Regulations
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[FR Doc. 2016–31240 Filed 12–27–16; 8:45 am]
BILLING CODE 6714–01–P
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245–AG67
Small Business Investment
Companies: Passive Business
Expansion and Technical Clarifications
U.S. Small Business
Administration.
ACTION: Final rule.
AGENCY:
The U.S. Small Business
Administration (SBA) is revising the
regulations for the Small Business
Investment Company (SBIC) program to
expand permitted investments in
passive businesses and provide further
clarification with regard to investments
in such businesses. SBICs are generally
prohibited from investing in passive
businesses under the Small Business
Investment Act of 1958, as amended
(Act). SBIC program regulations provide
for two exceptions that allow an SBIC to
structure an investment utilizing a
passive small business as a passthrough. The first exception provides
conditions under which an SBIC may
structure an investment through up to
two levels of passive entities to make an
investment in a non-passive business
that is a subsidiary of the passive
business directly financed by the SBIC.
The second exception, prior to this final
rule, enabled a partnership SBIC, with
SBA’s prior approval, to provide
financing to a small business through a
passive, wholly-owned C corporation
(commonly known as a blocker
corporation), but only if a direct
financing would cause the SBIC’s
investors to incur Unrelated Business
Taxable Income (UBTI). This final rule
clarifies several aspects of the first
exception and in the second exception
eliminates the prior approval
requirement and expands the purposes
for which a blocker corporation may be
SUMMARY:
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formed. The final rule also adds new
reporting and other requirements for
passive investments to help protect
SBA’s financial interests and ensure
adequate oversight and makes minor
technical amendments. Finally, this rule
makes a conforming change to the
regulations regarding the amount of
leverage available to SBICs under
common control. This change is
necessary for consistency with the
Consolidated Appropriations Act, 2016,
which increased the maximum amount
of such leverage to $350 million.
DATES: This rule is effective January 27,
2017.
FOR FURTHER INFORMATION CONTACT:
Theresa Jamerson, Office of Investment
and Innovation, (202) 205–7563 or sbic@
sba.gov.
SUPPLEMENTARY INFORMATION:
I. Background Information
The SBIC Program is an SBA
financing program authorized under
Title III of the Small Business
Investment Act of 1958, 15 U.S.C. 681
et seq. 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, SBA does
not invest directly in small businesses.
Rather, through the SBIC Program, SBA
licenses and provides debenture
leverage (Leverage) to SBICs. SBICs are
privately-owned and professionally
managed for-profit investment funds
that make loans to, and investments in,
qualified small businesses using a
combination of privately raised capital
and Leverage guaranteed by SBA. SBA
will guarantee the repayment of
debentures issued by an SBIC based on
the amount of qualifying private capital
raised by an SBIC up to a maximum
amount of $150 million in Leverage.
SBICs are generally prohibited from
investing in passive businesses under
the Small Business Investment Act of
1958. Prior to this final rule, the SBIC
program regulations provided for the
following two exceptions that allowed
an SBIC to structure an investment
utilizing a passive small business as a
pass-through:
A. ‘‘Holding company exception’’—
§ 107.720(b)(2): This exception provides
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conditions under which an SBIC may
structure an investment through up to
two levels of passive entities to make an
investment in a non-passive business
that is a subsidiary of the passive
business directly financed by the SBIC.
The regulation defines a subsidiary
company as one in which the financed
passive business directly or indirectly
owns at least 50% of the outstanding
voting securities. As an example, this
exception allows an SBIC to finance
ABC Holdings 1, a passive small
business, with the proceeds flowing
through ABC Holdings 2, another
passive small business, and then to ABC
Manufacturing, a non-passive small
business in which ABC Holdings 1
owns directly or indirectly at least 50%
of the outstanding voting securities.
B. ‘‘Blocker corporation exception’’—
§ 107.720(b)(3): This exception enables a
partnership SBIC, with SBA’s prior
approval, to provide financing to a small
business through a passive, whollyowned C corporation, but only if a
direct financing would cause one or
more of the SBIC’s investors to incur
Unrelated Business Taxable Income
(UBTI). A passive C corporation formed
under the second exception is
commonly known as a blocker
corporation.
On October 5, 2015, SBA published a
proposed rule (80 FR 60077) to further
expand the permitted use of passive
businesses, provide clarification with
regard to investments in such
businesses, and make minor technical
clarifications. SBA received three
comments on the proposed rule, not
including one comment that generally
questioned the fairness of the Act as a
whole and did not provide any specific
comments on the rule. The three
comments pertinent to the rule are
addressed in Section II.
Section II also discusses a conforming
regulatory change to implement Section
521 of the Consolidated Appropriations
Act, 2016 which increased the
maximum leverage available to two or
more SBICs under common control from
$225 million to $350 million.
II. Section-By-Section Analysis
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A. Passive Business Rules
Section 107.720—Small Businesses That
May Be Ineligible for Financing
1. Changes to Holding Company
Exception § 107.720(b)(2): SBA
proposed revisions to § 107.720(b)(2) to
explicitly permit an SBIC to form and
finance a passive business that will
either pass the proceeds through to or
use the proceeds to acquire all or part
of a non-passive business. These
changes were intended to codify SBA’s
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existing interpretation of the
regulations.
SBA received 2 comments on
§ 107.720(b)(2) indicating that the
proposed changes would be more
effective if the passive business directly
financed was not required to own at
least 50 percent of the underlying active
business. Commenters suggested that
SBICs be allowed to structure
investments using passive investment
vehicles ‘‘irrespective of the number of
parent entities involved so long as the
parent entities in question directly or
indirectly own or control at least 50
percent of the voting or economic
interests of the active business.’’ SBA
received similar comments as part of the
rulemaking process when it last
proposed expanding the permitted use
of passive businesses. SBA reconsidered
these previous suggestions in
developing this current rule; however,
in light of the additional protections
added in this final rule (see the
discussion of § 107.720(b)(4) in
paragraph II.A.3 of this preamble),
neither set of comments was adopted.
Although the new § 107.720(b)(4)
should help address some of SBA’s
credit concerns, SBA believes that
controlling ownership provisions are
needed to facilitate access to
information and records needed to
effectively monitor these transactions
and to aid in the recovery of assets in
the event of a default. SBA also
continues to maintain its position that
effective monitoring of transactions with
unlimited levels of passive companies
would require resources well beyond
those available to the Agency. Proposed
§ 107.720(b)(2) is adopted without
change.
2. Changes to Blocker Corporation
Exception—§ 107.720(b)(3): The
proposed rule also included the
following changes to § 107.720(b)(3):
a. Removing the requirement to obtain
SBA’s prior approval to form a blocker
corporation;
b. Permitting an SBIC to form a
blocker corporation to enable any
foreign investors to avoid effectively
connected income (ECI) under the
Internal Revenue Code;
c. Permitting a blocker corporation to
provide financing to a second passive
small business that passes the proceeds
through to a non-passive small business
in which it owns at least 50 percent of
the outstanding voting securities
(effectively permitting an investment
structured with two levels of passive
companies, one of which is the blocker
corporation); and
d. Removing outdated language
indicating that an SBIC’s ownership of
a blocker corporation formed under
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§ 107.720(b)(3) will not constitute a
violation of § 107.865(a). This provision
was rendered unnecessary by a rule
change in 2002 (67 FR 64789) that
revised § 107.865(a) to permit an SBIC
to exercise control over a small business
for up to seven years without SBA
approval.
SBA received comments on proposed
§ 107.720(b)(3) as discussed below:
a. Regulated Investment Company
(RIC) Exception. All 3 commenters
asked that the regulations provide an
additional exception for SBICs that are
wholly owned subsidiaries of Business
Development Companies (BDCs). A BDC
typically elects to be taxed as a RIC
pursuant to Subchapter M of the
Internal Revenue Code of 1986. In
general, a RIC is not subject to U.S.
federal income taxes on income and
gains that it distributes to stockholders,
provided that it satisfies certain
minimum distribution requirements. To
qualify as a RIC, a BDC must satisfy
certain source of income and assetdiversification tests; among other things,
a RIC must generally derive at least 90%
of its gross income for each taxable year
from certain types of investment. In
particular, the commenters explained
that equity interests in pass-through tax
entities generate operating income that,
if received or deemed received directly
by a BDC, could disqualify the BDC
from maintaining RIC status, and
therefore, such interests must often be
held through a blocker corporation. The
commenters requested that
§ 107.720(b)(3) be revised to permit an
SBIC to form a blocker corporation to
avoid adverse tax consequences to an
investor that has elected to be taxed as
a RIC. This final rule adopts the
suggestion.
b. Blocker Entity Form of
Organization. SBA also received two
comments suggesting that non-corporate
forms of organization should be
permitted for blocker entities. The
commenters explained that these
structures are often ‘‘more streamlined
in terms of corporate formalities than a
C corporation’’ and suggested the
regulations allow ‘‘any entity that elects
to be taxed as a corporation for Federal
income tax purposes.’’ SBA considered
this suggestion to be overly broad, but
partially adopted this suggestion in the
final rule by allowing a blocker entity to
be structured as an LLC that elects to be
taxed as a corporation.
c. Two Level Holding Company
Financing. Two commenters indicated
that § 107.720(b)(3) should allow SBICs
to structure a financing with a blocker
entity and then two levels of passive
holding companies as defined in
§ 107.720(b)(2). The commenters stated
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that the proposed rule puts an SBIC that
requires a blocker entity to
accommodate its investors at a
disadvantage compared to other SBICs
that do not require a blocker entity,
since the blocker entity can only finance
a single passive business entity that in
turn makes an investment into an active
business. For example, an SBIC with a
foreign investor would not be able to
participate in a financing that is
structured as a two-level passive
business financing under 107.720(b)(2),
if they also needed a separate passive
business to serve as a blocker entity in
order to avoid effectively connected
income. However, SBA believes that one
of the other passive businesses
permitted under § 107.720(b)(2) could
possibly be used as a blocker. The
commenters’ suggestion would
effectively permit up to three levels of
passive businesses between the SBIC
and the operating business. SBA did not
adopt this suggestion because additional
levels of passive businesses impose a
burden on SBA as regulator and
increase the Agency’s credit risk. SBA
believes that two levels of passive
businesses under either exception
should provide SBICs with sufficient
flexibility to operate successfully.
d. SBA did not receive any comments
on the proposed change to
§ 107.720(b)(3) regarding the removal of
outdated language. This rule adopts the
change as proposed.
