Small Business Investment Company Investment Diversification and Growth, 45982-46014 [2023-13981]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 88, Number 136 (Tuesday, July 18, 2023)]
[Rules and Regulations]
[Pages 45982-46014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13981]



[[Page 45981]]

Vol. 88

Tuesday,

No. 136

July 18, 2023

Part II





Small Business Administration





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13 CFR Parts 107 and 121





Small Business Investment Company Investment Diversification and 
Growth; Final Rule

Federal Register / Vol. 88 , No. 136 / Tuesday, July 18, 2023 / Rules 
and Regulations

[[Page 45982]]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 107 and 121

RIN 3245-AH90


Small Business Investment Company Investment Diversification and 
Growth

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: On October 19, 2022, the U.S. Small Business Administration 
(``SBA'' or ``Agency'') published a notice of proposed rulemaking 
(``NPRM'' or ``proposed rule'') to revise the regulations for the Small 
Business Investment Company (``SBIC'') program to significantly reduce 
barriers to program participation for new SBIC fund managers and funds 
investing in underserved communities and geographies, capital intensive 
investments, and technologies critical to national security and 
economic development. The proposed rule introduced an additional type 
of SBIC (``Accrual SBICs'') to increase program investment 
diversification and patient capital financing for Small Businesses, 
modernize rules to lower financial barriers to program participation, 
and incorporate the statutory requirements of the Spurring Business in 
Communities Act of 2017, which was enacted on December 19, 2018. This 
final rule implements proposed regulatory changes as modified to 
address comments SBA received.

DATES: This rule is effective August 17, 2023.

FOR FURTHER INFORMATION CONTACT: 
    Policy: Bailey G. DeVries, Associate Administrator of the Office of 
Investment and Innovation, Small Business Administration, 
sba.gov">[email protected]sba.gov, 202-941-6064. This phone number can also be 
reached by individuals who are deaf or hard of hearing, or who have 
speech disabilities, through the Federal Communications Commission's 
TTY-Based Telecommunications Relay Service teletype service at 711.
    Regulatory Comments/Federal Register Docket: Nathan Putnam, Office 
of Investment and Innovation, Small Business Administration, 
sba.gov">[email protected]sba.gov, 202-699-1746. This phone number can also be 
reached by individuals who are deaf or hard of hearing, or who have 
speech disabilities, through the Federal Communications Commission's 
TTY-Based Telecommunications Relay Service teletype service at 711.

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Small Business Investment Company Program

    The mission of the SBIC program is to enhance small business access 
to capital by stimulating and supplementing ``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.'' SBA carries out this mission by licensing and 
monitoring privately owned and managed investment funds that raise 
capital from private investors (``Private Capital'') and issue SBA-
guaranteed Debentures (``Debentures'') to make private long-term equity 
and debt investments into qualifying Small Businesses.
    SBA currently has two types of Debentures available for private 
funds that have received an SBIC license: a current pay (or 
``Standard'') Debenture and a ``Discount'' Debenture. The vast majority 
of licensed SBICs applying for SBA Leverage use the Standard Debenture 
with a ten-year maturity and interest due and payable on a semi-annual 
basis. This structure aligns with the cash flows of a subset of private 
fund strategies, including funds with mezzanine, private credit, and 
leveraged buyout strategies because private funds utilizing such 
mezzanine, private credit, or leveraged buyout strategies typically 
generate fund-level cash liquidity within the time period required to 
meet semi-annual interest payments. The Discount Debenture is issued at 
a steep discount to face value and accrues to face value over five 
years, at which time SBICs must pay current interest; this Debenture is 
only available for low and moderate income (LMI) investments and Energy 
Saving Qualified Investments (as defined in 13 CFR 107.50). Although 
SBICs have invested almost 20% of their investments in LMI areas, as of 
December 31, 2021, less than 0.5% of Debentures committed and issued 
since Fiscal Year (``FY'') 2000 used the Discount Debenture to make 
such investments. No SBIC has used the Discount Debenture for Energy 
Saving Qualified Investments. Market feedback suggests that the reason 
SBICs do not utilize the Discount Debenture is due to the steep 
discount at issue and the misalignment of the required interest 
payments commencing at year five to the typical cash flow patterns of 
patient capital investors, such as long-duration private equity funds. 
Between FYs 1994 through 2004, SBA was authorized to issue 
Participating Securities, which were an SBIC Program instrument 
designed to support equity investors. The program ceased due to losses 
in that program.
    Based on SBA's analysis of SBICs licensed for the legacy 
Participating Securities instrument, SBA found widespread evidence that 
participating security SBIC losses were largely due to the instrument's 
statutorily mandated structural flaws and regulations which enabled 
high risk portfolio construction decisions. These issues were further 
exacerbated by macro-economic conditions, concentration in early-stage 
venture (which, at the time, was an emerging alternative investment 
strategy), and pervasive information asymmetry in the venture market in 
the early 2000s. One of the major flaws in the participating security 
was that SBA advanced interest payments (known as ``prioritized 
payments'') on behalf of the Licensee and was only repaid out of the 
Licensee's profits. Since over half of these SBICs were not profitable, 
less than half of the $2.8 billion in prioritized payments advanced by 
SBA were reimbursed by SBICs licensed in the Participating Securities 
program. Due to the complexities associated with the statutory 
Participating Securities distribution waterfall, computing a single 
distribution required a significant amount of time and effort on the 
part of the Licensee and SBA. For example, Licensees were required to 
file hard copies of the computation documents with SBA for regulatory 
monitoring and examination purposes. These complications increased the 
workload on SBA to calculate each distribution, increased fund 
administration expenses for the Licensee, and created loopholes whereby 
Licensees could sequence profits distributions such that SBA would 
receive only its capped share of profits (typically less than 10%). In 
several cases, private investors received substantial returns based on 
early profit distributions and the SBIC would subsequently incur 
losses, resulting in SBA being the only party not fully repaid. 
Further, Licensees in the Participating Securities program typically 
did not have diverse portfolios and SBA did not consider portfolio 
diversification at the fund-of-fund level as a means to mitigate risk, 
an important consideration in modern portfolio theory. As a result, 
about half of the participating securities financings prior to 2001 
were in computers, information technology, and related professional 
technical services. Additionally, almost half of the participating 
securities financings prior to 2001 were in companies under two years 
of age at first financing. As a result, when the

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``dot com'' bubble financial downturn arrived in 2000, the SBIC 
portfolio was not appropriately diversified for sustained portfolio 
financial performance.
    Between October 1, 2016, and September 30, 2021, SBICs provided 
over $29 billion in financings to Small Businesses. However, only 18 
percent of Debenture SBIC financings were in the form of patient 
capital equity investments, and less than a quarter of SBICs licensed 
were focused on equity. Over 75 percent of all financings of Small 
Businesses by Debenture SBICs included a debt component. During this 
same timeframe, SBA licensed 116 SBICs with almost $7.8 billion in 
initial Private Capital, and two-thirds of licenses were approved for 
subsequent funds from asset management firms that had previously 
received an SBIC license. As of December 31, 2021, SBA had 298 
operating SBICs across 207 asset management firms with almost $35 
billion in Regulatory Capital and Debentures, including undrawn 
commitments.

B. Notice of Proposed Rulemaking

    The Small Business Investment Act of 1958, as amended (the ``Act'') 
declares to be the policy of the Congress and the purpose of the Act to 
improve and stimulate the national economy in general and the small-
business segment thereof. The Act states as the intention of Congress 
``financial assistance under this Act, when practicable, priority be 
accorded to small business concerns which lease or purchase equipment 
and supplies which are produced in the United States'' and ``financial 
assistance provided hereunder shall not result in a substantial 
increase of unemployment in any area of the country.'' The Act further 
authorizes the SBA Administrator ``to prescribe regulations governing 
the operations of small business investment companies.''
    On October 19, 2022, SBA proposed changes to 13 CFR part 107 (87 FR 
63436) to reduce barriers to program participation for new SBIC fund 
managers and funds investing in (i) underserved communities and 
geographies, (ii) capital intensive investments, and (iii) technologies 
critical to national security and economic development. This rule also 
was intended to implement Executive Order (``E.O.'') 13985, Advancing 
Racial Equity and Support for Underserved Communities Through the 
Federal Government, by reducing financial and administrative barriers 
to participation in the SBIC program and modernizing the program's 
license offerings to align with a more diversified set of new funds 
investing in underserved small businesses. Changes included (1) 
implementing a new type of Debenture (``Accrual Debenture'') designed 
to align with the cash flows of long-term, equity-oriented funds 
(``Accrual SBICs''); (2) revising the existing prohibited investment 
requirements under 13 CFR 107.720 that permit SBICs to invest in 
relenders or reinvestors under specific circumstances; (3) modernizing 
the licensing, operations, and examinations rules to lower costs and 
administrative barriers faced by new funds applying to the SBIC 
program; (4) implementing a formal licensee ``Watchlist'' process; (5) 
implementing a consistent approach to investor and SBA distributions; 
(6) implementing some of the modernization improvements it received 
through a Federal Register notification (82 FR 38617) and round tables 
in 2017; and (7) formally implementing the Spurring Business in 
Communities Act, Public Law 115-333.

C. Comments

    SBA received 15 comment letters related to the proposed rule or the 
SBIC program and two comments that were not related to the proposed 
rule or the SBIC program. Those comments that addressed the content of 
the proposed rule or were pertinent to the rule are discussed in the 
Section-by-Section Analysis below. Some of the comments related to the 
SBIC program were not directly within the scope of the rule but are 
briefly addressed below.
Comments Related to the SBIC Program But Not Directly Within Scope of 
the Proposed Rulemaking
    Three comments focused on the timeline of the SBIC licensing 
process, a matter addressed in the context of applicants from 
Underlicensed States within proposed changes to 13 CFR 107.300. One 
comment focused on whether anticipated approval timeframes for 
applicants who have successfully raised Private Capital could be 
shortened. Two comments focused on how an expedited licensing process 
would be valuable and how a clear, defined, expedited timeline could be 
critical to increasing underserved fund manager applications. In 
response to these comments, SBA intends to move forward with two 
courses of action: (1) introduce an expedited subsequent fund licensing 
process for eligible applicants while maintaining current risk 
management standards and practices (see discussion of Expedited 
Subsequent Fund licensing in section II.D. and revisions to 13 CFR 
107.305, below), and (2) modify standard operating procedures to 
increase transparency in the licensing process and decrease potential 
tail-end delays.
    One commenter recommended an amendment to 13 CFR 107.501 requiring 
SBA to publish in the Federal Register the names of SBICs that were 
licensed and the dates on which SBICs were licensed. SBA appreciates 
this recommendation and will publish license approvals in the Federal 
Register within 30 business days of the end of the month in which the 
license was approved by the SBA Administrator.
    One commenter encouraged SBA to underscore the importance of 
operational capability to the SBIC program by adopting an exclusion 
from the management fee offset requirement for fees paid by portfolio 
companies to operations teams aligned formally with an SBIC licensee. 
SBA agrees that operating partners, venture partners, portfolio 
services teams and venture studio models provide valuable technical 
assistance and networking for SBIC portfolio concerns. SBA recognizes 
the management fee offset (including fees for services provided to 
portfolio concerns) is often negotiated between private funds and their 
limited partners and will approve the scope and type of services 
included or excluded from management fee offsets during the licensing 
process. Upon licensure, an SBIC Licensee must adhere to the scope of 
the approved management fee plan.
    One commenter suggested, in pursuit of increased fund manager 
diversity, that SBA create new programs that help Licensees, 
particularly new Licensees, increase their chances of success while 
gaining valuable experience. SBA agrees with the posture of ``field-
building'' and seeks to do so in this final rule through (a) reducing 
regulatory restrictions on investments in reinvestors and (b) the 
introduction of the Accrual Debenture, both of which will enable access 
to capital to more first-time and emerging fund managers through SBIC 
fund-of-funds strategies.
    One commenter suggested putting processes in place for SBICs to 
collect and share data of entrepreneurs obtaining capital disaggregated 
by gender, race, and ethnicity. SBA agrees that transparency into the 
demographics, as well as more detailed geographic data, of portfolio 
concerns and licensees will enable greater public understanding of the 
SBIC program impact. As such, SBA is making modifications to existing 
data collections that enable voluntarily reporting of this information 
from licensees and their portfolio concerns.
    One commenter suggested SBA work more closely with limited partners

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(investors in SBICs) and share SBIC program financial returns 
information, as it could help first-time and emerging managers raise 
more Private Capital. SBA agrees with this comment. As such, SBA is 
considering modifications to the existing Form 468 to consistently 
collect industry standard investment performance metrics including 
Total Value to Paid-in Capital, Distributed to Paid-in Capital, 
Residual Value to Paid-in Capital, and Gross and Net Internal Rate of 
Return on a quarterly and annual basis. This will enable SBA to 
publicly report on the investment performance of the overall SBIC 
portfolio, by vintage year, investment strategy and emerging vs. 
established SBIC funds. SBA will not publicly disclose the investment 
returns of individual Licensees.
    One commenter suggested SBA create a diversity working group which 
would include SBA staff, principals of SBIC Licensees, and industry 
participants. This working group would support the stated efforts of 
SBA to recruit a more diverse set of managers to the SBIC program. SBA 
agrees with the substance of this comment and believe that this can be 
addressed through the Agency's recently announced Federal Advisory 
Committee (the SBA Investment Capital Advisory Committee) established 
under the Federal Advisory Committee Act.
    One commenter requested SBA consider rule changes now and in the 
future that would further encourage the SBIC program to focus on 
technology and tech-driven companies which address critical national 
priorities, including addressing climate change, strengthening supply 
chains, improving health outcomes, and bolstering national security. 
SBA agrees with the substance of this comment. The program-wide 
diversification rules support prioritization of undercapitalized 
industries and technologies, particularly those aligned to seeding, 
scaling and transitioning technologies critical to U.S. national 
security.
    One commenter expressed support for SBA's proposed rule extending 
the affiliation exceptions under 13 CFR 121.103(b)(5) to private equity 
partnerships organized as a 3(c)(7) funds. The commentator also 
referenced a 2015 comment letter concerning 13 CFR 107.720(b) and 
suggested further modification to SBA's passive business investment 
rule. SBA does not intend to change the passive investment rules.
    One commenter supports a rule that lowers barriers and advances 
racial equity and asks that the rule consider opportunities to support 
emerging managers. SBA agrees with the substance of this comment and is 
implementing several program modernizations to support this objective 
including removal of ``reinvestment'' restrictions which prohibit 
Section 301(c) Licensees from investing in a fund-of-funds capacity in 
emerging managers, scaled licensing fees, and reductions in 
administrative burdens.
    One commenter suggested SBICs licensed under the proposed rule 
should be allowed to participate to a limited degree (10-15 percent of 
the total invested into a company) in secondary sales--i.e., 
supplementary funding provided at financing for purposes other than 
funding the operations of a Small Business. SBA agrees this has become 
a standard industry practice. Current regulations do not restrict 
partial secondary sales from current investors in future financing 
rounds.
    One commenter proposed an additional change to the definition of 
Leverageable Capital by suggesting a definition change to the sum of 
Regulatory Capital, excluding unfunded commitments, and the greater of 
$0 or 50 percent times the total of the financed investments made by 
the Licensee less the Leverage provided by SBA and Regulatory Capital, 
excluding unfunded commitments. SBA appreciates this suggestion and 
notes that SBA is revising the definition of Regulatory Capital to be 
more explicit regarding how to interpret the exclusion clause. As such, 
SBA is revising the exclusion of questionable commitments to clarify 
that an unfunded commitment may be questionable due to lack of 
enforceable legal agreements under United States law or an issue of 
collectability for financial or any other reason, or both. SBA notes 
that the unfunded commitment of an investor that has satisfied the 
applicable net worth test set forth in the definition of Institutional 
Investor will not be of questionable collectability (for financial 
reasons) if the Licensee's Limited Partnership Agreement (or other 
governing agreement) contains sufficient remedies against defaulting 
investor to ensure collection. Furthermore, SBA is revising the 
definition of Regulatory Capital to highlight the distinction between 
Regulatory Capital and Leverageable Capital--i.e., that Regulatory 
Capital which is not in the form of unfunded commitments is 
Leverageable Capital.
General Comments About the Rulemaking
    One commenter asked why the proposed rule refers to October 1, 
2023, several times. SBA is removing the reference to October 1, 2023, 
except with respect to implementation of the minimum Annual Charge. One 
commenter suggested that SBA follow this comment period with an 
``Interim Final Rule'' instead of a final rule. SBA has followed the 
Federal rulemaking and comment process. During the 60-day public 
comment period, SBA raised awareness for the proposed rule through 
events noted on the Federal Register. (See, e.g., 87 FR 68109) The 
comments received by SBA are robust and significant relative to 
historical rulemaking feedback received on regulations governing the 
SBIC program. SBA is confident that the robust engagement from the 
public enables the agency to publish and implement a final rule.
    One commenter stated that they are supportive of increased 
``underserved'' focus. SBA appreciates support for the increased focus 
on underserved communities and industries.

II. Section by Section Analysis

A. Section 107.50 Definition of Terms

    In the proposed rulemaking, SBA proposed adding two terms 
associated with the new Accrual Debenture discussed in section I.B. of 
this rule: ``Accrual Debenture'' and ``Accrual Small Business 
Investment Company (``Accrual SBIC'').'' The Accrual Debenture means a 
Debenture issued at face value that accrues interest over its ten-year 
term, where SBA guarantees all principal and unpaid accrued interest. 
As discussed in the preamble, SBA believes that the Standard Debenture 
does not align with the cash flows needed for patient capital 
strategies primarily investing in the equity of or providing revenue-
based financing to Small Businesses.
    One commenter supported the introduction of Accrual Debenture SBICs 
and administrative changes to facilitate access for first-time fund 
managers. SBA appreciates this support for the Accrual Debenture 
financial instrument and administrative changes to facilitate access.
    Two commenters supported expansion of the asset classes and 
strategies of private funds participating in the SBIC program, yet had 
concerns about incorporating ``highly risky, very long-term, early 
investments which may span 10-15 years before failure or success are 
determined.'' There were additional comments regarding the management 
and oversight of taxpayer exposure to potential defaults and losses in 
the SBIC Program. One commenter urged SBA to publicly produce the 
distribution models displaying how the SBIC program will maintain a 
zero-subsidy rate with the addition of an

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alternative debenture instrument to the existing semi-annual interest 
payment debenture instrument. SBA appreciates the public's concern for 
portfolio risk management and credit risk management processes in a 
Federal credit program. Among others, risks in private investing come 
in many forms. including illiquidity risk, duration risk, volatility 
risk, concentration risk, credit risk, and tail-event risk. Over 
several decades, SBA has found that illiquidity risk, duration risk, 
and strategy concentration risk correlate with the highest risk of 
overall program losses. The Accrual Debenture instrument combined with 
the portfolio diversification rules address these three primary risk 
considerations through cash flow matching, duration and repayment 
management, and guardrails to prevent the overall program from over-
concentrating in more volatile `risk-on' strategies. As with all 
private fund investments, proper investment and operational due 
diligence and ongoing portfolio monitoring is essential to safeguarding 
capital.
    Three comments remarked on the control provisions related to 
Accrual SBICs. One comment was concerned that by excluding control 
equity funds from securing licenses for the Accrual Debenture, SBA will 
hamper its ability to achieve the goals of the SBIC program noting that 
allowing control equity strategies will reduce the overall risk of the 
new Accrual class. Another comment encouraged SBA to include buyout 
funds in Accrual SBICs by removing the restriction that they are 
required to own less than 50 percent at the time of initial financing. 
SBA also received a comment noting that strict requirements may limit 
the universe of investible companies and interest from investors and 
suggested that SBA further study the potential impact of these 
requirements. Finally, two comments raised general concerns around the 
provision that Accrual SBIC licensees will generally own no more than 
50 percent of the Small Business at initial Financing. SBA agrees with 
the recommendation to encourage more private markets flexibility and 
dynamism with the adoption of the Accrual Debenture instrument. As 
such, SBA is removing both the language in the proposed rule which 
restricted ownership of a portfolio concern at the time of initial 
Financing to less than 50% and the guidance that at least 75% of 
financing by an Accrual SBIC be classified as equity. SBA's objective 
with the introduction of the Accrual Debenture is to offer a financial 
product aligned to investment strategies with longer duration and 
strategies with more episodic distributions to investors. The 
introduction of the Accrual Debenture instrument is intended to ensure 
that SBA can support the full spectrum and the dynamic nature of 
private market investments in Small Businesses. Between the existing 
Standard Debenture and the Accrual Debenture instrument, SBA will 
increase program flexibility for greater private market participation 
resulting in increased benefits to small businesses. One comment stated 
that the increase in the oversight that the rule implements would 
result in costs to the taxpayer or increased fees. That commenter 
further noted that fee changes should consider rising interest rates 
and that when capital is drawn incrementally, taxpayer losses 
associated with rising inflation and interest rates are reduced. SBA 
has taken such factors into account in the program subsidy model which 
includes the President's Economic Assumptions. The model forecasts 
interest rates based on macro-economic conditions. Interest rates are 
set at the time of funding draws which mitigates risk of future 
taxpayer losses.
    One commenter expressed concerns that the nature of the repayment 
terms of the Accrual Debenture could pose the same type of issues that 
resulted from the Participating Securities program. SBA performed 
extensive analysis and modeling of the historical defaults, repayments, 
recoveries and losses across Debenture instruments and the 
Participating Securities instrument when preparing the proposed 
rulemaking.
    The following table summarizes preliminary modeling outputs for 
anticipated fiscal year cohort 2024 Accrual SBIC commitments.

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                                                           Lifetime defaults      Lifetime
                SBIC type                   Fiscal year          (% of         recoveries (%    Net loss rate (%
                                               cohort        disbursements)     of defaults)   of disbursements)
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Accrual.................................            2024              35.78            67.77              11.53
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    SBA assumes a higher default risk profile and net loss rate for 
anticipated Accrual Debenture Leverage compared to Standard Debenture 
leverage. This assumption is supported by an analysis of third-party 
private equity industry data and historical SBIC debenture performance 
data. Because accrued interest and leverage is repaid as profit 
distributions become available, SBA considered how fund performance 
will impact the expected loss rate on Accrual Debentures. SBA therefore 
estimated distribution to paid-in capital (DPI) and total value to 
paid-in capital (TVPI) assumptions for the Accrual SBIC population 
using custom venture capital and private equity benchmarks relevant to 
anticipated Accrual SBIC funds. These distributional assumptions are 
fed into a cash flow engine to estimate leverage repayments and 
defaults for anticipated Accrual SBIC Leverage commitments. SBA 
estimates the terminal DPI distribution for Accrual SBIC funds in the 
table shown below. The median terminal DPI assumption is just above the 
forecasted breakeven point to repay all accrued interest and leverage 
(approximately 1.20). SBA forecasts defaults on funds assumed to have a 
DPI at debenture maturity below the forecasted breakeven point.

