13 CFR Part 107 — Small Business Investment Companies

PART 107—SMALL BUSINESS INVESTMENT COMPANIES Authority: 15 U.S.C. 662, 681-687, 687b-h, 687k-m. Source: 61 FR 3189, Jan. 31, 1996, unless otherwise noted. Subpart A—Introduction to Part 107 § 107.20 Legal basis and applicability of this part 107. (a) The regulations in this part implement Title III of the Small Business Investment Act of 1958, as amended. All Licensees must comply with all applicable regulations, accounting guidelines and valuation guidelines for Licensees. (b) Provisions of this part which are not mandated by the Act shall not supersede existing State law. A party claiming that a conflict exists shall submit an opinion of independent counsel, citing authorities, for SBA's resolution of the issues involved. § 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. [88 FR 46005, July 18, 2023] § 107.30 Amendments to Act and regulations. A Licensee shall be subject to all existing and future provisions of the Act and parts 107 and 112 of title 13 of the Code of Federal Regulations. § 107.40 How to read this part 107. (a) Center Headings. (b) Capitalizing defined terms. (c) The pronoun “you” as used in this part 107 means a Licensee or license applicant, as appropriate, unless otherwise noted. Subpart B—Definition of Terms Used in Part 107 § 107.50 Definition of terms. Accrual Debenture Accrual Small Business Investment Company (“Accrual SBIC”) Accumulated Prioritized Payments Act Adjustments Affiliate Affiliates Annual Charge Annual Charge means an annual fee on the principal amount of outstanding Debentures which is payable to SBA by Licensees, subject to the terms and conditions set forth in §§ 107.585 and 107.1130(d). Articles Assistance Assisted Associate (1)(i) An officer, director, employee or agent of a Corporate Licensee; (ii) A Control Person, employee or agent of a Partnership Licensee; (iii) An Investment Adviser/Manager of any Licensee, including any Person who contracts with a Control Person of a Partnership Licensee to be the Investment Adviser/Manager of such Licensee; or (iv) Any Person regularly serving a Licensee on retainer in the capacity of attorney at law. (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. (3) Any officer, director, partner (other than a limited partner), manager, agent, or employee of any Associate described in paragraph (1) or (2) of this definition. (4) Any Person that directly or indirectly Controls, or is Controlled by, or is under Common Control with, a Licensee. (5) Any Person that directly or indirectly Controls, or is Controlled by, or is under Common Control with, any Person described in paragraphs (1) and (2) of this definition. (6) Any Close Relative of any Person described in paragraphs (1),(2), (4), and (5) of this definition. (7) Any Secondary Relative of any Person described in paragraphs (1), (2), (4), and (5) of this definition. (8) Any concern in which— (i) Any person described in paragraphs (1) through (6) of this definition is an officer; general partner, or managing member; or (ii) Any such Person(s) singly or collectively Control or own, directly or indirectly, an equity interest of at least 10 percent (excluding interests that such Person(s) own indirectly through ownership interests in the Licensee). (9) Any concern in which any Person(s) described in paragraph (7) of this definition singly or collectively own (including beneficial ownership) a majority equity interest, or otherwise have Control. As used in this paragraph (9), “collectively” means together with any Person(s) described in paragraphs (1) though (7) of this definition. (10) For the purposes of this definition, if any Associate relationship described in paragraphs (1) through (7) of this definition exists at any time within six months before or after the date that a Licensee provides Financing, then that Associate relationship is considered to exist on the date of the Financing. Capital Call Line Capital Impairment Central Registration Agent CRA Charge Close Relative (1) A current or former spouse; (2) A father, mother, guardian, brother, sister, son, daughter; or (3) A father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Combined Capital Commitment Common Control Control Control Person (1) A general partner of a Partnership Licensee; (2) Any Person serving as the general partner, officer, director, or manager (in the case of a limited liability company) of any entity that controls a Licensee, either directly or through an intervening entity; (3) Any Person that— (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, (4) Any Person that controls or owns, directly or through an intervening entity, at least 50 percent of a Partnership Licensee or any entity described in paragraphs (1) or (2) of this definition. Corporate Licensee. Cost of Money Critical Minerals Critical Technology Debenture Rate Debentures Debt Securities Disadvantaged Business Distributable Securities (1) The securities (which may include securities that are salable pursuant to the provisions of Rule 144 (17 CFR 230.144) under the Securities Act of 1933, as amended) are salable immediately without restriction under Federal and state securities laws; (2) The securities are of a class: (i) Which is listed and registered on a national securities exchange, or (ii) For which quotation information is disseminated in the National Association of Securities Dealers Automated Quotation System and as to which transaction reports and last sale data are disseminated pursuant to Rule 11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities Exchange Act of 1934, as amended; and (3) The quantity of such securities to be distributed to SBA can be sold over a reasonable period of time without having an adverse impact upon the price of the security. Distribution Early Stage SBIC Earmarked Assets Earmarked Profit (Loss) Earned Prioritized Payments Energy Saving Activities (1) Manufacturing or research and development of products, integral product components, integral material, or related software that meet one or more of the following: (i) Improves residential energy efficiency as demonstrated by meeting Department of Energy or Environmental Protection Agency criteria for use of the Energy Star trademark label; (ii) Improves commercial energy efficiency as demonstrated by being in the upper 25% of efficiency for all similar products as designated by the Department of Energy's Federal Energy Management Program; (iii) Improves automobile efficiency or reduces consumption of non-renewable fuels through the use of advanced batteries, power electronics, or electric motors; advanced combustion engine technology; alternative fuels; or advanced materials technologies, such as lightweighting; (iv) Improves industrial energy efficiency through combined heat and power (CHP) prime mover or power generation technologies, heat recovery units, absorption chillers, desiccant dehumidifiers, packaged CHP systems, more efficient process heating equipment, more efficient steam generation equipment, heat recovery steam generators, or more efficient use of water recapture, purification and reuse for industrial application; (v) Advances commercialization of technologies developed by recipients of awards from the Department of Energy under the Advanced Research Projects Agency—Energy, Small Business Innovation Research, or Small Business Technology Transfer programs; (vi) Reduces the consumption of non-renewable energy by providing renewable energy sources, as demonstrated by meeting the standards, applicable to the year in which the investment is made, for receiving a Renewable Electricity Production Tax Credit as defined in Internal Revenue Code Section 45 or an Energy Credit as defined in Internal Revenue Code Section 48; (vii) Reduces the consumption of non-renewable energy for electric power generation as described in Internal Revenue Code Section 48(c)(1)(A) by providing highly efficient energy conversion systems that can use renewable or non-renewable fuel through fuel cells; or (viii) Improves electricity delivery efficiency by supporting one or more of the smart grid functions as identified in 42 U.S.C. 17386(d), by means of a product, service, or functionality that serves one or more of the following smart grid operational domains: Equipment manufacturing, customer systems, advanced metering infrastructure, electric distribution systems, electric transmission systems, storage systems, and cyber security. (2) Installation and/or inspection services associated with the deployment of energy saving products as identified by meeting one or more of the following standards: (i) Deploys products that qualify, in the year in which the investment is made, for installation-related Federal Tax Credits for Residential Consumer Energy Efficiency; (ii) Deploys products related to commercial energy efficiency as demonstrated by deploying commercial equipment that is in the upper 25% of efficiency for all similar products as designated by the Department of Energy's Federal Energy Management Program; (iii) Deploys combined heat and power products, goods, or services; (iv) Deploys products that qualify, in the year in which the investment is made, for receiving a Renewable Electricity Production Tax Credit as defined in Internal Revenue Code Section 45 or an Energy Credit as defined in Internal Revenue Code Section 48; or (v) Deploys a product, service, or functionality that improves electricity delivery efficiency by supporting one or more of the smart grid functions as identified in 42 U.S.C. 17386(d), and that serves one or more of the following smart grid operational domains: Equipment manufacturing, customer systems, advanced metering infrastructure, electric distribution systems, electric transmission systems, or grid cyber security. (3) Auditing or consulting services performed with the objective of identifying potential improvements of the type described in paragraph (1) or (2) of this definition. (4) Other manufacturing, service, or research and development activities that use less energy to provide the same level of energy service or reduce the consumption of non-renewable energy by providing renewable energy sources, as determined by SBA. A Licensee must obtain such determination in writing prior to providing Financing to a Small Business. SBA will consider factors including but not limited to: (i) Results of energy efficiency testing performed in accordance with recognized professional standards, preferably by a qualified third-party professional, such as a certified energy assessor, energy auditor, or energy engineer; (ii) Patents or grants awarded to or licenses held by the Small Business related to Energy Saving Activities listed in subsection (1) or (2) above; (iii) For research and development of products or services that are anticipated to reduce the consumption of non-renewable energy, written evidence from an independent, certified third-party professional of the feasibility, commercial potential, and projected energy savings of such products or services; and (iv) Eligibility of the product or service for a Federal tax credit cited in this definition that is not available in the year in which the investment is made, but was available in a previous year. Energy Saving Qualified Investment (1) Is made by a Licensee licensed after September 30, 2008; (2) Is in the form of a Loan, Debt Security, or Equity Security, each as defined in this section; (3) Is made to a Small Business that is primarily engaged in Energy Saving Activities. A Licensee must obtain a determination from SBA prior to the provision of Financing as to whether a Small Business is primarily engaged in Energy Saving Activities. SBA will consider the distribution of revenues, employees and expenditures, intellectual property rights held, and Energy Saving Activities described in a business plan presented to investors as part of a formal solicitation in making its determination. However, a Small Business is presumed to be primarily engaged in Energy Saving Activities, and no pre-Financing determination by SBA is required, if: (i) The Small Business derived at least 50% of its revenues during its most recently completed fiscal year from Energy Saving Activities; or (ii) The Small Business will utilize 100% of the Financing proceeds received from a Licensee to engage in Energy Saving Activities. Equity Capital Investments Equity Securities Final Licensing Fee Financing Financed (1) Loans; (2) Debt Securities; (3) Equity Securities; (4) Guarantees; or (5) Purchases of securities of a Small Business through or from an underwriter (see § 107.825). GAAP Guaranty Agreement Includible Non-Cash Gains Inflation Adjustment (1) Multiply the result by the current fee; and (2) Round to the nearest $100. Initial Licensing Fee Institutional Investor (1) Entities. (i) A State or National bank, trust company, savings bank, or savings and loan association. (ii) An insurance company. (iii) A 1940 Act Investment Company or Business Development Company (each as defined in the Investment Company Act of 1940, as amended (15 U.S.C. 8a-1 et seq. (iv) A holding company of any entity described in paragraph (1)(i), (ii) or (iii) of this definition. (v) An employee benefit or pension plan established for the benefit of employees of the Federal government, any State or political subdivision of a State, or any agency or instrumentality of such government unit. (vi) An employee benefit or pension plan (as defined in the Employee Retirement Income Security Act of 1974, as amended (Pub. L. 93-406, 88 Stat. 829), excluding plans established under section 401(k) of the Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended). (vii) A trust, foundation or endowment exempt from Federal income taxation under the Internal Revenue Code of 1986, as amended. (viii) A corporation, partnership or other entity with a net worth (exclusive of unfunded commitments from investors) of more than $10 million. (ix) A State, a political subdivision of a State, or an agency or instrumentality of a State or its political subdivision. (x) An entity managed by an SEC regulated Registered Investment Adviser in good standing, provided the Licensee's limited partnership agreement (or other governing agreement) contains sufficient provisions to ensure collectability. (xi) Any other entity that SBA determines to be an Institutional Investor. (2) Individuals. (A) An individual who is an Accredited Investor (as defined in the Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose commitment to the Licensee is backed by a letter of credit from a State or National bank acceptable to SBA. (B) An individual whose personal net worth is at least $2 million and at least ten times the amount of his or her commitment to the Licensee. The individual's personal net worth must not include the value of any equity in his or her most valuable residence. (C) An individual whose personal net worth (determined in accordance with paragraph (2)(i)(B) of this definition) is at least $10 million. (ii) Any individual who is not a permanent resident of the United States but who otherwise satisfies paragraph (2)(i) of this definition provided Investment Adviser/Manager Lending Institution Leverage 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. Leverageable Capital Leveraged Licensee Licensee LMI Enterprise (1) A Small Business that has at least 50% of its employees or tangible assets located in LMI Zone(s) or in which at least 35% of the full-time employees have primary residences in LMI Zone(s), in either case determined as of the time of application for SBIC financing; or (2) A Small Business that does not meet the requirements of paragraph (1) of this definition as of the time of application for SBIC financing but that certifies at such time that it intends to meet the requirements within 180 days after the closing of the SBIC financing. A Small Business qualifying under this paragraph (2) will no longer be an LMI Enterprise as of the 180th day after the closing of the SBIC financing unless, on or before such date, at least 50% of its employees or tangible assets are located in LMI Zones or at least 35% of its full-time employees have primary residences in LMI Zones. LMI Investment LMI Zone Loan Loans and Investments Management Expenses 1940 Act Company 1980 Act Company Non-leveraged Licensee Original Issue Price Participating Securities Partnership Licensee. Payment Date (1) For a Participating Securities issuer, each February 1, May 1, August 1, and November 1 during the term of a Participating Security, or (2) For an Early Stage SBIC, each March 1, June 1, September 1, and December 1 during the term of a Debenture. Person Pool Portfolio Portfolio Concern Prior Fund Prioritized Payments Private Capital Profit Participation Publicly Traded and Marketable et seq. Qualified Non-private Funds Redemption Price Regulatory Capital (1) General. Regulatory Capital (2) Exclusion of questionable commitments. provided, however, Reinvestor SBIC Retained Earnings Available for Distribution (READ) Revenue-Based Financing Revenue-Based Loan SBA SBIC SBIC website www.sba.gov/sbic, SBICCT Secondary Relative (1) A grandparent, grandchild, or any other ancestor or lineal descendent who is not a Close Relative; (2) An uncle, aunt, nephew, niece, or first cousin; or (3) A spouse of any person described in paragraph (1) or (2) of this definition. Section 301(c) Licensee Section 301(d) Licensee Short-term Financing Small Business Smaller Enterprise Start-up Financing (1) Has not had sales exceeding $3,000,000 or positive cash flow from operations in any of its last three full fiscal years; and (2) Was not formed to acquire any existing business, unless the acquired business satisfies paragraphs (1) and (2) of this definition. State Temporary Debt Total Intended Leverage Commitment Total Private Capital Commitment Trust Trust Certificate Rate Trust Certificates (TCs) Trustee Underlicensed State Undistributed Net Realized Earnings Unrealized Appreciation Unrealized Depreciation Unrealized Gain (Loss) on Securities Held Watchlist Wind-down Plan [61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 62 FR 11759, Mar. 13, 1997; 63 FR 5865, Feb. 5, 1998; 64 FR 52645, Sept. 30, 1999; 64 FR 70995, Dec. 20, 1999; 69 FR 8098, Feb. 23, 2004; 77 FR 23378, Apr. 19, 2012; 77 FR 25051, Apr. 27, 2012; 79 FR 62823, Oct. 21, 2014; 82 FR 39340, Aug. 18, 2017; 82 FR 52184, Nov. 13, 2017; 88 FR 46005, July 18, 2023; 89 FR 3547, Jan. 19, 2024; 91 FR 7, Jan. 2, 2026] Subpart C—Qualifying for an SBIC License Organizing an SBIC § 107.100 Organizing a Section 301(c) Licensee. Section 301(c) Licensee means a company licensed under section 301(c) of the Act. It may be organized as a for-profit corporation or as a limited partnership created in accordance with the special rules of § 107.160. § 107.115 1940 Act and 1980 Act Companies. A 1940 Act or 1980 Act Company is eligible to apply for an SBIC license, and an existing Licensee is eligible to apply for SBA's approval to convert to a 1940 Act or 1980 Act Company. In either case, the 1940 Act or 1980 Act Company may elect to be taxed as a regulated investment company under section 851 of the Internal Revenue Code of 1986, as amended (26 U.S.C. 851). However, a Licensee making such election may make Distributions only as permitted under the applicable sections of this part (see the definition of Retained Earnings Available for Distribution, § 107.585, and §§ 107.1540 through 107.1580). § 107.120 [Reserved] § 107.130 Requirement for qualified management. When applying for a license, and