3. Additional Passive Business
Guidance—§ 107.720(b)(4): The
proposed rule identified SBA’s concerns
with regard to passive investments,
including making sure the financing
dollars go to the eligible non-passive
small business, fees being charged at
each passive business level, and SBA’s
ability to access passive business
financial records, especially in the case
of a defaulting SBIC. To address these
concerns, SBA proposed making the the
following changes in new
§ 107.720(b)(4), which would apply to
any eligible passive investment made
under § 107.720(b)(2) or (b)(3):
a. ‘‘Substantially All’’ Definition.
Clarifying the meaning of ‘‘substantially
all’’ in § 107.720(b)(2) and (b)(3) to mean
99 percent of the financing proceeds
after deduction of actual application
fees, closing fees, and expense
reimbursements, which may not exceed
those permitted under § 107.860.
b. Fee Requirements. Requiring fees
charged by an SBIC or its Associate
under §§ 107.860 and 107.900 to not
exceed those permitted if the SBIC had
directly financed the eligible Small
Business and requiring any such fees
received by an SBIC’s Associate to be
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paid to the SBIC in cash within 30 days
of receipt.
c. ‘‘Portfolio Concern’’ Clarification.
Clarifying that both passive and nonpassive businesses included in a
financing are ‘‘Portfolio Concerns’’ and
therefore subject to record keeping and
reporting obligations with respect to any
‘‘Portfolio Concern,’’ defined in § 107.50
as ‘‘a Small Business Assisted by a
Licensee.’’
SBA received 3 comments on
proposed § 107.720(b)(4) as discussed
below:
a. ‘‘Substantially All’’ Definition.
Commenters suggested that the
definition of ‘‘substantially all’’ be
lowered to 95 percent of the proceeds
instead of 99% of the proceeds because
they were concerned that the 99 percent
threshold ‘‘may be too limiting and pose
issues in deal structuring.’’ SBA did not
adopt this comment. The definition
already excludes allowable fees and
expense reimbursements permitted
under §§ 107.860 and 107.900, and SBA
believes that a 95 percent threshold
could result in excessive expenses being
charged in the passive businesses that is
diverted from the intended operating
business. Although this percentage may
seem inconsequential, 4% of a $20
million financing represents $800,000
that could be diverted from the
operating business.
b. Fee Requirements. Two
commenters suggested removing the
requirement that fees received by an
Associate must be paid over in cash to
the SBIC. They noted that SBIC program
policy guidance known as TechNote 7a,
which provides guidelines concerning
allowable management expenses for
leveraged SBICs (see www.sba.gov/
sbicpolicy), already requires that 100%
of fees collected under § 107.860 or
§ 107.900 must benefit the SBIC, either
by being paid directly to the SBIC or (if
paid to an Associate) through a
corresponding reduction in the
management fee paid by the SBIC,
typically called a ‘‘management fee
offset.’’ Commenters also indicated that
management fee offsets have tax
advantages relative to other approaches.
Although SBA recognizes that
management fee offsets can provide tax
advantages, SBA did not adopt this
suggestion because of the difficulty in
monitoring investments utilizing
passive businesses and identifying fees
associated with each passive business in
addition to those paid by the operating
business.
c. ‘‘Portfolio Concern’’ Clarification.
Two commenters indicated that the
clarification of Portfolio Concern should
be revised to apply only ‘‘for the
purposes of this part 107.720’’ to avoid
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any unintended effects arising from the
use of the term ‘‘Portfolio Concern’’ in
other sections of the regulations. The
commenters indicated that this
adjustment would still allow SBA to
retain the necessary information rights
contemplated by the proposed rule. A
search for the term ‘‘Portfolio Concern’’
within the regulations identified the
following instances.
• § 107.50 defines ‘‘Portfolio
Concern’’ as ‘‘a Small Business Assisted
by a Licensee.’’
• §§ 107.600–107.660 describe record
keeping and information requirements,
including those for a Portfolio Concern.
• § 107.730 discusses conflicts of
interest with regards to Portfolio
Concerns.
• § 107.760 discusses how a change
in size or activity affect the Licensee
with regards to a Portfolio Concern.
• § 107.850 discusses restrictions on
redemption of Equity Securities of a
Portfolio Concern.
SBA believes that all of the
requirements in these sections are
applicable to passive business
financings. Therefore, this suggestion
was not adopted.
4. Section 107.610 Required
certifications for Loans and Investments.
The proposed rule also added a
certification requirement to § 107.610 to
require an SBIC that finances a business
under § 107.720(b)(3) to certify as to the
qualifying basis for such financing. The
certification replaces the requirement
for SBA prior approval of the formation
and financing of a blocker corporation.
Although SBA received no comments
on proposed § 107.610, because SBA
adopted the suggestion to allow SBICs
that are BDC subsidiaries to form
blocker entities in order to maintain the
BDC’s RIC status under § 107.720 (b)(3),
the language in the final rule adds
compliance with this tax election as a
permissible basis for a passive business
formed under § 107.720(b)(3).
B. Technical Changes
SBA also proposed the following
technical changes to the regulations.
1. Section 107.50 Definition of terms.
Changing ‘‘Associates’s’’ to
‘‘Associate’s’’.
2. Section 107.210 Minimum capital
requirements for Licensees. Modifying
paragraph (a) of § 107.210 to allow both
Leverageable Capital and Regulatory
Capital to fall below the stated
minimums if the reductions are
performed in accordance with an SBAapproved wind-up plan per
§ 107.590(c), to conform with SBA’s
current oversight practices.
3. Section 107.503 Licensee’s
adoption of an approved valuation
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policy. Changing the last sentence of
§ 107.503(a) to indicate that valuation
guidelines for SBICs may be obtained
from the SBIC program’s public Web
site, www.sba.gov/inv.
4. Section 107.630 Requirement for
Licensees to file financial statements
with SBA (Form 468). Removing current
§ 107.630(d), which provides a mailing
address for submission of SBA Form
468, and re-designating paragraph (e) as
paragraph (d). These instructions are no
longer necessary because SBICs submit
this information electronically using the
SBA’s web-based application.
5. Section 107.1100 Types of Leverage
and application procedures. Correcting
the misspelling of ‘‘Yu’’ to ‘‘You’’ and
removing paragraph (c) which identifies
where to send Leverage applications.
This paragraph is unnecessary because
the application forms provide these
instructions.
None of the comments SBA received
in response to the proposed rule were
related to these technical changes. The
final rule incorporates these changes as
proposed.
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C. Increase to Maximum Leverage to
SBICs Under Common Control
Section 521 of the Consolidated
Appropriations Act, 2016, Public Law
114–113, 129 Stat. 2242, (December 22,
2015) amended section 303(b)(2) of the
Small Business Investment Act of 1958
to increase the maximum amount of
Leverage available to two or more SBICs
under Common Control from $225
million to $350 million. SBA defines
Common Control to mean a condition
where two or more persons, either
through ownership, management,
contract, or otherwise, are under the
control of one group or person. Under
13 CFR 107.50, SBA presumes that two
or more SBICs are under Common
Control if, among other things, they
have common officers, directors, or
general partners. Currently, 13 CFR
107.1150(b) limits two or more SBICs
under Common Control to the
maximum aggregate amount of
outstanding Leverage of $225 million,
which amount is subject to further
limitations under SBA’s credit policies.
Solely as a conforming change, this rule
increases the maximum amount set
forth in the regulation from $225
million to $350 million. This statutory
change was not addressed previously
because it had not yet been enacted
when the rule was proposed. Now that
it has, the technical change is necessary
to avoid public confusion and ensure
consistency between the regulations and
the current law.
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Compliance With Executive Orders
12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C. Ch.
35) and the Regulatory Flexibility Act (5
U.S.C. 601–612).
Executive Order 12866
The Office of Management and Budget
has determined that this rule is not a
‘‘significant’’ regulatory action under
Executive Order 12866. This is also not
a ‘‘major’’ rule under the Congressional
Review Act, 5 U.S.C. 801, et seq.
Executive Order 12988
This action meets applicable
standards set forth in section 3(a) and
3(b)(2) of Executive Order 12988, Civil
Justice Reform, to minimize litigation,
eliminate ambiguity, and reduce
burden. The action does not have
retroactive or presumptive effect.