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                               Metric                                10th percentile  25th percentile  50th percentile  75th percentile  90th percentile
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DPI................................................................            0.26             0.68             1.26             1.98             3.62
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    After blending forecasted cash flows for anticipated Accrual and 
Standard SBIC leverage and factoring in the estimated composition of 
debenture leverage by fund type (Accrual vs. Standard), SBA forecasts a 
0.00 percent subsidy rate in the debenture program. To maintain a 0.00 
percent subsidy rate in the debenture program, SBA estimates an annual 
fee charge landing between the annual charge implemented for fiscal 
years 2022 and 2023.
    Further, SBA has taken several steps to mitigate risk to the 
program, such as limiting the leverage available to

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individual Accrual SBICs to one and one quarter tiers of leverage in 
relation to their Leverageable Capital and modifying the distribution 
waterfall for Accrual Debenture SBICs to ensure that SBA receives 
distributions on accrued interest and pro rata on principal with 
distributions to the private investors. SBA retains the ability to take 
action for regulatory defaults including uncured capital impairment, 
which remains vital to protecting U.S. taxpayer dollars.
    The Accrual Debenture instrument is based on the successful 
features of the existing Debenture instrument with modifications to the 
distribution waterfall and timing of interest payments to reduce the 
risk of default and losses. The requirement for pro rata distributions 
to SBA is specifically designed to avoid the repayment issues that 
occurred in the Participating Securities program which included a 
flawed time-based return metric that enabled Participating Securities 
Licensees to pay a minimum amount to SBA and then forego future 
distributions if the SBIC subsequently performed poorly.
    After consideration of all public comments, SBA has modified the 
final rule to state that the Accrual Debenture will only be available 
to Accrual SBICs and Reinvestor SBICs, defined in Sec.  107.720, to 
align with the types of long-duration growth investing they primarily 
perform. Standard SBICs may only issue Standard Debentures and Discount 
Debentures. Approval to operate as an Accrual SBIC or Reinvestor SBIC 
is subject to SBA's investment due diligence, credit procedures, and 
statutory limitations. The final rule defines an Accrual SBIC as a 
Section 301(c) Licensee that elects at the time of licensing to issue 
Accrual Debentures. SBA expects that Accrual SBICs will most commonly 
be formed as limited partnerships that are subject to 13 CFR 107.160. 
These regulations will limit the Accrual Debenture to SBICs that focus 
on stimulating and supporting the creation and growth of Small 
Businesses.
    A limitation of the Accrual Debenture is the amount of SBA leverage 
available to Accrual SBICs and Reinvestor SBICs. In order to determine 
the maximum amount of leverage that Accrual SBICs and Reinvestor SBICs 
may have outstanding, SBA will aggregate the total principal leverage 
plus ten years of accrued interest on such principal to determine the 
total Accrual Debentures that the Accrual SBIC may issue based on the 
statutory limitation. For example, if an Accrual SBIC has $100 million 
in Regulatory Capital, the total Accrual Debenture principal it may be 
approved for may be only $118 million if the forecast interest would 
accrue to approximately $57 million over a ten-year timeframe at a four 
percent interest rate, since higher amounts would result in SBA 
guaranteeing outstanding leverage amounts in excess of $175 million, 
the current statutory maximum for Leverage available to a single 
Licensee. SBIC applicants will be required to identify whether they 
intend to use Standard or Discount Debentures or if they intend to use 
the Accrual Debenture as an Accrual SBIC or Reinvestor SBIC.
    SBA proposed modifying the definition of ``Associate'' regarding 
the status of an entity Institutional Investor based on its ownership 
interest in a Licensee. Currently an entity Institutional Investor 
whose ownership represents over 33 percent of the Licensee's Private 
Capital is considered an ``Associate''. SBA is revising regulations to 
change this to 50 percent or more to align with the financing practices 
of Community Development Corporations and other institutional investors 
seeking patient capital investment funds and first-time funds. Under 
the proposal, an entity Institutional Investor, as a limited partner in 
a partnership Licensee, will not be considered an Associate solely 
because that entity's investment in the Partnership, including 
commitments, represents 10 percent or more but less than 50 percent of 
the Licensee's Private Capital, provided that such investment also 
represents no more than five percent of the entity's net worth.
    One commenter asked whether the definition of Associate is 
applicable to all types of SBICs and expressed reservations around 
financing practices misalignment between taxpayer-guaranteed Federal 
programs and not-for-profit community development corporations, which 
often focus heavily on real estate and affordable housing. SBA 
clarifies that the definition of Associate is applicable to all SBICs. 
Notwithstanding the focus of any type of potential Licensee, SBA 
regulations already restrict financings to certain real estate 
businesses. (See 13 CFR 107.720(c)) Moreover, SBA carefully evaluates 
the proposed investment strategy of each license applicant to ensure 
conformance with SBA regulations.
    One commenter raised the potential unintended consequences of 
increasing, within the definition of Associate, the threshold 
percentage under which an entity Institutional Investor will be 
considered an Associate (from 33 percent to 50 percent) including the 
risk of giving a single investor nearly full control over governance 
matters including future amendments to a licensee's limited partnership 
agreement (LPA). The commenter recommended SBA withdraw the amendment 
and retain the current 33 percent threshold or, if it is raised, not 
increase beyond 35 percent. SBA seeks to increase regulatory 
flexibility through this final rule. The increased ownership threshold 
is a reflection of this principle. SBA appreciates that investors hold 
different governance and investment policy expectations which often 
must be agreed to by fund managers in order to receive a funding 
commitment. To protect the interests of limited partners in SBICs 
licensed prior to a final rule, SBA asserts this rule change only 
applies to funds licensed after the rule is implemented. Limited 
partners can align with the principals of SBICs on investor 
concentration and rights through their limited partnership agreement.
    The proposed rule defined the term ``Annual Charge'' that is 
currently defined as ``Charge'' under current 13 CFR 107.50. SBA is 
implementing this change because this is typically the term used to 
refer to the annual fee associated with SBA-guaranteed Leverage in both 
SBA's website and much of its documentation, and more appropriately 
refers to the recurring payment associated with this Leverage fee. SBA 
will maintain the term ``Charge'' in its regulations for backwards 
compatibility, but indicate it has the same meaning as ``Annual 
Charge''. Currently, the term ``Charge'' is defined as the annual fee 
on Leverage issued on or after October 1, 1996. Since there is no 
outstanding Leverage issued prior to October 1, 1996, this language 
will be removed from the definition. The current definition also states 
that the Leverage is subject to the terms and conditions set forth in 
Sec.  107.1130(d). This final rule adds a reference to Sec.  107.585. 
Although current Sec.  107.585 identifies restrictions regarding 
reductions in Regulatory Capital (which are typically performed in 
conjunction with a distribution to its private investors), this final 
rule expands Sec.  107.585 to define new distribution requirements for 
Accrual SBICs issuing Leverage. (See Sec.  107.585 later in this final 
rule.) The final rule adopts the definition substantially as proposed.
    SBA proposed amending the definition of ``Control Person'' under 
Sec.  107.50 to clarify what constitutes a controlling relationship 
over a Limited Partnership Licensee with a government sponsored non-
profit management company relationship. Section 107.50 is amended to 
state that when over 30

[[Page 45987]]

percent of the Private Capital managed by the Licensee comes from 
unaffiliated and unassociated entities (outside of their association as 
an investor in the Licensee), the management company of the Licensee is 
a government sponsored non-profit entity and the general partner(s) of 
the Licensee are bound by a fiduciary duty to the investors in the 
Licensee, the management of the Licensee can be determined to be free 
from outside control.
    One commenter noted it would be helpful to the public if SBA would 
(i) provide an example or examples of situations that meet the proposed 
definition of ``Control Person'', and (ii) provide additional 
information in the rule that explains how changing the definition of 
``Control Person'' does not further lessen SBA's control of Licensees, 
which exists with the current definition of ``Control Person''. SBA 
respectfully notes that it does not exert control over Licensees. SBA 
further notes that as set forth in 13 CFR 107.305, appropriate 
evaluation and risk mitigation measures including but not limited to: 
due diligence, background checks, review of governance documents, 
transferee's liability contract and applicant certifications etc. are 
in place to ensure that SBA has properly evaluated any persons exerting 
control over Licensees.
    Another commenter noted licensees or anchor funds that seek 
intentional or known future ownership of small businesses appears to be 
outside the intention or Statement of Policy by Congress in the Small 
Business Investment Act of 1958 for capital supplementation to small 
businesses versus control and ownership of small businesses. The SBA 
could not substantiate the commenters interpretation based on the Small 
Business Investment Act of 1958 and adds that permissive SBIC control 
of portfolio concerns for up to seven years is a longstanding principle 
of the program. The final rule adopts the definition substantially as 
proposed. In the proposed rulemaking, SBA sought public input for any 
suggested changes to ``Equity Capital Investments'' that SBA should 
consider. One commenter suggested that SBA adopt the definition of 
``qualifying investment[s]'' for a venture capital fund from 17 CFR 
275.203(l)-1 (Rule 203(l)-1 under the Investment Advisers Act of 1940) 
(or a substantially similarly definition). SBA will continue to 
maintain its definition of ``equity capital investments.'' The proposed 
rule included under Sec.  107.50 the terms ``Final Licensing Fee'' and 
``Initial Licensing Fee,'' as these terms have been defined in Sec.  
107.300 and used in Sec.  107.410. The final rule adopts the definition 
substantially as proposed.
    The proposed rule defined the term ``GAAP'' as ``Generally Accepted 
Accounting Principles'' as established by the Financial Accounting 
Standards Board (FASB), which refer to financial accounting and 
reporting standards for public and private companies and not for profit 
organizations in the United States. The U.S. Securities and Exchange 
Commission has recognized the financial accounting and reporting 
standards of the FASB as ``generally accepted'' under section 108 of 
the Sarbanes-Oxley Act. SBA is defining this term as the final rule 
refers to GAAP in various locations in the regulations.
    SBA proposed amending the term ``Leverage'' to remove the inclusion 
of ``Participating Securities'' and ``Preferred Securities'' which are 
no longer available in the SBIC program and no longer outstanding in 
operating SBICs. While SBICs with outstanding Participating Securities 
Leverage remain in the Office of SBIC Liquidation, those Licensees are 
subject to the regulations at the time that Leverage was issued. SBA 
also is amending the term Leverage to clarify that Leverage and SBA's 
guarantee would apply to both the principal and unpaid accrued interest 
associated with the Accrual Debenture. This definition will clarify 
SBA's guarantee in relation to the new security and the Leverage 
maximum restrictions regarding Accrual Leverage. For example, SBA will 
not approve Accrual Debentures for an amount in which the principal 
balance and ten years of accrued interest are projected to exceed the 
statutory maximum for leverage available to any single licensee 
(currently $175 million). This definition also clarifies the total 
capital that SBA is guaranteeing at any time. For example, if an 
Accrual SBIC had $20 million principal in Accrual Debentures that 
accrued $4 million in interest, SBA's guarantee would be $24 million, 
as SBA's guarantee extends to the accrued interest. SBA is required 
under statute to guarantee both principal and interest on outstanding 
leverage. This final rule requires SBA to estimate the interest rate 
associated with any Accrual Debenture commitment in a conservative 
manner to ensure that the total capital that SBA guarantees does not 
exceed its overall authority set forth in the Act or other applicable 
Federal laws.
    SBA proposed the terms ``Leveraged Licensee'' and ``Non-leveraged 
Licensee'' in Sec.  107.50. Current regulations provide greater 
flexibility to Licensees that do not have outstanding Leverage and do 
not intend to issue leverage since SBA has no credit risk. This final 
rule will provide further benefits and flexibility to such Licensees. 
In order to simplify the regulations, Leveraged Licensees would include 
any Licensee with outstanding Leverage, Leverage commitments, Earmarked 
Assets (which are only associated with Licensees that issued 
Participating Securities), and any Licensee that intends to issue 
Leverage in the future. The intent of the certification is to ensure 
that SBA applies the appropriate scrutiny to any Licensee that intends 
to seek Leverage in the future. This regulation is not intended to 
prohibit subsequent SBIC funds from seeking Leverage. This final rule 
also defines Non-leveraged Licensee as a Licensee that has no 
outstanding Leverage or Leverage commitment, certifies (in writing) 
that such Licensee will not seek Leverage throughout the life of the 
fund, and has no Earmarked Assets. For example, if ABC, LP has 
outstanding Leverage of $10 million and subsequently (a) fully repays 
its outstanding Leverage, (b) has no further Leverage commitments, (c) 
has no Earmarked Assets, and (d) certifies that it will not seek any 
Leverage in the future, ABC, LP would be considered a Non-leveraged 
Licensee, even if the management company of ABC, LP also has a 
Leveraged Licensee (ABC II, LP) with outstanding Leverage of $20 
million. As another example, if DEF, LP is granted an SBIC License and 
certifies to SBA (in writing) that it does not intend to issue 
Leverage, SBA would consider DEF, LP to be a Non-leveraged Licensee. 
This final rule adds the proposed terms substantially as proposed.
    In the proposed rule, SBA proposed to define the term ``Qualified 
Line of Credit'' to describe a form of secured borrowing which would be 
available to leveraged licensees under Sec.  107.550(c). Considering 
the matter further, SBA decided to use the more descriptive term 
``Capital Call Line'' to align with industry terminology and to better 
describe what is essentially the same type of borrowing to be permitted 
under Sec.  107.550(e). (See section II.I. of this rule.)
    SBA proposed changing regulations to modify the term ``Retained 
Earnings Available for Distribution'' to include the acronym ``READ'' 
and to clarify that READ distributions must be performed in accordance 
with the proposed Sec.  107.585. This final rule adopts the 
modification and clarifies that READ distributions must be performed in 
accordance with the revised Sec.  107.585.

[[Page 45988]]

    SBA proposed changing regulations to add the terms ``SBIC'' or 
``Small Business Investment Company'' to have the same meaning as 
Licensee. SBA uses the terms ``SBIC'' and ``Licensee'' interchangeably 
throughout the regulations and in its policies and documents. SBA also 
proposed changing regulations to add the term ``SBIC website'' as 
www.sba.gov/sbics, which is the public website that SBA maintains all 
information on the SBIC program, including all standard operating 
procedures, policies, SBIC forms, and any reports that SBA publishes 
from time to time. Regulations refer to this site throughout the 
regulations. This final rule adopts the changes as proposed.
    The proposed rule added the terms ``State'' and ``Underlicensed 
State'' in Sec.  107.50 to support implementation of Public Law 115-333 
which gives priority in Licensing to applicants headquartered in 
Underlicensed States with below median SBIC financing. The term 
``State'' will be defined to include all fifty States, the Commonwealth 
of Puerto Rico, the District of Columbia, and all U.S. territories with 
permanent populations (Guam, U.S. Virgin Islands, Northern Mariana 
Islands, and American Samoa). The term ``Underlicensed State'' means a 
State in which the number of operating licensees per capita is fewer 
than the median number for all States. To determine the per capita per 
State, SBA will use the most recent resident population from the U.S. 
Census as of the date of the calculation. SBA will publish the list of 
Underlicensed States periodically on the SBIC website.
    One commenter expressed support of the ``under-licensed state'' 
concept and suggested expanding the concept to ``under-licensed 
region.'' Another commenter requested as an extension of the proposed 
change to include Underlicensed States where there are little to no 
licenses for minority and women-led SBIC funds. In this final rule, SBA 
is implementing regulations in support of the ``Spurring Business Act 
of 2017.'' Additionally, SBA has outlined an increased focus on 
``underserved'' broadly in this final rule which includes geographies 
as well as communities. The final rule adds the terms substantially as 
proposed.
    SBA proposed to add the term ``Total Leverage Commitment'' to have 
the meaning as defined in proposed Sec.  107.300. This final rule adds 
the term ``Total Intended Leverage Commitment'' to have the meaning as 
defined in revised Sec.  107.300. As discussed under that section, SBA 
is changing regulations to approve the Total Intended Leverage 
Commitment at the time of licensing.
    SBA proposed changing regulations to add the term ``Enhanced 
Monitoring'' as defined in the proposed Sec.  107.1850. As discussed 
under that section, SBA has replaced ``Enhanced Monitoring'' with 
``Watchlist'' and is implementing the Watchlist process in this final 
rule (previously outlined under Standard Operating Procedures) to 
better monitor SBICs.
    SBA proposed changing regulations to change the term ``Wind-up'' 
Plan to ``Wind-down'' Plan throughout part 107 because SBA believes 
that it better reflects the wind-down of a fund at the end of its life 
cycle. This final rule adopts the change as proposed.

B. Section 107.150 Management Ownership Diversification Requirements

    This regulation identifies the SBIC ownership diversification 
requirement under section 302(c) of the Act (also referenced in part 
107 as the ``diversification requirement''). That section requires SBIC 
ownership be ``sufficiently diversified from and unaffiliated with the 
ownership of the licensee in a manner that ensures independence and 
objectivity in the financial management and oversight of the 
investments and operations of the licensee.'' To ensure independence 
per statute, current Sec.  107.150(b) requires that ``no Person or 
group of Persons who are Affiliates of one another may own or control, 
directly or indirectly, more than 70 percent of your Regulatory Capital 
or your Leverageable Capital.'' In the proposed rulemaking, SBA 
proposed changing regulations to remove the ``indirectly'' requirement 
to provide greater clarification as to sources of Regulatory Capital 
available to an SBIC.
    As an exception to the diversification ownership requirement under 
Sec.  107.150(b)(1), SBA allows an investor that is a Traditional 
Investment Company (a term defined in 13 CFR 107.150(b)(2)) to own and 
control more than 70 percent of the Licensee's Regulatory Capital. Such 
SBICs are essentially drop-down funds for that Traditional Investment 
Company and are structured exclusively to pool capital from more than 
one source for the purpose of investing and generate profits. SBA 
proposed changing regulations also to include non-profit entities to 
also own more than 70 percent of the Licensee's Regulatory Capital to 
facilitate capital raising efforts, particularly for first-time funds 
and funds targeting investments in underserved geographies and critical 
technologies.
    By meeting the requirements of Sec.  107.150(c)(2), such non-profit 
entities would be exempt from requirements under Sec.  107.150(c)(1) 
which state that the management of the Licensee must be unaffiliated 
from the sources of Regulatory Capital. It should be noted that SBA 
will continue to review and monitor such entities to ensure that the 
SBIC is a for-profit vehicle for the non-profit, the management of the 
Licensee is bound by a fiduciary duty to investors, and to ensure such 
entities do not pose undue investment or operational risk to SBA.
    Two commenters supported the regulation as proposed. One commenter 
suggested allowances for non-profit entities to control more than 70 
percent of the Licensee's Regulatory Capital. SBA appreciates the 
comment. In terms of extending the allowance beyond that of 
``traditional investment companies'', SBA believes, at this time, 
consistency with existing practices and regulations is most prudent and 
will not extend beyond the 70 percent threshold.
    One commenter opposed the proposed modification to the definition 
of ``traditional investment company'' to include non-profit entities. 
SBA appreciates the comment and seeks to clarify that this modification 
to the existing regulations does not permit SBA to license a non-profit 
entity as an SBIC. By statute, SBICs must be for-profit entities. The 
modification to the regulation permits up to 70 percent of the 
regulatory capital contributed to the for-profit SBIC to come from non-
profit management company of a limited partnership SBIC. Non-profit 
entities are already permitted as the management company of limited 
partnership SBICs. The final rule provides guidance as to the extent of 
Regulatory Capital that can be provided by a management company with 
non-profit status. After consideration of all public comments, the 
final rule adopts the proposed Sec.  107.150 without change.

C. Section 107.210 Minimum Capital Requirements for Licensees

    This section identifies minimum Private Capital requirements for 
SBICs. In the proposed reulemaking, SBA proposed amending the term 
``Wind-up'' to ``Wind-down'' as previously discussed in section II.A. 
of this rule discussing Sec.  107.50. SBA also proposed removing all 
references to ``Participating Securities'' since SBA no longer issues 
such leverage and any SBICs in SBA's portfolio that issued such 
leverage are either in Wind-down or are monitored by the Office of SBIC 
Liquidations.
    Paragraph (a)(1) requires SBICs (with the exception of Early Stage 
SBICs) to

[[Page 45989]]

have Regulatory Capital of at least $5 million, but provides an 
exception for SBA, in its sole discretion and based on a showing 
special circumstances and good cause, to license an applicant with only 
$3 million if the applicant: (i) meets its licensing standards with the 
exception of minimum capital; (ii) has a viable business plan 
reasonably projecting profitable operations; and (iii) has a reasonable 
timetable for achieving Regulatory Capital of at least $5 million. 
Public Law 115-333 specifically allows an applicant licensed under this 
exception and located in an Underlicensed State to receive up to 1 tier 
of Leverage until the Licensee meets the $5 million minimum Regulatory 
Capital requirement. SBA proposed changing regulations to specify that 
one example of ``good cause'' would be the applicant is headquartered 
in an Underlicensed State. If licensed, Leveraged Licensees from 
Underlicensed States would be eligible for up to 1 tier of Leverage 
until they raise the $5 million minimum Regulatory Capital requirement.
    One commenter supports the regulations and encourages clarification 
and expansion of ``good cause'' to ensure the exception is applied 
fairly and not solely based on geography. SBA appreciates the comment 
and notes that the ``good cause'' exception is not solely based on 
geography. Consistent with existing regulations, ``good cause'' factors 
may be applied in a non-exclusive manner based on criteria already 
specified in Sec.  107.210. Further, SBA notes that any SBIC licensee 
that receives a license under the ``good cause'' exception must satisfy 
the requirements of 13 CFR 107.210, including satisfaction of all 
licensing standards and requirements except the minimum capital 
requirement, as determined solely by SBA, a viable business plan 
reasonably projecting profitable operations, and a reasonable timetable 
for achieving Regulatory Capital of at least $5,000,000.
    One commenter asserted hesitation with the low thresholds 
established by statute under the regulation because of the potential 
risk to the program from licensing under-capitalized licensees. The 
commenter also suggested SBA publish objective, quantifiable standards 
for fund sizes, ask Congress for higher ``low limit'', and warned SBA 
that using the ``good cause'' exception other than in rare instances 
involving a licensee's narrowly tailored circumstances would inject 
higher risk into the SBIC program that could trigger unintended 
consequences. Finally, the commenter suggested that Licensees should be 
allowed to accept ``indirect'' government funds, but this capital 
should not be leverageable. Further, it should not be used for 
satisfying the private market validation expectations for a license. 
SBA seeks to implement the statute as established by Congress. SBICs 
can accept government funds to the extent permitted by the Act. During 
the licensing process, SBA will continue to employ the concepts such as 
external validation and fund size viability when assessing applicants.
    One commenter encouraged SBA to allow first-time managers to lower 
the Private Capital commitment threshold to between $10 to 15 million, 
in an effort to reduce barriers to program participation for first time 
and diverse fund managers. SBA shares the value of reducing barriers to 
participation for emerging and diverse managers. The expansion of 
reinvestor provisions coupled with the introduction of the Accrual 
Debenture seeks to enable access to capital to more first-time and 
emerging fund managers through targeted fund-of-funds SBIC 
relationships. SBA notes that SBICs with at least $5 million (or $3 
million for ``good cause'') satisfies minimum capital requirements set 
forth in 13 CFR 107.210--however, SBICs must also meet the minimum 
adequacy requirements set forth in section 302(a)(3) of the Act. The 
final rule adopts the proposed Sec.  107.210 without change.