while you have a license, you must show, to the satisfaction of SBA, that your current or proposed management team is qualified and has the knowledge, experience and capability necessary for investing in the types of businesses contemplated by the Act, the regulations in this part 107, and your business plan. You must designate at least one individual as the official responsible for contact with SBA. [61 FR 3189, Jan. 31, 1996, as amended at 77 FR 25051, Apr. 27, 2012] § 107.140 SBA approval of initial Management Expenses. If you plan to obtain Leverage, you must have your Management Expenses approved by SBA at the time of licensing. (See § 107.520 for the definition of Management Expenses.) § 107.150 Management-ownership diversification requirement. (a) Diversification requirement. (1) In order to obtain an SBIC license (unless you do not plan to obtain Leverage), (2) If at the time you were licensed you did not plan to obtain Leverage, but you now wish to be eligible for Leverage, or (3) If SBA so requires as a condition of approval of your transfer of Control under § 107.440. (b) Percentage ownership requirement. General rule. (2) Exception. (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) Non-affiliation requirement General rule. (i) Entities whose overall activities are regulated and periodically examined by state, Federal or other governmental authorities satisfactory to SBA; (ii) Entities listed on the New York Stock Exchange; (iii) Entities that are publicly-traded and that meet both the minimum numerical listing standards and the corporate governance listing standards of the New York Stock Exchange; (iv) Public or private employee pension funds; (v) Trusts, foundations, or endowments, but only if exempt from Federal income taxation; and (vi) Other Institutional Investors satisfactory to SBA. (2) Look-through for Traditional Investment Company investors. (d) Voting requirement. (2) Exception. (e) Requirement to maintain diversity. (1) Notify SBA within 10 days; and (2) Re-establish diversity within six months. For the consequences of failure to re-establish diversity, see §§ 107.1810(g) and 107.1820(f). [65 FR 71055, Nov. 29, 2000, as amended at 88 FR 46007, July 18, 2023; 89 FR 3547, Jan. 19, 2024] § 107.160 Special rules for Licensees formed as limited partnerships. A limited partnership organized under State law solely for the purpose of performing the functions and conducting the activities contemplated under the Act may apply for a license under section 301(c) or section 301 (d) of the Act (“Partnership Licensee”). (a) Number of Licensee's General Partners. (b) Entity General Partner of Licensee. (1) SBA must approve any person who will serve as an officer, director, manager, or general partner of the Entity General Partner. This provision must be stated in an Entity General Partner's Certificate of Incorporation, member agreement, Limited Partnership Agreement or other similar governing instrument which must, in each case, accompany the license application. (2) An Entity General Partner is subject to the same examination and reporting requirements as a Licensee under section 310(b) of the Act. The restrictions and obligations imposed upon a Licensee by §§ 107.1800 through 107.1820, and 107.30, 107.410 through 107.450, 107.470, 107.475, 107.500, 107.510, 107.600, 107.680, 107.690 through 107.692, 107.865, and 107.1910 apply also to an Entity General Partner of a Licensee. (3) The general partner(s) of your Entity General Partner(s) will be considered your general partner. (4) If your Entity General Partner is a limited partnership, its limited partners may be considered your Control Person(s) if they meet the definition for Control Person in § 107.50. (5) If your Entity General Partner is a limited partnership, it is subject to paragraph (a) of this section. (c) Other requirements for Partnership Licensees. (1) You must have a minimum duration of ten years or two years following the maturity of your last-maturing Leverage security, whichever is longer. After 10 years, if all Leverage has been repaid or redeemed and all amounts due SBA, its agent, or Trustee have been paid, the Partnership Licensee may be terminated by a vote of your partners. (For purposes of this provision SBA is not considered a partner.); (2) None of your general partner(s) may be removed or replaced by your limited partners without prior written approval of SBA; (3) Any transferee of, or successor in interest to, your general partner shall have only the rights and liabilities of a limited partner pending SBA's written approval of such transfer or succession; and (4) You must incorporate all the provisions in this paragraph (c) in your Limited Partnership Agreement. (d) Obligations of a Control Person. (e) Liability of general partner for partnership debts to SBA. (f) Reorganization of Licensee. (g) Special Leverage requirement. [61 FR 3189, Jan. 31, 1996, as amended at 91 FR 7, Jan. 2, 2026] Capitalizing an SBIC § 107.200 Adequate capital for Licensees. You must meet the requirements of this § 107.200 to qualify for a license, to continue as a Licensee, and to receive Leverage. (a) You must have enough Regulatory Capital to provide reasonable assurance that: (1) You will operate soundly and profitably over the long term; and (2) You will be able to operate actively in accordance with your Articles and within the context of your business plan, as approved by SBA. (b) In SBA's sole discretion, you must be economically viable, taking into consideration actual and anticipated income and losses on your Loans and Investments, and the experience and qualifications of your owners and managers. § 107.210 Minimum capital requirements for Licensees. (a) Companies licensed on or after October 1, 1996. (1) Licensees other than Early Stage SBICs. (i) Has satisfied all licensing standards and requirements except the minimum capital requirement, as determined solely by SBA; (ii) Has a viable business plan reasonably projecting profitable operations; and (iii) Has a reasonable timetable for achieving Regulatory Capital of at least $5,000,000. (2) Early Stage SBICs. (b) Companies licensed before October 1, 1996. [63 FR 5866, Feb. 5, 1998, as amended at 77 FR 25051, Apr. 27, 2012; 82 FR 39340, Aug. 18, 2017; 88 FR 46007, July 18, 2023] § 107.230 Permitted sources of Private Capital for Licensees. Private Capital means the contributed capital of a Licensee, plus unfunded binding commitments by Institutional Investors (including commitments evidenced by a promissory note) to contribute capital to a Licensee. (a) Contributed capital. (b) Exclusions from Private Capital. (1) Funds borrowed by a Licensee from any source. (2) Funds obtained through the issuance of Leverage. (3) Funds obtained directly or indirectly from any Federal, State, or local government agency or instrumentality, except for: (i) Funds invested by a public pension fund; (ii) Funds obtained from the business revenues (excluding any governmental appropriation) of any federally chartered or government-sponsored corporation established before October 1, 1987, to the extent that such revenues are reflected in the retained earnings of the corporation; and (iii) “Qualified Non-private Funds” as defined in paragraph (d) of this section. (4) Any portion of a commitment from an Institutional Investor with a net worth of less than $10 million that exceeds 10 percent of such Institutional Investor's net worth and is not backed by a letter of credit from a State or National bank acceptable to SBA. (c) Non-cash capital contributions. (d) Qualified Non-private Funds. (1) Funds directly or indirectly invested in any Licensee on or before August 16, 1982 by any Federal agency except SBA, under a statute explicitly mandating the inclusion of such funds in “Private Capital”; (2) Funds directly or indirectly invested in any Licensee by any Federal agency under a statute that is enacted after September 4, 1992, explicitly mandating the inclusion of such funds in “Private Capital”; (3) Funds invested in any Licensee or license applicant by one or more State or local government entities (including any guarantee extended by such entities) in an aggregate amount that does not exceed 33 percent of Regulatory Capital; and (4) Funds invested in or committed in writing to any Section 301(d) Licensee prior to October 1, 1996, from the following sources: (i) A State financing agency, or similar agency or instrumentality, if the funds invested are derived from such agency's net income and not from appropriated State or local funds; and (ii) Grants made by a state or local government agency or instrumentality into a nonprofit corporation or institution exercising discretionary authority with respect to such funds, if SBA determines that such funds have taken on a private character and the nonprofit corporation or institution is not a mere conduit. (e) Borrowed funds exclusion. (1) Such Person's net worth is at least twice the amount borrowed; or (2) SBA gives its prior written approval of the capital contribution. (f) Public sector contributions. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 64 FR 70995, Dec. 20, 1999; 89 FR 3547, Jan. 19, 2024] § 107.240 Limitations on including non-cash capital contributions in Private Capital. Non-cash capital contributions to a Licensee or license applicant are included in Private Capital only if they fall into one of the following categories: (a) Direct obligations of, or obligations guaranteed as to principal and interest by, the United States. (b) Services rendered or to be rendered to you, priced at no more than their fair market value. (c) Tangible assets used in your operations, priced at no more than their fair market value. (d) Shares in a Disadvantaged Business received by a subsidiary Section 301(d) Licensee from its parent Licensee, valued at the lower of cost or fair value. (e) Other non-cash assets approved by SBA. § 107.250 [Reserved] Applying for an SBIC License § 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. (1) SBA retains discretion to require that such applicant submit the standard MAQ or request additional information if SBA is unable to properly evaluate an applicant under the factors required by the Act and described in 13 CFR 107.305; and (2) only those applicants meeting all of the criteria described in § 107.305(e) are entitled to an “Expedited Subsequent Fund Evaluation Process.” (b) Final licensing. (c) Licensing Fees. (1) Initial Licensing Fee. Table 1 to Paragraph ( c Fund sequence Initial licensing fee Fund I $5,000 Fund II 10,000 Fund III 15,000 Fund IV+ 20,000 Example 1 to paragraph (c)(1): (2) Final Licensing Fee. Table 2 to Paragraph ( c Fund sequence Final licensing base fee Fund I $10,000 Fund II 15,000 Fund III 25,000 Fund IV+ 30,000 (3) Resubmission Penalty Fee. in addition (4) Inflation Adjustments. Federal Register [88 FR 46007, July 18, 2023, as amended at 91 FR 7, Jan. 2, 2026] § 107.305 Evaluation of license applicants. SBA will evaluate a license applicant based on the submitted application materials, any interviews with the applicant's management team, and the results of background investigations, public record searches, and other due diligence conducted by SBA and other Federal agencies. SBA's evaluation will consider factors including the following: (a) Management qualifications. (b) Demonstrated investment acumen. (c) Strategy and fit. (d) Structure and economics. (e) Subsequent fund applicants. (1) Consistent Strategy and Fund Size. (2) Clean Regulatory History. (3) Consistent Limited Partner-General Partner Dynamics. (4) Investment Performance Stability. (5) Firm Stability. (6) Federal Bureau of Investigation (FBI) Criminal and Internal Revenue Service (IRS) Background Check. (7) No Outstanding or Unresolved Material Litigation Matters. (8) No Outstanding Tax Liens. [77 FR 25052, Apr. 27, 2012, as amended at 88 FR 46008, July 18, 2023; 89 FR 3547, Jan. 19, 2024; 91 FR 7, Jan. 2, 2026] § 107.310 [Reserved] § 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. [88 FR 46009, July 18, 2023] Subpart D—Changes in Ownership, Control, or Structure of Licensee; Transfer of License Changes in Control or Ownership of Licensee § 107.400 Changes in ownership of 10 percent or more of Licensee but no change of Control. (a) Prior approval requirements. (b) Fee. § 107.410 Changes in Control of Licensee (through change in ownership or otherwise). (a) Prior approval requirements. (b) Fee. [61 FR 3189, Jan. 31, 1996, as amended at 82 FR 52185, Nov. 13, 2017] § 107.420 Prohibition on exercise of ownership or Control rights in Licensee before SBA approval. Without prior written SBA approval, no change of ownership or Control may take effect and no officer, director, employee or other Person acting on your behalf shall: (a) Register on your books any transfer of ownership interest to the proposed new owner(s); (b) Permit the proposed new owner(s) to exercise voting rights with respect to such ownership interest (including directly or indirectly procuring or voting any proxy, consent or authorization as to such voting rights at any shareholders' or partnership meeting); (c) Permit the proposed new owner(s) to participate in any manner in the conduct of your affairs (including exercising control over your books, records, funds or other assets; participating directly or indirectly in any disposition thereof; or serving as an officer, director, partner, employee or agent); or (d) Allow ownership or Control to pass to another Person. § 107.430 Notification to SBA of transactions that may change ownership or Control. You must promptly notify SBA as soon as you have knowledge of transactions or events that may result in a transfer of Control or ownership of at least 10 percent of your capital. If there is any doubt as to whether a particular transaction or event will result in such a change, report the facts to SBA. § 107.440 Standards governing prior SBA approval for a proposed transfer of Control. SBA approval is contingent upon full disclosure of the real parties in interest, the source of funds for the new owners' interest, and other data requested by SBA. As a condition of approving a proposed transfer of control, SBA may: (a) Require an increase in your Regulatory Capital; (b) Require the new owners or the transferee's Control Person(s) to assume, in writing, personal liability for your Leverage, effective only in the event of their direct or indirect participation in any transfer of Control not approved by SBA; or (c) Require compliance with any other conditions set by SBA, including compliance with the requirements for minimum capital and management-ownership diversity as in effect at such time for new license applicants. [61 FR 3189, Jan. 31, 1996] § 107.450 Notification to SBA of pledge of Licensee's shares. (a) You must notify SBA in writing, within 30 calendar days, of the terms of any transaction in which: (1) Any Person, or group of Persons acting in concert, pledges shares of your stock (or equivalent ownership interests) as collateral for indebtedness; and (2) The shares pledged are at least 10 percent of your Regulatory Capital. (b) If the transaction creates a change of ownership or Control, you must comply with § 107.400 or § 107.410, as appropriate. § 107.460 [Reserved] Change in Structure of Licensee § 107.470 SBA approval of merger, consolidation, or reorganization of Licensee. (a) Prior approval requirements. (b) Fee. Transfer of License § 107.475 Transfer of license. You may not transfer your license in any manner without SBA's prior written approval. Subpart E—Managing the Operations of a Licensee General Requirements § 107.500 Lawful operations under the Act. You must engage only in the activities contemplated by the Act and in no other activities. § 107.501 Identification. (a) Publication upon issuance. Federal Register (b) Identification as a Licensee. [88 FR 46009, July 18, 2023] § 107.502 Representations to the public. You may not represent or imply to anyone that the SBA, the U.S. Government or any of its agencies or officers has approved any ownership interests you have issued or obligations you have incurred. Be certain to include a statement to this effect in any solicitation to investors. Example: You may not represent or imply that “SBA stands behind the Licensee” or that “Your capital is safe because SBA's experts review proposed investments to make sure they are safe for the Licensee.” § 107.503 Licensee's adoption of an approved valuation policy. (a) Valuation guidelines. (b) SBA approval of valuation policy. (1) Adopt without change the model valuation policy set forth in section III of the Valuation Guidelines for SBICs; or (2) Obtain SBA's prior written approval of an alternative valuation policy. If you are or applying to be a Non-leveraged Licensee, SBA will generally approve a valuation policy that meets GAAP. (c) Responsibility for valuations. (d) Frequency of valuations. (2) Otherwise, you must value your Loans and Investments only at your fiscal year end. (3) On a case-by-case basis, SBA may require you to perform valuations more frequently. (4) You must report material adverse changes in valuations at least quarterly, within 30 days following the close of the quarter. (e) Review of valuations by independent public accountant. (2) The independent public accountant's report on your audited annual financial statements (SBA Form 468) must include a statement that your valuations were prepared in accordance with your approved valuation policy established in accordance with section 310(d)(2) of the Act. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 82 FR 39340, Aug. 18, 2017; 88 FR 46009, July 18, 2023; 89 FR 3547, Jan. 19, 2024] § 107.504 Equipment and office requirements. (a) Technology. (b) Accessible office. [88 FR 46009, July 18, 2023] § 107.506 Safeguarding Licensee's assets/Internal controls. You must adopt a plan to safeguard your assets and monitor the reliability of your financial data, personnel, Portfolio, funds and equipment. You must provide your bank and custodian with a certified copy of your resolution or other formal document describing your control procedures. § 107.507 Violations based on false filings and nonperformance of agreements with SBA. The following shall constitute a violation of this part: (a) Nonperformance. (b) False statement. (1) Any false statement knowingly made; or (2) Any misrepresentation of a material fact; or (3) Any failure to state a material fact. A material fact is any fact which is necessary to make a statement not misleading in light of the circumstances under which the statement was made. [61 FR 3189, Jan. 31, 1996, as amended at 91 FR 8, Jan. 2, 2026] § 107.509 Employment of SBA officials. Without SBA's prior written approval, for a period of two years after the date of your most recent issuance of Leverage (or the receipt of any SBA Assistance as defined in part 105 of this chapter), you are not permitted to employ, offer employment to, or retain for professional services, any person who: (a) Served as an officer, attorney, agent, or employee of SBA on or within one year before such date; and (b) As such, occupied a position or engaged in activities which, in SBA's determination, involved discretion with respect to the granting of Assistance under the Act. Management and Compensation § 107.510 SBA approval of Licensee's Investment Adviser/Manager. You may employ an Investment Adviser/Manager who will be subject to the supervision of your board of directors or general partner. If you have Leverage or plan to seek Leverage, you must obtain SBA's prior written approval of the management contract. SBA's approval of an Investment Adviser/Manager for one Licensee does not indicate approval of that manager for any other Licensee. (a) Management contract. (1) Specify the services the Investment Adviser/Manager will render to you and to the Small Businesses in your Portfolio; and (2) Indicate the basis for computing Management Expenses. (b) Material change to approved management contract. § 107.520 Management Expenses of a Licensee. SBA must approve any increases in your Management Expenses if you have outstanding Leverage or Earmarked Assets. (a) Definition of Management Expenses. (1) Salaries; (2) Office expenses; (3) Travel; (4) Business development; (5) Office and equipment rental; (6) Bookkeeping; and (7) Expenses related to developing, investigating and monitoring investments. (b) Management Expenses do not include services provided by specialized outside consultants, outside lawyers and independent public accountants, if they perform services not generally performed by a venture capital company. (c) If your Management Expenses have not already been approved by SBA, you must submit such expenses for approval with your SBA Form 468 for your first fiscal year ending after January 31, 1996. Cash Management by a Licensee § 107.530 Restrictions on investments of idle funds by leveraged Licensees. (a) Applicability of this section. (b) Permitted investments of idle funds. (1) Direct obligations of, or obligations guaranteed as to principal and interest by, the United States, which mature within 15 months from the date of the investment; or (2) Repurchase agreements with federally insured institutions, with a maturity of seven days or less. The securities underlying the repurchase agreements must be direct obligations of, or obligations guaranteed as to principal and interest by, the United States. The securities must be maintained in a custodial account at a federally insured institution; or (3) Mutual funds, securities, or other instruments that exclusively consist of, or represent pooled assets of, investments described in paragraphs (b)(1) or (b)(2) of this section; or (4) Certificates of deposit with a maturity of one year or less, issued by a federally insured institution; or (5) A deposit account in a federally insured institution, subject to a withdrawal restriction of one year or less; or (6) A checking account in a federally insured institution; or (7) A reasonable petty cash fund. (c) Deposit of funds in excess of the insured amount. (2) Exception: You may make a temporary deposit (not to exceed 30 days) in excess of the insured amount, in a transfer account established to facilitate the receipt and disbursement of funds or to hold funds necessary to honor Commitments issued. (d) Deposit of funds in Associate institution. [61 FR 3189, Jan. 31, 1996, as amended at 77 FR 20294, Apr. 4, 2012] Borrowing by Licensees From Non-SBA Sources § 107.550 Prior approval of secured third-party debt of Leveraged Licensees. (a) Definition. secured third-party debt (b) General rule. (c) Capital Call Line. (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 § 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. [88 FR 46009, July 18, 2023] § 107.560 Subordination of SBA's creditor position. (a) Debentures purchased or guaranteed on or before July 1, 1991. (b) Debentures purchased or guaranteed after July 1, 1991, including refinancings of Debentures previously purchased or guaranteed. (2) In order to induce others to lend you money after your Debenture has been purchased or guaranteed, SBA may agree in writing on a case-by-case basis to subordinate its unsecured claims, on such terms as it may determine, in favor of one or more of your Associates, or in favor of other lenders in excess of the amounts mentioned in paragraph (b)(1) of this section. (3) SBA reserves the authority to refuse to subordinate its claims if it determines, at the time you request your Debenture be purchased or guaranteed, that the exercise of reasonable investment prudence and your financial condition warrant such refusal. § 107.565 Restrictions on third-party debt of Early Stage SBICs. If you are an Early Stage SBIC and you have outstanding Leverage or a Leverage commitment, you must get SBA's prior written approval to have, incur, or refinance any third-party debt other than accounts payable from routine business operations. [77 FR 25052, Apr. 27, 2012] § 107.570 [Reserved] Distributions and Reductions in Regulatory Capital § 107.585 Distributions and reductions in Regulatory Capital. (a) Non-leveraged Licensees. (b) Non-Accrual Leveraged Licensees. (c) Accrual SBICs and Reinvestor SBICs. (1) Payment of Annual Charges and accrued interest. (2) Calculate SBA's share of distribution. (i) Total Distributions means any prior tax distributions plus the total amount of distributions, whether profit or return of capital, you intend to make after paying all accrued interest and Annual Charges; (ii) Total Intended Leverage Commitment is as defined in § 107.300. (iii) Total Private Capital Commitments is as defined in § 107.300. (3) Apply SBA Share. (4) Distribute to private investors. (5) Report distribution to SBA. Example 1 to paragraph (c): Step 1: Step 2: Step 3: Step 4: Step 5: [88 FR 46009, July 18, 2023, as amended at 89 FR 3548, Jan. 19, 2024] Requirement To Conduct Active Investment Operations § 107.590 Licensee's requirement to maintain active operations. (a) Activity test. (1) During the eighteen months preceding your most recent fiscal year end, you made Financings totaling at least 20 percent of your Regulatory Capital; or (2) Your idle funds did not exceed 20 percent of your total assets (at cost) at your most recent fiscal year end. (b) Permitted exceptions to activity requirements. (1) Your excess idle funds are the result of the receipt, within the previous nine months, of realized gains, repayments, additional capital contributions, or Leverage. (2) It is necessary for you to maintain excess idle funds to conduct your operations because: (i) Your unfunded commitments from investors are no more than 20 percent of your Regulatory Capital; and (ii) You cannot receive additional Leverage, solely because SBA has insufficient funds available. (3) You have not made sufficient Financings because of a lack of available funds, evidenced by Loans and Investments (at cost) equal to at least 90 percent of your Combined Capital as of your most recent fiscal year end. (4) You have not made sufficient Financings solely because SBA has restricted your ability to make investments. (c) Applicability of activity requirements. (1) The remaining number of years you expect to operate. (2) For each of your Loans and Investments, the expected liquidation date and anticipated proceeds. (3) The timing of your repayment of obligations to SBA. (4) The timing and amount of any planned reductions in your Management Expenses. (d) Phase-in of activity requirements General rule. (2) Rule for new Licensees. [61 FR 3189, Jan. 31, 1996, as amended at 88 FR 46010, July 18, 2023] Subpart F—Recordkeeping, Reporting, and Examination Requirements for Licensees Recordkeeping Requirements for Licensees § 107.600 General requirement for Licensee to maintain and preserve records. (a) Maintaining your accounting records. (b) Location of records. (1) All your accounting and other financial records; (2) All minutes of meetings of directors, stockholders, executive committees, partners, or other officials; and (3) All documents and supporting materials related to your business transactions, except for any items held by a custodian under a written agreement between you and a Portfolio Concern or non-SBA lender, or any securities held in a safe deposit box, or by a licensed securities broker in an amount not exceeding the broker's per-account insurance coverage. (c) Preservation of records. (1) You must preserve for at least 15 years or, in the case of a Partnership Licensee, at least two years beyond the date of liquidation: (i) All your accounting ledgers and journals, and any other records of assets, asset valuations, liabilities, equity, income, and expenses. (ii) Your Articles, bylaws, minute books, and license application. (iii) All documents evidencing ownership of the Licensee including ownership ledgers, and ownership transfer registers. (2) You must preserve for at least six years all supporting documentation (such as vouchers, bank statements, or canceled checks) for the records listed in paragraph (b)(1) of this section. (3) After final disposition of any item in your Portfolio, you must preserve for at least six years: (i) Financing applications and Financing instruments. (ii) All loan, participation, and escrow agreements. (iii) Size status declarations (SBA Form 480) and Financing Eligibility Statements (SBA Form 1941). (iv) Any capital stock certificates and warrants of the Portfolio Concern that you did not surrender or exercise. (v) All other documents and supporting material relating to the Portfolio Concern, including correspondence. (4) You may substitute a computer-scanned or generated copy for the original of any record covered by this paragraph (c). [61 FR 3189, Jan. 31, 1996, as amended at 79 FR 62823, Oct. 21, 2014] § 107.610 Required certifications for Loans and Investments. For each of your Loans and Investments, you must have the documents listed in this section. Except for information and documentation prepared under paragraphs (f)(2) and (3) of this section, you must keep these documents in your files and make them available to SBA upon request. (a) SBA Form 480, the Size Status Declaration, executed both by you and by the concern you are financing. By executing this document, both parties certify that the concern is a Small Business. For securities purchased from an underwriter in a public offering, you may substitute a prospectus showing that the concern is a Small Business. (b) SBA Form 652, a certification by the concern you are financing that it will not illegally discriminate (see part 112 of this chapter). (c) SBA Form 1941 (for Section 301(d) Licensees only), executed both by you and by the concern you are financing. By executing this document, both parties certify that the concern is a Disadvantaged Business. (d) A certification by the concern you are financing of the intended use of the proceeds. For securities purchased from an underwriter in a public offering, you may substitute a prospectus indicating the intended use of proceeds. (e) For each LMI Investment: (1) A certification by the concern, dated as of the date of application for SBIC financing, as to the basis for its qualification as an LMI Enterprise, (2) If the concern qualifies as an LMI Enterprise as defined in paragraph (2) of the definition of LMI Enterprise in § 107.50, an additional certification dated no later than the date 180 days after the closing of the LMI Investment, as to the location of the concern's employees or tangible assets or the principal residences of its full-time employees as of the date of such certification, and (3) Certification(s) by the SBIC, made contemporaneously with the certification(s) of the concern, that the concern qualifies as an LMI Enterprise as of the date(s) of the concern's certification(s) and the basis for such qualification. (f) For each Energy Saving Qualified Investment: (1) If a pre-Financing determination of eligibility by SBA is not required under the definition of Energy Saving Activities or Energy Saving Qualified Investment: (i) A certification by you, dated as of the closing date of the Financing, as to the basis for the qualification of the Financing as an Energy Saving Qualified Investment; (ii) Supporting documentation of the Energy Saving Activities engaged in by the concern; (iii) Supporting documentation of either the percentage of its revenues derived from Energy Saving Activities during the concern's most recently completed fiscal year, which must be at least 50 percent, or the concern's intended use of the Financing proceeds, all of which must be used for Energy Saving Activities; and (iv) A certification by the concern, dated as of the closing date of the Financing, that any information it provided to you in connection with this paragraph (f)(1) is true and correct to the best of its knowledge. (2) If, prior to providing Financing, you must obtain a determination from SBA that the activities in which a concern is engaged are Energy Saving Activities, submit to SBA in writing a description of the product or service being provided or developed, including all available documentation of the energy savings produced or anticipated, addressing the factors considered under paragraph (4) of the definition of “Energy Saving Activities” in § 107.50 and certified by the concern to be true and correct to the best of its knowledge. (3) If, prior to providing Financing, you must obtain a determination from SBA that the concern is “primarily engaged” in Energy Saving Activities, submit to SBA in writing all available information concerning the factors considered under paragraph (3) of the definition of “Energy Saving Qualified Investment” in § 107.50, certified by the concern to be true and correct to the best of its knowledge. (4) For each Financing closed after you obtain a determination from SBA under paragraph (f)(2) or (3) of this section, a certification by you, dated as of the closing date of the Financing, that to the best of your knowledge, you have no reason to believe that the materials submitted are incorrect. (5) For each Financing closed based on supporting documentation of the concern's intended use of proceeds for Energy Saving Activities under paragraph (f)(1)(iii) of this section: (i) Documentation by the concern, dated no later than six months after the closing of the Financing, of the proceeds used to date for Energy Saving Activities, with further updates provided at six month intervals until 100 percent of the Financing proceeds have been accounted for; and (ii) Documentation that you have reviewed the information submitted by the concern under paragraph (f)(5)(i) of this section and have reasonably determined that 100 percent of the Financing proceeds were used for Energy Saving Activities. (g) For each passive business financed under § 107.720(b)(3), a certification by you, dated as of the closing date of the Financing, as to the basis for the qualification of the Financing under § 107.720(b)(3) and identifying one or more limited partners for which a direct Financing would cause those investors: (1) To incur “unrelated business taxable income” under section 511 of the Internal Revenue Code (26 U.S.C. 511); or (2) To incur “effectively connected income” to foreign investors under sections 871 and 882 of the Internal Revenue Code (26 U.S.C. 871 and 882). [61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999; 77 FR 23379, Apr. 19, 2012; 82 FR 39340, Aug. 18, 2017] § 107.620 Requirements to obtain information from Portfolio Concerns. All the information required by this section is subject to the requirements of § 107.600 and must be in English. (a) Information for initial Financing decision. (b) Updated financial information. (i) Evaluate the financial condition of the Portfolio Concern for the purpose of valuing your investment; (ii) Determine the continued eligibility of the Portfolio Concern; and (iii) Verify the use of Financing proceeds. (2) Demographic information on the Portfolio Concern's ownership is requested for reporting purposes only and is on a voluntary basis. (3) The information submitted to you must be certified by the president, chief executive officer, treasurer, chief financial officer, general partner, or proprietor of the Portfolio Concern. (4) For financial and valuation purposes, you may accept a complete copy of the Federal income tax return filed by the Portfolio Concern (or its proprietor) in lieu of financial statements, but only if appropriate for the size and type of the business involved. (5) The requirements in this paragraph (b) do not apply when you acquire securities from an underwriter in a public offering (see § 107.825). In that case, you must keep copies of all reports furnished by the Portfolio Concern to the holders of its securities. (c) Information required for examination purposes. [61 FR 3189, Jan. 31, 1996, as amended at 88 FR 46010, July 18, 2023] Reporting Requirements for Licensees § 107.630 Requirement for Licensees to file financial statements with SBA (Form 468). (a) Annual filing of Form 468. (1) Audit of Form 468. (2) Insurance requirement for public accountant. (b) Interim filings of Form 468. (c) Standards for preparation of Form 468. (d) Reporting of economic impact information on Form 468. (e) Fund management contact and optional demographic information. [61 FR 3189, Jan. 31, 1996, as amended at 82 FR 39340, Aug. 18, 2017; 88 FR 46011, July 18, 2023; 89 FR 3548, Jan. 19, 2024] § 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 § 107.1850). [88 FR 46011, July 18, 2023] § 107.650 Requirement to report portfolio valuations to SBA. You must determine the value of your Loans and Investments in accordance with § 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. Reinvestor SBICs must report valuations to SBA within 120 calendar days of the end of the fiscal year in the case of annual valuations, and within 120 calendar days following the close of other reporting periods. You must report material adverse changes in valuations at least quarterly, within 30 days following the close of the quarter. [89 FR 3548, Jan. 19, 2024] § 107.660 Other items required to be filed by Licensee with SBA. (a) Reports to owners. (b) Documents filed with SEC. (c) Litigation reports. (1) The proceedings covered by this paragraph (c) include any action by you, or by your security holder(s) in a personal or derivative capacity, against an officer, director, Investment Adviser or other Associate of yours for alleged breach of official duty. (2) SBA may require you to submit copies of the pleadings and other documents SBA may specify. (3) Where proceedings have been terminated by settlement or final judgment, you must promptly advise SBA of the terms. (4) This paragraph (c) does not apply to collection actions or proceedings to enforce your ordinary creditors' rights. (d) Notification of criminal charges. (e) Other reports. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 88 FR 46011, July 18, 2023] § 107.665 Civil penalties. Except as provided in § 107.670, a Licensee that violates any regulation or written directive issued by SBA, requiring the filing of any regular or special report pursuant to this part, shall be fined a civil penalty of not more than $332 for each day the Licensee fails to file such report. The civil penalties provided for in this section shall accrue to the United States and may be recovered in a civil action brought by the SBA. [81 FR 31491, May 19, 2016, as amended at 82 FR 9969, Feb. 9, 2017; 83 FR 7363, Feb. 21, 2018; 84 FR 12061, Apr. 1, 2019; 85 FR 13727, Mar. 10, 2020; 86 FR 52957, Sept. 24, 2021; 87 FR 28758, May 11, 2022; 88 FR 50004, Aug. 1, 2023; 89 FR 48134, June 5, 2024; 90 FR 23424, June 3, 2025] § 107.670 Application for exemption from civil penalty for late filing of reports. (a) If it is impracticable to submit any required report within the time allowed, you may apply for an extension. The request for an extension must: (1) Be filed before the reporting deadline; (2) Certify to an extraordinary occurrence, not within your control, that makes timely filing of the report impracticable; and (3) Be accompanied by written evidence of such occurrence, where appropriate. (b) Upon receipt of your request, SBA may exempt you from the civil penalty stated in § 107.665, in such manner and under such conditions as SBA determines. [61 FR 3189, Jan. 31, 1996, as amended at 81 FR 31491, May 19, 2016] § 107.680 Reporting changes in Licensee not subject to prior SBA approval. (a) Changes to be reported for post approval. (2) Exception for non-leveraged Licensees. (b) Approval by SBA. Examinations of Licensees by SBA for Regulatory Compliance § 107.690 Examinations. SBA will examine all Licensees for the purpose of evaluating regulatory compliance. § 107.691 Responsibilities of Licensee during examination. You must make all books, records and other pertinent documents and materials available for the examination, including any information required by the examiner under § 107.620(c). In addition, the agreement between you and the independent public accountant performing your audit must provide that any information in the accountant's working papers be made available to SBA upon request. § 107.692 Examination fees. (a) General. (b) Base Fee. Time period Minimum Maximum Maximum December 13, 2017 to September 30, 2018 $6,000 $22,500 $26,000 October 1, 2018 to September 30, 2019 7,000 25,000 32,000 October 1, 2019 to September 30, 2020 8,000 27,500 38,000 October 1, 2020 to September 30, 2021 9,000 30,000 44,000 (2) In the table in paragraph (b)(1) of this section, a Non-leveraged SBIC means any SBIC that, as of the date of the examination, has no outstanding Leverage or Leverage commitment, has no Earmarked Assets, and certifies to SBA that it will not seek Leverage in the future. Beginning on October 1, 2021, SBA will annually adjust the Minimum Base Fee and Maximum Base Fees using the Inflation Adjustment and will publish a Notice prior to such adjustment in the Federal Register (c) Adjustments to Base Fee. (1) If you were not fully responsive to the letter of notification of examination (that is, you did not provide all requested documents and information within the time period stipulated in the notification letter in a complete and accurate manner, or you did not prepare or did not have available all information requested by the examiner for on-site review) after a written warning by the SBA, you will pay an additional charge equal to 15% of your Base Fee; (2) If you maintain your records/files in multiple locations (as permitted under § 107.600(b)), you will pay an additional charge equal to 10% of your Base Fee; and (3) For any regulatory violation that remains unresolved 90 days from the date SBA notified you that you must take corrective action (as established by the date of the notification letter) or such later date as SBA sets forth in the notice, you will pay an additional charge equal to 5% of the Base Fee for every 30 days or portion thereof that the violation remains unresolved after the cure period, unless SBA resolves the finding in your favor. (d) Fee additions table. Examination fee additions Amount of addition − % of base fee Non-responsive 15%. Records/Files at multiple locations 10%. Unresolved Findings 5% of Base Fee for every 30 days or portion thereof beyond the 90 day cure period or such later date as SBA sets forth in the notice for each unresolved finding. (e) Delay fee. Federal Register [62 FR 23338, Apr. 30, 1997, as amended at 77 FR 25052, Apr. 27, 2012; 82 FR 52185, Nov. 13, 2017] Subpart G—Financing of Small Businesses by Licensees Determining the Eligibility of a Small Business for SBIC Financing § 107.700 Compliance with size standards in part 121 of this chapter as a condition of Assistance. You are permitted to provide financial assistance and management services only to a Small Business. To determine whether an applicant is a Small Business, you may use either the financial size standards in § 121.301(c)(2) of this chapter or the industry standard covering the industry in which the applicant is primarily engaged, as set forth in § 121.301(c)(1) of this chapter. [61 FR 3189, Jan. 31, 1996, as amended at 74 FR 33915, July 14, 2009] § 107.710 Requirement to finance smaller enterprises. Your Portfolio must include Financings to Smaller Enterprises. (a) Definition of Smaller Enterprise. (1) Both together with its Affiliates, and by itself, meets the size standard of § 121.201 of this chapter at the time of Financing for the industry in which it is then primarily engaged; or (2) Together with its affiliates has a net worth of not more than $6 million and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two years no greater than $2 million. If the applicant is not required by law to pay Federal income taxes at the enterprise level, but is required to pass income through to its shareholders, partners, beneficiaries, or other equitable owners, the applicant's “net income after Federal income taxes” will be its net income reduced by an amount computed as follows: (i) If the applicant is not required by law to pay State (and local, if any) income taxes at the enterprise level, multiply its net income by the marginal State income tax rate (or by the combined State and local income tax rates, as applicable) that would have applied if it were a taxable corporation. (ii) Multiply the applicant's net income, less any deduction for State and local income taxes calculated under paragraph (a)(2)(i) of this section, by the marginal Federal income tax rate that would have applied if the applicant were a taxable corporation. (iii) Add the results obtained in paragraphs (a)(2)(i) and (a)(2)(ii) of this section. (b) Smaller Enterprise Financings. (1) If you were licensed after February 17, 2009, at least 25 percent (in dollars) of your Financings must have been invested in Smaller Enterprises. (2) If you were licensed on or before February 17, 2009, and you have received no SBA Leverage commitment issued after February 17, 2009, at least 20 percent (in dollars) of your Financings, excluding Financings made in whole or in part with Leverage in excess of $90 million, must have been invested in Smaller Enterprises. In addition, 100 percent of all Financings made in whole or in part with Leverage in excess of $90 million (including aggregate Leverage over $90 million issued by two or more Licensees under Common Control) must have been invested in Smaller Enterprises. (3) If you were licensed on or before February 17, 2009, and you have received an SBA Leverage commitment after February 17, 2009: (i) For all Financings made after the date of the first Leverage commitment issued after February 17, 2009, at least 25 percent (in dollars) of your Financings must have been invested in Smaller Enterprises, and (ii) For all Financings made before February 17, 2009, at least 20 percent (in dollars) of your Financings, excluding Financings made in whole or in part with Leverage in excess of $90 million, must have been invested in Smaller Enterprises. In addition, 100 percent of all Financings made in whole or in part with Leverage in excess of $90 million (including aggregate Leverage over $90 million issued by two or more Licensees under Common Control) must have been invested in Smaller Enterprises. (c) Special requirement for certain leveraged Licensees. (i) Less than $10,000,000 if such Leverage included Participating Securities; or (ii) Less than $5,000,000 if such Leverage was Debentures only. (2) At the close of each of your fiscal years, at least 50 percent of the total dollar amount of the Financings you extended after September 30, 1996 must have been invested in Smaller Enterprises. (d) Financing a change of ownership which results in the creation of a Smaller Enterprises. The Financing of a change of ownership under § 107.750 which results in the creation of a Smaller Enterprise qualifies as a Smaller Enterprise Financing. (e) Non-compliance with this section. see [62 FR 11760, Mar. 13, 1997, as amended at 63 FR 5866, Feb. 5, 1998; 64 FR 70995, Dec. 20, 1999; 66 FR 30647, June 7, 2001; 74 FR 33915, July 14, 2009] § 107.720 Small Businesses that may be ineligible for financing. (a) Relenders or reinvestors. (1) Definition. (2) Exceptions Reinvestor SBICs. Reinvestor SBIC (ii) Equity Capital Investments to Disadvantaged Businesses. (b) Passive Businesses. (1) Definition. (i) It is not engaged in a regular and continuous business operation (for purposes of this paragraph (b), the mere receipt of payments such as dividends, rents, lease payments, or royalties is not considered a regular and continuous business operation); or (ii) Its employees are not carrying on the majority of day to day operations, and the company does not provide effective control and supervision, on a day to day basis, over persons employed under contract; or (iii) It passes through substantially all of the proceeds of the Financing to another entity. (2) Exception for pass-through of proceeds to subsidiary. (i) Directly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities; or (ii) Indirectly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities (by directly owning the outstanding voting securities of another passive Small Business that is the direct owner of the outstanding voting securities of the subsidiary company). (3) Exception for certain Partnership Licensees. (i) Directly to one or more eligible non-passive Small Businesses; or (ii) Directly to a passive Small Business that passes substantially all the proceeds directly to (or uses substantially all the proceeds to acquire) one or more eligible non-passive Small Businesses in which the passive Small Business directly owns, or will own as a result of the Financing, at least 50% of the outstanding voting securities. (4) Additional conditions for permitted passive business financings. (i) For the purposes of this paragraph (b), “substantially all” means at least 99 percent of the Financing proceeds after deduction of actual application fees, closing fees, and expense reimbursements, which may not exceed those permitted by § 107.860. (ii) If you and/or your Associate charge fees permitted by § 107.860 and/or § 107.900, the total amount of such fees charged to all passive and non-passive businesses that are part of the same Financing may not exceed the fees that would have been permitted if the Financing had been provided directly to a non-passive Small Business. Any such fees received by your Associate must be paid to you in cash within 30 days of the receipt of such fees. (iii) For the purposes of this part 107, each passive and non-passive business included in the Financing is a Portfolio Concern and subject to the provisions set forth in the Act. The terms of the financing must also provide SBA with access to Portfolio Concern information in compliance with this part 107, including without limitation §§ 107.600 and 107.620. (c) Real Estate Businesses. (2) You are not permitted to finance a Small Business, regardless of NAICS classification, if the Financing is to be used to acquire or refinance real property, unless the Small Business: (i) Is acquiring an existing property and will use at least 51 percent of the usable square footage for an eligible business purpose; or (ii) Is building or renovating a building and will use at least 67 percent of the usable square footage for an eligible business purpose; or (iii) Occupies the subject property and uses at least 67 percent of the usable square footage for an eligible business purpose. (d) Project Financing (1) General Rule. (i) The assets of the business are to be reduced or consumed, generally without replacement, as the life of the business progresses, and the nature of the business requires that a stream of cash payments be made to the business's financing sources, on a basis associated with the continuing sale of assets. Examples include real estate development projects and oil and gas wells; or (ii) The primary purpose of the Financing is to fund production of a single item or defined limited number of items, generally over a defined production period, and such production will constitute the majority of the activities of the Small Business. Examples include motion pictures and electric generating plants. (2) Exception. (e) Farm land purchases. (f) Public interest. (g) Foreign investment General rule. (i) The funds will be used substantially for a foreign operation; or (ii) At the time of the Financing or within one year thereafter, more than 49 percent of the employees or tangible assets of the Small Business are located outside the United States (unless you can show, to SBA's satisfaction, that the Financing was used for a specific domestic purpose). (2) Exception. (h) Associated supplier. (1) The amount of goods and services purchased (or to be purchased) from your Associate with the proceeds of the Financing, or with funds released as a result of the Financing, is less than 50 percent of the total amount of the Financing (75 percent for a Section 301(d) Licensee); (2) The price of such goods and services is no higher than that charged other customers of your Associate; and (3) The Small Business purchases no capital goods from your Associate. (i) Financing Licensees. (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. (2) To repay an indebtedness incurred for the purpose of investing in a Licensee. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 FR 70995, Dec. 20, 1999; 79 FR 62823, Oct. 21, 2014; 82 FR 39340, Aug. 18, 2017; 88 FR 46011, July 18, 2023; 89 FR 3548, Jan. 19, 2024; 91 FR 8, Jan. 2, 2026] § 107.730 Financings which constitute conflicts of interest. (a) General rule. (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 (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): (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. (2) Provide Financing to an Associate of another Licensee if one of your Associates has received or will receive any direct or indirect Financing or a Commitment from that Licensee or a third Licensee (including Financing or Commitments received under any understanding, agreement, or cross dealing, reciprocal or circular arrangement). (3) Borrow money from: (i) A Small Business Financed by you; (ii) An officer, director, or owner of at least a 10 percent equity interest in such business; or (iii) A Close Relative of any such officer, director, or equity owner. (4) Provide Financing to a Small Business to discharge an obligation to your Associate or free other funds to pay such obligation. This paragraph (a)(4) does not apply if the obligation is to an Associate Lending Institution and is a line of credit or other obligation incurred in the normal course of business. (5) Provide Financing to a Small Business for the purpose of purchasing property from your Associate, except as permitted under § 107.720(h). (b) Rules applicable to Associates. (1) Borrow money from any Person described in paragraph (a)(3) of this section. (2) Receive from a Small Business any compensation in connection with Assistance you provide (except as permitted under §§ 107.825(c) and 107.900), or anything of value for procuring, attempting to procure, or influencing your action with respect to such Assistance. (c) Applicability of other laws. (d) Financings with Associates Financings with Associates requiring prior approval. (2) Other Financings with Associates. (3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. (i) Your Associate is a Lending Institution that is providing financing under a credit facility in order to meet the operational needs of the Small Business, and the terms of such financing are usual and customary. (ii) Your Associate invests in the Small Business on the same terms and conditions and at the same time as you. (iii) You are a Non-leveraged Licensee, and your Associate either is not a Licensee or is a Non-leveraged Licensee. (e) Use of Associates to manage Portfolio Concerns. (1) Have any other direct or indirect financial interest in the Portfolio Concern that exceeds, or has the potential to exceed, 5 percent of the Portfolio Concern's equity. (2) Have served for more than 30 days as an officer, director or other participant in the management of the Portfolio Concern before you provided Financing. (3) Receive any income or anything of value from the Portfolio Concern unless it is for your benefit, with the exception of director's fees, expenses, and distributions based upon the Associate's ownership interest in the Concern. (f) 1940 and 1980 Act Companies: SEC exemptions. (g) Public notice. Federal Register. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 FR 70996, Dec. 20, 1999; 77 FR 20294, Apr. 4, 2012; 88 FR 46011, July 18, 2023] § 107.740 Portfolio diversification (“Overline” limitation). If you are a Leveraged Licensee, the aggregate amount of financings you may provide and commitments you may issue to a Small Business and its affiliates may not, without SBA's prior written approval, exceed 10 percent of the sum of: (a) Your Private Capital; and (b) The total amount of Leverage principal (excluding any interest which may become due or accrue at any point following the issuance of Leverage) projected to be issued in the business plan that was approved by SBA at the time you were licensed. [89 FR 3548, Jan. 19, 2024] § 107.750 Conditions for financing a change of ownership of a Small Business. You may finance a change of ownership of a Small Business only under the conditions set forth in this section. (a) The Financing must: (1) Promote the sound development or preserve the existence of the Small Business; (2) Help create a Small Business as a result of a corporate divestiture; or (3) Facilitate ownership in a Disadvantaged Business. (b) The Resulting Concern (as defined in paragraph (c) of this section) must: (1) Be a Small Business under § 107.700; (2) Have 500 or fewer full-time equivalent employees; or meet one of the appropriate debt/equity ratio tests: (i) If you have outstanding Leverage, the Resulting Concern's ratio of debt to equity must be no more than 5 to 1; or (ii) If you have no outstanding Leverage, the Resulting Concern's ratio of debt to equity must be no more than 8 to 1. (c) Definitions. (2) For purposes of this section, “debt” means long-term debt, including contingent liabilities, but excluding accounts payable, operating leases, letters of credit, subordinated notes payable to the seller, any other liabilities approved for exclusion by SBA and short-term working capital loans (so long as the loans carry a zero balance for 30 consecutive days during the concern's fiscal year). (3) For purposes of this section, “equity” means common and preferred stock (corporation), contributed capital (partnership), or membership interests (limited liability company). § 107.760 How a change in size or activity of a Portfolio Concern affects the Licensee and the Portfolio Concern. (a) Effect on Licensee of a change in size of a Portfolio Concern. (1) Subject to the overline limitations of § 107.740, you may provide additional Financing to the concern up to the time it makes a public offering of its securities. (2) Even after the concern makes a public offering, you may exercise any stock options, warrants, or other rights to purchase Equity Securities which you acquired before the public offering, or fund Commitments you made before the public offering. (b) Effect of a change in business activity occurring within one year of Licensee's initial Financing Retention of Investment. (2) Request for SBA's approval to retain investment. (3) Additional Financing. (c) Effect of a change in business activity occurring more than one year after the