Executive Order 13132
The final rule would not have
substantial direct effects on the States,
or the distribution of power and
responsibilities among the various
levels of government. Therefore, for the
purposes of Executive Order 13132,
Federalism, SBA determines that this
rule has no federalism implications
warranting the preparation of a
federalism assessment.
Executive Order 13563
This final rule was developed in
response to comments received on
previously proposed amendments to
these regulations on investments in
passive businesses. See 78 FR 77377
(December 23, 2013). SBA received one
set of comments on that rule that
suggested changes to further liberalize
permitted financings to passive
businesses under Sec. 107.720(b). In
response to the comment, SBA
indicated in the final rule (79 FR 62819)
that it would further consider the
suggested changes in a future
rulemaking. As part of that
reconsideration, SBA discussed the
comments with industry representatives
and solicited additional comments in
the proposed rule published in October
2015 at 80 FR 60077. This final rule
reflects the input received from those
public outreach efforts.
Paperwork Reduction Act, 44 U.S.C. Ch.
35
SBA has determined that this rule
would impose additional reporting and
recordkeeping requirements under the
Paperwork Reduction Act. In particular,
this rule implements changes to the
Portfolio Financing Report, SBA Form
1031 (OMB Control Number 3245–
0078), to clarify information to be
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reported in Parts A, B, and C of the
form. The changes, described in detail
below, also include designating current
Part D as Part F and adding new Parts
D and E.
The title, description of respondents,
description of the information collection
and the changes to it are discussed
below with an estimate of the revised
annual burden. Included in the estimate
is the time for reviewing instructions,
searching existing data sources,
gathering and maintaining the data
needed, and completing and reviewing
each collection of information.
Title: Portfolio Financing Report, SBA
Form 1031 (OMB Control Number
3245–0078).
Summary: SBA Form 1031 is a
currently approved information
collection. SBA regulations, specifically
§ 107.640, require all SBICs to submit a
Portfolio Financing Report using SBA
Form 1031 for each financing that an
SBIC provides to a Small Business
Concern within 30 days after closing an
investment. SBA uses the information
provided on Form 1031 to evaluate SBIC
compliance with regulatory
requirements. The form is also SBA’s
primary source of information for
compiling statistics on the SBIC
program as a provider of capital to small
businesses. The proposed rule (80 FR
60077) invited the public to provide
comments on the following changes to
SBA Form 1031:
(1) Clarifying the SBIC should report
the non-passive Small Business Concern
information in the Form 1031. SBA has
noted that SBICs sometimes report data
on the passive Small Business Concern
rather than the non-passive Small
Business Concern when reporting
financing information. SBA has clarified
that the SBIC should report data on the
non-passive Small Business Concern
when reporting information on
financings using passive businesses in
the Form 1031 Part A—the Small
Business Concern; Part B—the prefinancing data; and Part C—the
financing information, with the
exception of the financing dollars in
Question 29. The amount of financing
dollars provided by the SBIC should be
the total amount of such financing,
regardless of whether the dollars were
provided directly or indirectly to the
non-passive business concern. Example:
The SBIC provides $5 million in equity
to ABC Holding Corporation, which
passes $4.98 million to the non-passive
business, Acme Manufacturing LLC. In
addition, the SBIC provides $5 million
in debt directly to Acme Manufacturing
LLC. The SBIC would report
information on Acme Manufacturing
LLC in Parts A, B, and C. However, the
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total financing dollars would be
reported as $5 million in equity and $5
million in debt for a total of $10 million
in total financing dollars.
(2) Identifying financings using one or
more passive businesses. SBA has
added a question on whether the
financing utilizes one or more passive
businesses as part of the financing, to
help SBA identify these financings.
(3) Adding information on passive
business financings to aid in regulatory
compliance monitoring. SBA has also
added a requirement for SBICs to
upload a file in Portable Document
Format (PDF) that contains the
following information, which SBA will
use to help assess whether the financing
meets regulatory compliance:
(a) Qualifying exception:
Identification of the passive business
exception under which the financing is
made (i.e., § 107.720(b)(2) Exception for
pass-through of proceeds to subsidiary,
or § 107.720(b)(3) Exception for certain
Partnership Licensees). If the SBIC
indicates that the financing is made
under § 107.720(b)(3), it would also
indicate the qualifying basis for the
financing (i.e., financing would cause an
investor in the fund to incur unrelated
business taxable income or effectively
connected income or to receive nonqualifying income for a regulated
investment company).
(b) Passive Business Entities:
Identification of the name and employer
ID number for each passive business
entity used within the financing. This is
needed so that SBA can identify all
Portfolio Concerns involved in the
financing.
(c) Financing Structure Description: A
description of the financing structure,
including the flow of the money
between the SBIC and the non-passive
Small Business Concern that receives
the proceeds (including amounts and
types of securities between each entity),
and the ownership from the SBIC
through each entity to the non-passive
Small Business Concern. This
information will help SBA assess that
the Small Business Concern receives
‘‘substantially all’’ the financing dollars
and the ownership percentages are in
compliance with the regulations. This
will also help SBA with SBICs
transferred to the Office of Liquidation
to identify the structure of the financing
and aid in recovery of SBA leverage.
(4) Impact Fund Policy Initiative:
Finally, a new Part D, consisting of two
questions concerning whether the
investment is a fund-identified impact
investment or SBA-identified impact
investment has been added to the Form.
This change provides a vehicle for
SBICs licensed to participate in SBA’s
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Impact Investment Fund (Impact SBICs
to more clearly report whether they are
reporting on an SBA-identified impact
investment or a Fund-identified impact
investment. The Impact Investment
Fund was launched in April 2011 as
part of President Obama’s Start-Up
America Initiative. See, [https://www.
sba.gov/about-sba/sba-initiatives/
startup-america/about-startup-america.]
The initiative was amended in
September 2014 to allow Impact SBICs
to invest in self-identified impact
investments. [https://www.sba.gov/sites/
default/files/articles/SBA%20Impact
%20Investment%20Fund%20Policy
%20-%20September%202014_1.pdf or
https://www.sba.gov/content/new-2014expanding-sbas-impact-fund] While
Impact SBICs, like all SBICS use Form
1031 to report on their financings, SBA
has determined that it would be
beneficial to Impact SBICs if SBA Form
1031 were to include questions
specifically targeted towards impact
investments.
SBA did not receive any comments on
the changes; therefore, they are adopted
as proposed.
Description of Respondents and
Burden: There are approximately 299
licensed SBICs. All of these SBICs are
required to submit SBA Form 1031 for
each financing. The current estimated
number of responses (i.e., number of
financings) is 2,021 based on a recent
three year period (FY 2012 through
2014). The current estimate indicates
that it takes approximately 12 minutes
to complete the form, for a total annual
burden of 404 hours.
Neither the number of respondents
nor the number of responses per year is
expected to be affected by this rule.
However, SBA estimates a slight
increase in the burden hour as a result
of the additional reporting in new Parts
D (Impact Investments) and Part E
(Passive Business).
Impact Fund Reporting. This
reporting is expected to have minimal
impact. The estimated eight SBICs
making impact investments would
complete new Part D an estimated total
56 times annually. At an estimated 2
minutes per response, this additional
reporting would add 2 hours to the
annual burden for Form 1031.
Passive Business Reporting. SBA
believes that the SBIC should be able to
provide the passive business
information since it should be readily
available as part of the financing. SBA
estimates that providing the information
will take on average an additional 30
minutes for those financings utilizing
passive businesses, with no incremental
burden for those financings that do not
use a passive business. SBA estimates
PO 00000
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95423
that about 12% of the annual responses
relate to passive businesses financings
(based on financing data in 2014). Based
on the number of SBICs reporting such
financings the total estimated annual
hour burden resulting from new Part E
reporting would be 122.
Therefore the total estimated annual
hour burden for all SBICs submitting
SBA Form 1031s in a year would be 528
hours.
The current cost estimate for
completing SBA Form 1031 uses a rate
of $35 per hour for an accounting
manager to fill out the form. Using that
same rate, the cost per form would
change from $7 per form to $9.14 per
form. However, SBA has increased its
estimate of an hourly rate for an
accounting manager to $43 per hour
(estimated using www1.salary.com/
Accounting-Manager-hourly-wages.html
in July 2015), which rate results in a
new cost per form of $11.23 for an
aggregate cost of $22,704 for the 2,021
estimated responses.
This final rule also identifies
information that an SBIC must maintain
in its files to support the required
changes. SBA believes that the SBICs
should already be maintaining this
information since a passive business by
definition is a Portfolio Concern and the
SBIC should be maintaining all
documents needed to support each
financing. The rule makes this
expectation explicit. Furthermore,
currently, an SBIC must maintain this
information for it to effectively monitor
and evaluate an investment that uses a
passive business to finance a nonpassive business. Therefore, SBA does
not believe this recordkeeping
requirement increases the burden.
The rule also requires a certification
under § 107.610 when the SBIC makes
a financing using the exemption in
§ 107.720(b)(3). This includes
maintaining records supporting the
certification. Since this regulation
effectively replaces the requirement for
SBICs to seek prior SBA approval and
maintain these records, SBA does not
believe this change will increase the
burden.