D. Section 107.300 License Application Form and Fee

    This regulation identifies the process and rules regarding applying 
for a License and the associated Licensing Fees. SBA proposed amending 
the introductory paragraph to give priority to applicants headquartered 
in Underlicensed States with below median SBIC financing dollars, in 
accordance with Public Law 115-333. Applicants may have branch offices 
in other locations, but the headquarters for the applicant must be in 
an Underlicensed State with below median SBIC financing dollars to 
receive priority. The proposed regulation provides that SBA will 
publish the list of States in a notice on the SBIC website, which was 
previously discussed under section II.A. of this rule. SBA also 
proposed changing regulations to ensure that once priority is 
established, such applicants will continue to receive priority 
throughout the licensing process. For example, if Iowa is identified as 
an Underlicensed State with below median financing and an applicant 
headquartered in Iowa applies to receive an SBIC license, SBA would 
give them priority in licensing. If SBA then published a new list of 
States qualifying for licensing priority after the applicant was given 
priority, the applicant would continue to have priority in both phases 
of the licensing process (initial review and final licensing) even if 
Iowa is no longer identified as an Underlicensed State with below 
median SBIC financing dollars.
    SBA proposed amending paragraph (b) to identify that SBA will 
approve the total leverage commitments for the life of the Licensee at 
licensing. SBA believes that similar to private investors, SBA should 
approve the entire leverage commitment at licensing, based on the 
evaluation criteria set forth in Sec.  107.305 and the maximum leverage 
commitment limits set forth in Sec.  107.1150. This change is intended 
to (1) reduce the burden associated with separate commitment requests 
performed after the fund has been licensed and (2) reduce the 
uncertainty with regard to SBA's leverage commitment and consequently 
reduce the Private Capital raise timeframe for a prospective Licensee. 
SBA recognizes that Licensees often raise capital after licensing. 
However, SBA notes that it is important for Licensees to raise their 
capital prior to submitting their Licensing application for Final 
Review, as this practice will help SBA better evaluate applicants, 
monitor for potential risks, and process applications faster. SBA will 
continue to maintain its right to deny any new issuance of Leverage at 
the time of a debenture commitment funding draw request and to exercise 
other rights and remedies as discussed in part 107, subpart J, in the 
event of regulatory violations, including capital impairment. SBA is 
also seeking to better diversify its leverage portfolio for maximum 
impact across underserved sectors as finalized under Sec.  107.320.
    SBA proposed modifying its Licensing fees to lower financial 
barriers for new funds. Effective October 1, 2022, the Initial 
Licensing Fee is $11,500 and the Final Licensing Fee is $40,200 for a 
combined Licensing Fee of $51,700. Each year, SBA adjusts these fees 
based on the Consumer Price Index. Although larger more established 
funds can easily afford these fees, smaller funds and new fund managers 
view the fees as prohibitive to SBIC program participation given their 
smaller size. Additionally, SBA charges the same fee for applicants 
seeking to issue Debentures as those who do not intend to issue 
Debentures. SBA proposed to revise the Initial Licensing Fees based on 
its fund sequence (meaning the order of succession of the fund) as 
follows:

[[Page 45990]]



------------------------------------------------------------------------
                                                              Initial
                      Fund sequence                        licensing fee
------------------------------------------------------------------------
Fund I..................................................          $5,000
Fund II.................................................          10,000
Fund III................................................          15,000
Fund IV+................................................          20,000
------------------------------------------------------------------------

    SBA will determine the applicant's Fund Sequence based on the 
applicant's management team composition and experience as a team, 
including the business plan (also known as the strategy) of the fund 
provided in Phase I of the application process. For example, if the 
management team of applicant DEF I consists primarily of the same team 
members of funds ABC I and ABC II, SBA will consider the fund sequence 
of DEF I as a Fund III, regardless of the number in the applicant's 
name.
    SBA proposed changing the Final Licensing Fee as the Final 
Licensing Base Fee plus 1.25 basis points multiplied by the Leverage 
dollar amount requested by the applicant, where the Final Licensing 
Base Fee would be as follows:

------------------------------------------------------------------------
                                                               Final
                      Fund sequence                       licensing base
                                                                fee
------------------------------------------------------------------------
Fund I..................................................         $10,000
Fund II.................................................          15,000
Fund III................................................          25,000
Fund IV+................................................          30,000
------------------------------------------------------------------------

    For example, a fourth time fund seeking $175 million in Leverage 
would pay a Final Licensing Base Fee of $51,875, computed as $30,000 
plus 1.25 basis points (or .0125 percent) times $175 million.
    SBA believes that its Non-leveraged Licensees present less credit 
risk to SBA, while accomplishing the SBIC mission of providing equity 
and long-term loans to Small Businesses. SBA's final changes would 
effectively lower the combined Licensing Fee for all Non-leveraged 
applicants and lower the fees for applicants with less SBA leverage at 
risk and new funds. Fund managers seeking a fourth or later fund and 
seeking leverage would pay a higher fee, and the fee would scale with 
the dollar amount of SBA leverage sought by the Applicant. SBA notes 
that SBA's licensing costs are substantially higher than even the 
highest final combined Licensing Fee. SBA believes this modernized 
licensing fee model, which is designed to make fees commensurate with 
years of participation in the SBIC program and the dollar amount of SBA 
leverage at risk, will reduce cost barriers for small funds and new 
funds applying to the SBIC program.
    SBA also proposed an application resubmission penalty fee of 
$10,000 for any applicant that has previously withdrawn or otherwise is 
not approved for a license that must be paid in addition to the Initial 
and Final Licensing Fees. SBA's final licensing fees remain below SBA's 
expenses required to process such applications. The intent of the 
resubmission fee is to impose a penalty for each time an applicant 
resubmits its application to offset the outlay of additional SBA time 
and resources. Applicants can request SBA approval to waive the 
resubmission penalty fee that SBA may consider on a case-by-case basis.
    One commenter agreed with the proposed $10,000 application 
resubmission fee and encouraged SBA to have written, clear, consistent, 
objective, licensing criteria that are published and applied evenly and 
consistently across all applicants. Another comment suggested: (1) 
lower license fees should be exclusive to ``small'' applicants, (2) 
clarifying licensing metrics, (3) expanding the definition of 
qualifying experience to include relevant operating or investment 
experience. A third comment noted that the proposed regulatory changes 
are intended to expand the program and make it easier for applicants in 
certain geographical areas, but that this may take place at the expense 
of applicants that are otherwise equally qualified. A fourth comment 
agrees with the resubmission fee and suggested increased transparency 
to the applicant surrounding the application review process and timely 
communication from the licensing committee through the process. The 
commenter further suggested that if an exam finding during the 
application review process is the cause of denial, the applicant should 
be given a reasonable amount of time to resolve the finding. SBA agrees 
with the concept of reduced fees for first-time SBIC applicants. 
Consistent with the items raised by these commenters, SBA will 
implement an expedited licensing process for eligible subsequent 
license applicants (discussed below) and modernize standard operating 
procedures and policies to further reduce administrative, cost and time 
burdens on applicants.
    Regarding Licensees with multiple SBIC licenses, one commenter 
noted opposition to proposed higher fees for licensing and 
examinations, noting the relative ease of processing those licenses. 
The commenter recommended that SBA include an optional accelerated 
license for qualified repeat SBIC managers, which option would be worth 
the increased fee. The commenter also recommends that SBA establish an 
accelerated licensing process for non-leveraged bank-owned SBICs, as it 
would improve the licensing process and justify the proposed fee 
increase. Another commenter believes increased fees for subsequent 
licenses penalizes funds with an established track record and may deter 
SBIC managers from continuing to obtain new licenses. In response to 
these comments, SBA will not implement changes to examination fees 
which were included in the proposed rule. Furthermore, SBA is 
introducing regulatory reforms which will reduce time and cost burdens 
associated with licensing for qualifying subsequent funds as a result 
of an expedited licensing process. Regulatory reforms to support an 
expedited and streamlined licensing process for qualifying subsequent 
fund applications are as follows:
    Expedited Subsequent Fund Licensing: Management teams that are 
already operating one or more licensed SBICs must be in good 
operational and regulatory compliance standing with SBA in order to 
submit a license application for a subsequent fund. Subsequent fund 
license applicants must have at least two full years of operations from 
date of licensing of the most recently licensed SBIC (a longer or 
shorter operating history may be merited based on track record and 
prior performance). The financial performance and portfolio valuations 
of the current licensee(s) must demonstrate adequate coverage for any 
outstanding SBA Leverage. The current licensee(s) must also be able to 
present a clean audit opinion from the SBIC's independent public 
accountant, covering the most recent, full year of operations, and no 
unresolved regulatory violations for the most recent SBA exam covering 
a period ended within 12 months of the request being filed.
    SBA will consider a series of factors when determining whether a 
subsequent fund applicant has demonstrated a commitment to best 
practices within the SBIC program.
    Streamlined Application Requirements for Subsequent Fund License 
Applicants: Applicants operating an active Licensee, can apply under a 
``Short-Form Subsequent Fund MAQ'' application by meeting the following 
eligibility criteria:
     Consistent strategy and fund size--targeted Regulatory 
Capital to be raised is <=133% the size of their most recent SBIC fund 
(inflation adjustments will be considered). Same asset class and

[[Page 45991]]

investment strategy as most recent license.
     Clean Regulatory History--no major findings, significant 
``other matters'' or unresolved ``other matters'' related to licensees 
managed by the principals of applicant in the previous ten years.
     Consistent LP-general partnership (GP) Dynamics--no new 
limited partner will represent >=33% of the Private Capital of the 
licensee upon reaching final close at target fund size or hard cap. The 
two largest investors in terms of committed capital have verbally 
committed to invest in the new fund pending receipt of license. The 
most recent Limited Partnership Agreement of the active Licensee and 
all Side Letters will have no substantive changes for the applicant 
fund.
     Investment Performance Stability--the most recent licensee 
net distributions to paid-in capital (DPI) and net total value to paid-
in capital (TVPI) are at or above median vintage year and strategy 
performance benchmarks for the prior three quarters. The principals of 
the applicant are not managing a licensee in default or with high 
Capital Impairment (CIP).
     Consistent or Reduced Leverage Management--the applicant 
is requesting a leverage to Private Capital ratio <= the current or 
most recent SBIC licensee at target fund size or hard cap.
     Firm stability--subject to SBA's determination, no 
material changes to the broader firm, to include resignations, 
terminations, or retirements by members of the General Partnership, 
investment committee, broader investment team, or key finance and 
operations personnel that have a material adverse impact on the 
stability of the SBIC.
     Promotions from within--demonstration of a commercially 
reasonable effort of promoting internal investment team talent from 
within the firm/organization sponsoring the license.
     Inclusive equity--demonstration of a commercially 
reasonable effort of the appropriate/increased sharing of carry and/or 
management company economics with promoted talent or distribution of 
equitable or increasingly equitable economics among the partnership.
     Federal Bureau of Investigation (FBI) Criminal and 
Internal Revenue Service (IRS) Background Check No Findings--the 
sponsoring entity and all principals of the Licensee do not have an FBI 
criminal record and do not have IRS violations from the date of their 
most recent SBIC fund licensure.
     No Outstanding or Unresolved Material Litigation Matters--
no outstanding or unresolved litigation matters involving allegations 
of dishonesty, fraud, or breach of fiduciary duty or otherwise 
requiring a report under Sec.  107.660(c) or (d) as to a prior 
Licensee, the prospective Applicant's general partner, or any other 
person who was required by SBA to complete a personal history statement 
in connection with the license application.
     No Outstanding Tax Liens--on the principals applying to 
manage the licensee, on the most recent or active licensee, and on the 
sponsoring entity of the licensee.
    Should an applicant fulfill and formally attest to meeting all of 
the above eligibility criteria, the applicant can submit a streamlined 
``Short-Form Subsequent Fund MAQ''.
    All named principals of the applicant will be subject to FBI 
criminal and IRS background checks as well as reference checks. 
Applicants with minimal and non-material changes to the active or most 
recent licensee LPA and any Side Letters, will be designated for 
expedited processing.
    Regarding capital at licensure, one commenter welcomes the change 
to the licensing application fee but requested further clarity on the 
fee structure. One commenter had concerns regarding fund-raising 
challenges faced by first-time applicants fundraising at time of 
application. The commenter suggested SBA approve a specific maximum 
ratio of Leverage to Regulatory capital for the Licensee. Further, the 
commenter suggested that SBA implement a specific upper limit of 
Regulatory Capital that would be leverageable at the approved ratio. 
Another commenter expressed concern that the revised regulations could 
limit sources of capital and leverage, noting that SBICs could 
potentially be subject to upfront fees on unutilized leverage within 
the investment period. A third commenter noted capital flow into the 
program could be negatively impacted by licensing revisions, 
effectively eliminating post-license capital raise campaigns and 
requiring greater commitments up front from capital investors/limited 
partners. And finally, a fourth commenter recommended amending the 
proposal to continue to allow leverage commitments on capital raised 
post-licensing. The commenter noted concerns that the current proposal 
may negatively impact capital flow, limiting fund size, capacity to 
finance small businesses, and negatively impacting investors. In 
response, SBA clarifies that SBA Leverage commitments, up to the dollar 
amount indicated in the letter of intent to commit, must equal the 
ratio of SBA-to-private capital commitments indicated in that letter. 
Such SBA commitments be extended following Closings occurring within 12 
months of licensing. These requests will be filled automatically, 
contingent upon the licensee certifying no material adverse changes 
(MACs) have occurred since licensing. This is intended to streamline 
and expedite the commitment request process. SBA further seeks to 
clarify language to distinguish between a `Total Intended Leverage 
Commitment' letter of intent indicating a specific intended commitment 
dollar amount at Green Light and ratio of SBA leverage to Private 
Capital from SBA available upon licensing. Additionally, SBA seeks to 
further clarify the difference between the `Total Intended Leverage 
Commitment' and `commitment requests' made toward the amount indicated 
in the letter of intent to commit.
    SBA seeks to clarify that SBA's commitment dollar amount will be 
limited such that leverage principal and projected interest must be 
less than or equal to the statutory cap on individual Licensee 
leverage, currently $175 million, for a Licensee issuing Accrual 
Debentures or leverage principal less than or equal to the statutory 
leverage cap for a Licensee issuing Standard Debentures. For both 
debenture instruments, Total Intended Leverage Commitment dollar 
amounts made to the applicant represents leverage principal. SBA 
defines the term ``Total Intended Leverage Commitment'' to mean the 
dollar amount or ratio of SBA Leverage Commitments to Private Capital 
that SBA will approve conditional upon closing the applicant's stated 
Private Capital target and conditional upon maintaining acceptable 
capital impairment (CIP) levels and regulatory compliance during the 
life of the license. SBA will provide the `Total Intended Leverage 
Commitment' to the applicant in the Green Light Letter. The Total 
Intended Leverage Commitment dollar amount will be made final within 12 
months of licensure or upon the Licensee's final closing, whichever 
occurs first. Licensees issuing Accrual Debentures shall not be 
permitted to make distributions within 12 months of Licensure.
    Finally, it should be noted that SBA is amenable to and expects 
that most applicants will have multiple fund closings. It is acceptable 
to SBA for an applicant to have a fund closing and begin making 
investments prior to Licensing. However, the applicant bears the burden 
of assuming any risk should a license not be approved. One

[[Page 45992]]

commenter identified that SBIC program administrative and operating 
costs are not covered by subsidy, noting that in 2017, less than 40 
percent of SBA's administrative costs were offset by fees, leaving the 
taxpayer to bear the costs. The commenter stated that SBA should seek 
ways to reduce taxpayer costs associated with SBIC program expenses.
    The table below displays the cost to administer the SBIC program. 
It includes direct costs from the operating budget, including 
contracts; compensation and benefits; Agency-wide costs, such as rent 
and telecommunications; and indirect costs.

------------------------------------------------------------------------
     FY 2020 actual           FY 2021 actual          FY 2022 actual
------------------------------------------------------------------------
      $24,254,000              $21,492,000             $28,211,000
------------------------------------------------------------------------

    In FY2022, the return-on-investment (ROI) of taxpayer dollars as 
measured by the ratio of FY2022 financings to U.S. small businesses 
relative to program cost was 28,003 percent or $7.9 billion divided by 
$28,211,000. The same $28,211,000 resulted in 129,098 U.S. small 
business jobs created and sustained and enabled the program to operate 
with the necessary risk management and oversight practices and 
procedures to provide Federal funding to SBICs at zero subsidy to U.S. 
taxpayers. The final rule includes an expedited and streamlined 
licensing process for qualifying subsequent fund applications and SBA 
is finalizing Sec.  107.300 substantially as proposed.

E. Section 107.305 Evaluation of License Applicants

    Current Sec.  107.305 discusses how SBA evaluates an applicant to 
the program. Paragraph (a) describes management qualifications. SBA is 
proposing to amend paragraph (a) to include two additional management 
qualifications. The first is relevant industry operational experience, 
which may be combined with investment skill to demonstrate managerial 
capacity. The second, if applicable, is the applicant's experience in 
managing a regulated business, including but not limited to an SBIC. 
Paragraph (b) describes how SBA evaluates an applicant's track record. 
SBA is amending paragraph (b) to include two additional performance 
qualifications. The first is the inclusion of an applicant's operating 
experience, which when combined with an investment team's prior 
relevant industry investing experience, is relevant in assessing an 
applicant's investment performance. The second addition, when 
applicable, is the applicant's past adherence to statutory and 
regulatory SBIC program requirements. This addition will be considered 
for applicants with past SBIC program experience.
    Paragraph (c) describes how SBA evaluates the applicant's 
investment strategy. SBA is amending paragraph (c) to clarify that the 
applicant's investment strategy is to be contained in its business 
plan, as well as to underscore the importance of section 102 
``Statement of Policy'' of the Act which describes the public purpose 
of the SBIC program.
    Two commenters encouraged SBA to continue making the licensing 
process more transparent and inclusive, noting current criteria 
limiting the potential pool of qualified managers. SBA is updating 
standard operating procedures and policies to reduce the burden of the 
licensing process on applicants and to improve transparency in the 
licensing process.
    One commenter requested, in addition to relevant industry 
operational experience, inclusion of financial portfolio management 
experience in adjacent areas such as relevant experience in lending and 
early-stage equity investments. SBA agrees that relevant investment 
experience in adjacent areas is a valid consideration in the licensing 
process. SBA considers the totality of experience of the principals of 
the applicant during the licensing process. As the proposed rule is 
consistent with these principles, SBA is finalizing Sec.  107.305 
substantially as proposed.

F. Section 107.320 Leverage Portfolio Diversification

    Current Sec.  107.320 discusses how SBA evaluates Early Stage SBICs 
and reserves the right for SBA to maintain diversification among Early 
Stage SBICs with respect to the year they commence operations and their 
geographic location. In light of the fact that SBA used its entire 
Leverage authorization in FY 2021, SBA proposed modifying this 
regulation to reserve SBA's right to maintain Leverage portfolio 
diversification in approving Leverage commitments with respect to the 
year in which they commenced, the SBIC's geographic location, giving 
first priority to Licensees from Underlicensed States with below median 
SBIC financing dollars, their asset class and investment strategy. 
SBA's intent is to maximize the SBIC program's economic impact to 
underserved Small Businesses while managing risk through portfolio 
diversification. SBA notes that SBA will continue to license all 
qualified applicants based on its evaluation criteria and will not take 
into consideration any projected shortage or unavailability of leverage 
when reviewing and processing SBIC license applications.
    One commenter believes 13 CFR 107.320 should remain unchanged, 
noting the SBIC Debenture program doesn't currently exhibit outsized 
losses due to a lack of portfolio diversification. The same commentor 
also expressed concern that the proposed rule could result in SBA 
having too great discretion in selecting program participants. The 
purpose of portfolio diversification is to ensure that SBA successfully 
meets the mission and intent of the SBIC program (as established by 
Congress) while mitigating overall SBIC program concentration risk in 
strategies which could present higher repayment risk and volatility 
risk and thus compromise the program's zero subsidy status. Ensuring 
SBA has discretion to mitigate program concentration in risk assets to 
mitigate against the potential for taxpayer losses is in line with best 
practice portfolio risk management approaches of public and private 
institutional investment programs.
    One commenter stated that by prioritizing the approval of leverage 
commitments based on geographical characteristics, it may prolong the 
process for Licensees that are not headquartered in these areas. The 
final rule balances shifting licensing timelines with mitigating 
program risk. Through the introduction of expedited licensing for 
eligible subsequent funds and updates to standard operating procedures, 
SBA will improve licensing and leverage commitment timelines across the 
program, thus mitigating any risk of prolonged leverage commitment 
processes for Licensees. SBA is finalizing Sec.  107.320 substantially 
as proposed.

G. Section 107.501 Identification

    This regulation identifies requirements related acknowledgment of a 
Licensee as ``a Federal licensee under the Small Business Investment 
Act of 1958, as amended.''

[[Page 45993]]

    One commenter recommended an amendment to 13 CFR 107.501 requiring 
SBA to publish in the Federal Register the names of SBICs that were 
licensed and the dates on which SBICs were licensed. Based on this 
comment, SBA is finalizing Sec.  107.501 to include a requirement for 
SBA to publish license approvals in the Federal Register within 30 
business days of the end of the month in which the license was approved 
by the SBA Administrator.

H. Section 107.503 Licensee's Adoption of an Approved Valuation Policy

    This regulation requires Licensees to prepare and maintain a 
valuation policy that must be approved by SBA for use in determining 
the value of its investments. Current regulations require that 
Licensees adopt without change the model valuation policy set forth in 
SBA's Valuation Guidelines for SBICs or obtain SBA's prior approval of 
an alternative valuation policy. SBA established this requirement to 
ensure it could adequately monitor the SBIC portfolio, that valuations 
were performed in a reasonable and standard fashion, and to minimize 
Leverage losses in order to maintain zero subsidy cost. SBA recognizes 
that private equity typically uses valuations performed in accordance 
with GAAP and that many SBIC private investors require GAAP. This 
causes many SBICs to maintain two sets of valuations. SBA is currently 
working to re-evaluate this requirement for Leveraged Licensees. SBA is 
requiring both valuations based on SBA Valuation guidelines and those 
reported to their private investors in accordance with GAAP to assess 
the potential impact. SBA is also working with its valuation contractor 
to evaluate what changes to SBA's Valuation Guidelines would be 
necessary to make them GAAP compliant and the impact to SBA's 
monitoring and risk should SBA adopt GAAP compliant guidelines. SBA 
sought input from the public on this issue as part of this rulemaking. 
However, SBA recognizes that Non-leveraged Licensees pose no credit 
risk to SBA. In the proposed rule, SBA proposed that Non-leveraged 
Licensees (which include both those licensed as Non-leveraged Licensees 
and Licensees that fully repay Leverage and seek no further Leverage) 
may adopt a Valuation Policy in accordance with GAAP. SBA believes this 
will lower the burden associated with current regulations.
    Current paragraph (d) requires licensees with outstanding Leverage 
or Earmarked assets to value their portfolio twice a year (at the end 
of the second quarter and the end of the fiscal year). SBA proposed to 
clarify that this requirement applies to all Leveraged Licensees and 
increase reporting from semi-annually to quarterly, commensurate with 
the required quarterly reporting of the Form 468.
    One commenter agreed with the revision as written.
    One commenter gave feedback including (1) the Form 468 is not 
accommodating of GAAP reporting, (2) that SBICWeb requires a redesign, 
(3) new reporting requirements can put undue burden on analysts, (4) 
reporting is cumbersome, (5) by changing accounting principles, it 
would be difficult to compare year over year results, (6) unlevered 
SBICs could be at a disadvantage with respect to determining when to 
make READ. With respect to the first five items, SBA is updating its 
technology, data collection, and filing processes to accommodate new 
reporting requirements and reduce the reporting burden on managers and 
SBA analysts. Further, SBA notes that if the valuations are not 
changing significantly, the level of effort to update the reporting is 
limited. If valuations do change significantly, this does increase the 
level of effort required in updating the reporting, however SBA 
believes that sufficient program oversight of this federally regulated 
financial institution necessitates this level of effort and unlevered 
SBICs are not positioned to be disadvantaged. After consideration of 
all comments, SBA is finalizing Sec.  107.503 substantially as 
proposed.

I. Section 107.504 Equipment and Office Requirements

    This regulation identifies the equipment and office requirements 
needed by SBICs to operate within the program. The current regulation 
requires a personal computer with a modem and internet access under 
paragraph (a) and the need for a facsimile capability under paragraph 
(b). SBA received industry comments that this regulation was outdated. 
Some SBICs indicated that they bought facsimile machines to ensure they 
complied with the requirement. The intent of this regulation is to 
ensure that SBICs can properly communicate with SBA, receive official 
correspondence, prepare and provide electronic reporting, and apply for 
Leverage. The proposed changes would eliminate the modem requirement 
under paragraph (a); eliminate the facsimile requirement under 
paragraph (b); and modify paragraph (a) to more broadly require that 
SBICs must have technology to securely send and receive emails, scan 
documents, and prepare and submit electronic information and reports 
required by SBA. This language would allow for reasonable changes in 
technology without the need to modify regulations. All SBICs already 
utilize this technology in their day-to-day operations. This change 
should reduce costs by eliminating unnecessary equipment.
    One commenter concurred with the changes as written. SBA is 
finalizing Sec.  107.504 substantially as proposed.

J. Section 107.550 Prior Approval of Secured Third-Party Debt of 
Leveraged Licensees

    This regulation requires SBICs to obtain prior SBA approval for 
secured third-party debt for Leveraged Licensees.
    Section 107.550(a) defines secured third-party debt to include 
Temporary Debt, a defined term in Sec.  107.570 that applies only to 
SBICs with outstanding Participating Securities. Since there are no 
operating SBICs with outstanding Participating Securities, except in 
the Office of SBIC Liquidation, SBA proposed removing Sec.  107.570 and 
references to Temporary Debt and Participating Securities in Sec.  
107.550.
    Section 107.550(c) identifies rules associated with secured lines 
of credit in existence on April 8, 1994. SBA proposed to remove that 
requirement since it is obsolete.
    SBA proposed replacing Sec.  107.550(c) with a secured ``Qualified 
Line of Credit'' which SBICs could utilize without SBA prior approval. 
One commenter recommended clarifying the language in this section, and 
one commenter stated that the proposed terms will increase the 
administrative burden on Licensees as they would need to call capital 
more often. SBA agrees that the language required clarification and the 
terms should be more aligned to industry standard practices. 
Consequently, SBA is rescinding the proposed changes to Sec.  
107.550(c) and replacing it with this simplified update to the existing 
regulations by defining a ``Capital Call Line''.
    Since the final rule provides an exemption from SBA approval for 
Capital Call Lines that SBA would likely have otherwise approved, the 
final rule eliminates paragraph (e) which discusses automatic 30-day 
approval for secured third-party debt. With the replacement of 
``Qualified Line of Credit'' with ``Capital Call Line'', SBA is 
finalizing Sec.  107.550 substantially as proposed.

[[Page 45994]]

K. Section 107.570 Restrictions on Third-Party Debt of Issuers of 
Participating Securities

    This regulation identifies restrictions on third-party debt for 
SBICs that issued Participating Securities. As discussed under section 
II.L. of this rule, no operating SBICs have outstanding Participating 
Securities and SBA is no longer authorized to provides such Leverage. 
SBA proposed to remove this regulation.
    SBA received no comments on this section. This final rule adopts 
the proposed removal of Sec.  107.570.