initial Financing. (1) Retain your investment; and (2) Provide additional Financing to the Portfolio Concern to the extent necessary to protect against the loss of the amount of your original investment, subject to the overline limitations of § 107.740. Structuring Licensee's Financing of Eligible Small Businesses: Types of Financing § 107.800 Financings in the form of Equity Securities. (a) You may purchase the Equity Securities of a Small Business. You may not, inadvertently or otherwise: (1) Become a general partner in any unincorporated business; or (2) Become jointly or severally liable for any obligations of an unincorporated business. (b) Definition. [61 FR 3189, Jan. 31, 1996, as amended at 74 FR 33915, July 14, 2009] § 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. [88 FR 46011, July 18, 2023] § 107.815 Financings in the form of Debt Securities. You may purchase Debt Securities from Small Businesses. (a) Definitions. (b) Restriction on options obtained by Licensee's management and employees. (1) They participate in the Financing on a pari passu basis with you; or (2) SBA gives its prior written approval; or (3) The options received are compensation for service as a member of the board of directors of the Small Business, and such compensation does not exceed that paid to other outside directors. In the absence of such directors, fees must be reasonable when compared with amounts paid to outside directors of similar companies. [61 FR 3189, Jan. 31, 1996, as amended at 65 FR 69432, Nov. 17, 2000] § 107.820 Financings in the form of guarantees. At the request of a Small Business or where necessary to protect your existing investment, you may guarantee the monetary obligation of a Small Business to any non-Associate creditor. (a) You may not issue a guaranty if: (1) You would become subject to State regulation as an insurance, guaranty or surety business; (2) The amount of the guaranty plus any direct Financings to the Small Business exceed the overline limitations of § 107.740, except that a pledge of the Equity Securities of the issuer or a subordination of your lien or creditor position does not count toward your overline; or (3) The total financing cost to the Small Business exceeds the cost of money limits of § 107.855. (b) Pledge of Licensee's assets as guaranty. § 107.825 Purchasing securities from an underwriter or other third party. (a) Securities purchased through or from an underwriter. (1) You purchase such securities within 90 days of the date the public offering is first made; (2) Your purchase price is no more than the original public offering price; and (3) The amount paid by you for the securities (less ordinary and reasonable underwriting charges and commissions) has been, or will be, paid to the Small Business, and the underwriter certifies in writing that this requirement has been met. (b) Recordkeeping requirements. (c) Underwriter's requirements. (d) Securities purchased from another Licensee or from SBA. (e) Purchases of securities from other non-issuers. (1) Such acquisition is a reasonably necessary part of the overall sound Financing of the Small Business under the Act; or (2) The securities are acquired to finance a change of ownership under § 107.750. Structuring Licensee's Financing of an Eligible Small Business: Terms and Conditions of Financing § 107.830 Duration/term of financing. (a) General rule. The duration/term of all your Financings must be for a minimum period of one year, and the maximum term of any Loan or Debt Security Financing must be no longer than 20 years. The principal of any Loan (or the loan portion of any Debt Security) with a term of one year or less cannot be amortized faster than straight line. If the term is greater than one year, the principal cannot be amortized faster than straight line for the first year. (b) Exceptions. You may make a Short-term Financing for a term less than one year if the Financing is: (1) An interim Financing in contemplation of long-term Financing. The contemplated long-term Financing must be in an amount at least equal to the short-term Financing, and must be made by you alone or in participation with other investors; (2) For protection of your prior investment(s); (3) For the purpose of Financing a change of ownership under § 107.750. The total amount of such Short-term Financings may not exceed 20 percent of your Loans and Investments (at cost) at the end of any fiscal year; or (4) For the purposes of aiding a Disadvantaged Business certified to perform a contract awarded under a Federal, State, or local government set-aside program. (c) Restrictions on mandatory redemption of Equity Securities. (d) Special rules for Loans and Debt Securities Term. (2) Prepayment. (3) Prepayment penalties. [61 FR 3189, Jan. 31, 1996, as amended at 69 FR 8098, Feb. 23, 2004; 88 FR 46012, July 18, 2023; 91 FR 8, Jan. 2, 2026] § 107.835 [Reserved] § 107.840 [Reserved] § 107.845 [Reserved] § 107.850 Restrictions on redemption of Equity Securities. (a) A Portfolio Concern cannot be required to redeem Equity Securities earlier than one year from the date of the first closing unless: (1) The concern makes a public offering, or has a change of management or control, or files for protection under the provisions of the Bankruptcy Code, or materially breaches your Financing agreement; or (2) You make a follow-on investment, in which case the new securities may be redeemed in less than one year, but no earlier than the redemption date associated with your earliest Financing of the concern. (b) The redemption price must be either: (1) A fixed amount that is no higher than the price you paid for the securities; or (2) An amount that cannot be fixed or determined before the time of redemption. In this case, the redemption price must be based on: (i) A reasonable formula that reflects the performance of the concern (such as one based on earnings or book value); or (ii) The fair market value of the concern at the time of redemption, as determined by a professional appraisal performed under an agreement acceptable to both parties. (c) Any method for determining the redemption price must be agreed upon no later than the date of the first (or only) closing of the Financing. [61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999; 69 FR 8098, Feb. 23, 2004] § 107.855 Interest rate ceiling and limitations on fees charged to Small Businesses (“Cost of Money”). “Cost of Money” means 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 this section. (a) Financings to which the Cost of Money rules apply. (b) When to determine the Cost of Money ceiling for a Financing. (c) How to determine the Cost of Money ceiling for a Financing. (1) Choose a base rate for your Cost of Money computation. The base rate may be either the Debenture Rate currently in effect plus the applicable Charge determined under § 107.1130(d)(1), or your own “Cost of Capital” as determined under paragraph (d) of this section. (2) For a Loan, add 11 percentage points to the base rate; for a Debt Security, add 6 percentage points. In either case, round the sum down to the nearest eighth of one percent. (3) If the result is more than 19 percent (for a Loan) or 14 percent (for a Debt Security), you may use it as your Cost of Money ceiling. (4) If two or more Licensees participate in the same Financing of a Small Business, the base rate used in this paragraph (c) is the highest of the following: (i) The current Debenture Rate plus the applicable Charge determined under § 107.1130(d)(1); (ii) The Cost of Capital of the lead Licensee; or (iii) The weighted average of the Cost of Capital for all Licensees participating in the Financing. (d) How to determine your Cost of Capital. (1) For any fiscal year, you may compute your Cost of Capital: (i) As of the first day of your fiscal year, to remain in effect for the entire year; or (ii) As of the first day of every fiscal quarter during the fiscal year, to remain in effect for the duration of the quarter. (2) For each qualified borrowing outstanding at your last fiscal year or fiscal quarter end, multiply the ending principal balance (net of related unamortized fees) by the number of days during the past four fiscal quarters that the borrowing was outstanding, and divide the result by 365. (3) Add together the amounts computed for all borrowings under paragraph (d)(2) of this section. The result is your weighted average borrowings. (4) For all qualified borrowings outstanding at your last fiscal year or fiscal quarter end, determine the aggregate interest expense for the past four fiscal quarters, excluding amortization of loan fees. For the purposes of this paragraph (d)(4): (i) Interest expense on Debentures includes the 1 percent Charge paid by a Licensee under § 107.1130(d)(1); and (ii) Section 301(d) Licensees with outstanding subsidized Debentures are presumed to have paid interest at the rate stated on the face of such Debentures, without regard to any subsidy paid by SBA. (5) Divide the interest expense from paragraph (d)(4) of this section by the weighted average borrowings from paragraph (d)(3) of this section, and multiply by 100. The result is your Cost of Capital, which you may use to compute a Cost of Money ceiling under paragraph (c) of this section. (e) SBA review of Cost of Capital computation. (1) A computation that is kept in such a file and is audited by your independent public accountant is considered correct unless SBA demonstrates otherwise. (2) If a computation is not kept in such a file or is unaudited, you must prove its accuracy to SBA's satisfaction. (f) Charges included in the Cost of Money. (1) The portion of the fixed redemption price that exceeds your original cost. (2) Any amount of a redemption that is paid out of accounts other than the Small Business's capital accounts (capital, paid-in surplus, or retained earnings of a corporation; or partners' capital of a partnership). (g) Charges excluded from the Cost of Money. (1) Discount on the loan portion of a Debt Security, if such discount exists solely as the result of the allocation of value to detachable stock purchase warrants in accordance with generally accepted accounting principles. (2) Closing fees, application fees, and expense reimbursements, each as permitted under § 107.860. (3) Reasonable prepayment penalties permitted under § 107.830(d)(3). (4) Out-of-pocket conveyance and/or recordation fees and taxes. (5) Reasonable closing costs. (6) Fees for management services as permitted under § 107.900. (7) Reasonable and necessary out-of-pocket expenses you incur to monitor the Financing. (8) Board of director fees not in excess of those paid to other outside directors, if your board representation meets the requirements of § 107.730(e). (9) A reasonable fee for arranging financing for a Small Business from a source that is neither a Licensee nor an Associate of yours. The Small Business must agree in writing to pay such a fee before you arrange the financing. (10) The difference between the contractual interest rate of the Financing and a default rate of interest permitted as follows: (i) If a Small Business is in default, you may charge a default rate of interest as much as 7 percentage points higher than the contractual rate until the default is cured. (ii) For this purpose, “default” means either failure to pay an amount when due or failure to provide information required under the Financing documents. (11) Royalty payments based on improvement in the performance of the Small Business after the date of the Financing. (12) Gains realized on the disposition of Equity Securities issued by the Small Business. (h) How to evaluate compliance with the Cost of Money ceiling. (1) Beginning with the date of the first disbursement (“period zero”), identify your cash inflows and cash outflows for each period of the Financing. The appropriate period to use (such as years, quarters, or months) depends on how you have structured the disbursements and payments. (2) Discount the cash flows back to the first disbursement date using the Cost of Money ceiling from paragraph (c) of this section as the discount rate. (3) If the result is zero or less, the Financing is within the Cost of Money ceiling; if it is greater than zero, the Financing exceeds the Cost of Money ceiling. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 FR 52646, Sept. 30, 1999; 65 FR 69432, Nov. 17, 2000; 77 FR 20294, Apr. 4, 2012; 89 FR 3548, Jan. 19, 2024] § 107.860 Financing fees and expense reimbursements a Licensee may receive from a Small Business. You may collect Financing fees and receive expense reimbursements from a Small Business only as permitted under this § 107.860. (a) Application fee. (1) No more than 1 percent of the amount of Financing requested (or, if two or more Licensees participate in the Financing, their combined application fees are no more than 1 percent of the total Financing requested); and (2) Agreed to in writing by the Financing applicant. (b) SBA review of application fees. (c) Closing fee—Loans. (1) The fee is no more than 2 percent of the Financing amount (or, if two or more Licensees participate in the Financing, their combined closing fees are no more than 2 percent of the total Financing amount); and (2) You charge the fee no earlier than the date of the first disbursement. (d) Closing fee—Debt or Equity Financings. (1) The fee is no more than 4 percent of the Financing amount (or, if two or more Licensees participate in the Financing, their combined closing fees are no more than 4 percent of the total Financing amount); and (2) You charge the fee no earlier than the date of the first disbursement. (e) Limitation on dual fees. (f) Expense reimbursements. (g) Breakup fee. [61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996] § 107.865 Control of a Small Business by a Licensee. (a) In general. (b) Presumption of control. (1) At least 50 percent of the outstanding voting securities, if there are fewer than 50 shareholders; or (2) More than 25 percent of the outstanding voting securities, if there are 50 or more shareholders; or (3) At least 20 percent of the outstanding voting securities, if there are 50 or more shareholders and no other party holds a larger block. (c) Rebuttals to presumption of Control. (1) The management of the Small Business owns at least a 25 percent interest in the voting securities of the business; and (2) The management of the Small Business can elect at least 40 percent of the board members of a corporation, general partners of a limited partnership, or managers of a limited liability company, as appropriate, and the Investor Group can elect no more than 40 percent. The balance of such officials may be elected through mutual agreement by management and the Investor Group. (d) Extension of Control. (e) Additional Financing for businesses under Licensee's Control. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 FR 52646, Sept. 30, 1999; 67 FR 64790, Oct. 22, 2002] § 107.880 Assets acquired in liquidation of Portfolio securities. You may acquire assets in full or partial liquidation of a Small Business's obligation to you under the conditions permitted by this § 107.880. The assets may be acquired from the Small Business, a guarantor of its obligation, or another party. (a) Timely disposition of assets. (b) Permitted expenditures to preserve assets. (2) You may incur reasonably necessary expenditures for improvements to render such assets saleable. (3) You may make payments of mortgage principal and interest (including amounts in arrears when you acquired the asset), pay taxes when due, and pay for necessary insurance coverage. (c) SBA approval of expenditures. (1) Your total expenditures under paragraphs (b)(1) and (b)(2) of this section plus your total Financing(s) to the Small Business must not exceed your overline limit under § 107.740; and (2) Your total expenditures under paragraph (b) of this section plus your total Financing(s) to the Small Business must not exceed 35 percent of your Regulatory Capital. Limitations on Disposition of Assets § 107.885 Disposition of assets to Licensee's Associates or to competitors of Portfolio Concern. Sale of assets to Associate. [61 FR 3189, Jan. 31, 1996, as amended at 67 FR 64791, Oct. 22, 2002] Management Services and Fees § 107.900 Management fees for services provided to a Small Business by Licensee or its Associate. This § 107.900 applies to management services that you or your Associate provide to a Small Business during the term of a Financing or prior to Financing. It does not apply to management services that you or your Associate provide to a Small Business that you do not finance. Fees permitted under this section are not included in the Cost of Money (see § 107.855). (a) Permitted management fees. (1) You or your Associate have entered into a written contract with the Small Business; (2) The fees charged are for services actually performed; (3) Services are provided on an hourly fee, project fee, or other reasonable basis; and (4) You can demonstrate to SBA, upon request, that the rate does not exceed the prevailing rate charged for comparable services by other organizations in the geographic area of the Small Business. (b) Fees for service as a board member. (c) SBA approval required. (d) Recordkeeping requirements. (e) Transaction fees. (2) Your Associate may charge market rate investment banking fees to a Small Business on that portion of a Financing that you do not provide. Subpart H—Non-leveraged Licensees—Exceptions to Regulations § 107.1000 Non-leveraged Licensees—exceptions to this part. The regulatory exceptions in this section apply to Non-leveraged Licensees. (a) You are exempt from the following provisions (but you must come into compliance with them to become eligible for Leverage): (1) The overline limitation in § 107.740. (2) The restrictions in § 107.530 on investments of idle funds, provided you do not engage in activities not contemplated by the Act. (3) The restrictions in § 107.550 on third-party debt. (4) The restrictions in § 107.880 on expenses incurred to maintain or improve assets acquired in liquidation of Portfolio securities. (5) The recordkeeping requirements and fee limitations in § 107.825 (b) and (c), respectively, for securities purchased through or from an underwriter. (b) You are exempt from the requirements to obtain SBA's prior approval for: (1) A decrease in your Regulatory Capital of more than two percent under § 107.585 (but not below the minimum required under the Act or these regulations). You must report the reduction to SBA within 30 days. (2) Disposition of any asset to your Associate under § 107.885. (3) A contract to employ an Investment Adviser/Manager under § 107.510. However, you must notify SBA of the Management Expenses to be incurred under such contract, or of any subsequent material changes in such Management Expenses, within 30 days of execution. In order to become eligible for Leverage, you must have the contract approved by SBA. (4) Your initial Management Expenses under § 107.140 and increases in your Management Expenses under § 107.520. However, you must have your Management Expenses approved by SBA in order to become eligible for Leverage. (5) Options obtained from a Small Business by your management or employees under § 107.815(b). (c) You are exempt from the requirement in § 107.680 to obtain SBA's post approval of new directors and new officers, other than your chief operating officer. However, you must notify SBA of the new directors or officers within 30 days, and you must have all directors and officers approved by