Regulatory Flexibility Act, 5 U.S.C. 601–
612
The Regulatory Flexibility Act (RFA),
5 U.S.C. 601, requires administrative
agencies to consider the effect of their
actions on small entities, small nonprofit businesses, and small local
governments. Pursuant to the RFA,
when an agency issues a rule, the
agency must prepare an Initial
Regulatory Flexibility Act (IRFA)
analysis which describes whether the
impact of the rule will have a significant
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Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Rules and Regulations
economic impact on a substantial
number of small entities. However,
Section 605 of the RFA allows an
agency to certify a rule, in lieu of
preparing an IRFA, if the rulemaking is
not expected to have a significant
economic impact on a substantial
number of small entities. This rule
would affect all SBICs, of which there
are currently close to 300. SBA
estimates that approximately 75 percent
of these SBICs are small entities.
Therefore, SBA has determined that this
rule would have an impact on a
substantial number of small entities.
However, SBA has determined that the
economic impact on entities affected by
the rule would not be significant. As
discussed under the Paperwork
Reduction Act section, SBICs would
need to provide descriptions of the
transactions in the Form 1031, which
based on the estimate would cost each
SBIC approximately $28 per year. The
changes in the passive business
regulation provide SBICs with
additional flexibility to employ
transaction structures commonly used
by private equity or venture capital
funds that are not SBICs.
SBA asserts that the economic impact
of the rule, if any, would be minimal
and beneficial to small SBICs.
Accordingly, the Administrator of the
SBA certifies that this rule would not
have a significant economic impact on
a substantial number of small entities.
List of Subjects in 13 CFR Part 107
Investment companies, Loan
programs-business, Reporting and
recordkeeping requirements, Small
businesses.
For the reasons stated in the
preamble, the Small Business
Administration amends 13 CFR part 107
as follows:
PART 107—SMALL BUSINESS
INVESTMENT COMPANIES
[Amended]
2. Amend § 107.50 by removing from
the definition of ‘‘Lending Institution’’
the term ‘‘Associates’s’’ and adding in
its place the term ‘‘Associate’s’’.
■ 3. Amend § 107.210 by revising
paragraph (a) introductory text to read
as follows:
sradovich on DSK3GMQ082PROD with RULES
■
§ 107.210 Minimum capital requirements
for Licensees.
(a) Companies licensed on or after
October 1, 1996. A company licensed on
16:15 Dec 27, 2016
Jkt 241001
(a) * * * These guidelines may be
obtained from SBA’s SBIC Web site at
www.sba.gov/inv.
*
*
*
*
*
■ 5. Amend § 107.610 by adding
paragraph (g) to read as follows:
§ 107.610 Required certifications for Loans
and Investments.
*
*
*
*
*
(g) For each passive business financed
under § 107.720(b)(3), a certification by
you, dated as of the closing date of the
Financing, as to the basis for the
qualification of the Financing under
§ 107.720(b)(3) and identifying one or
more limited partners for which a direct
Financing would cause those investors:
(1) To incur ‘‘unrelated business
taxable income’’ under section 511 of
the Internal Revenue Code (26 U.S.C.
511);
(2) To incur ‘‘effectively connected
income’’ to foreign investors under
sections 871 and 882 of the Internal
Revenue Code (26 U.S.C. 871 and 882);
or
(3) For an investor that has elected to
be taxed as a regulated investment
company, to receive or be deemed to
receive gross income that does not
qualify under Section 851(b)(2) of the
Internal Revenue Code (26 U.S.C.
851(b)(2)).
[Amended]
6. Amend § 107.630 by removing
paragraph (d) and redesignating
paragraph (e) as paragraph (d).
■ 7. Amend § 107.720 by revising
paragraphs (b)(2) and (3) and adding
paragraph (b)(4) to read as follows:
■
Authority: 15 U.S.C. 681, 683, 687(c), 687b,
687d, 687g, 687m.
VerDate Sep<11>2014
§ 107.503 Licensee’s adoption of an
approved valuation policy.
§ 107.630
1. The authority citation for part 107
is revised to read as follows:
■
§ 107.50
or after October 1, 1996, must have
Leverageable Capital of at least
$2,500,000 and must meet the
applicable minimum Regulatory Capital
requirement in this paragraph (a), unless
lower Leverageable Capital and
Regulatory Capital amounts are
approved by SBA as part of a Wind-Up
Plan in accordance with § 107.590(c):
*
*
*
*
*
■ 4. Amend § 107.503 by revising the
last sentence of paragraph (a) to read as
follows:
§ 107.720 Small Businesses that may be
ineligible for financing.
*
*
*
*
*
(b) * * *
(2) Exception for pass-through of
proceeds to subsidiary. You may
provide Financing directly to a passive
business, including a passive business
that you have formed, if it is a Small
Business and it passes substantially all
PO 00000
Frm 00028
Fmt 4700
Sfmt 4700
the proceeds through to (or uses
substantially all the proceeds to acquire)
one or more subsidiary companies, each
of which is an eligible Small Business
that is not passive. For the purpose of
this paragraph (b)(2), ‘‘subsidiary
company’’ means a company in which
the financed passive business either:
(i) Directly owns, or will own as a
result of the Financing, at least 50
percent of the outstanding voting
securities; or
(ii) Indirectly owns, or will own as a
result of the Financing, at least 50
percent of the outstanding voting
securities (by directly owning the
outstanding voting securities of another
passive Small Business that is the direct
owner of the outstanding voting
securities of the subsidiary company).
(3) Exception for certain Partnership
Licensees. If you are a Partnership
Licensee, you may form one or more
blocker entities in accordance with this
paragraph (b)(3). For the purposes of
this paragraph, a ‘‘blocker entity’’ means
a corporation or a limited liability
company that elects to be taxed as a
corporation for Federal income tax
purposes. The sole purpose of a blocker
entity must be to provide Financing to
one or more eligible, unincorporated
Small Businesses. You may form such
blocker entities only if a direct
Financing to such Small Businesses
would cause any of your investors to
incur ‘‘unrelated business taxable
income’’ under section 511 of the
Internal Revenue Code (26 U.S.C. 511);
incur ‘‘effectively connected income’’ to
foreign investors under sections 871 and
882 of the Internal Revenue Code (26
U.S.C. 871 and 882); or (for an investor
that has elected to be taxed as a
regulated investment company) receive
or be deemed to receive gross income
that does not qualify under section
851(b)(2) of the Internal Revenue Code
(26 U.S.C. 851(b)(2)). Your ownership
and investment of funds in such blocker
entities will not constitute a violation of
§ 107.730(a). For each passive business
financed under this section
107.720(b)(3), you must provide a
certification to SBA as required under
§ 107.610(g). A blocker entity formed
under this paragraph may provide
Financing:
(i) Directly to one or more eligible
non-passive Small Businesses; or
(ii) Directly to a passive Small
Business that passes substantially all the
proceeds directly to (or uses
substantially all the proceeds to acquire)
one or more eligible non-passive Small
Businesses in which the passive Small
Business directly owns, or will own as
a result of the Financing, at least 50%
of the outstanding voting securities.
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(4) Additional conditions for
permitted passive business financings.
Financings permitted under paragraphs
(b)(2) or (b)(3) of this section must meet
all of the following conditions:
(i) For the purposes of this paragraph
(b), ‘‘substantially all’’ means at least
ninety-nine percent of the Financing
proceeds after deduction of actual
application fees, closing fees, and
expense reimbursements, which may
not exceed those permitted by
§ 107.860.
(ii) If you and/or your Associate
charge fees permitted by § 107.860 and/
or § 107.900, the total amount of such
fees charged to all passive and nonpassive businesses that are part of the
same Financing may not exceed the fees
that would have been permitted if the
Financing had been provided directly to
a non-passive Small Business. Any such
fees received by your Associate must be
paid to you in cash within 30 days of
the receipt of such fees.
(iii) For the purposes of this part 107,
each passive and non-passive business
included in the Financing is a Portfolio
Concern. The terms of the financing
must provide SBA with access to
Portfolio Concern information in
compliance with this part 107,
including without limitation §§ 107.600
and 107.620.
*
*
*
*
*
§ 107.1100
[Amended]
8. Amend § 107.1100 by removing the
term ‘‘Yu’’ in the second to the last
sentence of paragraph (b) and adding in
its place ‘‘You’’, and by removing
paragraph (c).
■
§ 107.1150
[Amended]
9. Amend § 107.1150 by removing the
term ‘‘$225 million’’ in the first
sentence of paragraph (b) and adding in
its place ‘‘$350 million’’.
■
Dated: December 20, 2016.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016–31291 Filed 12–27–16; 8:45 am]
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BILLING CODE 8025–01–P
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DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2016–9537; Directorate
Identifier 2016–SW–075–AD; Amendment
39–18759; AD 2016–24–51]
RIN 2120–AA64
Airworthiness Directives; Sikorsky
Aircraft Corporation
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule; request for
comments.
AGENCY:
We are publishing a new
airworthiness directive (AD) for
Sikorsky Aircraft Corporation (Sikorsky)
Model S–92A helicopters, which was
sent previously to all known U.S.
owners and operators of these
helicopters. This AD requires inspecting
certain bearings. This AD is prompted
by a report of a failed bearing. We are
issuing this AD to address the unsafe
condition on these products.
DATES: This AD is effective January 12,
2017 to all persons except those persons
to whom it was made immediately
effective by Emergency AD 2016–24–51,
issued on November 16, 2016, which
contains the requirements of this AD.