L. Section 107.585 Distributions and reductions in Regulatory Capital

    This section is currently titled ``Voluntary decrease in Licensee's 
Regulatory Capital'' and requires Licensees to obtain SBA's prior 
written approval to reduce Regulatory Capital by more than two percent 
in any fiscal year. Current Sec.  107.1000(b)(2) exempts Non-leveraged 
Licensees from Sec.  107.585 if the decrease does not result in 
Regulatory Capital below what is required by the Act and the 
regulations and is reported to SBA within 30 days. Typically, 
reductions in capital are performed in conjunction with a distribution 
that represents a return of capital, to its private investors. SBA 
allows profit distributions, also known as ``Retained Earnings 
Available for Distribution'' or ``READ'' without SBA prior approval, 
unless the Licensee was licensed as an Early Stage SBIC or if the SBIC 
issued Participating Securities.
    SBA received comments from private investors that the existing 
regulations (prior to the proposed rule) were unclear as to when a 
Licensee could distribute to its investors. SBA has also had instances 
in which Leveraged Licensees made ``READ'' distributions, and 
subsequently wrote down assets that would have reduced or removed 
``READ''. Leveraged Licensees must consider such write-downs before 
making such distributions to avoid ``improper'' distributions. SBA is 
also concerned that Accrual Licensees may distribute profits without 
repaying Leverage. In particular, equity investors often have returns 
that are less consistent than private creditor or mezzanine funds. SBA 
has incurred losses in several Licensees that returned profits to its 
private investors through early profit distributions and then wrote 
down assets later in the fund's life.
    In the proposed rulemaking, SBA proposed to retitle this regulation 
to ``Distributions and Reductions in Regulatory Capital'' and modify 
the requirements to address these concerns. Three commenters raised 
that a change to the distribution waterfall of the Traditional 
Debenture. The SBA has considered this feedback and intends to apply 
the new pro rata distribution waterfall exclusively to the Accrual 
Debenture instrument and to institute a more flexible repayment 
timeframe to align with existing debenture pre-payment processes. Based 
on public comment, in issuing the final rule, SBA will not apply the 
modified distribution waterfall to Standard Debenture Licensees. This 
final rule thus separates distribution requirements based on three 
categories of SBICs: (1) Non-leveraged Licensees; (2) Standard 
Debenture SBICs; and (3) Accrual SBICs and Reinvestor SBICs. The 
rationale for these categories and the specific requirements follows.
    (1) Non-leveraged Licensees. SBA is setting a separate set of 
requirements for Non-leveraged Licensees because they pose no credit 
risk to SBA. Final rules would allow Non-leveraged Licensees to 
distribute to their private investors without SBA prior approval as 
long as they retain sufficient Regulatory Capital to meet minimum 
capital requirements under Sec.  107.210, unless such amounts are in 
accordance with their SBA approved Wind-up Plan. If a Non-leveraged 
Licensee does not have an SBA approved Wind-up Plan, they may make 
distributions, as long as such Non-leveraged Licensees retain 
sufficient Regulatory Capital to meet minimum capital requirements 
under Sec.  107.210. If a Non-leveraged Licensee has an SBA-approved 
Wind-down Plan, their Regulatory Capital can drop below the minimum 
capital requirements if such amounts are in accordance with that plan. 
This requirement should provide even greater flexibility to Non-
leveraged Licensees. In accordance with current policies, the final 
rule would clarify that Non-leveraged Licensees must report any 
reductions in Regulatory Capital to SBA within 30 days on an updated 
Capital Certificate, which is Exhibit K in SBA form 2181.
    (2) Standard Debenture SBICs. SBA recognizes that existing 
licensees and current applicants to the program expect to be able to 
distribute READ based on current regulations. Standard Debenture SBICs 
will remain under the current rules.
    (3) Accrual SBICs and Reinvestor SBICs. SBA is requiring, in the 
regulations for these SBICs, a distribution waterfall that repays SBA 
the principal balance on outstanding Leverage on at least a pro rata 
basis with private investors. Accrual SBICs and Reinvestor SBICs must 
repay Leverage at its ten-year maturity and may prepay Leverage at any 
time. SBA is requiring the following waterfall:
    a. Payment of Annual Charges and accrued interest associated with 
Leverage. (Interest will be paid to the bond holders based on the 
Leverage terms.)
    b. Calculate SBA's share based on the ratio of SBA Total Intended 
Leverage Commitment and Total Private Capital Commitments, inclusive of 
Qualified Non-Private Funds, determined within 12 months of Licensure 
established as follows: SBA Share = Total Distributions x [Total 
Intended Leverage Commitment/(Total Intended Leverage Commitment + 
Total Private Capital Commitments)].
    c. Repay SBA Leverage to bond holders in an amount no less than 
SBA's Share to the extent of outstanding Leverage. If SBA's share is 
more than the Outstanding Leverage held by the Licensee and the 
Licensee has unfunded Leverage Commitments, the Licensee must submit a 
Leverage Commitment cancellation equal to SBA's share minus SBA 
Leverage redemptions. The rationale for this cancellation requirement 
is to minimize the risk that the SBIC will distribute significant 
profits to its private investors, then issue additional SBA leverage 
that results in losses, leaving SBA with losses after the private 
investors made significant profits.
    d. Distribute to private investors the remaining amount.
    e. Report the distribution to SBA. You must report the distribution 
and calculations to SBA on your Form 468 submission(s).
    If permitted under a Licensee's partnership agreement, a Licensee 
may choose to reserve capital or reinvest all or a portion of it 
instead of distributing to SBA and investors. In this circumstance, a 
Licensee would decrease the amount distributed to its investors so that 
the private investors receive no more on a pro rata basis as the 
repayment of SBA Leverage and interest due. SBA is only concerned that 
private investors bear at least the same risk for loss as SBA.
    One commenter provided the following feedback: (a) tax 
distributions due to ordinary income must flow to limited partners for 
tax liabilities; (b) Debenture securities must be paid in full, which 
could limit SBIC ability to repay Debentures in full and provide 
sufficient distributions to limited partners to pay taxes; (c) 
potential unintended consequence of outcome of ``trapping'' cash in 
SBIC. SBA clarifies that Accrual SBICs are not prohibited from tax 
distributions in this final rule and encourages SBICs to consider

[[Page 45995]]

smaller distributions that can be repaid in full. SBA underscores that 
the intent of the changes is to reduce the risk to the taxpayer by 
ensuring that debentures backed by an SBA guarantee are repaid.
    One commenter concurred with SBICs being allowed to make 
distributions without prior SBA approval and with SBA proposing that 
future material adverse changes be taken into consideration for 
leveraged funds licensed before October 1, 2023. The same commenter 
raised that the proposed waterfall also does not differentiate between 
READ and return of capital proceeds, which would result in the 
repayment of leverage being misaligned with what may be laid out in a 
Licensee's wind down plan. As stated above, SBA has not included 
changes to the waterfall or READ requirements for Standard Debentures 
and is finalizing Sec.  107.585 with the modified distribution 
requirements based on three categories of SBICs: (1) Non-leveraged 
Licensees; (2) Standard Debenture SBICs; and (3) Accrual SBICs and 
Reinvestor SBICs.

M. Section 107.590 Licensee's Requirement To Maintain Active Operations

    This regulation identifies requirements for Licensees to maintain 
active operations and submit a Wind-up Plan when they decide they are 
no longer making any new investments. SBA proposed implementing 
regulations to change the name to ``Wind-down Plan'' as discussed under 
section II.A. of this rule.
    SBA received no comments on this section. This final rule adopts 
the proposed Sec.  107.590 without change.

N. Section 107.620 Requirements To Obtain Information From Portfolio 
Concerns

    This regulation specifies the threshold of information requested by 
SBICs from Portfolio Concerns. In the proposed rulemaking, SBA proposed 
implementing regulations to amend specified information collections for 
Financings after the effective date of the rule to provide certain 
optional demographic information on Portfolio Concerns. The SBA is 
amending information collections to enhance reporting accuracy and 
consistency around the small business demographic impact of the SBIC 
program.
    One commenter expressed concern that including voluntary reporting 
of demographic data could be viewed as mandatory by licensees and their 
portfolio companies and could be costly, while another commenter 
expressed concern that making this voluntary may discourage Licensees 
from providing it. SBA notes that voluntary reporting of demographic 
information balances flexibility for program participants with 
providing SBA and taxpayers with adequate transparency into the 
community impact of the SBIC program overall, in accordance with the 
President's Executive Order (``E.O.'') 13985, Advancing Racial Equity 
and Support for Underserved Communities Through the Federal Government. 
Additionally, SBA notes that such information is collected post-
licensing and is not a component of the SBIC licensing process. This 
final rule adopts the proposed Sec.  107.620 without change.

O. Section 107.630 Requirement for Licensees To File Financial 
Statements With SBA (Form 468)

    This regulation identifies requirements associated with Licensee's 
financial statements on Form 468. Paragraph (a) requires the annual 
Form 468 to be submitted on or before the last day of the third month 
following the end of the fiscal year, except for information in 
paragraph (e). This is not consistent with Sec.  107.650 which requires 
that portfolio valuations be submitted on the Form 468 within 90 days 
following the end of the fiscal year. Current Sec.  107.630 also does 
not have a paragraph (e). SBA believes the entire Form 468 should be 
due at the same time. Therefore, in the proposed rulemaking, SBA 
proposed implementing regulations to make the annual Form 468 due date 
consistent with Sec.  107.650.
    Paragraph (d) requires certain economic information regarding each 
Licensee's portfolio companies, so that SBA can assess the program's 
economic impact. SBA proposed implementing regulations adding 
information to help SBA determine net jobs created and total jobs 
created or retained, including identifying the number of jobs added due 
to a business acquisition versus growth in the business.
    SBA also proposed to add fund management contact information and 
optional demographic information. SBA is seeking to collect management 
contact information in order to improve its customer relationship 
management and to better assess relationships between its Licensees. 
Demographic information regarding fund management is requested for 
reporting purposes only and on a voluntary basis.
    Two commenters agreed with the proposal as written. One commentor 
asked whether the Form 468 could be filed on a Monday if the deadline 
falls on a weekend. Form 468 instructions will now provide the 
following procedural accommodation: when a deadline falls on a weekend 
the form can be filed on the next day which is not a Saturday, a 
Sunday, or a Federal holiday.
    One commentor agreed that SBA can improve its oversight of SBICs 
through timely reporting requirements. SBA appreciates the support for 
timely reporting. This final rule adopts the proposed Sec.  107.630 
substantially without change.

P. Section 107.640 Requirement To File Portfolio Financing Reports (SBA 
Form 1031)

    This regulation currently requires Licensees to submit a Portfolio 
Financing Report on SBA Form 1031 within 30 days of the closing date of 
the Financing. To reduce the burden on Licensees, SBA proposed to make 
this a quarterly submission in which the Licensee must report the 
financing within 30 calendar days of the calendar year quarter 
following the closing date of the Financing. For example, if a Licensee 
closes a financing on February 10, 2023, the Licensee will need to 
submit the related Form 1031 no later than April 30, 2023. If the 
Licensee is identified as meeting the Watchlist criteria, as finalized 
under Sec.  107.1850, SBA may require more frequent reporting.
    One commenter noted that new deadlines might have a negative impact 
on Bank limited partners with regard to federally required reporting 
and examination obligations and might elongate the time it takes SBIC 
licensees to report to SBA. Another commenter opposed quarterly 
submissions within 30 calendar days of quarter following closing or 
financing, noting generating a quarter's worth of Form 1031s would be 
burdensome. In response, SBA will allow for Form 1031s within 30 days 
of quarter end. To mitigate concerns around the burden of the reporting 
requirement when SBICs have a large number of 1031 filings due at one 
time, SBA permits Form 1031s for portfolio company financings to be 
disaggregated and submitted on a more frequent basis. The option to 
submit a single Form 1031 within 30 days of quarter end rather than 
within 30 days of financing is intended to reduce the administrative 
filing burden on SBICs. Bank limited partners are encouraged to 
establish reporting expectations with SBICs through their limited 
partnership agreements. SBA's intent is to provide additional 
regulatory flexibility, when and where possible, with respect to 1031 
filings. SBA agrees with

[[Page 45996]]

commenters who were supportive of changes that allow more time for 
SBICs to make timely submissions, and therefore SBA is issuing the 
final rule as set forth in 13 CFR 107.740.

Q. Section 107.650 Requirement To Report Portfolio Valuations to SBA

    This regulation currently requires Licensees to report portfolio 
valuations within 90 days of the end of the Licensee's fiscal year and 
quarterly valuations 30 days following the close of each quarter. SBA 
proposed implementing regulations to clarify that only Leveraged 
Licensees are required to report for quarterly reporting periods. All 
Licensees must report at least annually. SBA proposed implementing 
regulations to expand the timeframe for quarterly valuations, including 
material adverse changes, to 45 calendar days following the close of 
each quarter. This is intended to give Licensees additional time to 
prepare reports.
    One commenter stated they do not believe the benefits of reporting 
changes outweigh the costs unless SBA reports and publicly releases in 
a timely manner aggregate program data and analysis. As part of the 
final rule, SBA is modernizing data collection and reporting processes 
which will enable the timely reporting of existing program economic and 
operational performance measures and the introduction of new metrics 
related to the investment performance of the program. Quarterly 
reporting will be limited to a ``short form'' version of the Form 468 
to reduce the reporting burden while enabling transparency into program 
investment performance and improved monitoring.
    One commenter asked for clarification as to whether SBA will 
continue to allow data collections and metrics regarding net jobs 
created and total jobs created and retained to be provided on a quarter 
lag after year end, as the data may not be readily available within 90 
days of an SBICs fiscal year end. SBA confirms that the 90-day lag is 
intended to represent a one quarter lag after fiscal year end. This 
final rule adopts the proposed Sec.  107.650 without change.

R. Section 107.660 Other Items Required To Be Filed by Licensee With 
SBA

    This regulation identifies other items required by the Licensee. 
Paragraph (a) requires the Licensee to provide to SBA a copy of any 
report it gives to its private investors. Although the Licensee is 
required under current regulations to provide to SBA report they 
provide to their private investors, SBA proposed implementing 
regulations to specify valuation data items to improve clarity. SBA 
also proposed implementing regulations to specify that Licensees should 
submit to SBA any report it gives to its private investors no later 
than 30 days after the date on which such SBIC sent any report to its 
private investors. This requirement is intended to keep SBA aware of 
any important communications regarding the licensee in a timely 
fashion.
    Regarding submission of the reports provided to the private 
investors, one commenter noted it would be helpful for SBA to specify 
the types of reports they are looking for and their purpose. SBA 
specifies that quarterly and annual financial reports and fund 
investment performance reports are examples of reports frequently 
delivered to private investors with the intended purpose of providing 
transparency into portfolio holdings and investment returns. This final 
rule adopts the proposed Sec.  107.660 without change.

S. Section 107.692 Examination Fees

    This regulation identifies how SBA calculates examination fees. 
Currently under paragraph (b), SBA charges a Minimum Base Fee + .024% 
of assets at cost up, not to exceed a Maximum Base Fee. SBA adjusts the 
Minimum Base Fee and the Maximum Base Fee annually. Although current 
regulations give Non-leveraged Licensees a lower Maximum Base Fee, this 
formula does not fully address the risk and additional monitoring 
required for Leveraged Licensees. SBA proposed to change and streamline 
this formula to $10,000 + .035% of their Total Leverage Commitment 
established at Licensing (see section II.D. of this rule). By 
establishing the examination fee up front, SBA believes this will 
reduce uncertainty in cashflows. Because SBICs licensed prior to the 
proposed rule may not have a Total Leverage Commitment, SBA proposed 
that the formula for existing licensees be $10,000 + .035% of their 
outstanding Leverage plus SBA's undrawn commitment amount. Since the 
proposed formula would give all Non-leveraged licensees a flat rate of 
$10,000 and SBA incurs more costs based on the assets of the Licensee, 
SBA proposed that any Non-leveraged Licensee with over $50 million in 
assets at cost pay an additional $20,000. Although SBA recognizes that 
a Leveraged Licensee with over $50 million in assets at cost and $30 
million in leverage commitments would only pay $20,500 in exam fees 
versus $30,000 for a Non-leveraged Licensee, SBA nevertheless proposed 
this additional fee for larger Non-leveraged Licensees with over $50 
million in assets based on the infrequency of requests for less than 
one tier of leverage. Two commenters opposed the proposed fee changes. 
Regarding Licensees with multiple SBIC licensed funds or ``repeat 
licensees'', one commenter noted opposition to proposed higher fees for 
examinations for repeat licensees. One commenter requested that SBA 
annually publish the top-ten most common exam findings so SBICs can 
proactively remedy their own practices. SBA appreciates these comments 
and will not be moving forward with modifications to Examination fees.
    One commentor encouraged SBA to consider enhancing its credit 
standard to require examinations within an 18-month time period for all 
SBICs with SBA-guaranteed leverage. SBA appreciates the comment and, as 
stated prior in response to broader comments regarding licensing and 
examination fees, SBA withdraws the proposed changes to Sec.  107.692 
and will not be moving forward with modifications to Examination 
frequency because it believes that the incremental risk mitigation 
would be minimal and would not warrant the additional resources 
required.

T. Section 107.720 Small Businesses That May Be Ineligible for 
Financing

    This regulation identifies small businesses in which Licensees may 
not invest. Paragraph (a) restricts Licensees from making investments 
into relenders or reinvestors as defined under paragraph (a)(1). In the 
existing regulation, paragraph (a)(2) currently gives an exception for 
Venture Capital Financings to relenders or reinvestors that qualify as 
Disadvantaged Businesses unless the Disadvantaged Business is a bank or 
savings and loan not insured by agencies of the Federal Government or 
agricultural credit companies. In the proposed rule, SBA proposed 
modifying the exception to permit Licensees to make equity investments 
in certain underserved relenders or reinvestors that make financings 
solely to Small Business Concerns that a Licensee may directly finance 
under part 107. Based on the comments discussed below, SBA is now 
modifying this exception to permit reinvestors which are Accrual SBICs 
(i.e., ``Reinvestor SBICs'') to make equity investments in certain 
underserved reinvestors that, in turn, make financings solely to Small 
Businesses which meet the Act size standards (set forth in 13 CFR 
107.700 and 121.301(c)(2)) or the Small Business Act alternative size 
standards (set forth in 13 CFR 121.301(c)(1)) with at least 50 percent 
of employees in the United States, at the time of investment. SBA

[[Page 45997]]

believes expanding this provision will significantly help expand the 
SBIC program's footprint in underserved communities. By more broadly 
defining ``underserved,'' SBA can maintain flexibility and agility to 
align with evolving market conditions by clarifying what constitutes 
``underserved'' through policy notices in order to increase its 
economic impact to underserved communities. While Disadvantaged 
Business will continue to be considered underserved, rural and low-and-
moderate-income areas may also be applicable to this group. To ensure 
that capital continues to be directed to SBA's mission, SBA also is 
implementing regulations to limit reinvestor financing to those that 
existing SBICs could generally finance. This limitation is designed to 
help SBA grow a national emerging fund manager pipeline focused on 
supporting the financing needs of U.S. small businesses.
    Two commenters noted that the definition of ``underserved'' could 
be further clarified. However, another commenter was supportive of 
leaving ``underserved'' not fully defined and proposed including clear 
safe harbors for SBICs serving rural, low-income areas, and veteran-
owned businesses. SBA notes that a broad interpretation of underserved, 
consistent with the text of Executive Order 13985, ``Advancing Racial 
Equity and Support for Underserved Communities,'' and a requirement to 
provide a justification in the applicant's business plan as to how a 
particular geographic, industry or market segment is underserved and 
how the investment strategy and approach addresses this underserved 
part of the market. A safe harbor will not be required as SBA will 
approve the business plan prior to the licensee making investments. 
Investments are to be made in accordance with the approved business 
plan.
    Two commenters recommended that SBA revise the language to ensure 
that SBICs are not precluded from making investments in Minority 
Depository Institutions (MDIs). SBA appreciates the suggested comment. 
SBA notes that Licensees are permitted to make investments in certain 
types of relenders and reinvestors which, for Section 301(d) Licensees, 
which may include Minority Depository Institutions that qualify as 
Disadvantaged Businesses. Section 301(c) Licensees are permitted to 
make investments in reinvestors under the Act.
    One commenter suggested SBA define Fund-of-Funds as Reinvestor 
SBICs in regulations and standard operating procedures. SBA appreciates 
and agrees with the comment and will define Reinvestor SBIC. SBA will 
also clarify that there is no restriction on the type of capital that 
can be invested by a Reinvestor SBIC.
    Two commenters suggested that the requirements limiting investments 
in re-investors to only those who have complied with SBA cost of money 
and conflict of interest regulations could mean that not many qualified 
fund-of-funds managers will be able to access the program. One 
commenter suggested SBA clarify which specific rules it intended to 
capture and that all restrictions on existing SBICs be applied to the 
ultimate recipients of the capital. One commenter believes it would be 
necessary to permit potential reinvestor SBIC funds-of-funds to invest 
all of their capital into underserved underlying funds. In addition, 
the underlying funds in which an SBIC is investing pursuant to the 
exception should not be controlled by the SBICs or the SBIC's 
management. They should also be allowed to provide capital to non-
levered SBICs but not to SBICs with any type of leverage. Another 
commenter expressed concern around permitting Fund-of-Funds to invest 
only their Regulatory Capital into underlying re-lenders and re-
investors.
    SBA appreciates suggested revisions to permitted investments by the 
underlying funds of the Reinvestor SBICs and has revised this final 
rule to define and clarify that Reinvestor SBICs can make Equity 
Capital Investments in underserved non-SBA leveraged limited 
partnerships, SBIC or non-SBIC licensed, that finance businesses that 
meet SBA's small business size standards, are owned and controlled by 
U.S. citizens and/or entities headquartered in the United States, and 
have at least 50 percent of employees based in the United States at the 
time of investment.
    In terms of ``cost of money'', SBA notes that Sec.  107.855 defines 
``Cost of Money'' to mean ``the interest and other consideration that 
you receive from a Small Business.'' Subject to lower ceilings 
prescribed by local law, the Cost of Money to the Small Business must 
not exceed the ceiling determined under Sec.  107.855 introductory text 
and (a). In connection with this requirement, SBA notes that this 
section applies to all Loans and Debt Securities.
    Regarding conflicts of interest, given the nature of private 
markets, SBA anticipates Reinvestor SBICs are likely to invest in the 
portfolio concerns of underlying funds. Consistent with the safe 
harbors to conflicts of interest being implemented in this rule, SBA's 
prior written approval is not required in connection with such co-
investments if a third-party investor unaffiliated and unassociated 
with the Reinvestor SBIC and the underlying fund investor is 
contributing Equity Capital Investments to the portfolio concern 
alongside the Reinvestor SBIC investing directly into the portfolio 
concern held by the underlying fund. At least one substantial third-
party investor unaffiliated and unassociated with the Reinvestor SBIC 
must be investing on the same terms as the Reinvestor SBIC.
    One commenter noted a lack of clarity around monitoring and 
reporting of reinvestors. SBA clarifies that Reinvestor SBICs will be 
expected to submit reporting of all underlying portfolio concern 
holdings including information regarding the limited partnership 
investor in the portfolio concern, name of the concern, industry, size 
and type of investment, most recent valuation, tax identification 
number, industry, location and number of employees at time of initial 
investment. Such reporting will be provided as an exhibit to the Form 
468 for Reinvestor SBICs.
    One commenter expressed concern that expanding opportunities for 
reinvestors will confuse investors who consider the SBIC program. SBA 
appreciates the concern. With more diversification of asset classes and 
alternative investments strategies included in the SBIC Program, 
investors should consider each prospective SBIC fund investment's risks 
and benefits on a case-by-case basis before investing.
    Finally, one commenter encouraged SBA to consult with Congressional 
Committees to clarify whether these changes require new authorities 
granted by Congress. SBA notes that section 310(c) states that each 
small business investment company shall be examined at least every two 
years in such detail so as to determine whether or not it has engaged 
in relending. Permitting Reinvestor SBICs as Section 301(c) Licensees 
is consistent with the Act and aligns with the stated policy set forth 
in the SBIC Act of stimulating and supplementing the flow or 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.
    SBA has included clarification around Reinvestor SBICs and is 
finalizing Sec.  107.720 substantially as proposed.