SBA in order to become eligible for Leverage. [61 FR 3189, Jan. 31, 1996, as amended at 88 FR 46012, July 18, 2023] Subpart I—SBA Financial Assistance for Licensees (Leverage) General Information About Obtaining Leverage § 107.1100 Types of Leverage and application procedures. (a) Types of Leverageable available. (1) The purchase or guarantee of your Debentures. (2) The purchase or guarantee of your Participating Securities. (b) Applying for Leverage. [63 FR 5868, Feb. 5, 1998, as amended at 64 FR 70996, Dec. 20, 1999; 82 FR 39341, Aug. 18, 2017] § 107.1120 General eligibility requirements for Leverage. To be eligible for Leverage, you must: (a) Demonstrate a need for Leverage, evidenced by your investment activity and a lack of sufficient funds for investment. For your first issuance of Leverage, if you have invested at least 50 percent of your Leverageable Capital, you are presumed to lack sufficient funds for investment. (b) Have adequate Private Capital to satisfy the requirements for financial viability under § 107.200. (c) Meet the minimum capital requirements of § 107.210, subject to the following additional conditions: (1) If you were licensed after September 30, 1996, under the exception in § 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. (2) If you were licensed on or before September 30, 1996, and have Regulatory Capital of less than $5,000,000 (less than $10,000,000 if you wish to issue Participating Securities): (i) You must certify in writing that at least 50 percent of the aggregate dollar amount of your Financings extended after September 30, 1996 will be provided to Smaller Enterprises (as defined in § 107.710(a)); and (ii) You must demonstrate to SBA's satisfaction that the approval of Leverage will not create or contribute to an unreasonable risk of default or loss to the United States government, based on such measurements of profitability and financial viability as SBA deems appropriate. (d) For any Leverage draw that would cause you and any other Licensees under Common Control to have aggregate outstanding Leverage in excess of the amount permitted under Section 303(b)(2)(A)(ii) of the Act, which, as of June 21, 2018, is $175,000,000, certify that none of the Licensees has a condition of Capital Impairment. See also § 107.1150(b). (e) For any Leverage request pursuant to § 107.1150(d)(2)(i), certify that at least 50 percent (in dollars) of your Financings made on or after the date of such request will be invested in Small Businesses located in low-income geographic areas. (f) For any Leverage request pursuant to § 107.1150(d)(2)(ii), certify that at least 50 percent (in dollars) of the Financings made by each Licensee under Common Control on or after the date of such request will be invested in Small Businesses located in low-income geographic areas. (g) Certify in writing that you are in compliance with the requirement to finance Smaller Enterprises in § 107.710(b). (h) Show, to the satisfaction of SBA, that your management is qualified and has the knowledge, experience, and capability necessary for investing in the types of businesses contemplated by the Act, the regulations in this part and your business plan. (i) Be in compliance with the regulations in this part. (j) If required by SBA, have your Control Person(s) assume, in writing, personal responsibility for your Leverage, effective only if such Control Person(s) participate (directly or indirectly) in a transfer of Control not approved by SBA. (k) If you are an Early Stage SBIC, certify in writing that in accordance with § 107.1810(f)(11), at least 50 percent of the aggregate dollar amount of your Financings will be provided to “early stage” companies as defined under the definition of Early Stage SBIC in § 107.50 of this part. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64 FR 70996, Dec. 20, 1999; 74 FR 33916, July 14, 2009; 77 FR 25053, Apr. 27, 2012; 79 FR 62824, Oct. 21, 2014; 88 FR 46012, July 18, 2023; 89 FR 3548, Jan. 19, 2024] § 107.1130 Leverage fees and Annual Charges. (a) Leverage fee. (b) Payment of leverage fee. (2) If you issue a Debenture or Participating Security that is not used to repay or redeem existing Leverage, SBA will deduct the leverage fee from the proceeds remitted to you, unless you prepaid the fee under § 107.1210. (c) Refundability. (d) Additional charge for Leverage Debentures. (i) 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. (ii) 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. (iii) 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. (2) Participating Securities. (e) Other Leverage fees. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 77 FR 25053, Apr. 27, 2012; 88 FR 46012, July 18, 2023; 89 FR 3549, Jan. 19, 2024; 90 FR 55999, Dec. 5, 2025] § 107.1140 [Reserved] Maximum Amount of Leverage for Which a Licensee Is Eligible § 107.1150 Maximum amount of Leverage. A Leveraged Licensee, other than an Early Stage SBIC, may have maximum outstanding Leverage as set forth in paragraphs (a), (b), (d), and (e) of this section. An Early Stage SBIC may have maximum outstanding Leverage as set forth in paragraph (c) of this section. In general, SBA will approve Leverage commitment requests in excess of 200 percent of Regulatory Capital and draw requests in excess of 200 percent of Leverageable Capital only after a Licensee has demonstrated consistent, sustainable profitability based on a conservative investment strategy that limits downside risk. Any such Leverage request must be supported by an up-to-date business plan that reflects continuation of the Licensee's successful investment strategy and demonstrates the Licensee's ability to pay all SBA obligations in accordance with their terms. (a) Individual Licensee. Individual Maximum (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. See Example 1 to paragraph (b): (c) Early Stage SBICs. (1) The total amount of any and all Leverage commitments you receive from SBA shall not exceed 100 percent of your highest Regulatory Capital or $50 million, whichever is less; (2) On a cumulative basis, the total amount of Leverage you have issued shall not exceed the total amount of capital paid in by your investors; and (3) The maximum amount of Leverage you may have outstanding at any time is the lesser of: (i) 100 percent of your Leverageable Capital, or (ii) $50 million. (d) Additional Leverage based on investment in low-income geographic areas. (1) Investment in Smaller Enterprises located in low-income geographic areas. (i) Determine the cost basis, as reported on your most recent filing of SBA Form 468, of any investments in the Equity Securities of a Smaller Enterprise located in a low-income geographic area. (ii) Calculate the amount that equals 50 percent of your Leverageable Capital. (iii) Subtract from your outstanding Leverage the lesser of paragraph (d)(1)(i) or (ii). (iv) If the amount calculated in paragraph (d)(1)(iii) is less than the maximum leverage determined under paragraph (a) of this section, the difference between the two amounts equals your additional Leverage availability. (2) Investment in Small Businesses located in low-income geographic areas. (i) At least 50 percent (in dollars) of your Financings preceding the date of such request must have been invested in Small Businesses located in low-income geographic areas. In addition, you must certify that at least 50 percent (in dollars) of your Financings on or after the date of such request will be invested in Small Businesses located in low-income geographic areas. (ii) If you are requesting a draw that would cause you and any other Licensees under Common Control to have aggregate outstanding Leverage in excess of $225,000,000, at least 50 percent (in dollars) of the Financings made by each Licensee under Common Control preceding the date of such request must have been invested in Small Businesses located in low-income geographic areas. In addition, each such Licensee must certify that at least 50 percent (in dollars) of its Financings on or after the date of such request will be invested in Small Businesses located in low-income geographic areas. (e) Additional Leverage based on Energy Saving Qualified Investments in Smaller Enterprises. (2) To determine whether you may request a draw that would cause you to have outstanding Leverage in excess of the amount determined under paragraph (a) of this section: (i) Determine the cost basis, as reported on your most recent filing of SBA Form 468, of any Energy Saving Qualified Investments in a Smaller Enterprise that individually do not exceed 20% of your Regulatory Capital. (ii) Calculate the amount that equals 33% of your Leverageable Capital. (iii) Subtract from your outstanding Leverage the lesser of paragraph (e)(2)(i) or (ii). (iv) If the amount calculated in paragraph (e)(2)(iii) is less than the maximum Leverage determined under paragraph (a) of this section, the difference between the two amounts equals your additional Leverage availability. [74 FR 33916, July 14, 2009, as amended at 77 FR 23380, Apr. 19, 2012; 77 FR 25053, Apr. 27, 2012; 79 FR 62824, Oct. 21, 2014; 82 FR 39341, Aug. 18, 2017; 88 FR 46012, July 18, 2023] § 107.1160 [Reserved] Special Rules for Leverage Issued by an Early Stage SBIC § 107.1180 Required distributions to SBA by Early Stage SBICs. (a) Distribution requirement. (b) How SBA will apply Distributions. (c) Condition for making a Distribution. (d) SBA's share of Distribution. (1) Determine the highest ratio of outstanding Leverage to Leverageable Capital that you have ever attained (your “Highest Leverage Ratio”). For the purpose of determining your Highest Leverage Ratio, any deferred interest Debentures issued at a discount must be included in the computation at their face value. (2) Determine SBA's percentage share of cumulative Distributions: (i) If your Capital Impairment Percentage under § 107.1840 is less than 50 percent as of the Distribution date or your Highest Leverage Ratio equals 0.5 or less, except as provided in paragraph (d)(2)(iii) of this section, SBA's percentage share of cumulative Distributions equals: [Highest Leverage Ratio/(Highest Leverage Ratio + 1)] × 100 For example, if your Highest Leverage Ratio equals 1, then SBA's share of any distribution you make will be 50 percent. (ii) If your Capital Impairment Percentage under § 107.1840 is 50 percent or greater as of the Distribution date and your Highest Leverage Ratio is greater than 0.5, SBA's percentage share of cumulative Distributions equals 100 percent. (iii) If you have a condition of Capital Impairment under § 107.1830 and your Highest Leverage Ratio equals 0.5 or less as of the Distribution date, SBA's percentage share of cumulative Distributions equals 100 percent. (3) Multiply the sum of all your prior Distributions and your current proposed Distribution (including Distributions to SBA, your limited partners and your General Partner) by SBA's percentage share of cumulative Distributions as determined in paragraph (d)(2) of this section. (4) From the result in paragraph (d)(3) of this section, subtract the sum of all your prior Distributions to SBA under this § 107.1180. (5) The amount of your Distribution to SBA will be the least of: (i) The result in paragraph (d)(4) of this section; (ii) Your current proposed Distribution; or (iii) Your outstanding Leverage. (e) Additional Leverage prepayment. [77 FR 25053, Apr. 27, 2012] § 107.1181 Interest reserve requirements for Early Stage SBICs. (a) Reserve requirement. (1) Binding unfunded commitments from your Institutional Investors that cannot be called for any purpose other than the payment of interest and Charges to SBA, or the payment of any amounts due to SBA; and (2) Cash maintained in a separate bank account or separate investment account permitted under § 107.530 of this part and separately identified in your financial statements as “restricted cash” available only for the purpose of paying interest and Charges to SBA, or for the payment of any amounts due to SBA. (b) The required reserve associated with an individual Debenture shall be reduced on each Payment Date upon payment of the required interest and Charges. If you prepay a Debenture prior to the 21st Payment Date following its date of issuance, the reserve requirement associated with that Debenture shall be correspondingly eliminated. (c) Your limited partnership agreement must incorporate the reserve requirement in paragraph (a) of this section. [77 FR 25053, Apr. 27, 2012] § 107.1182 Valuation requirements for Early Stage SBICs based on Capital Impairment Percentage. (a) If you are an Early Stage SBIC, you must compute your Capital Impairment Percentage and determine whether you have a condition of Capital Impairment in accordance with §§ 107.1830 and 107.1840 of this part. (b) You must promptly notify SBA in writing if your Capital Impairment Percentage is at least 50 percent, even if your maximum permitted Capital Impairment Percentage is higher. (c) Upon receipt of your notification under paragraph (b) of this section, or upon making its own determination that your Capital Impairment Percentage is at least 50 percent, SBA has the right to require you to engage, at your expense, an independent third party, acceptable to SBA, to prepare valuations of some or all of your Loans and Investments, as designated by SBA. [77 FR 25053, Apr. 27, 2012] Conditional Commitments by SBA To Reserve Leverage for a Licensee § 107.1200 SBA's Leverage commitment to a Licensee—application procedure, amount, and term. (a) General. (b) Applying for a Leverage commitment. (c) Limitations on the amount of a Leverage commitment. (d) Term of Leverage commitment. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998] § 107.1210 Payment of leverage fee upon receipt of commitment. (a) Partial prepayment of leverage fee. (b) Automatic cancellation of commitment. [63 FR 5868, Feb. 5, 1998] § 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 § 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. [88 FR 46012, July 18, 2023] § 107.1230 Draw-downs by Licensee under SBA's Leverage commitment. (a) Licensee's authorization of SBA to purchase or guarantee securities. (b) Limitations on amount of draw. Federal Register (c) Effect of regulatory violations on Licensee's eligibility for draws General rule. (2) Exception to general rule. (i) SBA determines that your outstanding violations are of non-substantive provisions of the Act or regulations and that you have not repeatedly violated any non-substantive provisions; or (ii) You have agreed with SBA on a course of action to resolve your violations and such agreement does not prevent you from issuing Leverage. (d) Procedures for funding draws. (1) A statement certifying that there has been no material adverse change in your financial condition since your last filing of SBA Form 468 (see also § 107.1220 for SBA Form 468 filing requirements). (2) If your request is submitted more than 30 days following the end of your fiscal year, but before you have submitted your annual filing of SBA Form 468 (Long Form) in accordance with § 107.630(a), a preliminary unaudited annual financial statement on SBA Form 468 (Short Form). (3) A statement certifying that to the best of your knowledge and belief, you are in compliance with all provisions of the Act and SBA regulations (i.e., no unresolved regulatory or statutory violations), or a statement listing any specific violations you are aware of. Either statement must be executed by one of the following: (i) An officer of the Licensee; (ii) An officer of a corporate general partner of the Licensee; or (iii) An individual who is authorized to act as or for a general partner of the Licensee. (4) A statement that the proceeds are needed to fund one or more particular Small Businesses or to provide liquidity for your operations. If required by SBA, the statement must include the name and address of each Small Business, and the amount and anticipated closing date of each proposed Financing. (e) Reporting requirements after drawing funds. (2) If SBA required you to provide information concerning a specific planned Financing under paragraph (d)(3) of this section, and such Financing has not closed within 60 calendar days after the anticipated closing date, you must give SBA a written explanation of the failure to close. (3) If you do not comply with this paragraph (e), you will not be eligible for additional draws. SBA may also determine that you are not in compliance with the terms of your Leverage under §§ 107.1810 or 107.1820. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64 FR 70996, Dec. 20, 1999] § 107.1240 Funding of Licensee's draw request through sale to short-term investor. (a) Licensee's authorization of SBA to arrange sale of securities to short-term investor. (1) The sale of your Debenture or Participating Security to a short-term investor at a rate that may be different from the Trust Certificate Rate which will be established at the time of the pooling of your security; (2) The purchase of your security from the short-term investor, either by you or on your behalf; and (3) The pooling of your security with other securities with the same maturity date. (b) Sale of Debentures to a short-term investor. (1) The sale price will be the face amount. (2) At the next scheduled date for the sale of Debenture Trust Certificates, whether or not the sale actually occurs, you must pay interest to the short-term investor for the short-term period. If the actual sale of Trust Certificates takes place after the scheduled date, you must pay the short-term investor interest from the scheduled sale date to the actual sale date. This additional interest is due on the actual sale date. (3) Failure to pay the interest constitutes noncompliance with the terms of your Leverage (see § 107.1810). (c) Sale of Participating Securities to a short-term investor. (d) Licensee's right to repurchase its Debentures before pooling. (1) Give SBA written notice at least 10 days before the cut-off date for the pool in which your Debenture is to be included; and (2) Pay the face amount of the Debenture, plus interest, to the short-term investor. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998] § 107.1400 [Reserved] § 107.1410 [Reserved] § 107.1420 [Reserved] § 107.1430 [Reserved] § 107.1440 [Reserved] § 107.1450 [Reserved] Participating Securities Leverage § 107.1500 General description of Participating Securities. (a) Types of Participating Securities. (b) Special eligibility requirements for Participating Securities. (1) Minimum capital (see § 107.210). (2) Liquidity (see § 107.1505). (3) Non-SBA borrowing (see § 107.570). (4) Equity investing, as set forth in this paragraph (b)(4). If you issue Participating Securities, you must invest an amount equal to the Original Issue Price of such securities solely in Equity Capital Investments, as defined in § 107.50. (c) Special features of Participating Securities—Prioritized Payments, Adjustments, and Profit Participation. (1) Prioritized Payments. (2) Adjustments to Prioritized Payments. (3) SBA Profit Participation. (d) Distributions by Licensees issuing Participating Securities. (e) Mandatory redemption of Participating Securities. (f) Priority of Participating Securities in liquidation of Licensee. (1) The Redemption Price of Participating Securities; (2) Any Earned Prioritized Payments and any earned Adjustments and earned Charges (see § 107.1520); and (3) Any Profit Participation allocated to SBA under § 107.1530. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998] § 107.1505 Liquidity requirements for Licensees issuing Participating Securities. If you have outstanding Participating Securities, you must maintain sufficient liquidity to avoid a condition of Liquidity Impairment. Such a condition will constitute noncompliance with the terms of your Leverage under § 107.1820(e). (a) Definition of Liquidity Impairment. (1) As of the close of your fiscal year; (2) At the time you apply for Leverage, unless SBA permits otherwise; and (3) At such time as you contemplate making any Distribution. (b) Computation of Liquidity Ratio. Calculation of Liquidity Ratio Financial account Amount reported Weight Weighted amount (1) Cash and invested idle funds × 1.00 (2) Commitments from investors × 1.00 (3) Current maturities × 0.50 (4) Other current assets × 1.00 (5) Publicly Traded and Marketable Securities × 1.00 (6) Anticipated operating revenue for next 12 months 1 × 1.00 (7) Total Current Funds Available A (8) Current liabilities × 1.00 (9) Commitments to Small Businesses × 0.75 (10) Anticipated operating expense for next 12 months 1 × 1.00 (11) Anticipated interest expense for next 12 months 1 × 1.00 (12) Contingent liabilities (guarantees) × 0.25 (13) Total Current Funds Required B 1 [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998] § 107.1510 How a Licensee computes Earmarked Profit (Loss). Computing your Earmarked Profit (Loss) is the first step in determining your obligations to pay Prioritized Payments, Adjustments and Charges under § 107.1520 and Profit Participation under § 107.1530. (a) Requirement to compute your Earmarked Profit (Loss). (1) Each full fiscal year. (2) Any interim period (consisting of one or more fiscal quarters) for which you want to make a Distribution. (b) How to determine your Earmarked Assets. (1) An Earmarked Asset remains earmarked until you dispose of it, even if you no longer have any outstanding Participating Securities. (2) Investments you make after redeeming all your Participating Securities are not Earmarked Assets. However, if you issue new Participating Securities, all of your Loans and Investments again become Earmarked Assets. (3) If you were licensed before March 31, 1993, you may be permitted to exclude Loans and Investments held at that date from Earmarked Assets under § 107.1590. (c) How to compute your Earmarked Asset Ratio. EAR = (EA ÷ LI) × 100 where: EAR = Earmarked Asset Ratio. EA = Average Earmarked Assets (at cost) for the fiscal year or interim period. LI = Average Loans and Investments (at cost) for the fiscal year or interim period. (d) How to compute your Earmarked Profit (Loss) if Earmarked Asset Ratio is 100 percent. EP = NI + IK + EME where: EP = Earmarked Profit (Loss) NI = Net Income (Loss), as reported on SBA Form 468 except as otherwise provided in this paragraph (d)(1) IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that you are distributing as an In-Kind Distribution under § 107.1580 EME = Excess Management Expenses (ii) For the purpose of determining Net Income (Loss), leverage fees paid to SBA and partnership syndication costs that you incur must be capitalized and amortized on a straight-line basis over not less than five years. (2) “Excess Management Expenses” are those that exceed the following limit: (i) For a full fiscal year, the limit is the lower of: (A) 2.5 percent of your weighted average Combined Capital for the year, plus $125,000 if Combined Capital is below $20,000,000; or (B) Your Management Expenses approved by SBA. (ii) For less than a full fiscal year, you must prorate the annual amounts in paragraph (d)(2)(i) of this section to determine the limit. (e) How to compute your Earmarked Profit (Loss) if Earmarked Asset Ratio is less than 100 percent. (1) Do the Earmarked Profit (Loss) computation in paragraph (d) of this section. (2) Subtract your net realized gain (loss) (as reported on SBA Form 468) on Loans and Investments that are not Earmarked Assets. (3) Separate the result from paragraph (e)(2) of this section into: (i) Net realized gain (loss) (as reported on SBA Form 468) on Earmarked Assets (“EGL”); and (ii) The remainder (“R”). (4) Your Earmarked Profit (Loss) equals: EGL + (R × Earmarked Asset Ratio) (f) How to compute your cumulative Earmarked Profit (Loss). [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5870, Feb. 5, 1998] § 107.1520 How a Licensee computes and allocates Prioritized Payments to SBA. This section tells you how to compute Prioritized Payments, Adjustments and Charges on Participating Securities and determine the amounts you must pay. To distribute these amounts, see § 107.1540. (a) How to compute Prioritized Payments and Adjustments Prioritized Payments. (2) Adjustments. (3) Charges. (b) Licensee's obligation to pay Prioritized Payments, Adjustments and Charges. (1) Prioritized Payments that you must pay (or have already paid) because you have sufficient profit are “Earned Prioritized Payments”. (2) Prioritized Payments that have not become payable because you lack sufficient profit are “Accumulated Prioritized Payments”. Treat all Prioritized Payments as “Accumulated” until they become “Earned” under this section. (3) Adjustments (computed under paragraph (f) of this section) and Charges (computed under § 107.1130(d)(2)) are “earned” according to the same criteria applied to Prioritized Payments. (c) How to keep track of Prioritized Payments. (1) Accumulation Account. (2) Distribution Account. (3) Earned Payments Account. (d) How to determine your profit for Prioritized Payment purposes. (1) Bring the Accumulation Account up to date by adding to it all Prioritized Payments and Charges through the end of the appropriate fiscal period. (2) Determine whether you have profit for the purposes of this section by doing the following computation: (i) Cumulative Earmarked Profit (Loss) under § 107.1510(f); minus (ii) The Earned Payments Account balance; minus (iii) All Distributions previously made under §§ 107.1550, 107.1560 and 107.1570(a); minus (iv) Any Profit Participation previously allocated to SBA under § 107.1530, but not yet distributed. (3) The amount computed in paragraph (d)(2) of this section, if greater than zero, is your profit. If the amount is zero or less, you have no profit. (4) If you have a profit, continue with paragraph (e) of this section. Otherwise, continue with paragraph (f) of this section. (e) Allocating Prioritized Payments to the Distribution Account. (i) Your profit; or (ii) The balance in your Accumulation Account. (2) Subtract the result in paragraph (e)(1) of this section from the Accumulation Account and add it to the Distribution Account and the Earned Payments Account. (f) How to compute Adjustments. (1) Determine the combined average Accumulation Account and Distribution Account balances for the fiscal year, assuming that Prioritized Payments accumulate on a daily basis without compounding. (2) Multiply the average balance computed in paragraph (f)(1) of this section by the average of the Trust Certificate Rates for all the Participating Securities poolings during the fiscal year. (3) Add the amounts computed in this paragraph (f) to your Accumulation Account. (g) Licensee's obligation to pay Prioritized Payments after redeeming Participating Securities. (1) You must continue to perform all the procedures in this section as of the end of each fiscal quarter and prior to making any Distribution. You must distribute any Earned Prioritized Payments, earned Adjustments and earned Charges in accordance with § 107.1540. (2) After you dispose of all your Earmarked Assets and make any required Distributions in accordance with § 107.1540, your obligation to pay any remaining Accumulated Prioritized Payments, unearned Adjustments and unearned Charges will be extinguished. [63 FR 5870, Feb. 5, 1998] § 107.1530 How a Licensee computes SBA's Profit Participation. This section tells you how to compute SBA's Profit Participation. Profit Participation is included in the Distributions you make to SBA under §§ 107.1550 and 107.1560. (a) How to compute Profit Participation. (b) How to keep track of Profit Participation. (c) How to compute the Base. B = EP − PPA − UL where: B = Base. EP = Earmarked Profit (Loss) for the period from § 107.1510. PPA = Prioritized Payments for the period from § 107.1520(a)(1), Adjustments (if applicable) from § 107.1520(f), and Charges (if applicable) from § 107.1130(d)(2). UL = “Unused Loss” from prior periods as determined in this paragraph (c). (1) If the Base computed as of the end of your previous fiscal year (your “Previous Base”) was less than zero, your Unused Loss equals your Previous Base. (2) If your Previous Base was zero or greater, your Unused Loss equals zero, with the following exception: If you made an interim Distribution of Profit Participation during your previous fiscal year, and your Previous Base was lower than the interim Base on which your Distribution was computed, then your Unused Loss equals the difference between the interim Base and the Previous Base. For example, assume you are computing your Base as of December 31, 1997, your fiscal year end. Your Previous Base, computed as of December 31, 1996, was $3,000,000. During 1996, you made an interim Distribution which was computed on a Base of $3,500,000 as of June 30, 1996. The $500,000 difference between the 1996 interim and year-end Bases would be carried forward as Unused Loss in the computation of your Base as of December 31, 1997. (3) If you had no Participating Securities outstanding as of the end of your last fiscal year, you may request SBA's approval to treat your Undistributed Net Realized Loss, as reported on SBA Form 468 for that year, as Unused Loss. If you did not file SBA Form 468 because you were not yet licensed as of the end of your last fiscal year, you may request SBA's approval to treat pre-licensing losses as Unused Loss. (d) How to compute the Profit Participation Rate. (e) Compute the “PLC ratio” General rule. (2) Exception. (i) Divide the highest dollar amount of Participating Securities you have ever had outstanding by your increased Leverageable Capital. (ii) If the result in paragraph (e)(2)(i) of this section is lower than your PLC ratio currently in effect, such result will become your new PLC ratio. (f) Compute the Profit Participation Rate (before indexing). If your PLC ratio is: Then your Profit Participation Rate is: 1 or less 9% × PLC Ratio. More than 1 9% + [3% × (PLC ratio-1)]. (g) Indexing the Profit Participation Rate. (1) Licensees that have issued Participating Securities on only one occasion. (2) Licensees that have issued Participating Securities on more than one occasion. (i) Compute an average of all such Treasury Rates, weighted to reflect the dollar amount of each issuance (ignoring any redemptions) and the number of days from the date of each issuance to the date as of which you are computing the Profit Participation Rate. Example to paragraph (g)(2)(i) of this section. If you issued $10 million of Participating Securities on the 60th day of Fiscal Year 1 when the Treasury Rate was 8 percent, and another $15 million on the 100th day of Fiscal Year 3 when the Treasury Rate was 10 percent, then the weighted average Treasury Rate computed as of the end of Fiscal Year 3 would be 8.55 percent. [Days elapsed since first issuance of Participating Securities = 1,035; days elapsed since second issuance of Participating Securities = 265; weighted amount of first issuance = $10,000,000 × 1,035/1,035 = $10,000,000; weighted amount of second issuance = $15,000,000 × 265/1035 = $3,840,579; weighted average amount of Participating Securities issued = $10,000,000 + $3,840,579 = $13,840,579; weighted average Treasury Rate= {(.08 × $10,000,000) + (.10 × $3,840,579)} / $13,840,579 = 8.55%] (ii) Adjust the Profit Participation Rate from paragraph (f) of this section by the percentage difference between the weighted average Treasury Rate and 8 percent. In the example given in paragraph (g)(2)(i) of this section, if the PLC ratio were equal to 2, the Profit Participation Rate for the fiscal year would be 12.83 percent. [{((.0855−.08) ÷ .08) + 1} × .12 × 100 = 12.83%] (h) Computing SBA's Profit Participation. (1) Multiply the Base from paragraph (c) of this section by the Profit Participation Rate from paragraph (g) of this section. (2) If your last Profit Participation computation was for an interim period during the same fiscal year and used a higher Profit Participation Rate than the Rate you just used in paragraph (h)(1) of this section, you must adjust the amount computed in paragraph (h)(1) of this section as follows: (i) Determine the difference between the Profit Participation Rate you just used in paragraph (h)(1) of this section and the Rate used in your previous computation; (ii) Multiply the difference by the Base from your last Profit Participation computation; and (iii) Add the result to the amount you computed in paragraph (h)(1) of this section. (3) Reduce the Profit Participation computed in paragraphs (h)(1) and (h)(2) of this section by any amounts of Profit Participation that you distributed or reserved for distribution to SBA, or its designated agent or Trustee, for any previous interim period(s) during the fiscal year. The result is SBA's Profit Participation (unless it is less than zero, in which case SBA's Profit Participation is zero). (i) Allocation of Profit Participation. [61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 63 FR 5871, Feb. 5, 1998] § 107.1540 Distributions by Licensee—Prioritized Payments and Adjustments. After you compute Prioritized Payments and Adjustments under § 107.1520, you must distribute them in accordance with this § 107.1540. You must notify SBA of any planned distribution under this section 10 business days before the distribution date, unless SBA permits otherwise. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998; 88 FR 46012, July 18, 2023] § 107.1550 Distributions by Licensee—permitted “tax Distributions” to private investors and SBA. If you have outstanding Participating Securities or Earmarked Assets, and you are a limited partnership, “S Corporation,” or equivalent pass-through entity for tax purposes, you may make “tax Distributions” to your investors in accordance with this § 107.1550, whether or not they have an actual tax liability. SBA receives a share of any tax Distribution you make. This section tells you when you may make a “tax Distribution” and how to compute it. You must notify SBA of any planned distribution under this section 10 business days before the distribution date, unless SBA permits otherwise. (a) Conditions for making a tax Distribution. (1) You have paid all your Prioritized Payments, Adjustments, and Charges, so that the balance in both your Distribution Account and your Accumulation Account is zero (see § 107.1520). (2) You satisfy the liquidity requirement in § 107.1505. (3) The tax Distribution does not exceed your Retained Earnings Available for Distribution. (4) The tax Distribution does not exceed the Maximum Tax Liability from paragraph (b) of this section. (b) How to compute the Maximum Tax Liability. M = (TOI × HRO) + (TCG × HRC) where: M = Maximum Tax Liability TOI = Net ordinary income allocated to your partners or other owners for Federal income tax purposes for the fiscal year or calendar quarter for which the Distribution is being made, excluding Prioritized Payments allocated to SBA. HRO = The highest combined marginal Federal and State income tax rate for corporations or individuals on ordinary income, determined in accordance with paragraphs (b)(2) through (b)(4) of this section. TCG = Net capital gains allocated to your partners or other owners for Federal income tax purposes for the fiscal year or calendar quarter for which the Distribution is being made, excluding Prioritized Payments allocated to SBA. HRC = The highest combined marginal Federal and State income tax rate for corporations or individuals on capital gains, determined in accordance with paragraphs (b)(2) through (b)(4) of this section. (2) You may compute the highest combined marginal Federal and State income tax rate on ordinary income and capital gains using either individual or corporate rates. However, you must apply the same type of rate, either individual or corporate, to both ordinary income and capital gains. (3) In determining the combined Federal and State income tax rate, you must assume that State income taxes are deductible from Federal income taxes. For example, if the Federal tax rate was 35 percent and the State tax rate was 5 percent, the combined tax rate would be [35% × (1−.05)] + 5% = 38.25%. (4) For purposes of this paragraph (b), the “State income tax” is that of the State where your principal place of business is located, and does not include any local income taxes. (c) SBA's share of the tax Distribution. (2) SBA may direct you to pay its share of the tax Distribution to its designated agent or Trustee. (3) SBA will apply its share of the tax Distribution in the order set forth in § 107.1560(g). (d) Paying a tax Distribution. (e) Excess tax Distributions. (2) Determine your excess tax Distributions by adding together all your quarterly tax Distributions for the year (ignoring any required reductions for excess tax Distributions made in prior years), and subtracting the maximum tax Distribution that you would have been permitted to make based upon a single computation performed for the entire fiscal year. The result, if greater than zero, is your excess tax Distribution for the year. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998; 64 FR 70996, Dec. 20, 1999] § 107.1560 Distributions by Licensee—required Distributions to private investors and SBA. You must make Distributions under this § 107.1560 if you have outstanding Participating Securities or Earmarked Assets and you satisfy the conditions in paragraph (a) of this section. Distributions under this section are determined as of the end of each fiscal year. You must notify SBA of any planned distribution under this section 10 business days before the distribution date, unless SBA permits otherwise. (a) Conditions for making Distributions. (1) You must have paid all Prioritized Payments, Adjustments and Charges, so that the balance in both your Distribution Account and your Accumulation Account is zero (see §§ 107.1520 and 107.1540). (2) You must have made any permitted tax Distribution that you choose to make under § 107.1550. (3) You must satisfy the liquidity requirement in § 107.1505. (4) The amount you distribute under this section must not exceed your remaining Retained Earnings Available for Distribution. (b) Total amount you must distribute. (1) Your Retained Earnings Available for Distribution as of the end of your fiscal year, after giving effect to any Distribution under §§ 107.1540 and 107.1550; minus (2) All previous Distributions under this section and § 107.1570(a) that were applied as redemptions or repayments of Leverage; plus (3) All previous Distributions under § 107.1570(b) that reduced your Retained Earnings Available for Distribution. (c) When you must make Distributions. (d) Effect of Distributions on Retained Earnings Available for Distribution. (1) All Distributions to private investors reduce Retained Earnings Available for Distribution. (2) Distributions to SBA, or its designated agent or Trustee, reduce Retained Earnings Available for Distribution if they are applied as payments of Profit Participation (see paragraph (g) of this section). (3) Distributions to SBA, or its designated agent or Trustee, do not reduce Retained Earnings Available for Distribution if they are applied as a repayment or redemption of Leverage (see paragraph (g) of this section). (e) SBA's share of the total Distribution. SBA's Percentage Share of Total Distribution If your ratio of Leverage to Leverageable Capital as of the fiscal period end is: Then SBA's percentage share of the Distribution is: Over 200% [Leverage / (Leverage + Leverageable Capital)] × 100. Over 100% but not over 200% 50%. 