We must receive comments on this
AD by February 27, 2017.
ADDRESSES: You may send comments by
any of the following methods:
Federal eRulemaking Docket: Go to
https://www.regulations.gov. Follow the
online instructions for sending your
comments electronically.
• Fax: 202–493–2251.
• Mail: Send comments to the U.S.
Department of Transportation, Docket
Operations, M–30, West Building
Ground Floor, Room W12–140, 1200
New Jersey Avenue SE., Washington,
DC 20590–0001.
• Hand Delivery: Deliver to the
‘‘Mail’’ address between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
SUMMARY:
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2016–
9537; or in person at the Docket
Operations Office between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays. The AD docket
contains this AD, the economic
evaluation, any comments received, and
other information. The street address for
the Docket Operations Office (telephone
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95425
800–647–5527) is in the ADDRESSES
section. Comments will be available in
the AD docket shortly after receipt.
For service information identified in
this final rule, contact Sikorsky Aircraft
Corporation, Customer Service
Engineering, 124 Quarry Road,
Trumbull, CT 06611; telephone 1–800Winged-S or 203–416–4299; email: wcs_
cust_service_eng.gr-sik@lmco.com. You
may review the referenced service
information at the FAA, Office of the
Regional Counsel, Southwest Region,
10101 Hillwood Pkwy, Room 6N–321,
Fort Worth, TX 76177.
FOR FURTHER INFORMATION CONTACT:
Blaine Williams, Aerospace Engineer,
Boston Aircraft Certification Office,
Engine & Propeller Directorate, 1200
District Avenue, Burlington,
Massachusetts 01803; telephone (781)
238–7161; email blaine.williams@
faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
This AD is a final rule that involves
requirements affecting flight safety, and
we did not provide you with notice and
an opportunity to provide your
comments prior to it becoming effective.
However, we invite you to participate in
this rulemaking by submitting written
comments, data, or views. We also
invite comments relating to the
economic, environmental, energy, or
federalism impacts that resulted from
adopting this AD. The most helpful
comments reference a specific portion of
the AD, explain the reason for any
recommended change, and include
supporting data. To ensure the docket
does not contain duplicate comments,
commenters should send only one copy
of written comments, or if comments are
filed electronically, commenters should
submit them only one time. We will file
in the docket all comments that we
receive, as well as a report summarizing
each substantive public contact with
FAA personnel concerning this
rulemaking during the comment period.
We will consider all the comments we
receive and may conduct additional
rulemaking based on those comments.
Discussion
On November 16, 2016, we issued
Emergency AD 2016–24–51 to correct an
unsafe condition on Sikorsky Model S–
92A helicopters with a TR pitch change
shaft (TRPCS) assembly part number (P/
N) 92358–06303–041 or P/N 92358–
06303–042. Emergency AD 2016–24–51
was sent previously to all known U.S.
owners and operators of these
helicopters. Emergency AD 2016–24–51
requires removing TRPCS assemblies
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Agencies
[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Rules and Regulations]
[Pages 95419-95425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31291]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245-AG67
Small Business Investment Companies: Passive Business Expansion
and Technical Clarifications
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The U.S. Small Business Administration (SBA) is revising the
regulations for the Small Business Investment Company (SBIC) program to
expand permitted investments in passive businesses and provide further
clarification with regard to investments in such businesses. SBICs are
generally prohibited from investing in passive businesses under the
Small Business Investment Act of 1958, as amended (Act). SBIC program
regulations provide for two exceptions that allow an SBIC to structure
an investment utilizing a passive small business as a pass-through. The
first exception provides conditions under which an SBIC may structure
an investment through up to two levels of passive entities to make an
investment in a non-passive business that is a subsidiary of the
passive business directly financed by the SBIC. The second exception,
prior to this final rule, enabled a partnership SBIC, with SBA's prior
approval, to provide financing to a small business through a passive,
wholly-owned C corporation (commonly known as a blocker corporation),
but only if a direct financing would cause the SBIC's investors to
incur Unrelated Business Taxable Income (UBTI). This final rule
clarifies several aspects of the first exception and in the second
exception eliminates the prior approval requirement and expands the
purposes for which a blocker corporation may be formed. The final rule
also adds new reporting and other requirements for passive investments
to help protect SBA's financial interests and ensure adequate oversight
and makes minor technical amendments. Finally, this rule makes a
conforming change to the regulations regarding the amount of leverage
available to SBICs under common control. This change is necessary for
consistency with the Consolidated Appropriations Act, 2016, which
increased the maximum amount of such leverage to $350 million.
DATES: This rule is effective January 27, 2017.
FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment
and Innovation, (202) 205-7563 or sbic@sba.gov.
SUPPLEMENTARY INFORMATION:
I. Background Information
The SBIC Program is an SBA financing program authorized under Title
III of the Small Business Investment Act of 1958, 15 U.S.C. 681 et seq.
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, SBA does not
invest directly in small businesses. Rather, through the SBIC Program,
SBA licenses and provides debenture leverage (Leverage) to SBICs. SBICs
are privately-owned and professionally managed for-profit investment
funds that make loans to, and investments in, qualified small
businesses using a combination of privately raised capital and Leverage
guaranteed by SBA. SBA will guarantee the repayment of debentures
issued by an SBIC based on the amount of qualifying private capital
raised by an SBIC up to a maximum amount of $150 million in Leverage.
SBICs are generally prohibited from investing in passive businesses
under the Small Business Investment Act of 1958. Prior to this final
rule, the SBIC program regulations provided for the following two
exceptions that allowed an SBIC to structure an investment utilizing a
passive small business as a pass-through:
A. ``Holding company exception''--Sec. 107.720(b)(2): This
exception provides
[[Page 95420]]
conditions under which an SBIC may structure an investment through up
to two levels of passive entities to make an investment in a non-
passive business that is a subsidiary of the passive business directly
financed by the SBIC. The regulation defines a subsidiary company as
one in which the financed passive business directly or indirectly owns
at least 50% of the outstanding voting securities. As an example, this
exception allows an SBIC to finance ABC Holdings 1, a passive small
business, with the proceeds flowing through ABC Holdings 2, another
passive small business, and then to ABC Manufacturing, a non-passive
small business in which ABC Holdings 1 owns directly or indirectly at
least 50% of the outstanding voting securities.
B. ``Blocker corporation exception''--Sec. 107.720(b)(3): This
exception enables a partnership SBIC, with SBA's prior approval, to
provide financing to a small business through a passive, wholly-owned C
corporation, but only if a direct financing would cause one or more of
the SBIC's investors to incur Unrelated Business Taxable Income (UBTI).
A passive C corporation formed under the second exception is commonly
known as a blocker corporation.
On October 5, 2015, SBA published a proposed rule (80 FR 60077) to
further expand the permitted use of passive businesses, provide
clarification with regard to investments in such businesses, and make
minor technical clarifications. SBA received three comments on the
proposed rule, not including one comment that generally questioned the
fairness of the Act as a whole and did not provide any specific
comments on the rule. The three comments pertinent to the rule are
addressed in Section II.
Section II also discusses a conforming regulatory change to
implement Section 521 of the Consolidated Appropriations Act, 2016
which increased the maximum leverage available to two or more SBICs
under common control from $225 million to $350 million.
II. Section-By-Section Analysis
A. Passive Business Rules
Section 107.720--Small Businesses That May Be Ineligible for Financing
1. Changes to Holding Company Exception Sec. 107.720(b)(2): SBA
proposed revisions to Sec. 107.720(b)(2) to explicitly permit an SBIC
to form and finance a passive business that will either pass the
proceeds through to or use the proceeds to acquire all or part of a
non-passive business. These changes were intended to codify SBA's
existing interpretation of the regulations.
SBA received 2 comments on Sec. 107.720(b)(2) indicating that the
proposed changes would be more effective if the passive business
directly financed was not required to own at least 50 percent of the
underlying active business. Commenters suggested that SBICs be allowed
to structure investments using passive investment vehicles
``irrespective of the number of parent entities involved so long as the
parent entities in question directly or indirectly own or control at
least 50 percent of the voting or economic interests of the active
business.'' SBA received similar comments as part of the rulemaking
process when it last proposed expanding the permitted use of passive
businesses. SBA reconsidered these previous suggestions in developing
this current rule; however, in light of the additional protections
added in this final rule (see the discussion of Sec. 107.720(b)(4) in
paragraph II.A.3 of this preamble), neither set of comments was
adopted. Although the new Sec. 107.720(b)(4) should help address some
of SBA's credit concerns, SBA believes that controlling ownership
provisions are needed to facilitate access to information and records
needed to effectively monitor these transactions and to aid in the
recovery of assets in the event of a default. SBA also continues to
maintain its position that effective monitoring of transactions with
unlimited levels of passive companies would require resources well
beyond those available to the Agency. Proposed Sec. 107.720(b)(2) is
adopted without change.
2. Changes to Blocker Corporation Exception--Sec. 107.720(b)(3):
The proposed rule also included the following changes to Sec.