U. Section 107.730 Financings Which Constitute Conflicts of Interest

    Current Sec.  107.730 prohibits Licensees from transactions that 
constitute

[[Page 45998]]

conflicts of interest, as required by the Act. Paragraph (a) provides a 
general rule that Licensees may not self-deal to the prejudice of a 
Small Business, the Licensee, its shareholders or partners, or SBA, and 
must obtain prior written exemptions for transactions that may 
constitute a conflict of interest and specifies certain transactions in 
paragraphs (a)(1) through (5) that would constitute a conflict of 
interest. Paragraph (a)(1) identifies (as one specific prohibition) a 
Financing to a Licensee's Associate, as defined in Sec.  107.50, unless 
the Small Business being financed is only an Associate because another 
the Licensee's Associate investment fund holds a ten percent or greater 
interest in the Small Business, the Associate investment fund 
previously invested in the Small Business at the same time and on the 
same terms and conditions, and the Associate investment fund is 
providing a follow-on financing to the Small Business at the same time 
and on the same terms and conditions as the Licensee.
    Based on market feedback and an analysis of conflict-of-interest 
approval requests from Licensees, the current safe harbor provisions 
for follow-on financings to small business portfolio companies are 
resulting in delays providing capital to small businesses. This 
potentially hurts the small businesses and increases the burden on 
Licensees and SBA. SBA proposed implementing regulations to include a 
safe harbor for financing a portfolio concern by an Associate when an 
outside third-party participates in the equity financing of the 
Licensee's portfolio concern.
    Paragraph (d) identifies Financings with Associates that also 
constitute conflicts of interest requiring SBA prior approval but 
provides exceptions under paragraph (d)(3). Paragraph (d)(3)(iii) 
identifies exceptions for SBICs with outstanding Participating 
Securities. Since no operating Licensees remain in SBA's portfolio, SBA 
is implementing regulations to remove this exception. Paragraph 
(d)(3)(iv) identifies exceptions involving Non-leveraged Licensees. SBA 
is implementing regulations to revise this exception to incorporate the 
new Non-leveraged Licensee term and simplify this regulation.
    One commenter agreed with the regulation as proposed. This final 
rule adopts the proposed Sec.  107.730 substantially as set forth in 
the proposed rule.

V. Section 107.830 Minimum Duration/Term of Financing

    Paragraph (c)(2) discusses ``prepayments'' and states: ``You 
[Licensee] must permit voluntary prepayment of Loans and Debt 
Securities by the Small Business. You must obtain SBA's prior written 
approval of any restrictions on the ability of the Small Business to 
prepay other than the imposition of a reasonable prepayment penalty 
under paragraph (c)(3) of this section.''
    SBA considered in the proposed rulemaking process whether it should 
make changes to Sec.  107.830(c)(2) regarding prepayment restrictions 
for Loans and Debt Securities to remove the requirement for SBA's prior 
written approval regarding any restriction on the ability of a small 
business to prepay (other than the imposition of a reasonable 
prepayment penalty). SBA had become concerned that certain terms in 
unitranche or multi-lender transactions that require voluntary 
prepayments to be distributed on a pro rata basis to all lenders in a 
transaction could be considered a prepayment restriction. Generally, 
SBA does not view a financing term that requires a portfolio concern to 
make prepayment distributions on a pro rata basis to all lenders in a 
transaction to be a prepayment restriction.
    One commenter supported the regulation as proposed with two 
suggestions: a) support a clarifying statement within Sec.  
107.830(c)(2) that ``[r]equirements to apply prepayments pro rata among 
a group of lenders that is pari passu in rights to payment will not be 
deemed to constitute a restriction on prepayments hereunder'' and b) 
adding to 13 CFR 107.830(c) a safe harbor for a reasonable restriction 
on the minimum increments in which partial prepayments can be made by 
small businesses. SBA supports the proposed suggestions and, in 
response, added in the final rule a clarifying statement within Sec.  
107.830(c)(2) that ``[r]equirements to apply prepayments pro rata among 
a group of lenders that is pari passu in rights to payment will not be 
deemed to constitute a restriction on prepayments hereunder'' and added 
to 13 CFR 107.830(c) a safe harbor for a reasonable restriction on the 
minimum increments in which partial prepayments can be made by small 
businesses.
    One commenter indicated that small businesses should not be 
discouraged from making prepayments. SBA agrees that the small business 
must be the first consideration and does not seek to discourage 
prepayment for small businesses. However, in order to encourage funds 
to participate in the SBIC program and provide such capital, SBA must 
consider reasonable market terms for such securities that balances 
these objectives. SBA incorporated the proposed clarification into 
Sec.  107.830(c)(2) and is finalizing the proposed Sec.  107.830 
substantially as proposed.

W. Section 107.865 Control of a Small Business by a Licensee

    This regulation identifies limitations on the ability a Licensee to 
take ``Control'' as defined in Sec.  107.50, over a Small Business. In 
general, the regulations permit Licensees to take Control for up to 
seven years. In the proposed rule, SBA proposed that Accrual SBICs 
should limit ownership at first Financing to less than 50 percent.
    One commenter was concerned that the seven-year control provision 
is insufficient to enable SBICs to repay leverage in a timely manner. 
This provision has been in place for several years. As stated in 13 CFR 
107.865(d), with SBA's prior written approval an SBIC Licensee may 
retain Control of a Small Business for such additional period as may be 
reasonably necessary to complete divestiture of Control or to ensure 
the financial stability of the portfolio company. SBA seeks to maintain 
alignment with SBIC licensees and welcomes discussing situations on a 
case-by-case basis.
    In response to public comment, this final rule rescinds the 
proposed requirement that Accrual SBICs own less than 50 percent of 
small business concerns at initial financing in an effort to encourage 
the inclusion of long-term buy-and-build strategies. Proposed changes 
to Sec.  107.865 are not adopted.

X. Section 107.1000 Non-leveraged Licensees--Exceptions to this Part

    This regulation identifies exceptions to the regulations for 
Licensees without Leverage. SBA is implementing regulations to 
incorporate the term Non-leveraged Licensee as discussed in section 
II.A. of this rule. There were no comments on this section. This final 
rule adopts the proposed Sec.  107.1000 without substantial change.

Y. Section 107.1120 General Eligibility Requirements for Leverage

    This regulation identifies general requirements to be eligible for 
Leverage. Paragraph (c) references Sec.  107.210 concerning minimum 
Private Capital requirements. SBA proposed to amend paragraph (c) to 
incorporate Pub. L. 115-133 by adding an exception to the

[[Page 45999]]

$5 million minimum Regulatory Capital requirement if the SBIC was 
licensed because they are headquartered in an Underlicensed State. As 
identified in Sec.  107.1150, such Licensees will be limited to 
Leverage up to 100 percent of Regulatory Capital until they raise $5 
million in Regulatory Capital.
    One commenter believes benefits associated with Underlicensed 
States should be limited to those both headquartered in an 
Underlicensed State and deploying capital to portfolio concerns 
headquartered in that State. With respect to licensing priority, the 
Act defines an Underlicensed State as a State in which the number of 
licensees per capita is less than the median number of licensees per 
capita for all States--further, the Act provides first priority for 
SBIC applicants in Underlicensed States with below median financing. 
Additionally, Pub. L. 115-333 permits Licensees. Changing this language 
would be inconsistent with statute. This final rule adopts the proposed 
Sec.  107.1120 without change.

Z. Section 107.1130 Leverage Fees and Annual Charges

    This regulation identifies the fees and charges associated with SBA 
guaranteed Leverage. Currently the title identifies Annual Charges as 
``additional charges''. SBA proposed changing the title to clarify that 
the additional charge refers to the Annal Charge as discussed in Sec.  
107.50.
    Paragraph (d)(1) discusses the Annual Charge required for 
Debentures, noting that it only applies to Debentures issued on or 
after October 1, 1996, and that it does not apply to Leverage issued 
prior to that date. Since all Debentures outstanding were issued on or 
after October 1, 1996, SBA proposed implementing regulations to remove 
this language.
    SBA further proposed implementing regulations to set the minimum 
Annual Charge to 0.4 percent or 40 basis points which would be achieved 
over a number of years. The fiscally responsible administration of the 
program requires a minimum Annual Charge on outstanding leverage be 
established to address the long-term variances in losses. The 
historical losses vary greatly as a result of national economic health 
and private equity and venture fund vintage year performance. As a 
consequence, SBA experiences many years in which there are zero or 
minimal SBIC transfers to liquidation status and a few years in which 
there are numerous failures with resulting losses to SBA.
    The change will protect the government from significant losses, 
increase the prospects of preserving a zero or negative subsidy cost 
across program cohorts, enhance the long-term ability of SBA to provide 
guarantees to SBICs, license more applicants, and indirectly provide 
greater patient capital to qualifying small businesses.
    Two commentors expressed concerns that the 50 basis points (bps) 
minimum annual charge poses a significant cost to licensees. The 
average annual charge over the last twenty years is 57 bps. SBA 
appreciates these concerns, and in response will reduce the minimum 
annual charge floor to 40 bps and phase in the floor over time for a 
smooth transition:

[cir] FY24--10 bps
[cir] FY25--20 bps
[cir] FY26--25 bps
[cir] FY27--30 bps
[cir] FY28--35 bps
[cir] FY 29--40 bps (capped floor)

    One commenter recommends SBA use a different subsidy model to set 
Leverage fees and Annual Charges. The SBA appreciates the suggestion 
and will continue to work with the White House Office of Management and 
Budgets (OMB) to ensure the subsidy model remains robust and aligned to 
the requirements of the Federal Credit Reform Act of 1990. It is the 
objective of SBA to operate the SBIC program at a zero-subsidy rate 
while achieving the mission and intent of Congress in establishing the 
program in 1958. SBA has integrated the phased-in annual charge floor 
schedule into the final regulation and is finalizing Sec.  107.1130.

AA. Section 107.1150 Maximum Amount of Leverage

    Current Sec.  107.1150 identifies the maximum amount of a Leverage 
for a Section 301(c) Licensee. SBA approves Leverage commitments for 
those Licensees that were licensed under the now repealed section 
301(d) for Specialized SBICs. SBA proposed implementing regulations to 
correct the language to apply to all Leveraged Licensees.
    Paragraph (a) sets forth the maximum Leverage for an ``Individual 
Licensee.'' SBA proposed implementing regulations to clarify that per 
the revised definition of ``Leverage,'' the maximum Leverage includes 
both the principal and accrued interest associated with the Accrual 
Debenture. SBA also proposed implementing regulations to add that if a 
Licensee is headquartered in an Underlicensed State and has less than 
$5 million in Regulatory Capital, it is limited to one tier of 
Leverage.
    Paragraph (b) sets the maximum Leverage for multiple licensees 
under Common Control, as defined under Sec.  107.50. SBA is 
implementing regulations to clarify that similar to the requirements 
for an ``Individual Licensee,'' the interest associated with the 
Accrual Debenture will be used to calculate the maximum Leverage across 
all Licensees under Common Control.
    One commenter suggested increasing maximum leveraged capital 
provided. SBA notes that increasing the maximum amount of leverage 
available to Licensees is not within the authority of the rulemaking 
and will require an act of Congress. This final rule adopts the 
proposed Sec.  107.1150 without change.

BB. Section 107.1220 Requirement for Licensee To File Quarterly 
Financial Statements

    This regulation currently requires SBICs with outstanding Leverage 
commitments to submit quarterly Form 468s within 30 days after the 
close of each quarter. SBA proposed implementing regulations to clarify 
that this requirement pertains to all Leveraged Licensees and to allow 
45 days after the close of each quarter, commensurate with portfolio 
valuation due dates as finalized under Sec. Sec.  107.503 and 107.650. 
There were no comments on this section. This final rule adopts the 
proposed Sec.  107.1220 without change.

CC. Section 107.1830 Licensee's Capital Impairment--Definition and 
General Requirements

    This regulation currently requires Leveraged Licensees to calculate 
their capital impairment percentage (``CIP''), identifies the maximum 
CIP allowable, and requires them to report to SBA if they have a 
condition of capital impairment. Paragraph (a) currently identifies 
that this section only applies to leverage issued on or after April 25, 
1994, and identifies alternate requirements for Leverage issued prior 
to that date. Since all Leverage currently held by operating SBICs was 
issued after April 25, 1994, SBA is removing obsolete language in this 
paragraph. Section 107.1850 applies to all Leveraged Licensees with 
outstanding Leverage.
    Paragraph (e) requires Licensees to calculate their CIP and notify 
SBA if they have a condition of capital impairment. Paragraph (f) gives 
SBA the right to redetermine the CIP at any time. SBA proposed to 
change this requirement such that SBA will calculate the Licensee's CIP 
each quarter and notify the SBIC if they are capitally impaired. Since 
SBA is calculating the CIP, SBA also is implementing regulations to 
remove paragraph (f).

[[Page 46000]]

    Two commenters suggested SBA considering public disclosure of 
Capital Impairment (CIP) results. SBA notes that the Form 468 updates 
include automatic calculations of both the CIP and leverage coverage 
ratios. SBA is concerned that public disclosure of CIP ratios (based on 
SBA's valuation policy which can result in significantly lower 
valuations than FASB GAAP) might cause unintended harm and violate 
statutory restrictions on disclosure of SBIC licensee data. SBA is 
updating theForm 468 which will enable transparency into the overall 
aggregated SBIC program portfolio investment performance and aggregated 
SBIC licensed funds' investment performance by strategy and vintage 
year for the public. SBA believes such industry standard metrics will 
provide value to the public and, in particular, current and prospective 
investors in SBIC licensed funds. This final rule adopts the proposed 
Sec.  107.1830 without change.

DD. Section 107.1840 Computation of Licensee's Capital Impairment 
Percentage

    This regulation defines how to compute a Licensee's CIP. Since SBA 
proposed to calculate the CIP and notify Licensees if they have a 
condition of Capital Impairment, SBA proposed implementing regulations 
to make related changes to this regulation.
    One commenter concurred with the changes as written. This final 
rule adopts the proposed Sec.  107.1840 without change.

EE. Section 107.1845 Determination of Capital Impairment Percentage for 
Early Stage SBICs

    This regulation defines how to compute an Early Stage SBIC's CIP. 
Since SBA proposed to calculate the CIP and notify Licensees if they 
have a condition of Capital Impairment, SBA proposed implementing 
regulations to make related changes to this regulation.
    SBA received no comments on the proposed regulation. This final 
rule adopts the proposed Sec.  107.1845 without change.

FF. Section 107.1850 Watchlist

    For more than twenty years, Licensee Leverage default rates have 
averaged less than 16 percent. While this is a relatively small 
percentage of Licensees, these Licensees introduce risk to the 
sustainability of the SBIC program and to SBA. In an effort to 
proactively identify and manage risk, SBA is implementing regulations 
to introduce a Watchlist (previously referred to as Enhanced Monitoring 
in the proposed rule). A Licensee can be added to the Watchlist for a 
series of actions, including but not limited to, bottom quartile 
performance relative to the Licensee's stated benchmark for more than 
four consecutive quarters, or reporting failures defined in SBIC 
program policies and procedures. While on the Watchlist, the Licensee 
will be required to file Form 1031 on a more frequent basis, and upon 
request, conduct portfolio review meetings with SBA. The Licensee will 
be notified when added to the Watchlist upon determination. Once the 
events that warranted Watchlist status are addressed to SBA's 
satisfaction, Licensees will be notified that they are removed from the 
Watchlist. A series of performance metrics will be reviewed 
collectively to assess a holistic picture of performance. Of those 
metrics, TVPI or DPI metrics in the bottom quartile for four 
consecutive quarters relative to the Licensee's primary benchmark for 
the applicable vintage year can result in a Licensee being added to the 
Watchlist.
    Two commenters disagree with the proposed regulation and believes 
it should be withdrawn in favor of using existing oversight tools. One 
commentor also posed suggestions of how to limit watchlist status and 
suggested giving SBICs early warning and allow challenges in the event 
that SBA does decide to include watchlist status in the final rule. SBA 
responds that maintaining the Watchlist does not result in additional 
enforcement actions and the objective of the proposal is to formalize 
existing `watchlist' practices which have existed in SBIC Program 
Standard Operating Procedures for several years. The goal of the 
Watchlist is to identify SBICs for which there is potential for concern 
prior to their reaching violation or default and then increase 
communication with the licensee to remain aligned on potential steps to 
ensure sound operations of the licensee to mitigate the risk of a 
potential default. In that respect, SBA believes that the concept of 
the Watchlist aligns with the commentor's expressed goal of providing 
SBICs with `early warning'. To increase understanding and clarify as to 
what SBA is proposing in this section, SBA is renaming `enhanced 
monitoring' to `watchlist' consistent with industry best practices and 
longstanding SBA SBIC Program Standard Operating Procedure guidance.
    One commenter disagreed with putting the bottom quartile of SBICs 
on the Watchlist. SBA clarifies multiple factors and considerations 
will be assessed as part of the Watchlist process and incorporated 
these factors and considerations into 13 CFR 107.1850. SBA also 
clarifies that the bottom quartile of SBICs will not be put on the 
Watchlist, rather the SBICs that fall in the bottom quartile of the 
applicable vintage year and investment strategy industry benchmarks, 
not bottom quartile among the universe of SBIC licensees, will be 
identified as part of the broader watchlist process.
    One commenter requested clarification around the consequences of a 
fund being on Watchlist status for a prolonged period, and whether SBA 
is taking other factors into consideration when looking at the bottom 
quartile, such as capital impairment, operating plan, and the source of 
the performance issues. SBA clarifies that identification for watchlist 
does not result in enforcement action. The consequence of a licensee 
being identified for the Watchlist is increased communication with SBA 
to ensure alignment of objectives and mitigate the risk of potential 
future enforcement action.
    One commenter suggested SBA should require examinations within an 
18-month time period for leveraged Licensees. While SBA sets a goal to 
examine Leveraged Licensees within an 18-month period, the SBIC is not 
considered at fault if SBA needs to extend the examination date due to 
resource issues. SBA does prioritize exams based on credit risk among 
other factors. SBA updated the regulation to reflect the considerations 
raised by the commenter related to enforcement and SBAhas replaced 
``enhanced monitoring'' with ``watchlist.'' The final rule adopts Sec.  
107.1850 substantially as proposed.

GG. Section 121.103 Small Business Size Regulations: How Does SBA 
Determine Affiliation?

    In 13 CFR part 121, SBA sets forth size standards and defines a 
business's size to include the size of the affiliates of the business, 
subject to certain exceptions. One of these exceptions, Sec.  
121.103(b)(5)(vi), applies only to financial, management, and 
assistance under the Act and is intended to exclude Traditional 
Investment Companies which includes funds exempt from registration 
under the 1940 Act from affiliation coverage. As noted above, the term 
Traditional Investment Companies, generally includes non-profits, in 
the capacity as the management company of a for-profit fund, and 
issuers that would be ``investment companies,'' as defined under the 
Investment Company Act of 1940 (the ``1940 Act''). It also includes all 
3(c)(1) and 3(c)(7) private funds not registered under the 1940 Act. 
This

[[Page 46001]]

exception to SBA affiliation requirement was provided to allow SBIC 
Financings with other private equity, private credit, and venture 
capital funds since co-investment and syndication between such funds is 
typical and increases the amount of Private Capital available for small 
businesses. It should be noted that SBA's regulations and 
determinations are not determinative as to whether a licensed 
Traditional Investment Company must comply with the 1940 Act.
    One commenter supports expanding the size standard exception to 
include ``qualified purchasers'' because it would conform to the SEC's 
definition of ``private fund'' that includes both 3(c)(1) and 3(c)(7) 
funds and offer material relief and clarity to SBICs in applying the 
SBA size standards when investing in sponsored transactions. The SBA 
appreciates this support for expanding the size standard exception.
    One commenter questioned whether SBA would be able to determine 
affiliate relationship because 3(c)(7) funds do not have traditional 
SEC registration or disclosure requirements. SBA responds that these 
funds are similar to private funds under 3(c)(1) of the 1940 Act which 
are also exempt from registration except that (i) 3(c)(7) funds are not 
limited in beneficial owners and (ii) all investors in a 3(c)(7) fund 
must be qualified purchasers. SBA also notes that since 1996, the 
regulations have excepted from affiliation coverage 3(c)(1) funds 
(which are also exempt from registration) and this exception from 
affiliation coverage has never posed risk to the program. SBICs often 
invest with others, thereby increasing the amount of capital to these 
underserved businesses. SBA notes that removing such funds from the 
exceptions to affiliation coverage would greatly reduce the ability for 
SBICs to provided needed financings to Small Businesses, which is core 
to the mission of the program.
    SBA received one comment seeking clarification as to the 
applicability of Sec.  121.103(b), Exceptions to affiliation coverage, 
for Accrual SBICs. SBA confirms that the Agency has historically 
interpreted 13 CFR 121.103(b)(1) to mean that a Small Business that is 
owned, in whole or in substantial part, by a Licensee will remain 
unaffiliated from the Licensee, and confirms that the exception set 
forth in 13 CFR 121.103(b)(1) applies to Accrual SBICs. SBA is 
finalizing the proposed Section Sec.  121.103 substantially as 
proposed.

HH. Severability

    One comment recommended that SBA include in this rule an express 
provision addressing the effect of a judicial declaration of invalidity 
as to any section or portion of this rule or part 107. The question of 
severability addresses whether a judicial finding of a provision's 
invalidity should extend to other provisions or applications or whether 
it should be limited to the invalid provision or application, leaving 
in effect the remainder of the rule. Like the entirety of part 107, 
this rule seeks to implement, to the maximum extent possible, the 
stated congressional purpose of the Act itself--i.e., ``to improve and 
stimulate the national economy in general and the small-business 
segment thereof in particular by establishing a 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.'' See 15 
U.S.C. 661. Although this rule includes numerous enhancements to the 
SBIC program, most of the individual sections added or modified in this 
rule, like those which remain in part 107 from prior rulemakings, may 
operate independently in service of the stated congressional purposes 
and the objectives set forth above for this rule.
    Accordingly, in the event that any portion or application of the 
rule is declared invalid, SBA intends that the various other provisions 
and applications of part 107, including those added or modified in this 
rule, be severable from the unlawful portion, unless such declaration 
of invalidity renders another section or provision meaningless or 
deprives that other section or provision of its functionality. 
Moreover, such collateral invalidity is intended only to the extent 
required by logic or loss of functionality. Section 107.25 is therefore 
drafted to express and implement SBA's intent relative to severability 
within part 107. For example, if a court were to find unlawful this 
rule's establishment of the Accrual SBIC--a Section 301(c) Licensee 
which is authorized to issue Accrual Debentures--such finding would 
have no effect upon this rule's definition of unrelated terms (Sec.  
107.50), its changes to the management-ownership diversification 
requirements (Sec.  107.150), its changes to licensee fees (Sec.  
107.300), its provisions for expedited review of subsequent fund 
applicants (Sec.  107.305), or various other provisions which in no way 
are dependent upon the Accrual SBIC or the Accrual Debenture. Such 
finding would, however, deprive the ``Reinvestor SBIC'' concept of its 
functionality, since a Reinvestor SBIC is indeed a type of Accrual SBIC 
(i.e., one which at the time of licensing is authorized to issue 
Accrual debentures in the execution of a specific investment strategy), 
and where such a related provision could not ``function sensibly 
without the stricken provision,'' the invalidity of that related 
provision would be required as well, cf. Belmont Mun. Light Dep't v. 
FERC, 38 F.4th 173, 187-88 (D.C. Cir. 2022), though only in such 
circumstances. The foregoing is merely an example and does not express 
an intent that any other provision be considered non-severable. SBA 
reiterates that where any provision of this part is declared invalid, 
any collateral invalidity is intended to the least extent necessary, in 
order to advance program objectives to the maximum extent possible.