107.720(b)(3):
a. Removing the requirement to obtain SBA's prior approval to form
a blocker corporation;
b. Permitting an SBIC to form a blocker corporation to enable any
foreign investors to avoid effectively connected income (ECI) under the
Internal Revenue Code;
c. Permitting a blocker corporation to provide financing to a
second passive small business that passes the proceeds through to a
non-passive small business in which it owns at least 50 percent of the
outstanding voting securities (effectively permitting an investment
structured with two levels of passive companies, one of which is the
blocker corporation); and
d. Removing outdated language indicating that an SBIC's ownership
of a blocker corporation formed under Sec. 107.720(b)(3) will not
constitute a violation of Sec. 107.865(a). This provision was rendered
unnecessary by a rule change in 2002 (67 FR 64789) that revised Sec.
107.865(a) to permit an SBIC to exercise control over a small business
for up to seven years without SBA approval.
SBA received comments on proposed Sec. 107.720(b)(3) as discussed
below:
a. Regulated Investment Company (RIC) Exception. All 3 commenters
asked that the regulations provide an additional exception for SBICs
that are wholly owned subsidiaries of Business Development Companies
(BDCs). A BDC typically elects to be taxed as a RIC pursuant to
Subchapter M of the Internal Revenue Code of 1986. In general, a RIC is
not subject to U.S. federal income taxes on income and gains that it
distributes to stockholders, provided that it satisfies certain minimum
distribution requirements. To qualify as a RIC, a BDC must satisfy
certain source of income and asset-diversification tests; among other
things, a RIC must generally derive at least 90% of its gross income
for each taxable year from certain types of investment. In particular,
the commenters explained that equity interests in pass-through tax
entities generate operating income that, if received or deemed received
directly by a BDC, could disqualify the BDC from maintaining RIC
status, and therefore, such interests must often be held through a
blocker corporation. The commenters requested that Sec. 107.720(b)(3)
be revised to permit an SBIC to form a blocker corporation to avoid
adverse tax consequences to an investor that has elected to be taxed as
a RIC. This final rule adopts the suggestion.
b. Blocker Entity Form of Organization. SBA also received two
comments suggesting that non-corporate forms of organization should be
permitted for blocker entities. The commenters explained that these
structures are often ``more streamlined in terms of corporate
formalities than a C corporation'' and suggested the regulations allow
``any entity that elects to be taxed as a corporation for Federal
income tax purposes.'' SBA considered this suggestion to be overly
broad, but partially adopted this suggestion in the final rule by
allowing a blocker entity to be structured as an LLC that elects to be
taxed as a corporation.
c. Two Level Holding Company Financing. Two commenters indicated
that Sec. 107.720(b)(3) should allow SBICs to structure a financing
with a blocker entity and then two levels of passive holding companies
as defined in Sec. 107.720(b)(2). The commenters stated
[[Page 95421]]
that the proposed rule puts an SBIC that requires a blocker entity to
accommodate its investors at a disadvantage compared to other SBICs
that do not require a blocker entity, since the blocker entity can only
finance a single passive business entity that in turn makes an
investment into an active business. For example, an SBIC with a foreign
investor would not be able to participate in a financing that is
structured as a two-level passive business financing under
107.720(b)(2), if they also needed a separate passive business to serve
as a blocker entity in order to avoid effectively connected income.
However, SBA believes that one of the other passive businesses
permitted under Sec. 107.720(b)(2) could possibly be used as a
blocker. The commenters' suggestion would effectively permit up to
three levels of passive businesses between the SBIC and the operating
business. SBA did not adopt this suggestion because additional levels
of passive businesses impose a burden on SBA as regulator and increase
the Agency's credit risk. SBA believes that two levels of passive
businesses under either exception should provide SBICs with sufficient
flexibility to operate successfully.
d. SBA did not receive any comments on the proposed change to Sec.
107.720(b)(3) regarding the removal of outdated language. This rule
adopts the change as proposed.
3. Additional Passive Business Guidance--Sec. 107.720(b)(4): The
proposed rule identified SBA's concerns with regard to passive
investments, including making sure the financing dollars go to the
eligible non-passive small business, fees being charged at each passive
business level, and SBA's ability to access passive business financial
records, especially in the case of a defaulting SBIC. To address these
concerns, SBA proposed making the the following changes in new Sec.
107.720(b)(4), which would apply to any eligible passive investment
made under Sec. 107.720(b)(2) or (b)(3):
a. ``Substantially All'' Definition. Clarifying the meaning of
``substantially all'' in Sec. 107.720(b)(2) and (b)(3) to mean 99
percent of the financing proceeds after deduction of actual application
fees, closing fees, and expense reimbursements, which may not exceed
those permitted under Sec. 107.860.
b. Fee Requirements. Requiring fees charged by an SBIC or its
Associate under Sec. Sec. 107.860 and 107.900 to not exceed those
permitted if the SBIC had directly financed the eligible Small Business
and requiring any such fees received by an SBIC's Associate to be paid
to the SBIC in cash within 30 days of receipt.
c. ``Portfolio Concern'' Clarification. Clarifying that both
passive and non-passive businesses included in a financing are
``Portfolio Concerns'' and therefore subject to record keeping and
reporting obligations with respect to any ``Portfolio Concern,''
defined in Sec. 107.50 as ``a Small Business Assisted by a Licensee.''
SBA received 3 comments on proposed Sec. 107.720(b)(4) as
discussed below:
a. ``Substantially All'' Definition. Commenters suggested that the
definition of ``substantially all'' be lowered to 95 percent of the
proceeds instead of 99% of the proceeds because they were concerned
that the 99 percent threshold ``may be too limiting and pose issues in
deal structuring.'' SBA did not adopt this comment. The definition
already excludes allowable fees and expense reimbursements permitted
under Sec. Sec. 107.860 and 107.900, and SBA believes that a 95
percent threshold could result in excessive expenses being charged in
the passive businesses that is diverted from the intended operating
business. Although this percentage may seem inconsequential, 4% of a
$20 million financing represents $800,000 that could be diverted from
the operating business.
b. Fee Requirements. Two commenters suggested removing the
requirement that fees received by an Associate must be paid over in
cash to the SBIC. They noted that SBIC program policy guidance known as
TechNote 7a, which provides guidelines concerning allowable management
expenses for leveraged SBICs (see www.sba.gov/sbicpolicy), already
requires that 100% of fees collected under Sec. 107.860 or Sec.
107.900 must benefit the SBIC, either by being paid directly to the
SBIC or (if paid to an Associate) through a corresponding reduction in
the management fee paid by the SBIC, typically called a ``management
fee offset.'' Commenters also indicated that management fee offsets
have tax advantages relative to other approaches. Although SBA
recognizes that management fee offsets can provide tax advantages, SBA
did not adopt this suggestion because of the difficulty in monitoring
investments utilizing passive businesses and identifying fees
associated with each passive business in addition to those paid by the
operating business.
c. ``Portfolio Concern'' Clarification. Two commenters indicated
that the clarification of Portfolio Concern should be revised to apply
only ``for the purposes of this part 107.720'' to avoid any unintended
effects arising from the use of the term ``Portfolio Concern'' in other
sections of the regulations. The commenters indicated that this
adjustment would still allow SBA to retain the necessary information
rights contemplated by the proposed rule. A search for the term
``Portfolio Concern'' within the regulations identified the following
instances.
Sec. 107.50 defines ``Portfolio Concern'' as ``a Small
Business Assisted by a Licensee.''
Sec. Sec. 107.600-107.660 describe record keeping and
information requirements, including those for a Portfolio Concern.
Sec. 107.730 discusses conflicts of interest with regards
to Portfolio Concerns.
Sec. 107.760 discusses how a change in size or activity
affect the Licensee with regards to a Portfolio Concern.
Sec. 107.850 discusses restrictions on redemption of
Equity Securities of a Portfolio Concern.
SBA believes that all of the requirements in these sections are
applicable to passive business financings. Therefore, this suggestion
was not adopted.
4. Section 107.610 Required certifications for Loans and
Investments. The proposed rule also added a certification requirement
to Sec. 107.610 to require an SBIC that finances a business under
Sec. 107.720(b)(3) to certify as to the qualifying basis for such
financing. The certification replaces the requirement for SBA prior
approval of the formation and financing of a blocker corporation.
Although SBA received no comments on proposed Sec. 107.610,
because SBA adopted the suggestion to allow SBICs that are BDC
subsidiaries to form blocker entities in order to maintain the BDC's
RIC status under Sec. 107.720 (b)(3), the language in the final rule
adds compliance with this tax election as a permissible basis for a
passive business formed under Sec. 107.720(b)(3).
B. Technical Changes
SBA also proposed the following technical changes to the
regulations.
1. Section 107.50 Definition of terms. Changing ``Associates's'' to
``Associate's''.
2. Section 107.210 Minimum capital requirements for Licensees.
Modifying paragraph (a) of Sec. 107.210 to allow both Leverageable
Capital and Regulatory Capital to fall below the stated minimums if the
reductions are performed in accordance with an SBA-approved wind-up
plan per Sec. 107.590(c), to conform with SBA's current oversight
practices.
3. Section 107.503 Licensee's adoption of an approved valuation
[[Page 95422]]
policy. Changing the last sentence of Sec. 107.503(a) to indicate that
valuation guidelines for SBICs may be obtained from the SBIC program's
public Web site, www.sba.gov/inv.
4. Section 107.630 Requirement for Licensees to file financial
statements with SBA (Form 468). Removing current Sec. 107.630(d),
which provides a mailing address for submission of SBA Form 468, and
re-designating paragraph (e) as paragraph (d). These instructions are
no longer necessary because SBICs submit this information
electronically using the SBA's web-based application.