III. Compliance With Executive Orders 12866, 12988, 13132, 13563, 
13175, and 14094 the Paperwork Reduction Act (44 U.S.C., Ch. 35), and 
the Regulatory Flexibility Act (5 U.S.C. 601-612))

A. Executive Order 12866

    The Office of Management and Budget has determined that this rule 
constitutes a ``significant regulatory action'' under Executive Order 
12866, as amended by Executive Order 14094. SBA has drafted a 
Regulatory Impact Analysis for the public's information below. Each 
section begins with a core question.
1. Regulatory Objective of the Proposal
Is there a need for this regulatory action?
    This final rule is intended to reduce barriers to program 
participation for funds investing in (i) underserved communities and 
geographies, (ii) capital intensive investments, and (iii) technologies 
critical to national security and economic development. In this final 
rule, SBA is introducing additional types of SBICs (``Accrual'' SBICs 
and ``Reinvestor'' SBICs) to increase program investment 
diversification and patient capital financing for small businesses and 
modernize rules to lower financial barriers to program participation. 
The new Accrual Debenture allows more flexibility in financing to 
increase participation of SBICs capable of addressing identified 
capital access gaps and vulnerability in the U.S. small business 
segment. Additionally, this final rule introduces a ``Capital Call 
Line,'' a form of credit line that does not

[[Page 46002]]

require SBA approval. The aforementioned benefits and attractiveness of 
the Accrual Debenture will also reduce some of the previously perceived 
disadvantages to being an SBIC, as opposed to the non-SBIC private 
market. The revisions to 13 CFR 107.720 should improve the SBIC 
program's investment diversification and create more program entry 
points for new fund managers. This final rule also reduces barriers by 
revising reporting requirements that may allow increased use of 
valuation policies that are consistent with GAAP. This rule will help 
SBA implement Executive Order (``E.O.'') 13985, ``Advancing Racial 
Equity and Support for Underserved Communities Through the Federal 
Government,'' by reducing financial and time barriers to participate in 
the SBIC program and modernizing the program's license offerings to 
align with a more diversified set of funds investing in underserved 
small businesses. The final rule would also incorporate the statutory 
requirements under Pub. L. 115-333, titled ``Spurring Business in 
Communities Act of 2017'', enacted on December 19, 2018.
    The Agency believes it is necessary to reduce barriers to 
participation and diversify its patient capital and long-term loan 
program for long-term program stability and mission effectiveness. This 
will simultaneously diversify the sources and types of financing 
available to underserved small businesses and small businesses 
manufacturing products and technologies critical to national security 
and U.S. economic competitiveness. The Agency also believes that to be 
effective in delivery, it needs to streamline and reduce regulatory 
burdens to facilitate robust participation in its patient capital and 
long-term loan program which are responsible for enabling access to 
capital for underserved U.S. small businesses across the country.
    By offering an alternative to a semi-annual interest payment 
Debenture structure for all SBIC licensees investing in small 
businesses to help them grow and scale, SBA strives to increase equity 
and growth capital available to underserved small business owners and 
unlock equity and equity-like loan financing as sources of funding for 
many small business owners while still maintaining an expected zero 
subsidy cost in the program. This alternative structure accommodates a 
longer horizon for investments in small businesses that might require 
more patient capital. SBA has confidence this goal will be achieved 
while continuing to maintain a zero-subsidy based on extensive analysis 
of the performance of private funds over the last 20 years from 
Pitchbook and as supported by the 2021 Knight Diversity of Asset 
Manager Research Series \1\ which found that, ``diverse-owned firms 
have low levels of representation across each asset class; however, 
they exhibit returns that are not significantly different than non-
diverse-owned firms.'' SBA is revising its Debenture and license 
regulations in response to continuing requests by SBA's participating 
SBIC licensees and the public. SBA believes that revising its Debenture 
and license regulations will result in expansion of access to capital 
for those who cannot obtain adequate patient capital from traditional 
sources of funding, while decreasing time and cost associated with 
applying for an SBIC license. Greater access to capital is bolstered by 
the revisions enabling SBA to offer a debenture with terms and 
regulations aligned to the cash flows of a broader base of private 
funds as well as a reduction in cost burden to apply for and 
participate in the SBIC Program.
---------------------------------------------------------------------------

    \1\ Knight Foundation, ``Diversity of Asset Managers Research 
Series: Industry,'' December 7, 2021.
---------------------------------------------------------------------------

2. Benefits and Costs of the Rule
What Are the Potential Benefits and Costs of this Regulatory Action?
    SBA does not anticipate significant additional costs or impact on 
the subsidy to operate the SBIC program under these final regulations. 
Since SBA has existing authority to license and provide funding to 
equity-oriented and debt-oriented private funds, there is no request 
for additional funding.
    Currently, SBICs distribute about $1.5 billion or more per year in 
profit distributions to Limited Partners. SBA's regulations permit 
SBICs to distribute profits to Limited Partners without any 
corresponding repayment of SBA Leverage. SBA is proposing that Accrual 
SBICs and Reinvestor SBICs pay all accrued interest and annual charges, 
then repay its Leverage on a pro rata basis (in step) with its Limited 
Partners. Based on analysis of average cash flows regarding private 
funds, SBA expects that this will improve the likelihood that SBA will 
be repaid on the same schedule as Limited Partners regardless of the 
investment strategy of the Accrual SBIC or Reinvestor SBIC fund.
    Under these final regulations, SBA anticipates SBIC program 
administrative costs to decline over time due to streamlining of 
regulatory filing and reduction in duplicative data reporting across 
multiple filings. Furthermore, the final regulations include changes 
which reduce bureaucratic processes, such as approving the SBIC's Total 
Intended Leverage Commitment at licensing, reducing SBA approvals for 
certain conflicts of interest by creating additional safe harbors, and 
approving GAAP-compliant valuations for Non-leveraged licensees. SBA 
believes such changes will help SBA improve its response times and 
enable personnel to focus on customer relationships and monitoring its 
funds. In revising the SBIC Debenture offering into two categories of 
Debentures, ``Standard Debenture'' and ``Accrual Debenture,'' available 
to eligible SBIC licensees under 13 CFR 107.50, SBA anticipates de 
minimis impact on the subsidy for the SBIC program. Currently, as part 
of its licensing process, SBA reviews approximately 70 license requests 
annually and declines 10 to 15 percent (or 8 to 10 requests) due to 
poor performance, negative diligence and/or regulatory conflict issues. 
These 70 applications represent the total annual license applications 
for non-levered and Debenture SBICs combined. Two-thirds of these 
applications are submitted by entities with existing SBIC licensees 
requesting a license for a subsequent licensed SBIC fund. The 
approximate total number of licenses approved annually in the SBIC 
program is 25. Additionally, federally regulated private equity funds 
must comply with the requirements from relevant Federal regulating 
entities. Private equity funds must also abide by the terms of their 
investor agreements, such as a limited partnership agreement, and 
fulfill their fiduciary obligation to their investors. Because of these 
requirements, SBA anticipates these licensed SBIC funds will continue 
making investment decisions based on their fiduciary responsibility and 
terms of their investor agreements which limits risk to SBA. Regulated 
SBIC licensees must comply with the business plan and investor 
agreements approved by SBA while operating an SBIC license. Licensees 
will benefit by no longer being required to submit 1031 financing 
reports within 30-days of financing pursuant to Sec.  107.640, instead 
filing at the end of each quarter, unless the licensee is subject to 
the Watchlist, as previously mentioned. This will reduce paperwork and 
the reporting burden on SBIC licensees. As a result of this revision, 
SBA expects a decrease in the time required for small businesses to 
access capital at critical moments, which will in turn help more small 
businesses grow and scale. Furthermore, these changes will decrease 
SBA's administrative costs.

[[Page 46003]]

    SBA does not anticipate significant additional costs or impact on 
the subsidy to operate the SBIC program under the final regulations at 
13 CFR 107.50 regarding the accrual license and Accrual Debenture. One 
Debenture structure limits accessibility to SBA's patient equity and 
long-term private loan program, with an outsized impact on underserved 
small business owners who may struggle to access traditional sources of 
capital. SBA anticipates that providing clear and streamlined 
regulatory guidance, regulatory fees aligned with the size and scale of 
SBIC applicants and licensees, and a second Debenture structure to 
capital access gaps will result in an increase in the number of and 
diversity of participating SBIC licensees and will result in more 
underserved small business owners obtaining access to patient equity 
capital or long-term loans.
3. Alternatives
What alternatives have been considered?
    SBA considered eliminating additional regulatory burdens, such as 
shifting entirely to FASB GAAP-compliant valuation reports, and 
determined that this final rule strikes the appropriate balance between 
responsibly streamlining regulations without increasing the risk of 
waste, fraud, or abuse of the programs or otherwise threatening the 
integrity of the SBIC program or taxpayer dollars. Possible 
alternatives included eliminating more regulatory burdens, but such a 
course would require additional time for SBA to consider the impact of 
these eliminations. After considering feedback from stakeholders during 
the public comment period of the notice of proposed rulemaking, SBA 
qualitatively determined that benefits of a timely issuance of a rule 
with the included regulatory relief and measures to implement Executive 
Order 13985 outweighed the benefits of a delay to give the agency more 
time to consider further eliminations of regulatory burdens. Regarding 
Debenture instrument structure and license type, SBA has implemented 
several variations of its SBIC Debentures to increase program alignment 
and accessibility for new patient capital funds in the past as 
discussed above, and SBA has determined from these past experiences 
that the simplest rules finalized herein were the least burdensome.

B. Executive Order 12988

    This action meets applicable standards set forth in sections 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 preemptive effect or retroactive effect.

C. Executive Order 13132

    This final rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the National Government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive order. As 
such it does not warrant the preparation of a federalism assessment.

D. Executive Order 13175

    This final rule does not have tribal implications under Executive 
Order 13175, Consultation and Coordination with Indian Tribal 
Governments, because it would not have a substantial direct effect on 
one or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

E. Executive Order 13563

    1. Did the agency use the best available techniques to quantify 
anticipated present and future costs when responding to E.O. 12866 
(e.g., identifying changing future compliance costs that might result 
from technological innovation or anticipated behavioral changes)?
    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
12866.
    2. Public participation: Did the agency: (a) Afford the public a 
meaningful opportunity to comment through the internet on any proposed 
regulation, with a comment period that should generally consist of not 
less than 60 days; (b) provide for an ``open exchange'' of information 
among Government officials, experts, stakeholders, and the public; (c) 
provide timely online access to the rulemaking docket on 
Regulations.gov; and (d) seek the views of those who are likely to be 
affected by rulemaking, even before issuing a notice of final 
rulemaking?

F. Paperwork Reduction Act, 44 U.S.C., Ch. 35

    SBA has determined that this final rule would impose additional 
reporting and recordkeeping requirements under the Paperwork Reduction 
Act. Generally, this rule is implementing regulations changes to two 
information collections used in the SBIC program: (1) SBA Form 468, 
``SBIC Financial Reports,'' to include GAAP financial performance 
metrics, the number of jobs sustained and created, and voluntary 
demographic information at the SBIC management level; and, (2) SBA Form 
1031, ``Portfolio Financing Report,'' to decrease the current frequency 
of reporting on a per-financing basis as-of the date of a financing's 
close to quarterly reporting of all SBIC financings within a given 
quarter, no less than 30 days after the calendar year quarter-end.
    The title, summary description of the information collection, and 
the proposed changes to SBA Form 468 and SBA Form 1031 are discussed 
below with an estimate of the revised annual burden. Included in the 
estimates are 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 468 (OMB Control Number 
3245-0063).
    Description of Respondents: Small Business Investment Companies.
    Estimated Number of Respondents: 406.
    Estimated Annual Responses: 1,002.
    Estimated Annual Hour Burden: 24,708.
    Summary: To obtain the information needed to carry out its 
oversight responsibilities under the Small Business Investment Act of 
1958 (the ``Act''), SBA requires SBICs to submit financial statements 
and supplementary information on SBA Form 468. SBA uses this 
information to monitor SBIC financial condition and regulatory 
compliance, for credit analysis when considering SBIC leverage 
applications, and to evaluate financial risk and economic impact for 
individual SBICs and the program as a whole.
    Section 310(d)(1)(C)(i) of the Act requires SBICs to submit audited 
financial statements to SBA at least annually. SBA regulations at 13 
CFR 107.630 requires the use of SBA Form 468 when submitting the 
financial statements and supporting documentation. The information 
collected is used to determine the creditworthiness of an SBIC when 
considering its leverage application and to monitor its financial 
condition after assistance is provided. The information is also used to 
evaluate an SBIC's compliance with certain regulations, such as the 
activity requirements in 13

[[Page 46004]]

CFR 107.590 and the portfolio diversification requirements in 13 CFR 
107.740.
    To date, SBA's Form 468 reporting requirements have been tailored 
to satisfy SBA's specific regulatory and credit risk analytical 
requirements using SBA's guidelines on accounting principles and 
valuations. Many SBIC investors request GAAP financial information from 
SBICs, and SBA understands that all or substantially all SBICs 
currently prepare data under GAAP principles in addition to under SBA's 
accounting and valuation guidelines applicable to the SBA Form 468. 
Therefore, SBA anticipates the addition of GAAP financials in general 
to have a de minimis impact on calculating burden, as this information 
would be readily available to SBICs as part of the normal course of 
business.
    Specifically, SBA will be requesting from SBICs on SBA Form 468 the 
following metrics that SBICs already calculate using GAAP-audited 
financial data for reports to their private investors: (1) Net Total 
Value to Paid In Capital (TVPI)--the total distributions, including 
both cash and distributed securities (valued as of the distribution 
date) plus the net asset value of a private fund's portfolio net of 
carried interest and expenses, divided by the capital that has been 
paid in by investors; (2) Net Distributions to Paid In Capital (DPI)--
total distributions, including both cash and distributed securities 
(valued as of distribution date), a private fund has returned to 
investors net of fund expenses and carried interest, divided by the 
amount of money investors have paid into the fund; (3) Multiple on 
Invested Capital (MOIC)--the total gross realized and unrealized value 
generated by a private fund's portfolio, divided by the total amount of 
capital invested into the portfolio concerns by the fund; and, (4) Net 
Internal Rate of Return (IRR)--the rate at which the private investor 
cashflows and the unrealized net asset value minus any fund expenses 
and carried interest are discounted so that the net present value of 
cashflows equals zero.
    Similarly, under this final rule, SBA seeks to obtain GAAP 
financial data related to valuations in SBA Form 468 supplemental 
valuation reports, which are currently requested semiannually. Under 
this final rule, the reporting frequency would increase from 
semiannually to quarterly to supplement the valuations data SBICs must 
already report on SBA Form 468 Short Form for quarterly reporting. Many 
SBIC investors request portfolio company valuations from SBICs using 
GAAP principles, and SBA understands that all or substantially all 
SBICs currently prepare such data under GAAP principles in addition to 
under SBA's valuation guidelines applicable to the SBA Form 468. 
Therefore, SBA anticipates the addition of GAAP financials in general 
to have minimal impact on calculating increase to burden, as this 
information should already be available to SBICs as part of the normal 
course of business.
    Additionally, this final rule would add three new reporting 
requirements to the SBA Form 468. First, SBA will request the number of 
jobs sustained and the number of new jobs created per each portfolio 
company. Currently SBA request the number of employees per financing on 
SBA Form 1031 with updates per follow-on financings. Under this final 
rule, SBA seeks to ask for the number of jobs at the time of initial 
financing (i.e., jobs sustained) with annual updates of new jobs 
created (or lost) to obtain numbers of net new jobs created as a result 
of SBIC financings. Second, under this final rule, SBA seeks to request 
annual management contact and optional demographic information at the 
SBIC management level. SBA seeks the mandatory updates to management 
contact information in order to maintain and improve customer 
relationship between Licensees and SBA Operations Analysts. SBA seeks 
the voluntary information for reporting purposes to assess the current 
SBIC program as related to efforts undertaken in this final rule to 
promote reducing barriers to program participation for new funds and 
promoting the diversification of SBIC investments. In order to provide 
consistency on the distribution calculations, SBA seeks to collect the 
information in a new ``Distribution Schedule'' from Accrual SBICs. 
These new reporting requirements to the SBA Form 468 seek information 
that SBICs would have readily available under the normal course of 
business and therefore should have a de minimis impact on burden per 
SBIC.
    The current annual burden for SBA Form 468 is estimated at 24,708 
hours. Based on the current size of the SBIC program, SBA estimates the 
new reporting requirements to increase the annual hourly burden by 
1,950 hours for a total estimated annual burden of 26,658 hours.
    Title: Portfolio Financing Report, SBA Form 1031 (OMB Control 
Number 3245-0078).
    Description of Respondents: Small Business Investment Companies.
    Estimated Number of Respondents: 316.
    Estimated Annual Responses: 2,695.
    Estimated Annual Hour Burden: 728.
    Summary: To obtain the information needed to carry out its program 
evaluation and oversight responsibilities, SBA requires SBICs to 
provide information on SBA Form 1031 each time financing is extended to 
a Small Business. SBA uses this information to evaluate how SBICs fill 
market financing gaps and contribute to economic growth and monitor the 
regulatory compliance of individual SBIC. Currently, SBA regulations 
require all SBICs to submit a Portfolio Financing Report using SBA Form 
1031 for each financing that an SBIC provides to a Small Business 
within 30 days after closing an investment. Under this final rule, the 
reporting deadline for SBICs (except those subject to the Watchlist) 
would change to 30 days after the end of the calendar year quarter 
(March, June, September, and December) following the closing date of a 
financing that an SBIC provides to a Small Business, rather than 30 
days after the date of each financing. Therefore, there would be no 
change to the annual burden estimated at 728 hours.

G. 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 businesses, small organizations, and small governmental 
jurisdictions. According to the RFA, when an agency issues a 
rulemaking, it must prepare a regulatory flexibility analysis to 
address the impact of the rule on small entities. However, section 605 
of the RFA allows an agency to certify a rule, in lieu of preparing an 
analysis, if the rulemaking is not expected to have a significant 
economic impact on a substantial number of small entities.
    This final rule likely will not impact a substantial number of 
small entities relative to the population of existing private market 
funds and private market asset management companies. This rulemaking 
will affect only a limited population of existing and potential SBIC 
Licensees. Small entities affected by this final rule are a unique 
class comprised of SBIC Licensees. As of March 31, 2022, 294 SBIC 
Licensees were in operation.\2\ SBA estimated that approximately 98 
percent of these Licensees were small businesses based on North 
American Industry Classification System (NAICS) subsector

[[Page 46005]]

code 523 (Securities, Commodity Contracts, and Other Financial 
Investments and Related Activities) with annual receipts less than 
$41.5 million. Of these 294 SBICs, 57 were Non-leveraged Licensees. The 
final rule distinguishes between Leveraged and Non-leveraged Licensees 
in applicability of some of its changes and other changes apply to all 
SBICs.
---------------------------------------------------------------------------

    \2\ Small Business Investment Company (SBIC) Program Overview 
Report for the Quarter Ending March 31, 2022 (sba.gov).
---------------------------------------------------------------------------

    The final rule applies to all SBICs, 98 percent of which SBA 
estimates are small businesses. SBA estimates that the final rule may 
affect all of these small businesses. If SBICs are considered as a 
separate category from the other entities operating in the private 
equity, credit, and venture funds sector, then the rule does affect a 
substantial number of small businesses. However, the estimated burden 
of this final rule, detailed below, of a maximum of approximately $823 
per SBIC before consideration of the offsetting cost savings of this 
final rule, would likely not constitute a significant economic impact 
on these small businesses, even where the significance threshold is as 
low as one percent of revenue impacted.
    The final rule increases the frequency of filing Form 468 from 
semiannually to quarterly and requests more information on Form 468. 
SBA does not expect that these changes related to Form 468 will impose 
a significant burden because much of the required information is kept 
in the normal course of business. SBA also notes that the changes 
related to Form 468 are offset by reductions in other recordkeeping and 
compliance costs. The first offset is the facilitation of non-leveraged 
SBICs' use of valuation policies that meet GAAP, which decreases costs 
of reporting, recordkeeping, and compliance. The final rule's second 
offset is the ``Capital Call Line'' that provides an exception from 
SBA's prior approval requirement for some lines of credit, thus 
reducing those SBICs' compliance costs.
    Importantly, this final rule does not directly impact Small 
Businesses receiving investments, nor any investors or small banks 
participating in the SBIC Licensee. This final rule regulates the 
relevant SBIC Licensees. The courts have held that the RFA does not 
require a regulatory flexibility analysis for entities not directly 
regulated by the agency's final rulemaking. Thus, SBA is not required 
to conduct a reflexibility flexibility analysis on potential downstream 
benefits or costs to those entities.
    Even so, this final rulemaking also does not have a significant 
economic impact on those small entities directly regulated under this 
final rule. SBA expects the changes in this final rule to increase 
program participation, access to capital, and diversity of investment 
strategies. The final rule does not impose significant new compliance 
requirements to SBIC program participants. The final rule introduces 
some measures to strengthen risk controls that may impose some 
reporting and compliance requirements to some program participants. 
However, these reporting and compliance requirements comprise nominal 
changes to frequency and content, particularly compared to existing 
industry standards apart from the SBIC program. The current annual 
burden for SBA Form 468 is estimated at 24,708 hours. Based on the 
current size of the SBIC program, SBA estimates the new reporting 
requirements to increase the annual hourly burden by 1,950 hours for a 
total estimated annual burden of 26,658 hours. The current annual 
burden for SBA Form 1031 is estimated at 728 hours per small entity 
SBIC and because the deadline for reporting would only change to the 
quarter after the date of financing, rather than 30 days after the date 
of each financing, there would be no change.
    This final rule also defines a new class of Debentures, called 
Accrual Debentures, that align with cash flows of equity-focused 
strategies. SBA expects benefits to program participants from this 
ability to align cash flows but is not able to quantify these benefits.
    While SBA is unable to quantify the economic impact on small 
entities from these various changes, it reasonably expects these 
changes to not have significant impacts to the small entities that are 
program participants due to Congress authorizing a $1,000,000,000 
increase to the program commitment ceiling in FY2022.
    Based on the foregoing, the Administrator of the SBA hereby 
certifies that this rulemaking will not have a significant economic 
impact on a substantial number of small entities. The SBA invites 
comments from the public on this certification.

List of Subjects in 13 CFR Parts 107 and 121

    Investment companies, Loan programs-business, Reporting and 
recordkeeping requirements, Small businesses.

    Accordingly, for the reasons stated in the preamble, SBA amends 13 
CFR parts 107 and 121 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. 662, 681-687, 687b-h, 687k-m.


0
2. Add Sec.  107.25 to read as follows:


Sec.  107.25  Severability.

    Any provision of this part held to be invalid or unenforceable as 
applied to any person, entity, or circumstance shall be construed so as 
to continue to give the maximum effect to such provision as permitted 
by law, including as applied to persons or entities not similarly 
situated or to dissimilar circumstances, unless such holding is that 
the provision of this part is invalid and unenforceable in all 
circumstances, in which event the provision shall be severable from the 
remainder of this part and shall not affect the remainder thereof.

0
3. Amend Sec.  107.50 by:
0
a. Adding in alphabetical order the definitions of ``Accrual 
Debenture,'' ``Accrual Small Business Investment Company (``Accrual 
SBIC''),'' and ``Annual Charge;''
0
b. Revising paragraph (2) of the definition of ``Associate;''
0
c. Adding in alphabetical order the definition of ``Capital Call 
Line;''
0
d. Revising the definition of ``Charge'' and paragraphs (3)(i) and (ii) 
of the definition of ``Control Person;''
0
e. Adding in alphabetical order the definitions of ``Final Licensing 
Fee,'' ``GAAP'', and ``Initial Licensing Fee;''
0
f. Revising the definition of ``Leverage;''
0
g. Adding in alphabetical order the definitions of ``Leveraged 
Licensee'' and ``Non-leveraged Licensee;''
0
h. Revising the definition of ``Regulatory Capital;''
0
i. Adding in alphabetical order the definition of ``Reinvestor SBIC;''
0
j. Revising the definition of ``Retained Earnings Available for 
Distribution;''
0
k. Adding in alphabetical order the definitions of ``Revenue-Based 
Financing and Revenue-Based Loan'', ``SBIC,'' ``SBIC website,'' 
``State,'' ``Total Intended Leverage Commitment,'' ``Total Private 
Capital Commitment,'' ``Underlicensed State,'' ``Watchlist,'' and 
``Wind-down Plan;'' and
0
l. Removing the definition of ``Wind-up Plan.''
    The additions and revisions read as follows:


Sec.  107.50  Definition of terms.