5. Section 107.1100 Types of Leverage and application procedures.
Correcting the misspelling of ``Yu'' to ``You'' and removing paragraph
(c) which identifies where to send Leverage applications. This
paragraph is unnecessary because the application forms provide these
instructions.
None of the comments SBA received in response to the proposed rule
were related to these technical changes. The final rule incorporates
these changes as proposed.
C. Increase to Maximum Leverage to SBICs Under Common Control
Section 521 of the Consolidated Appropriations Act, 2016, Public
Law 114-113, 129 Stat. 2242, (December 22, 2015) amended section
303(b)(2) of the Small Business Investment Act of 1958 to increase the
maximum amount of Leverage available to two or more SBICs under Common
Control from $225 million to $350 million. SBA defines Common Control
to mean a condition where two or more persons, either through
ownership, management, contract, or otherwise, are under the control of
one group or person. Under 13 CFR 107.50, SBA presumes that two or more
SBICs are under Common Control if, among other things, they have common
officers, directors, or general partners. Currently, 13 CFR 107.1150(b)
limits two or more SBICs under Common Control to the maximum aggregate
amount of outstanding Leverage of $225 million, which amount is subject
to further limitations under SBA's credit policies. Solely as a
conforming change, this rule increases the maximum amount set forth in
the regulation from $225 million to $350 million. This statutory change
was not addressed previously because it had not yet been enacted when
the rule was proposed. Now that it has, the technical change is
necessary to avoid public confusion and ensure consistency between the
regulations and the current law.
Compliance With Executive Orders 12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory
Flexibility Act (5 U.S.C. 601-612).
Executive Order 12866
The Office of Management and Budget has determined that this rule
is not a ``significant'' regulatory action under Executive Order 12866.
This is also not a ``major'' rule under the Congressional Review Act, 5
U.S.C. 801, et seq.
Executive Order 12988
This action meets applicable standards set forth in section 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or presumptive effect.
Executive Order 13132
The final rule would not have substantial direct effects on the
States, or the distribution of power and responsibilities among the
various levels of government. Therefore, for the purposes of Executive
Order 13132, Federalism, SBA determines that this rule has no
federalism implications warranting the preparation of a federalism
assessment.
Executive Order 13563
This final rule was developed in response to comments received on
previously proposed amendments to these regulations on investments in
passive businesses. See 78 FR 77377 (December 23, 2013). SBA received
one set of comments on that rule that suggested changes to further
liberalize permitted financings to passive businesses under Sec.
107.720(b). In response to the comment, SBA indicated in the final rule
(79 FR 62819) that it would further consider the suggested changes in a
future rulemaking. As part of that reconsideration, SBA discussed the
comments with industry representatives and solicited additional
comments in the proposed rule published in October 2015 at 80 FR 60077.
This final rule reflects the input received from those public outreach
efforts.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this rule would impose additional reporting
and recordkeeping requirements under the Paperwork Reduction Act. In
particular, this rule implements changes to the Portfolio Financing
Report, SBA Form 1031 (OMB Control Number 3245-0078), to clarify
information to be reported in Parts A, B, and C of the form. The
changes, described in detail below, also include designating current
Part D as Part F and adding new Parts D and E.
The title, description of respondents, description of the
information collection and the changes to it are discussed below with
an estimate of the revised annual burden. Included in the estimate is
the time for reviewing instructions, searching existing data sources,
gathering and maintaining the data needed, and completing and reviewing
each collection of information.
Title: Portfolio Financing Report, SBA Form 1031 (OMB Control
Number 3245-0078).
Summary: SBA Form 1031 is a currently approved information
collection. SBA regulations, specifically Sec. 107.640, require all
SBICs to submit a Portfolio Financing Report using SBA Form 1031 for
each financing that an SBIC provides to a Small Business Concern within
30 days after closing an investment. SBA uses the information provided
on Form 1031 to evaluate SBIC compliance with regulatory requirements.
The form is also SBA's primary source of information for compiling
statistics on the SBIC program as a provider of capital to small
businesses. The proposed rule (80 FR 60077) invited the public to
provide comments on the following changes to SBA Form 1031:
(1) Clarifying the SBIC should report the non-passive Small
Business Concern information in the Form 1031. SBA has noted that SBICs
sometimes report data on the passive Small Business Concern rather than
the non-passive Small Business Concern when reporting financing
information. SBA has clarified that the SBIC should report data on the
non-passive Small Business Concern when reporting information on
financings using passive businesses in the Form 1031 Part A--the Small
Business Concern; Part B--the pre-financing data; and Part C--the
financing information, with the exception of the financing dollars in
Question 29. The amount of financing dollars provided by the SBIC
should be the total amount of such financing, regardless of whether the
dollars were provided directly or indirectly to the non-passive
business concern. Example: The SBIC provides $5 million in equity to
ABC Holding Corporation, which passes $4.98 million to the non-passive
business, Acme Manufacturing LLC. In addition, the SBIC provides $5
million in debt directly to Acme Manufacturing LLC. The SBIC would
report information on Acme Manufacturing LLC in Parts A, B, and C.
However, the
[[Page 95423]]
total financing dollars would be reported as $5 million in equity and
$5 million in debt for a total of $10 million in total financing
dollars.
(2) Identifying financings using one or more passive businesses.
SBA has added a question on whether the financing utilizes one or more
passive businesses as part of the financing, to help SBA identify these
financings.
(3) Adding information on passive business financings to aid in
regulatory compliance monitoring. SBA has also added a requirement for
SBICs to upload a file in Portable Document Format (PDF) that contains
the following information, which SBA will use to help assess whether
the financing meets regulatory compliance:
(a) Qualifying exception: Identification of the passive business
exception under which the financing is made (i.e., Sec. 107.720(b)(2)
Exception for pass-through of proceeds to subsidiary, or Sec.
107.720(b)(3) Exception for certain Partnership Licensees). If the SBIC
indicates that the financing is made under Sec. 107.720(b)(3), it
would also indicate the qualifying basis for the financing (i.e.,
financing would cause an investor in the fund to incur unrelated
business taxable income or effectively connected income or to receive
non-qualifying income for a regulated investment company).
(b) Passive Business Entities: Identification of the name and
employer ID number for each passive business entity used within the
financing. This is needed so that SBA can identify all Portfolio
Concerns involved in the financing.
(c) Financing Structure Description: A description of the financing
structure, including the flow of the money between the SBIC and the
non-passive Small Business Concern that receives the proceeds
(including amounts and types of securities between each entity), and
the ownership from the SBIC through each entity to the non-passive
Small Business Concern. This information will help SBA assess that the
Small Business Concern receives ``substantially all'' the financing
dollars and the ownership percentages are in compliance with the
regulations. This will also help SBA with SBICs transferred to the
Office of Liquidation to identify the structure of the financing and
aid in recovery of SBA leverage.
(4) Impact Fund Policy Initiative: Finally, a new Part D,
consisting of two questions concerning whether the investment is a
fund-identified impact investment or SBA-identified impact investment
has been added to the Form. This change provides a vehicle for SBICs
licensed to participate in SBA's Impact Investment Fund (Impact SBICs
to more clearly report whether they are reporting on an SBA-identified
impact investment or a Fund-identified impact investment. The Impact
Investment Fund was launched in April 2011 as part of President Obama's
Start-Up America Initiative. See, [https://www.sba.gov/about-sba/sba-initiatives/startup-america/about-startup-america.] The initiative was
amended in September 2014 to allow Impact SBICs to invest in self-
identified impact investments. [https://www.sba.gov/sites/default/files/articles/SBA%20Impact%20Investment%20Fund%20Policy%20-%20September%202014_1.pdf or https://www.sba.gov/content/new-2014-expanding-sbas-impact-fund] While Impact SBICs, like all SBICS use Form
1031 to report on their financings, SBA has determined that it would be
beneficial to Impact SBICs if SBA Form 1031 were to include questions
specifically targeted towards impact investments.
SBA did not receive any comments on the changes; therefore, they
are adopted as proposed.
Description of Respondents and Burden: There are approximately 299
licensed SBICs. All of these SBICs are required to submit SBA Form 1031
for each financing. The current estimated number of responses (i.e.,
number of financings) is 2,021 based on a recent three year period (FY
2012 through 2014). The current estimate indicates that it takes
approximately 12 minutes to complete the form, for a total annual
burden of 404 hours.
Neither the number of respondents nor the number of responses per
year is expected to be affected by this rule. However, SBA estimates a
slight increase in the burden hour as a result of the additional
reporting in new Parts D (Impact Investments) and Part E (Passive
Business).
Impact Fund Reporting. This reporting is expected to have minimal
impact. The estimated eight SBICs making impact investments would
complete new Part D an estimated total 56 times annually. At an
estimated 2 minutes per response, this additional reporting would add 2
hours to the annual burden for Form 1031.
Passive Business Reporting. SBA believes that the SBIC should be
able to provide the passive business information since it should be
readily available as part of the financing. SBA estimates that
providing the information will take on average an additional 30 minutes
for those financings utilizing passive businesses, with no incremental
burden for those financings that do not use a passive business. SBA
estimates that about 12% of the annual responses relate to passive
businesses financings (based on financing data in 2014). Based on the
number of SBICs reporting such financings the total estimated annual
hour burden resulting from new Part E reporting would be 122.