    Accrual Debenture means a Debenture issued at face value that 
accrues interest over its ten-year term, as to which instrument SBA 
guarantees both the principal and unpaid accrued interest.
    Accrual Small Business Investment Company (``Accrual SBIC'') means 
a Section 301(c) Partnership Licensee,

[[Page 46006]]

licensed under Sec.  107.300 and approved by SBA to issue Accrual 
Debentures. Accrual SBICs shall be limited to a maximum of one and one 
quarter tiers of Leverage.
* * * * *
    Annual Charge means an annual fee on Leverage which is payable to 
SBA by Licensees, subject to the terms and conditions set forth in 
Sec. Sec.  107.585 and 107.1130(d).
* * * * *
    Associate * * *
    (2) Any Person who owns or controls, or who has entered into an 
agreement to own or control, directly or indirectly, at least 10 
percent of any class of stock of a Corporate Licensee or a limited 
partner's interest of at least 10 percent of the partnership capital of 
a Partnership Licensee. However, an entity Institutional Investor, as a 
limited partner in a Partnership Licensee, is not considered an 
Associate solely because such Person's investment in the Partnership, 
including commitments, represents 10 percent or more but less than 50 
percent of the Licensee's partnership capital, provided that such 
investment also represents no more than five percent of such Person's 
net worth and such limited partner also has no role in the management 
of the subject Licensee, with no right to control or approve any matter 
(other than such entity's vote as a limited partner) involving the 
Licensee.
* * * * *
    Capital Call Line has the meaning set forth in Sec.  107.550(c).
* * * * *
    Charge has the same meaning as Annual Charge.
* * * * *
    Control Person * * *
    (3) * * *
    (i) Controls or owns, directly or through an intervening entity, at 
least 30 percent of a Partnership Licensee or any entity described in 
paragraph (1) or (2) of this definition; and
    (ii) Participates in the investment decisions of the general 
partner of such Partnership Licensee; provided that, if at least 30% of 
Regulatory Capital is unaffiliated and unassociated with management of 
the Licensee, the management company of the Licensee is a government 
sponsored non-profit entity, the general partners of the Licensee are 
bound by a fiduciary duty to the investors in the Licensee, and such 
members of the general partner may not be hired or removed directly or 
indirectly by such government sponsor, the management of the Licensee 
will be deemed to be free from any outside Control; and
* * * * *
    Final Licensing Fee has the meaning set forth in Sec.  107.300.
* * * * *
    GAAP means Generally Accepted Accounting Principles as established 
by the Financial Accounting Standards Board (FASB) and refers to 
established financial accounting and reporting standards for public and 
private companies and not-for-profit organizations.
* * * * *
    Initial Licensing Fee has the meaning set forth in Sec.  107.300.
* * * * *
    Leverage means financial assistance provided to a Licensee by SBA, 
either through the purchase or guaranty of a Licensee's Debentures, and 
any other SBA financial assistance evidenced by a security of the 
Licensee. For the Accrual Debenture, Leverage includes principal and 
accrued unpaid interest.
* * * * *
    Leveraged Licensee means a Licensee which has outstanding Leverage, 
Leverage commitments, or intends to issue Leverage in the future.
* * * * *
    Non-leveraged Licensee means a Licensee which has no outstanding 
Leverage or Leverage commitment, no earmarked assets, and certifies to 
SBA (in writing) that it will not seek Leverage in the future.
* * * * *
    Regulatory Capital means:
    (1) General. Regulatory Capital means Private Capital, excluding 
non-cash assets contributed to a Licensee or a license applicant and 
non-cash assets purchased by a license applicant, unless such assets 
have been converted to cash or have been approved by SBA for inclusion 
in Regulatory Capital. For purposes of this definition, sales of 
contributed non-cash assets with recourse or borrowing against such 
assets shall not constitute a conversion to cash. Regulatory Capital 
becomes Leverageable Capital when it is paid in.
    (2) Exclusion of questionable commitments. An investor's commitment 
to a Licensee is excluded from Regulatory Capital if SBA determines 
that there is a lack of enforceable legal agreements under United 
States law or there is an issue of collectability for financial or any 
other reason, provided, however, that the unfunded commitment of an 
investor that has satisfied the applicable net worth test set forth in 
the definition of Institutional Investor will not be of questionable 
collectability (for financial reasons) if the Licensee's limited 
partnership agreement (or other governing agreement) contains 
sufficient provisions to ensure collectability.
    Reinvestor SBIC has the meaning set forth in Sec.  107.720(a)(2).
    Retained Earnings Available for Distribution (READ) means 
Undistributed Net Realized Earnings less any Unrealized Depreciation on 
Loans and Investments (as reported on SBA Form 468) and represents the 
amount that a Licensee may distribute to investors (including SBA) in 
accordance with Sec.  107.585 as a profit Distribution, or transfer to 
Private Capital.
    Revenue-Based Financing and Revenue-Based Loan have the meaning set 
forth in Sec.  107.810.
* * * * *
    SBIC means Small Business Investment Company and has the same 
meaning as ``Licensee'' as set forth in this section.
    SBIC website means the website maintained by SBA at www.sba.gov/sbic, which contains information on the SBIC program, including 
notices, policies, procedures, and forms pertaining to the program.
* * * * *
    State means one of the United States, the Commonwealth of Puerto 
Rico, the District of Columbia, Guam, the United States Virgin Islands, 
the Northern Mariana Islands, and American Samoa.
* * * * *
    Total Intended Leverage Commitment means the dollar amount or ratio 
of SBA Leverage commitments to Private Capital commitments. The final 
Total Intended Leverage Commitment dollar amount applied in the Accrual 
Debenture SBA Share calculation will be finalized no later than 12 
months after licensure or upon the Licensee's final close, whichever 
occurs first.
    Total Private Capital Commitment has the meaning set forth in Sec.  
107.300.
* * * * *
    Underlicensed State means a State in which the number of operating 
licensees per capita is less than the median number of operating 
licensees per capita for all States, where the per capita per State is 
based on the most recent resident population published by the U.S. 
Census as of the date of the calculation. SBA publishes a notice with 
the current list of Underlicensed States on the SBIC website.
* * * * *
    Watchlist has the meaning set forth in Sec.  107.1850.
    Wind-down Plan has the meaning set forth in Sec.  107.590.

[[Page 46007]]


0
4. Amend Sec.  107.150 by:
0
a. Revising the section heading;
0
b. In paragraph (a), revising the heading and adding a parenthetical 
sentence at the beginning of the introductory text; and
0
c. Revising paragraphs (b)(1) and (2), the second sentence of paragraph 
(c)(1), and paragraph (c)(2).
    The revisions and addition read as follows:


Sec.  107.150  Management-ownership diversification requirement.

    (a) Diversification requirement. (Also referenced in this part as 
the ``diversity requirement.'') * * *
* * * * *
    (b) * * *
    (1) General rule. Except as provided in paragraph (b)(2) of this 
section, no Person or group of Persons who are Affiliates of one 
another may own, directly or indirectly, more than 70 percent of your 
Regulatory Capital or your Leverageable Capital.
    (2) Exception. An investor that is a Traditional Investment 
Company, as determined by SBA, may own more than 70% of a Licensee's 
Regulatory Capital and Leverageable Capital. A Traditional Investment 
Company may also serve as the management company of an SBIC owning and 
control more than 70 percent of the Licensee's Regulatory Capital and 
Leverageable Capital. A non-profit entity which is a Traditional 
Investment Company may only serve as the management company of a 
Licensee and, unlike other Traditional Investment Companies, is limited 
to no more than 70% of the Licensee's Regulatory and Leverageable 
Capital. A Licensee must be a for-profit entity. In determining whether 
a firm is a Traditional Investment Company for purposes of this 
section, SBA will also consider:
    (i) The degree to which the managers of the firm are unrelated to 
and unaffiliated with the investors in the firm or non-profit entity.
    (ii) Whether the managers of the firm are authorized and motivated 
to make investments that, in their independent judgment, are likely to 
produce significant returns to all investors in the firm or non-profit 
entity.
    (iii) Whether the firm or non-profit entity serving as the 
management company of a for-profit SBIC benefits from the use of the 
SBIC through the financial performance of the SBIC.
    (iv) Other related factors.
    (c) * * *
    (1) * * * Such Persons must not be your Associates (except for 
their status as your shareholders, limited partners, or members). * * *
    (2) Look-through for Traditional Investment Company investors. SBA, 
in its sole discretion, may consider the requirement in paragraph 
(c)(1) of this section to be satisfied if at least 30 percent of your 
Regulatory Capital and Leverageable Capital is owned and controlled 
indirectly, through a Traditional Investment Company, by Persons 
unaffiliated with your management.
* * * * *

0
5. Amend Sec.  107.210 by:
0
a. Removing the phrase ``Wind-Up Plan'' in paragraph (a) introductory 
text and adding in its place the phrase ``Wind-down Plan'';
0
b. Revising paragraph (a)(1) introductory text;
0
c. Removing paragraph (a)(2);
0
d. Redesignating paragraph (a)(3) as paragraph (a)(2).
    The revision reads as follows:


Sec.  107.210  Minimum capital requirements for Licensees.

    (a) * * *
    (1) Licensees other than Early Stage SBICs. Except for Early Stage 
SBICs, a Licensee must have Regulatory Capital of at least $5,000,000. 
As an exception to the general rule in this paragraph (a)(1), SBA in 
its sole discretion and based on a showing of special circumstances and 
good cause, which includes applicants that are headquartered in an 
Underlicensed State, may license an applicant with Regulatory Capital 
of at least $3,000,000, but only if the applicant:
* * * * *

0
6. Revise Sec.  107.300 to read as follows:


Sec.  107.300  License application form and fee.

    SBA evaluates license applicants, giving first priority to 
applicants headquartered in Underlicensed States with below median SBIC 
Financing dollars per State, as determined by SBA and published 
periodically in a notice on the SBIC website. Once priority is 
established, such applicants will continue to receive priority 
throughout the licensing process. SBA reviews and processes 
applications in two review phases (initial review and final licensing), 
as follows:
    (a) Initial review. Except as provided in this paragraph (a), SBIC 
applicants must submit a Management Assessment Questionnaire (``MAQ'') 
c and the Initial Licensing Fee, as defined in paragraph (c) of this 
section. An applicant under Common Control with one or more Licensees 
must submit a written request to SBA, and the Initial Licensing Fee, to 
be considered for a license and is exempt from the requirement in this 
paragraph (a) to submit a MAQ, unless otherwise determined by SBA in 
SBA's discretion. Eligible ``Expedited Subsequent Funds'' as described 
in Sec.  107.305(e) are permitted to submit a streamlined ``Short-
Form'' Subsequent Fund MAQ.
    (b) Final licensing. An applicant may proceed to the final 
licensing phase only if notified in writing by SBA that it may do so. 
Following receipt of such notice, in order to proceed to the final 
licensing phase, the applicant must submit a complete license 
application with all required appendices, within the timeframe 
identified by SBA and the Final Licensing Fee, as defined in paragraph 
(c) of this section. If you are seeking to be licensed as a Leveraged 
Licensee and SBA approves your License, SBA will also approve your 
Total Intended Leverage Commitment amount and ratio as defined in Sec.  
107.50 based on the target fund size stated in the MAQ, which means the 
total Leverage commitments available to you for the life of your SBIC, 
subject to the provisions of Sec. Sec.  107.320 and 107.1150. A 
Licensee is permitted to hold multiple fund closings within and for up 
to 12 months of receiving a License to reach the target fund size. SBA 
will then determine the final Total Intended Leverage Commitment which 
is either the dollar amount or ratio to targeted Private Capital 
provided at the Green Light. SBA will determine the Total Private 
Capital Commitment (defined as the total Private Capital committed to a 
Licensee within 12 months after licensure or upon the Licensee's final 
closing, whichever occurs first) amount for the Accrual Debenture SBA 
Share calculation.
    (c) Licensing Fees. SBIC Initial and Final Licensing Fees are non-
refundable fees determined as set forth in paragraphs (c)(1) and (2) of 
this section.
    (1) Initial Licensing Fee. The Initial Licensing Fee is based on 
the applicant's fund sequence, where the fund sequence means the order 
of succession of private equity or private credit funds for the same 
fund management team and same strategy. SBA will determine the 
applicant's fund sequence based on the management team's composition 
and experience as a team. The Initial Licensing Fees are as follows:

                       Table 1 to Paragraph (c)(1)
------------------------------------------------------------------------
                                                              Initial
                      Fund sequence                        licensing fee
------------------------------------------------------------------------
Fund I..................................................          $5,000
Fund II.................................................          10,000

[[Page 46008]]

 
Fund III................................................          15,000
Fund IV+................................................          20,000
------------------------------------------------------------------------

    Example 1 to paragraph (c)(1): If the management team members of 
applicant DEF I consists primarily of the same team members of fund ABC 
II and ABC II represented the second fund for those team members, SBA 
will consider the fund sequence of DEF I as a Fund III, regardless of 
the number in the applicant's name.
    (2) Final Licensing Fee. The Final Licensing Fee is calculated as 
the Final Licensing Base Fee plus 1.25 basis points multiplied by the 
Leverage dollar amount requested by the applicant, where the Final 
Licensing Base Fee is based on the applicant's Fund Sequence as 
follows:

                       Table 2 to Paragraph (c)(2)
------------------------------------------------------------------------
                                                               Final
                      Fund sequence                       licensing base
                                                                fee
------------------------------------------------------------------------
Fund I..................................................         $10,000
Fund II.................................................          15,000
Fund III................................................          25,000
Fund IV+................................................          30,000
------------------------------------------------------------------------

    (3) Resubmission Penalty Fee. The Resubmission Penalty Fee means a 
$10,000 penalty fee assessed to an applicant that has previously 
withdrawn or is otherwise not approved for a license that must be paid 
in addition to the Initial and Final Licensing Fees at the time the 
applicant resubmits its application.
    (4) Inflation Adjustments. SBA annually adjusts the Initial 
Licensing Fee, Final Licensing Base Fee, and Resubmission Penalty Fee 
using the Inflation Adjustment and will publish notification prior to 
such adjustment in the Federal Register identifying the amount of the 
fees.

0
7. Amend Sec.  107.305 by:
0
a. Revising paragraphs (a), (b), and (c);
0
b. Adding a heading to paragraph (d); and
0
c. Adding paragraph (e).
    The revisions and additions read as follows:


Sec.  107.305  Evaluation of license applicants.

* * * * *
    (a) Management qualifications. Management qualifications, including 
demonstrated investment skills and experience as a principal investor, 
or a combination of investment skill and relevant industry operational 
experience; business reputation; adherence to legal and ethical 
standards; record of active involvement in making and monitoring 
investments and assisting portfolio companies; managing a regulated 
business, if applicable; successful history of working as a team; and 
experience in developing appropriate processes for evaluating 
investments and implementing best practices for investment firms.
    (b) Demonstrated investment acumen. Performance of proposed 
investment team's prior relevant industry investments as well as any 
supporting operating experience, including investment returns measured 
both in percentage terms and in comparison to appropriate industry 
benchmarks; the extent to which investments have been realized as a 
result of sales, repayments, or other exit mechanisms; evidence of 
previous investment or operational experience contributing to U.S. 
domestic job creation and, when applicable, demonstrated past adherence 
to statutory and regulatory SBIC program requirements.
    (c) Strategy and fit. Applicant's proposed investment strategy as 
presented in its business plan, including adherence to the Statement of 
Policy as stated in section 102 of the Act, clarity of objectives; 
strength of management's rationale for pursuing the selected strategy; 
compliance with this part and applicable provisions of part 121 of this 
chapter; fit with management's skills and experience; and the 
availability of sufficient resources to carry out the proposed 
strategy. As determined by SBA, a Licensee may not materially deviate 
from the proposed investment strategy after three years of Licensure.
    (d) Structure and economics. ***
    (e) Subsequent fund applicants. (1) Applicants operating an active 
Licensee that meet the following eligibility criteria can apply under 
an ``Expediated Subsequent Fund'' evaluation process. Should an 
applicant fulfill and formally attest to meeting all of the following 
eligibility criteria, the applicant can apply for an ``Expediated 
Subsequent Fund'' evaluation process:
    (i) Consistent strategy and fund size. Targeted Regulatory Capital 
to be raised is <=133% the size of their most recent SBIC fund 
(inflation adjustments will be considered). Same asset class and 
investment strategy as most recent license.
    (ii) Clean regulatory history. No major findings, significant 
``other matters,'' or unresolved ``other matters'' related to licensees 
managed by the principals of applicant in the previous ten years.
    (iii) Consistent limited partnership (LP)-general partnership (GP) 
dynamics. No new limited partner will represent >=33% of the Private 
Capital of the licensee upon reaching final close at target fund size 
or hard cap. The two largest investors in terms of committed capital 
have verbally committed to invest in the new fund pending receipt of 
license. The most recent limited partnership agreement (LPA) of the 
active Licensee and all side letters will have no substantive changes 
for the applicant fund.
    (iv) Investment performance stability. The most recent licensee net 
distributions to paid-in capital (DPI) and net total value to paid-in 
capital (TVPI) TVPI are at or above median vintage year and strategy 
performance benchmarks for the prior three quarters. The principals of 
the applicant are not managing a licensee in default or with high 
Capital Impairment (CIP).
    (v) Consistent or reduced leverage management. The applicant is 
requesting a leverage to Private Capital ratio <= the current or most 
recent SBIC licensee at target fund size or hard cap.
    (vi) Firm stability. Subject to SBA's determination, no material 
changes to the broader firm, to include resignations, terminations, or 
retirements by members of the general partnership, investment 
committee, broader investment team, or key finance and operations 
personnel, subject to paragraph (e)(1)(vii) of this section.
    (vii) Promotions from within. Demonstration of promoting internal 
investment team talent from within the firm/organization sponsoring the 
license.
    (viii) Inclusive equity. Demonstration of appropriate/increased 
sharing of carry and/or management company economics with promoted 
talent or distribution of equitable or increasingly equitable economics 
among the partnership.
    (ix) Federal Bureau of Investigation (FBI) criminal and Internal 
Revenue Service (IRS) background check no findings. The sponsoring 
entity and all principals of the Licensee do not have an FBI criminal 
record and do not have IRS violations from the date of their most 
recent SBIC fund licensure.
    (x) No outstanding or unresolved material litigation matters. No 
outstanding or unresolved litigation matters involving allegations of 
dishonesty, fraud, or breach of fiduciary duty or otherwise requiring a 
report under Sec.  107.660(c) or (d) as to a prior Licensee, the 
prospective Applicant's general partner, or any other person who was 
required by SBA to complete

[[Page 46009]]

a personal history statement in connection with the license 
application.
    (xi) No outstanding tax liens. On the principals applying to manage 
the licensee, on the most recent or active licensee, and on the 
sponsoring entity of the licensee.
    (2) Should an applicant fulfill and formally attest to meeting all 
of the eligibility criteria in paragraph (e)(1) of this section, the 
applicant can submit a streamlined ``Short-Form Subsequent Fund MAQ''.

0
8. Revise Sec.  107.320 to read as follows:


Sec.  107.320  Leverage portfolio diversification.

    To minimize ``cost'' as defined in section 502(5)(A) of the Federal 
Credit Reform Act of 1990, SBA reserves the right to maintain broad 
diversification to mitigate concentration of investment risk in 
approving Leverage commitments for Leveraged Licensees with respect to:
    (a) The year in which they commence operations;
    (b) The geographic location (giving first priority to applicants 
from Underlicensed States with below median SBIC Financing dollars per 
State); and
    (c) The asset class and investment strategy.

0
9. Revise Sec.  107.501 to read as follows:


Sec.  107.501  Identification.

    (a) Publication upon issuance. SBA shall publish in the Federal 
Register the names of SBICs with date of licensure and Total Intended 
Leverage Commitments approved within 30 days of the end of the month of 
licensure.
    (b) Identification as a Licensee. You must display your SBIC 
license in a prominent location. You must also have a listed telephone 
number. Before collecting an application fee or extending Financing to 
a Small Business, you must obtain a written statement from the concern 
acknowledging its awareness that you are ``a Federal licensee under the 
Small Business Investment Act of 1958, as amended.''

0
10. Amend Sec.  107.503 by:
0
a. Revising the last sentence of paragraph (a);
0
b. Adding a sentence at the end of paragraph (b)(2); and
0
c. Revising paragraphs (d)(1) and (4).
    The revisions and addition read as follows:


Sec.  107.503  Licensee's adoption of an approved valuation policy.

    (a) * * * These guidelines may be obtained from the SBIC website.
    (b) * * *
    (2) * * * If you are or applying to be a Non-leveraged Licensee, 
SBA will generally approve a valuation policy that meets GAAP.
* * * * *
    (d) * * *
    (1) If you are a Leveraged Licensee, you must value your Loans and 
Investments at the end of each quarter of your fiscal year, and at the 
end of your fiscal year.
* * * * *
    (4) You must report material adverse changes in valuations at least 
quarterly, within forty-five days following the close of the quarter.
* * * * *

0
11. Revise Sec.  107.504 to read as follows:


Sec.  107.504  Equipment and office requirements.

    (a) Technology. You must have access to technology to securely send 
and receive emails, scan documents, and prepare and submit electronic 
information and reports required by SBA.
    (b) Accessible office. You must maintain an office that is open to 
the public during normal working hours.

0
12. Revise Sec.  107.550 to read as follows:


Sec.  107.550  Prior approval of secured third-party debt of Leveraged 
Licensees.

    (a) Definition. In this section, secured third-party debt means any 
non-SBA debt secured by any of your assets, including secured 
guarantees and other contingent obligations that you voluntarily 
assume, and secured lines of credit.
    (b) General rule. If you are a Leveraged Licensee, you must get 
SBA's written approval before you incur any secured third-party debt or 
refinance any debt with secured third-party debt, including any renewal 
of a secured line of credit, increase in the maximum amount available 
under a secured line of credit, or expansion of the scope of a security 
interest or lien. For purposes of this paragraph (b), ``expansion of 
the scope of a security interest or lien'' does not include the 
substitution of one asset or group of assets for another, provided the 
asset values (as reported on your most recent annual Form 468) are 
comparable.
    (c) Capital Call Line. Without obtaining SBA's written approval, a 
Leveraged Licensee may obtain from a federally regulated financial 
institution, a line of credit (``Capital Call Line'') that meets all of 
the following conditions:
    (1) The maximum amount available under the Capital Call Line is no 
more than your unfunded Regulatory Capital, as reflected on your most 
recent Capital Certificate;
    (2) Your payment obligations under the Capital Call Line may be 
secured, but only by your unfunded Regulatory Capital;
    (3) The lender under the Capital Call Line may have a right to 
debit your depository account(s) at the lender's institution, so long 
as such lender's right to debit is limited to circumstances involving a 
default of your obligation to pay principal, interest, or fees due 
(``Payment Default'') under the Capital Call Line and only to the 
amount of such Payment Default;
    (4) Each borrowing under the Capital Call Line must be repaid, in 
full, within 120 days after it is drawn;
    (5) The term of the Capital Call Line may not exceed 12 months, but 
may be renewable, provided that each renewal does not exceed 12 months 
and you remain in compliance with the conditions of this paragraph (c); 
and
    (6) Consistent with Sec.  107.410, the Capital Call Line contains 
no provision permitting the lender to dictate when capital calls are 
made or otherwise ceding to the lender any control of the Licensee or 
its operations; provided, however, that the Capital Call Line may 
include a provision authorizing the lender, in the event of a Payment 
Default, to endorse, on your behalf, checks and other forms of payment 
in the Lender's possession and to apply the proceeds of such 
instruments to such Payment Default, with unapplied and remaining 
proceeds promptly to be paid to you.
    (d) Conditions for SBA approval. Excluding Capital Call Lines 
defined in paragraph (c) of this section, SBA approval is required for 
secured third-party debt. As a condition of granting such approval 
under this section, SBA may impose such restrictions or limitations as 
it deems appropriate, taking into account your historical performance, 
current financial position, proposed terms of the secured debt and 
amount of aggregate debt you will have outstanding (including 
Leverage). SBA will not favorably consider any requests for approval 
which include a blanket lien on all your assets, or a security interest 
in your investor commitments in excess of 125 percent of the proposed 
borrowing.


Sec.  107.570  [Removed and Reserved]

0
13. Remove and reserve Sec.  107.570.

0
14. Revise the undesignated center heading directly preceding Sec.  
107.585 and Sec.  107.585 to read as follows:

[[Page 46010]]

Distributions and Reductions in Regulatory Capital


Sec.  107.585  Distributions and reductions in Regulatory Capital.

    (a) Non-leveraged Licensees. If you are a Non-leveraged Licensee, 
you may make distributions to your private investors without SBA prior 
approval. At all times, you must retain sufficient Regulatory Capital 
to meet the minimum capital requirements in the Act and in Sec.  
107.210, unless such amounts are in accordance with your SBA approved 
Wind-down Plan (see Sec.  107.590). You must report any reductions of 
Regulatory Capital to SBA within 30 days via an updated Capital 
Certificate (see Sec.  107.300).
    (b) Non-Accrual Leveraged Licensees. If you are a Standard 
Debenture Leveraged Licensee that is also an Early Stage SBIC, you are 
subject to the distributions identified in Sec.  107.1180. If you are a 
Standard Debenture Leveraged Licensee, you may distribute READ to your 
private investors without SBA approval only after considering any 
material adverse changes to your portfolio. You must obtain SBA's prior 
written approval to reduce your Regulatory Capital by more than two 
percent in any fiscal year. Such approved reduction amount may, for a 
period of five years after the reduction, be included in the sum 
determined under Sec.  107.740(a). In seeking SBA's prior written 
approval, you must disclose any material adverse changes or certify 
that you have no material adverse changes and provide an updated Wind-
down Plan. You must retain sufficient Regulatory Capital to meet the 
minimum capital requirements of Sec.  107.210 and sufficient 
Leverageable Capital to avoid having excess Leverage in violation of 
section 303 of the Act and Sec.  107.1150. You must report any 
reductions of Regulatory Capital to SBA within 30 days via an updated 
Capital Certificate (see Sec.  107.300).
    (c) Accrual SBICs and Reinvestor SBICs. If you are an Accrual SBIC 
or Reinvestor SBIC, unless you receive prior approval from SBA for the 
purposes of covering a tax distribution you may only distribute as 
follows:
    (1) Payment of Annual Charges and Accrued Interest. Prior to any 
distributions to your private investors, you must pay to SBA any Annual 
Charges and all accrued interest on outstanding Leverage at the next 
available repayment window but no later than six months following a 
distribution to your private investors. Within six months of any non-
tax distribution to your private investors, you must pay any Annual 
Charges owed to SBA and all accrued interest on your outstanding 
Leverage.
    (2) Calculate SBA's share of distribution. Within six months of any 
non-tax distribution to your private investors, you must make payments 
to SBA on a pro rata basis with any distributions to your private 
investors based on your SBA Total Intended Leverage Commitment relative 
to your Total Private Capital Commitments, inclusive of Qualified Non-
Private Funds, determined within 12 months of Licensure calculated as 
follows: SBA's Share = Total Distributions x [Total Intended Leverage 
Commitment/(Total Intended Leverage Commitment + Total Private Capital 
Commitments)] where:
    (i) Total Distributions means the total amount of distributions 
(whether profit or return of capital) you intend to make after paying 
all accrued interest and Annual Charges plus any prior tax 
distributions.
    (ii) Total Intended Leverage Commitment is as defined in Sec.  
107.300.
    (iii) Total Private Capital Commitments is as defined in Sec.  
107.300.
    (3) Apply SBA Share. You must repay SBA outstanding Leverage in an 
amount no less than SBA's Share to the extent of Outstanding Leverage 
and report the SBA calculation to SBA. If SBA's Share is greater than 
Outstanding Leverage and you have unfunded Leverage commitments, you 
must submit a Leverage commitment cancellation equal to SBA's Share 
minus the SBA Leverage redemption up to the unfunded Leverage 
commitments.
    (4) Distribute to private investors. You must report SBA's Share 
calculation to SBA prior to distributing READ to your private investors 
without SBA approval and only after considering any adverse changes to 
your portfolio. You must pay Annual Charges to SBA prior to 
distributing READ. After repaying all accrued interest, Annual Charges, 
and outstanding Leverage calculated as SBA's Share, you may distribute 
READ to your private investors without SBA approval only after 
considering any adverse changes to your portfolio. You must obtain 
SBA's prior written approval to reduce your Regulatory Capital by more 
than two percent in any fiscal year. Such approved reduction amount 
may, for a period of five years after the reduction, be included in the 
sum determined under Sec.  107.740(a). In seeking SBA's prior written 
approval, you must disclose any material adverse changes or certify 
that you have no material adverse changes and provide an updated Wind-
down Plan. You must retain sufficient Regulatory Capital to meet the 
minimum capital requirements of Sec.  107.210 and sufficient 
Leverageable Capital to avoid having excess Leverage in violation of 
section 303 of the Act and Sec.  107.1150. You must report any 
reductions of Regulatory Capital to SBA within 30 days. Prior to any 
reduction in Regulatory Capital, if you have made a tax distribution, 
you must make a distribution to SBA pursuant to the formula set forth 
in paragraph (c)(2) of this section, as if you had made a non-tax 
distribution.
    (5) Report distribution to SBA. You must report to SBA the 
distribution, the calculations, and the amounts distributed to each 
party as part of your annual and quarterly Form 468 (see Sec. Sec.  
107.630 and 107.1220).
    Example 1 to paragraph (c): Your Total Intended Leverage Commitment 
is $50 million, and your Total Private Capital Commitments are $25 
million. You currently have $25 million in Outstanding Leverage, $25 
million in unfunded Leverage commitments, and $15 million in 
Leverageable Capital. You owe $1 million in accrued interest and Annual 
Charges. You have $61 million to distribute.
    Step 1: Payment of Annual Charges and all accrued interest. You 
would first pay the $1 million in accrued interest and Annual Charges.
    Step 2: Calculate SBA's Share of Distribution. SBA's share is 
calculated as: $60 million x [$50 million/($50 million + $25 million)] 
= $40 million.
    Step 3: Apply SBA Share. You would repay $25 million in Outstanding 
Leverage and cancel $15 million of your unfunded Leverage commitments.
    Step 4: Distribute to Private Investors. You would distribute $35 
million to Private Investors.
    Step 5: Report Distribution to SBA. You would then report the 
distribution to SBA, detailing the amounts and calculations from steps 
1 through 4 of this example 1.


Sec.  107.590  [Amended]

0
15. Amend Sec.  107.590 in paragraph (c) introductory text by removing 
the phrase ``Wind-up Plan'' wherever it appears and adding in its place 
the phrase ``Wind-down Plan''.

0
16. Amend Sec.  107.620 by:
0
a. Redesignating paragraphs (b)(2) through (4) as paragraphs (b)(3) 
through (5), respectively; and
0
b. Adding a new paragraph (b)(2).
    The addition reads as follows:


Sec.  107.620  Requirements to obtain information from Portfolio 
Concerns.

* * * * *
    (b) * * *
    (2) Demographic information on the Portfolio Concern's ownership is

[[Page 46011]]

requested for reporting purposes only and is on a voluntary basis.
* * * * *

0
17. Amend Sec.  107.630 by revising the last sentence of paragraph (a) 
introductory text and paragraph (d) and adding paragraph (e) to read as 
follows:


Sec.  107.630  Requirement for Licensees to file financial statements 
with SBA (Form 468).

    (a) * * * You must file Annual Form 468 within 90 calendar days of 
the end of your fiscal year.
* * * * *
    (d) Reporting of economic impact information on Form 468. Your 
annual filing of SBA Form 468 must include an assessment of the 
economic impact of each Financing, specifying the full-time equivalent 
net jobs created and total jobs created or retained, and the impact of 
the Financing on the revenues and profits of the business and on taxes 
paid by the business and its employees.
    (e) Fund management contact and optional demographic information. 
The Licensee shall provide and update management contact information. 
Demographic information is requested for reporting purposes only and on 
a voluntary basis.

0
18. Revise Sec.  107.640 to read as follows:


Sec.  107.640  Requirement to file Portfolio Financing Reports (SBA 
Form 1031).

    For each Financing of a Small Business (excluding guarantees), you 
must submit a Portfolio Financing Report on SBA Form 1031 within 30 
calendar days of the end of the calendar year quarter (March, June, 
September, and December) following the closing date of the Financing. 
SBA also permits Form 1031s for portfolio company financings to be 
disaggregated and submitted individually for each portfolio company 
within 30 days of the closing of a Financing or otherwise submitted on 
a more frequent basis. If you are on the Watchlist, SBA may require 
more frequent reporting (see Sec.  107.1850).

0
19. Revise Sec.  107.650 to read as follows:


Sec.  107.650  Requirement to report portfolio valuations to SBA.

    You must determine the value of your Loans and Investments in 
accordance with Sec.  107.503. You must report such valuations to SBA 
within 90 calendar days of the end of the fiscal year in the case of 
annual valuations, and if you are a Leveraged Licensee within 45 
calendar days following the close of other reporting periods. You must 
report material adverse changes in valuations at least quarterly, 
within 45 calendar days following the close of the quarter.

0
20. Amend Sec.  107.660 by revising paragraph (a) to read as follows:


Sec.  107.660  Other items required to be filed by Licensee with SBA.

    (a) Reports to owners. You must give SBA a copy of any report you 
furnish to your investors, including any prospectus, quarterly or 
annual valuation data, materials presented to investors during any 
meetings (including any annual meeting), fund management demographic 
information, letter, or other publication concerning your financial 
operations or those of any Portfolio Concern no later than 30 calendar 
days after you submit the report to your private investors.
* * * * *

0
21. Amend Sec.  107.720 by revising paragraphs (a)(2) and (i)(1) to 
read as follows:


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

    (a) * * *
    (2) Exceptions--(i) Reinvestor SBICs. Reinvestor SBIC means a 
Section 301(c) Partnership licensed as a Reinvestor SBIC under Sec.  
107.300 and approved by SBA at the time of licensing to issue Accrual 
Debentures and shall provide a meaningful percentage of Equity Capital 
Investments to underserved Small Business reinvestors (except banks, 
savings and loans not insured by agencies of the Federal Government, 
and agricultural credit companies) that make direct financings solely 
to Small Businesses with at least 50% of employees in the United 
States, Small Businesses Concerns headquartered in the United States, 
owned and controlled by United States citizens and/or entities, and 
Small Businesses eligible for investment based on SBA size standards 
defined in Sec.  121.301 of this chapter or SBIC alternative size 
standards defined in Sec.  121.301(c) of this chapter at the time of 
initial investment. SBA may require that each Reinvestor SBIC obtain 
from each such Small Business reinvestor a written agreement that such 
Small Business reinvestor has only provided and will only provide 
financing in compliance with this paragraph (a)(2)(i) and will provide 
to such Reinvestor SBIC information reasonably necessary to verify 
compliance with this paragraph (a)(2)(i).
    (ii) Equity Capital Investments to Disadvantaged Businesses. 
Licensees may provide Equity Capital Investments to Disadvantaged 
Businesses that are relenders or reinvestors (except banks or savings 
and loans not insured by agencies of the Federal Government, and 
agricultural credit companies).
* * * * *
    (i) * * *
    (1) To purchase stock in or provide capital to a Licensee, provided 
that a Reinvestor SBIC is permitted to make Equity Capital Investments 
in Non-leveraged Licensees.
* * * * *

0
22. Amend Sec.  107.730 by:
0
a. Revising paragraphs (a)(1) and (d)(3)(iii); and
0
b. Removing paragraph (d)(3)(iv).
    The revisions read as follows:


Sec.  107.730  Financings which constitute conflicts of interest.

    (a) * * *
    (1) Provide Financing to any of your Associates, except for when 
the Small Business that receives the Financing is your Associate, 
pursuant to paragraph (8)(ii) of Associate as defined in Sec.  107.50, 
only because an investment fund that is your Associate holds a 10% or 
greater equity interest in the Small Business and either of the 
following conditions is met:
    (i) You and the Associate investment fund previously invested in 
the Small Business at the same time and on the same terms and 
conditions; and you and the Associate investment fund are providing 
follow-on financing to the Small Business at the same time, on the same 
terms and conditions, and in the same proportionate dollar amounts as 
your respective investments in the previous round(s) of financing.
    Example 1 to paragraph (a)(1)(i): If you invested $2 million and 
your Associate invested $1 million in the previous round, your 
respective follow-on investments would be in the same 2:1 ratio.
    (ii) An independent third party is investing in the Small Business 
at the same time as the Licensee and on the same terms and conditions 
as the Licensee and represents a significant portion of the Financing; 
provided, that if the Licensee has a prior Financing in such Small 
Business, a Licensee's position in such prior Financing may not be 
diminished or diluted to the benefit of an Associate.
* * * * *
    (d) * * *
    (3) * * *
    (iii) You are a Non-leveraged Licensee, and your Associate either 
is not a Licensee or is a Non-leveraged Licensee.
* * * * *

0
23. Revise Sec.  107.810 to read as follows:

[[Page 46012]]

Sec.  107.810  Financing in the form of Loans.

    You may make Loans to Small Businesses. A Loan means a transaction 
evidenced by a debt instrument with no provision for you to acquire 
Equity Securities. Loans may include Revenue-Based Financing or 
Revenue-Based Loans in which you provide financing to a Small Business 
in exchange for a percentage of the Small Business's anticipated future 
revenue which shall not exceed 19% of the Small Business's annual gross 
revenue.

0
24. Amend Sec.  107.830 by revising paragraph (c)(2) to read as 
follows:


Sec.  107.830  Minimum duration/term of financing.

* * * * *
    (c) * * *
    (2) Prepayment. You must permit voluntary prepayment of Loans and 
Debt Securities by the Small Business. You must obtain SBA's prior 
written approval of any restrictions on the ability of the Small 
Business to prepay other than the imposition of a reasonable prepayment 
penalty under paragraph (c)(3) of this section. For purposes of 
evaluating prepayment restrictions under this section, requirements to 
apply prepayments pro rata among a group of lenders participating in 
such Financing that is pari passu in rights to payment will not be 
deemed to constitute a restriction on prepayments.
* * * * *

0
25. Amend Sec.  107.1000 by revising the section heading and 
introductory text to read as follows:


Sec.  107.1000  Non-leveraged Licensees--exceptions to this part.

    The regulatory exceptions in this section apply to Non-leveraged 
Licensees.
* * * * *

0
26. Amend Sec.  107.1120 by revising paragraph (c)(1) to read as 
follows:


Sec.  107.1120  General eligibility requirements for Leverage.

* * * * *
    (c) * * *
    (1) If you were licensed after September 30, 1996, under the 
exception in Sec.  107.210(a)(1), you will not be eligible for Leverage 
until you have Regulatory Capital of at least $5,000,000, unless you 
were licensed because you are headquartered in an Underlicensed State.
* * * * *

0
27. Amend Sec.  107.1130 by revising the section heading and paragraph 
(d)(1) to read as follows:


Sec.  107.1130  Leverage fees and Annual Charges.

* * * * *
    (d) * * *
    (1) Debentures. You must pay to SBA an Annual Charge, not to exceed 
1.38 percent per annum, on the outstanding amount of your Debentures, 
payable under the same terms and conditions as the interest on the 
Debentures. For Leverage issued pursuant to Leverage commitments 
approved on or after October 1, 2023, the Annual Charge, established 
and published, shall not be less than 0.10 percent per annum, subject 
to the following provisions:
    (i) For Leverage issued pursuant to Leverage commitments approved 
on or after October 1, 2024, the Annual Charge, established and 
published, shall not be less than 0.20 percent per annum.
    (ii) For Leverage issued pursuant to Leverage commitments approved 
on or after October 1, 2025, the Annual Charge, established and 
published, shall not be less than 0.25 percent per annum.
    (iii) For Leverage issued pursuant to Leverage commitments approved 
on or after October 1, 2026, the Annual Charge, established and 
published, shall not be less than 0.30 percent per annum.
    (iv) For Leverage issued pursuant to Leverage commitments approved 
on or after October 1, 2027, the Annual Charge, established and 
published annually, shall not be less than 0.35 percent per annum.
    (v) For Leverage issued pursuant to Leverage commitments approved 
on or after October 1, 2028, the Annual Charge, established and 
published annually, shall not be less than 0.40 percent per annum.
* * * * *

0
28. Amend Sec.  107.1150 by:
0
a. Revising the section heading;
0
b. Removing the phrase ``Section 301(c) Licensee'' in the introductory 
text and adding in its place the phrase ``Leveraged Licensee''; and
0
c. Revising paragraphs (a) and (b).
    The revisions read as follows:


Sec.  107.1150  Maximum amount of Leverage.

* * * * *
    (a) Individual Licensee. Subject to SBA's credit policies, if you 
are a Leveraged Licensee and not an Accrual SBIC, the maximum amount of 
Leverage you may have outstanding at any time is the Individual 
Maximum. If you are an Accrual SBIC, the maximum amount of Leverage and 
accrued interest you may have outstanding at any time is the Individual 
Maximum. The Individual Maximum means the lesser of:
    (1) 300 percent of your Leverageable Capital;
    (2) 100 percent of your Leverageable Capital if you have less than 
$5 Million in Regulatory Capital and you were Licensed because you are 
headquartered in an Underlicensed State; or
    (3) The maximum Leverage available to a single Licensee under 
section 303(b) of the Act.
    (b) Multiple Licensees under Common Control. Subject to SBA's 
credit policies, two or more Licenses under Common Control may have 
maximum aggregate outstanding Leverage as permitted under the Act. For 
any Accrual SBIC or Reinvestor SBIC under Common Control, the aggregate 
accrued interest associated with Accrual Debentures will be included in 
determining whether this maximum has been exceeded. However, for any 
Leverage draw(s) by one or more such Licensees that would cause the 
aggregate outstanding Leverage to exceed the Individual Maximum, each 
of the Licensees under Common Control must certify that it does not 
have a condition of Capital Impairment. See also Sec.  107.1120(d).
    Example 1 to paragraph (b): If a fund manager has both a regular 
Leveraged Licensee with $250 million in outstanding Leverage and an 
Accrual SBIC with $50 million in Accrual Debentures that could accrue 
interest of $25 million at maturity, SBA will apply the principal from 
the regular Leverage plus the $50 million from the Accrual Debenture 
plus the $25 million in potential accrued interest for a combined total 
of $325 million.
* * * * *

0
29. Revise Sec.  107.1220 to read as follows:


Sec.  107.1220  Requirement for Licensee to file quarterly financial 
statements.

    Leveraged Licensees must submit to SBA a Financial Statement on SBA 
Form 468 (Short Form) as of the close of each quarter of your fiscal 
year (other than the fourth quarter, which is covered by your annual 
filing of Form 468 under Sec.  107.630(a)). You must file this form 
within 45 days after the close of the quarter. You will not be eligible 
for a draw if you are not in compliance with this section.


Sec.  107.1540  [Amended]

0
30. Amend Sec.  107.1540 by removing paragraphs (a) and (b).

0
31. Revise the heading for subpart J to read as follows:

Subpart J--Licensee's Noncompliance

0
32. Amend Sec.  107.1830 by revising paragraph (e) to read as follows:

[[Page 46013]]

Sec.  107.1830  Licensee's Capital Impairment--definition and general 
requirements.

* * * * *
    (e) Quarterly computation requirement and procedure. SBA will 
determine whether you have a condition of Capital Impairment as of the 
end of each fiscal quarter. If SBA finds you capitally impaired, they 
will notify you.
* * * * *

0
33. Amend Sec.  107.1840 by revising paragraphs (a), (b) introductory 
text, (c) heading, (c)(1), and (d)(6) to read as follows:


Sec.  107.1840  Computation of Licensee's Capital Impairment 
Percentage.

    (a) General. This section contains the procedures SBA will use to 
determine your Capital Impairment Percentage. SBA will compare your 
Capital Impairment Percentage to the maximum permitted under Sec.  
107.1830(c) to determine whether you have a condition of Capital 
Impairment.
    (b) Preliminary impairment test. If you satisfy the preliminary 
impairment test, your Capital Impairment Percentage is zero and SBA 
will not have to perform any more procedures in this section. 
Otherwise, SBA will continue with paragraph (c) of this section. You 
satisfy the test if the following amounts are both zero or greater:
* * * * *
    (c) How to compute Capital Impairment Percentage. (1) If you have 
an Unrealized Gain on Securities Held, SBA will compute your Adjusted 
Unrealized Gain using paragraph (d) of this section. If you have an 
Unrealized Loss on Securities Held, SBA will continue with paragraph 
(c)(2) of this section.
* * * * *
    (d) * * *
    (6) If any securities that are the source of either Class 1 or 
Class 2 Appreciation are pledged or encumbered in any way, SBA will 
reduce the Adjusted Unrealized Gain computed in paragraph (d)(5) of 
this section by the amount of the related borrowing or other 
obligation, up to the amount of the Unrealized Appreciation on the 
securities.

0
34. Amend Sec.  107.1845 by revising paragraph (a) introductory text to 
read as follows:


Sec.  107.1845  Determination of Capital Impairment Percentage for 
Early Stage SBICs.

* * * * *
    (a) To determine your Class 2 Appreciation under Sec.  
107.1840(d)(3), SBA will use the following provisions instead of Sec.  
107.1840(d)(3)(iii):
* * * * *

0
35. Revise Sec.  107.1850 to read as follows:


Sec.  107.1850  Watchlist.

    Under certain circumstances, SBA may place Licensees on a Watchlist 
as a process to increase proactive communication between SBA and the 
Licensee to help mitigate the potential for a future default or 
significant regulatory violation. Being on a Watchlist means that SBA 
has determined, based on certain triggers discussed in this section, a 
Licensee will provide a heightened level of reporting and communication 
with SBA.
    (a) Watchlist triggers. SBA may place you on the Watchlist for any 
of the following:
    (1) You perform an investment that is a direct violation of your 
fund's stated investment policy as identified in its limited 
partnership agreement (or other governing agreement) or as presented to 
SBA in its license application under Sec.  107.300.
    (2) The key person clause in your limited partnership agreement (or 
other governing agreement) is invoked due to a change in personnel of 
management team members identified as key persons.
    (3) You or your General Partner has been named as a party in 
litigation proceedings brought by a Federal agency, involving felony 
charges, or allegations of dishonesty, fraud, or breach of fiduciary 
duty.
    (4) You have violated a material provision in your limited 
partnership agreement (or other governing agreement) or any side letter 
agreement.
    (5) You rank in the bottom quartile for the primary strategy 
benchmark, as identified by the Licensee at the time of licensure, by 
vintage year, defined as the year in which you were licensed as an 
SBIC, after three years based on the private investor's total value to 
paid-in capital (TVPI), where TVPI is calculated as (cumulative 
distributions to private investors plus net asset value minus expenses 
and carried interest)/cumulative private investor paid in capital.
    (6) Your leverage coverage ratio (LCR) falls below 1.25, where LCR 
is calculated as (unfunded Regulatory Capital commitments plus net 
asset value minus outstanding Leverage)/outstanding Leverage or a 
Capital Impairment Percentage approaching your threshold set forth in 
Sec.  107.1830.
    (7) You default on your interest payment and fail to pay within 30 
days of the date it is due. (Note: This event represents an event of 
default under Sec.  107.1810(f) for which SBA maintains its rights 
under Sec.  107.1810(g) if the Licensee does not cure to SBA's 
satisfaction.)
    (8) Outstanding or unresolved regulatory matters.
    (b) Requirements for Licensees on the Watchlist. If SBA places you 
on the Watchlist, you will be required to comply with any or all of the 
following:
    (1) You must submit Portfolio Company Financing Reports (SBA Form 
1031s), required under Sec.  107.640, within 30 calendar days of the 
financing date.
    (2) You must participate in monthly portfolio reviews with SBA.
    (3) You must file quarterly valuation reports on specific or all of 
your portfolio company holdings, as requested by SBA.
    (4) You must submit a letter formally requesting whether you may 
submit a request for a subsequent fund if you are currently on the 
Watchlist or have managed any Licensee on a Watchlist within the last 
12 months. If you have already submitted a request or are otherwise in 
the Licensing process (see Sec.  107.300), SBA may suspend processing 
your request until it is satisfied that SBA's concerns are resolved or 
otherwise disapprove your request for a subsequent fund. SBA maintains 
the right to deny approval of any request to submit a subsequent fund 
request or any subsequent fund request submitted under Sec.  107.300.
    (c) Removal from the Watchlist. SBA will remove you from the 
Watchlist if the event that triggered your addition to the Watchlist 
(see paragraph (a) in this section) is resolved to SBA's satisfaction. 
Accordingly, SBA may require any or all of the following resolutions:
    (1) Successful completion of a portfolio review to confirm 
compliance of your adherence to your investment policy.
    (2) SBA's written approval of your key person resolution.
    (3) SBA's written acknowledgement of pending litigation.
    (4) SBA's written consent to the resolution of the LPA or side 
letter violation.
    (5) Two quarters of performance above a bottom quartile industry 
benchmark based on the TVPI by vintage year and strategy, as calculated 
under paragraph (a) of this section.
    (6) Two quarters of consistent reporting of your LCR, as calculated 
under paragraph (a) of this section, exceeding 1.25.
    (7) You are current on your Leverage interest payments.

[[Page 46014]]

    (8) A completed regulatory examination acceptable to SBA.
    (d) Watchlist communications--(1) Notification to Licensee. If you 
trigger any of the events under paragraph (a) of this section, SBA will 
notify you in writing that you have been placed on the Watchlist, 
identify the event(s) which triggered your placement on the Watchlist, 
the actions you must take as noted under paragraph (b) of this section, 
and the remedies as identified under paragraph (c) of this section.
    (2) Watchlist status disclosure. SBA will not disclose your 
Watchlist status publicly.
    (3) Removal from Watchlist status notification. SBA will provide 
you with written notice after SBA determines that you have resolved all 
matter identified in your notification letter and satisfied the 
applicable requirements set forth in paragraph (c) of this section.

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
36. The authority citation for part 121 is revised to read as follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, and 
694a(9).

0
37. Amend Sec.  121.103 by revising paragraph (b)(5)(vi) to read as 
follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (b) * * *
    (5) * * *
    (vi) Entities determined by SBA to be Traditional Investment 
Companies under 13 CFR 107.150(b)(2) and private funds exempt from 
registration under section 3(c)(1) or 3(c)(7) of the 1940 Act.
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-13981 Filed 7-13-23; 11:15 am]
BILLING CODE 8026-09-P