Therefore the total estimated annual hour burden for all SBICs
submitting SBA Form 1031s in a year would be 528 hours.
The current cost estimate for completing SBA Form 1031 uses a rate
of $35 per hour for an accounting manager to fill out the form. Using
that same rate, the cost per form would change from $7 per form to
$9.14 per form. However, SBA has increased its estimate of an hourly
rate for an accounting manager to $43 per hour (estimated using
www1.salary.com/Accounting-Manager-hourly-wages.html in July 2015),
which rate results in a new cost per form of $11.23 for an aggregate
cost of $22,704 for the 2,021 estimated responses.
This final rule also identifies information that an SBIC must
maintain in its files to support the required changes. SBA believes
that the SBICs should already be maintaining this information since a
passive business by definition is a Portfolio Concern and the SBIC
should be maintaining all documents needed to support each financing.
The rule makes this expectation explicit. Furthermore, currently, an
SBIC must maintain this information for it to effectively monitor and
evaluate an investment that uses a passive business to finance a non-
passive business. Therefore, SBA does not believe this recordkeeping
requirement increases the burden.
The rule also requires a certification under Sec. 107.610 when the
SBIC makes a financing using the exemption in Sec. 107.720(b)(3). This
includes maintaining records supporting the certification. Since this
regulation effectively replaces the requirement for SBICs to seek prior
SBA approval and maintain these records, SBA does not believe this
change will increase the burden.
Regulatory Flexibility Act, 5 U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires
administrative agencies to consider the effect of their actions on
small entities, small non-profit businesses, and small local
governments. Pursuant to the RFA, when an agency issues a rule, the
agency must prepare an Initial Regulatory Flexibility Act (IRFA)
analysis which describes whether the impact of the rule will have a
significant
[[Page 95424]]
economic impact on a substantial number of small entities. However,
Section 605 of the RFA allows an agency to certify a rule, in lieu of
preparing an IRFA, if the rulemaking is not expected to have a
significant economic impact on a substantial number of small entities.
This rule would affect all SBICs, of which there are currently close to
300. SBA estimates that approximately 75 percent of these SBICs are
small entities. Therefore, SBA has determined that this rule would have
an impact on a substantial number of small entities. However, SBA has
determined that the economic impact on entities affected by the rule
would not be significant. As discussed under the Paperwork Reduction
Act section, SBICs would need to provide descriptions of the
transactions in the Form 1031, which based on the estimate would cost
each SBIC approximately $28 per year. The changes in the passive
business regulation provide SBICs with additional flexibility to employ
transaction structures commonly used by private equity or venture
capital funds that are not SBICs.
SBA asserts that the economic impact of the rule, if any, would be
minimal and beneficial to small SBICs. Accordingly, the Administrator
of the SBA certifies that this rule would not have a significant
economic impact on a substantial number of small entities.
List of Subjects in 13 CFR Part 107
Investment companies, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons stated in the preamble, the Small Business
Administration amends 13 CFR part 107 as follows:
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
0
1. The authority citation for part 107 is revised to read as follows:
Authority: 15 U.S.C. 681, 683, 687(c), 687b, 687d, 687g, 687m.
Sec. 107.50 [Amended]
0
2. Amend Sec. 107.50 by removing from the definition of ``Lending
Institution'' the term ``Associates's'' and adding in its place the
term ``Associate's''.
0
3. Amend Sec. 107.210 by revising paragraph (a) introductory text to
read as follows:
Sec. 107.210 Minimum capital requirements for Licensees.
(a) Companies licensed on or after October 1, 1996. A company
licensed on or after October 1, 1996, must have Leverageable Capital of
at least $2,500,000 and must meet the applicable minimum Regulatory
Capital requirement in this paragraph (a), unless lower Leverageable
Capital and Regulatory Capital amounts are approved by SBA as part of a
Wind-Up Plan in accordance with Sec. 107.590(c):
* * * * *
0
4. Amend Sec. 107.503 by revising the last sentence of paragraph (a)
to read as follows:
Sec. 107.503 Licensee's adoption of an approved valuation policy.
(a) * * * These guidelines may be obtained from SBA's SBIC Web site
at www.sba.gov/inv.
* * * * *
0
5. Amend Sec. 107.610 by adding paragraph (g) to read as follows:
Sec. 107.610 Required certifications for Loans and Investments.
* * * * *
(g) For each passive business financed under Sec. 107.720(b)(3), a
certification by you, dated as of the closing date of the Financing, as
to the basis for the qualification of the Financing under Sec.
107.720(b)(3) and identifying one or more limited partners for which a
direct Financing would cause those investors:
(1) To incur ``unrelated business taxable income'' under section
511 of the Internal Revenue Code (26 U.S.C. 511);
(2) To incur ``effectively connected income'' to foreign investors
under sections 871 and 882 of the Internal Revenue Code (26 U.S.C. 871
and 882); or
(3) For an investor that has elected to be taxed as a regulated
investment company, to receive or be deemed to receive gross income
that does not qualify under Section 851(b)(2) of the Internal Revenue
Code (26 U.S.C. 851(b)(2)).
Sec. 107.630 [Amended]
0
6. Amend Sec. 107.630 by removing paragraph (d) and redesignating
paragraph (e) as paragraph (d).
0
7. Amend Sec. 107.720 by revising paragraphs (b)(2) and (3) and adding
paragraph (b)(4) to read as follows:
Sec. 107.720 Small Businesses that may be ineligible for financing.
* * * * *
(b) * * *
(2) Exception for pass-through of proceeds to subsidiary. You may
provide Financing directly to a passive business, including a passive
business that you have formed, if it is a Small Business and it passes
substantially all the proceeds through to (or uses substantially all
the proceeds to acquire) one or more subsidiary companies, each of
which is an eligible Small Business that is not passive. For the
purpose of this paragraph (b)(2), ``subsidiary company'' means a
company in which the financed passive business either:
(i) Directly owns, or will own as a result of the Financing, at
least 50 percent of the outstanding voting securities; or
(ii) Indirectly owns, or will own as a result of the Financing, at
least 50 percent of the outstanding voting securities (by directly
owning the outstanding voting securities of another passive Small
Business that is the direct owner of the outstanding voting securities
of the subsidiary company).
(3) Exception for certain Partnership Licensees. If you are a
Partnership Licensee, you may form one or more blocker entities in
accordance with this paragraph (b)(3). For the purposes of this
paragraph, a ``blocker entity'' means a corporation or a limited
liability company that elects to be taxed as a corporation for Federal
income tax purposes. The sole purpose of a blocker entity must be to
provide Financing to one or more eligible, unincorporated Small
Businesses. You may form such blocker entities only if a direct
Financing to such Small Businesses would cause any of your investors to
incur ``unrelated business taxable income'' under section 511 of the
Internal Revenue Code (26 U.S.C. 511); incur ``effectively connected
income'' to foreign investors under sections 871 and 882 of the
Internal Revenue Code (26 U.S.C. 871 and 882); or (for an investor that
has elected to be taxed as a regulated investment company) receive or
be deemed to receive gross income that does not qualify under section
851(b)(2) of the Internal Revenue Code (26 U.S.C. 851(b)(2)). Your
ownership and investment of funds in such blocker entities will not
constitute a violation of Sec. 107.730(a). For each passive business
financed under this section 107.720(b)(3), you must provide a
certification to SBA as required under Sec. 107.610(g). A blocker
entity formed under this paragraph may provide Financing:
(i) Directly to one or more eligible non-passive Small Businesses;
or
(ii) Directly to a passive Small Business that passes substantially
all the proceeds directly to (or uses substantially all the proceeds to
acquire) one or more eligible non-passive Small Businesses in which the
passive Small Business directly owns, or will own as a result of the
Financing, at least 50% of the outstanding voting securities.
[[Page 95425]]
(4) Additional conditions for permitted passive business
financings. Financings permitted under paragraphs (b)(2) or (b)(3) of
this section must meet all of the following conditions:
(i) For the purposes of this paragraph (b), ``substantially all''
means at least ninety-nine percent of the Financing proceeds after
deduction of actual application fees, closing fees, and expense
reimbursements, which may not exceed those permitted by Sec. 107.860.
(ii) If you and/or your Associate charge fees permitted by Sec.
107.860 and/or Sec. 107.900, the total amount of such fees charged to
all passive and non-passive businesses that are part of the same
Financing may not exceed the fees that would have been permitted if the
Financing had been provided directly to a non-passive Small Business.
Any such fees received by your Associate must be paid to you in cash
within 30 days of the receipt of such fees.
(iii) For the purposes of this part 107, each passive and non-
passive business included in the Financing is a Portfolio Concern. The
terms of the financing must provide SBA with access to Portfolio
Concern information in compliance with this part 107, including without
limitation Sec. Sec. 107.600 and 107.620.
* * * * *
Sec. 107.1100 [Amended]
0
8. Amend Sec. 107.1100 by removing the term ``Yu'' in the second to
the last sentence of paragraph (b) and adding in its place ``You'', and
by removing paragraph (c).
Sec. 107.1150 [Amended]
0
9. Amend Sec. 107.1150 by removing the term ``$225 million'' in the
first sentence of paragraph (b) and adding in its place ``$350
million''.
Dated: December 20, 2016.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-31291 Filed 12-27-16; 8:45 am]
BILLING CODE 8025-01-P