100% or less Profit Participation Rate from § 107.1530. (f) Exceptions to the Distribution requirement. (i) If you submit a written request for SBA approval, you may consider it approved unless SBA notifies you otherwise within 30 days from receipt. (ii) Reserves that you withhold from distribution may not be used to make investments in additional portfolio companies. (iii) Withholding of reserves under this paragraph (f)(1) is not a “payment failure” in violation of § 107.1820(e)(6). (2) SBA may restrict Distributions under this § 107.1560 if SBA determines that the value of your assets is materially overstated. SBA must give you notice of such a determination in advance of your proposed Distribution. (g) How SBA will apply your Distributions. (1) First, to Profit Participation; (2) Second, as a redemption of Participating Securities in order of issue; and (3) Third, as the repayment of principal of any outstanding Debentures, with such repayment to be made into escrow on terms and conditions SBA determines. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998; 91 FR 9, Jan. 2, 2026] § 107.1570 Distributions by Licensee—optional Distribution to private investors and SBA. If you have outstanding Participating Securities or Earmarked Assets, you may make two types of optional Distributions under this § 107.1570: quarterly Distributions determined the same way as the required annual Distributions in § 107.1560, and Distributions allocated between SBA and your private investors in proportion to the capital contributions of each. You must notify SBA of any planned distribution under this section 10 business days before the distribution date, unless SBA permits otherwise. (a) Quarterly Distributions subject to conditions in § 107.1560. (2) Such Distributions are subject to all the provisions in § 107.1560 (a)(1), (a)(3), (a)(4), (d), (f)(2), and (g). (3) You may make such Distributions only on the next Payment Date following the end of your fiscal quarter. (4) The total amount of such Distributions may not exceed the result of the following computation: (i) Your Retained Earnings Available for Distribution as of the end of your fiscal quarter; minus (ii) All previous Distributions under this paragraph (a) or § 107.1560 that were applied as redemptions or repayments of Leverage; plus (iii) All previous Distributions under paragraph (b) of this section that reduced your Retained Earnings Available for Distribution. (b) Other optional Distributions. (1) Conditions for making a Distribution. (i) You have distributed all Earned Prioritized Payments, earned Adjustments, and earned Charges, so that the balance in your Distribution Account is zero (see § 107.1520). (ii) You have distributed all Profit Participation computed under § 107.1530 which you are required to distribute under § 107.1560 or permitted to distribute under paragraph (a) of this section, as appropriate, and you have made all required Distributions under § 107.1560. (iii) You satisfy the liquidity requirement in § 107.1505 or obtain SBA's prior written approval of the Distribution. (iv) You do not have a condition of Capital Impairment. (v) The Distribution does not reduce your Regulatory Capital (excluding commitments from Institutional Investors) below the minimum required under § 107.210, unless SBA approves the reduction as part of a plan of liquidation. (vi) The Distribution does not cause you to have excess Leverage contrary to section 303 of the Act. (2) SBA's share of Distribution. [Leverage /(Leverage + Leverageable Capital)] × 100 In this formula, use Leverage and Leverageable Capital as of the date of the Distribution, after giving effect to any Distribution under § 107.1560 and paragraph (a) of this section. (ii) If your Capital Impairment Percentage under § 107.1840 is greater than zero, you must modify the formula in paragraph (b)(2)(i) of this section by replacing Leverageable Capital with: Leverageable Capital × (100% − CIP) where “CIP” is your Capital Impairment Percentage or 100 percent, whichever is less. (3) How SBA will apply Distributions. (4) Effect of Distributions on Retained Earnings Available for Distribution. (5) Permitted exception to § 107.585. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998] § 107.1575 Distributions on other than Payment Dates. (a) Permitted Distributions on other than Payment Dates. (1) Required annual Distributions under § 107.1540(a)(1), annual Distributions under § 107.1550, and any Distributions under § 107.1560 must be made no later than the second Payment Date following the end of your fiscal year. (2) Required Distributions under § 107.1540(b) must be made no later than the first Payment Date following the end of the applicable fiscal quarter; (3) Optional Distributions under § 107.1540(a)(2) and § 107.1570 may be made on any date. (4) Quarterly Distributions under § 107.1550 must be made no earlier than the last day of the calendar quarter for which the Distribution is being made and no later than the first Payment Date following the end of such calendar quarter. (b) Conditions for making Distribution. (1) You must obtain SBA's written approval before the distribution date; (2) The ending date of the period for which you compute your Earmarked Profits, Prioritized Payments, Adjustments, Charges, Profit Participation, Retained Earnings Available for Distribution, liquidity ratio, Capital Impairment, and any other applicable computations required under §§ 107.1500 through 107.1570, must be: (i) The distribution date, or (ii) If your Distribution includes annual Distributions under §§ 107.1540(a)(1), 107.1550 and/or 107.1560, your most recent fiscal year end; (3) If your Distribution includes an amount which SBA will apply as a redemption of Participating Securities, the effective date of such redemption, for all purposes including future computations of Prioritized Payments, will be the next Payment Date following the distribution date. [63 FR 5872, Feb. 5, 1998, as amended at 64 FR 70997, Dec. 20, 1999] § 107.1580 Special rules for In-Kind Distributions by Licensees. (a) In-Kind Distributions while Licensee has outstanding Participating Securities. (1) You may distribute only Distributable Securities. (2) You must distribute each security pro-rata to all investors and to SBA or its designated agent or Trustee, based on the amounts that each party would receive if the Distribution were in cash. (3) You must impute a gain (loss) on each security being distributed as if it were being sold, using the value of the security as of the declaration date of the Distribution (if you are a Corporate Licensee) or the distribution date (if you are a Partnership Licensee). (4) You must deposit SBA's share of securities being distributed with a disposition agent designated by SBA. As an alternative, if you agree, SBA may direct you to dispose of its shares. In this case, you must promptly remit the proceeds to SBA. (b) In-Kind Distributions after Licensee has redeemed all Participating Securities. (1) You may make an In-Kind Distribution of an Earmarked Asset only if you pay SBA the lower of: (i) An amount equal to the Unrealized Appreciation on the asset; or (ii) The full amount of your Accumulated Prioritized Payments and unpaid Adjustments. (2) You must obtain SBA's prior written approval of any In-Kind Distribution of Earmarked Assets that are not Distributable Securities, specifically including approval of the valuation of the assets. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998; 64 FR 70997, Dec. 20, 1999] § 107.1585 ][Reserved] § 107.1590 [Reserved] Funding Leverage by Use of SBA-Guaranteed Trust Certificates (“TCs”) § 107.1600 SBA authority to issue and guarantee Trust Certificates. (a) Authorization. (b) Periodic exercise of authority. (c) SBA authority to arrange public or private fundings of Leverage. (d) Pass-through provisions. (e) Formation of a Pool or Trust holding Leverage Securities. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998] § 107.1610 Effect of prepayment or early redemption of Leverage on a Trust Certificate. (a) The rights, if any, of a Licensee to prepay any Debenture or make early redemption of any Participating Security are established by the terms of such securities, and no such right is created or denied by the regulations in this part. (b) SBA's rights to purchase or prepay any Debenture without premium are established by the terms of the Guaranty Agreement relating to the Debenture. SBA's rights to redeem, at any time, any Participating Security without premium are established by the terms of the Guaranty Agreement relating to the Participating Security. (c) Any prepayment of a Debenture or early redemption of a Participating Security pursuant to the terms of the Guaranty Agreement relating to such securities, shall reduce the SBA guarantee of timely payment of principal and interest on a TC in proportion to the amount of principal or Redemption Price that such prepaid Debenture or redeemed Participating Security represents in the Trust or Pool backing such TC. (d) SBA shall be discharged from its guarantee obligation to the holder or holders of any TC, or any successor or transferee of such holder, to the extent of any such prepayment, whether or not such successor or transferee shall have notice of any such prepayment. (e) Interest on prepaid Debentures and Prioritized Payments on Participating Securities shall accrue only through the date of such voluntary prepayment or SBA payment, as the case may be. (f) In the event that all Debentures or Participating Securities constituting a Trust or Pool are prepaid, the TCs backed by such Trust or Pool shall be redeemed by payment of the unpaid principal and interest on the TCs; Provided, however, § 107.1620 Functions of agents, including Central Registration Agent, Selling Agent and Fiscal Agent. (a) Agents. (1) Selling Agent. (i) Selecting qualified entities to become pool or Trust assemblers (“Poolers”). (ii) Receiving guaranteed Debentures and Participating Securities as well as negotiating the terms and conditions of periodic offerings of Debentures and/or TCs with Poolers on behalf of Licensees. (iii) Directing and coordinating periodic sales of Debentures and Participating Securities and/or TCs. (iv) Arranging for the production of the Offering Circular, certificates, and such other documents as may be required from time to time. (2) Fiscal Agent. (i) Establish performance criteria for Poolers. (ii) Monitor and evaluate the financial markets to determine those factors that will minimize or reduce the cost of funding Debentures or Participating Securities. (iii) Monitor the performance of the Selling Agent, Poolers, CRA, and the Trustee. (iv) Perform such other functions as SBA, from time to time, may prescribe. (3) Central Registration Agent. (i) Form an SBA-approved Pool or Trust; (ii) Issue the TCs in the form prescribed by SBA; (iii) Transfer the TCs upon the sale of original issue TCs in any secondary market transaction; (iv) Receive payments from Licensees; (v) Make periodic payments as scheduled or required by the terms of the TCs, and pay all amounts required to be paid upon prepayment of Debentures or redemption of Participating Securities; (vi) Hold, safeguard, and release all Debentures and Participating Securities constituting Trusts or Pools upon instructions from SBA; (vii) Remain custodian of such other documentation as SBA shall direct by written instructions; (viii) Provide for the registration of all pooled Debentures and Participating Securities, all Pools and Trusts, and all TCs; (ix) Perform such other functions as SBA may deem necessary to implement the provisions of this section. (b) Functions. § 107.1630 SBA regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates. (a) Disclosure to purchasers. (b) Brokers and Dealers. (c) Suspension and/or termination of Broker or Dealer. (1) If such broker's or dealer's authority to engage in the securities business has been revoked or suspended by a supervisory agency. When such authority has been suspended, such broker or dealer will be suspended by SBA for the duration of such suspension by the supervisory agency. (2) If such broker or dealer has been indicted or otherwise formally charged with a misdemeanor or felony bearing on its fitness, such broker or dealer may be suspended while the charge is pending. Upon conviction, participation may be terminated. (3) If such broker or dealer has suffered an adverse final civil judgment, holding that such broker or dealer has committed a breach of trust or violation of law or regulation protecting the integrity of business transactions or relationships, participation in the market for Debentures, Participating Securities or TCs may be terminated. (4) If such broker or dealer has failed to make full disclosure of the information required by SBA in paragraph (a) of this section, such broker's or dealer's participation in the market for Debentures, Participating Securities or TCs may be terminated. (d) Termination/suspension proceedings. § 107.1640 SBA access to records of the CRA, Brokers, Dealers and Pool or Trust assemblers. The CRA and any broker, dealer and Pool or Trust assembler operating under the regulations in this part shall make all books, records and related materials associated with Debentures, Participating Securities and TCs available to SBA for review and copying purposes. Such access shall be at such party's primary place of business during normal business hours. Miscellaneous § 107.1700 Transfer by SBA of its interest in Licensee's Leverage security. Transfer by SBA of its interest in Licensee's Leverage security. Upon such conditions and for such consideration as it deems reasonable, SBA may sell, assign, transfer, or otherwise dispose of any Debenture, Participating Security, or other security held by or on behalf of SBA in connection with Leverage.

Upon notice by SBA, Licensee will make all payments of principal, dividends, interest, Prioritized Payments, and redemptions as shall be directed by SBA. Licensee will be liable for all damage or loss which SBA may sustain by reason of such disposal, up to the amount of Licensee's liability under such security, plus court costs and reasonable attorney's fees incurred by SBA. [61 FR 3189, Jan. 31, 1996, as amended at 91 FR 9, Jan. 2, 2026] § 107.1710 SBA authority to collect or compromise its claims. SBA may, upon such conditions and for such consideration as it deems reasonable, collect or compromise all claims relating to Preferred or Participating Securities or obligations held or guaranteed by SBA, and all legal or equitable rights accruing to SBA. § 107.1720 Characteristics of SBA's guarantee. If SBA agrees to guarantee a Licensee's Debentures or Participating Securities, such guarantee will be unconditional, irrespective of the validity, regularity or enforceability of the Debentures or Participating Securities or any other circumstances which might constitute a legal or equitable discharge or defense of a guarantor. Pursuant to its guarantee, SBA will make timely payments of principal and interest on the Debentures or the Redemption Price of and Prioritized Payments on the Participating Securities. [63 FR 5873, Feb. 5, 1998] Subpart J—Licensee's Noncompliance § 107.1800 Licensee's agreement to terms and conditions in §§ 107.1810 and 107.1820. Any Licensee that violates the terms and conditions of its Leverage is subject to SBA remedies. The terms, conditions and remedies in § 107.1810 apply to outstanding Debentures issued after April 25, 1994. The terms, conditions and remedies in § 107.1820 apply to outstanding Participating Securities issued after April 25, 1994, or if you have Earmarked Assets in your portfolio. [61 FR 3189, Jan. 31, 1996, as amended at 91 FR 9, Jan. 2, 2026] § 107.1810 Events of default and SBA's remedies for Licensee's noncompliance with terms of Debentures. (a) Applicability of this section. (b) Automatic events of default. (1) Insolvency. (2) Voluntary assignment. (3) Bankruptcy. (c) SBA remedies for automatic events of default. (1) Without notice, presentation or demand, the entire indebtedness evidenced by your Debentures, including accrued interest, and any other amounts owed SBA with respect to your Debentures, is immediately due and payable; and (2) You automatically consent to the appointment of SBA or its designee as your receiver under section 311(c) of the Act. (d) Events of default with notice. (1) Fraud. (2) Fraudulent transfers. (3) Willful conflicts of interest. (4) Willful non-compliance. (5) Repeated Events of Default. (6) Transfer of Control. (7) Non-cooperation under § 107.1810(h). (8) Non-notification of Events of Default. (9) Non-notification of defaults to others. (e) SBA remedies for events of default with notice. (1) SBA may declare the entire indebtedness evidenced by your Debentures, including accrued interest, and/or any other amounts owed SBA with respect to your Debentures, immediately due and payable; and (2) SBA may avail itself of any remedy available under the Act, specifically including institution of proceedings for the appointment of SBA or its designee as your receiver under section 311(c) of the Act. (f) Events of default with opportunity to cure. (1) Excessive Management Expenses. (2) Improper Distributions. (i) Distributions permitted under § 107.585; (ii) Payments from Retained Earnings Available for Distribution based on either the shareholders' pro-rata interests or the provisions for profit distributions in your partnership agreement, as appropriate; (iii) Distributions by Participating Securities issuers as permitted under §§ 107.1540 through 107.1580; and (iv) Distributions by Early Stage SBICs as permitted under § 107.1180. (3) Failure to make payment. (4) Failure to maintain Regulatory Capital. (5) Capital Impairment. (6) Cross-default. (7) Nonperformance. (8) Noncompliance. (9) Failure to maintain diversity. (10) Failure by an Early Stage SBIC to meet investment requirements. (11) Failure by an Early Stage SBIC to maintain required interest reserve. (g) SBA remedies for events of default with opportunity to cure. (i) SBA may declare the entire indebtedness evidenced by your Debentures, including accrued interest, and/or any other amounts owed SBA with respect to your Debentures, immediately due and payable; and (ii) SBA may avail itself of any remedy available under the Act, specifically including institution of proceedings for the appointment of SBA or its designee as your receiver under section 311(c) of the Act. (2) SBA may invoke the remedies in paragraph (g)(1) of this section only if: (i) It has given you at least 15 days to cure the default(s); and (ii) You fail to cure the default(s) to SBA's satisfaction within the allotted time. (h) Repeated non-substantive violations. (i) Consent to removal of officers, directors, or general partners and/or appointment of receiver. (1) With respect to a Corporate Licensee, upon written notice, to require you to replace, with individuals approved by SBA, one or more of your officers and/or such number of directors of your board of directors as is sufficient to constitute a majority of such board; or (2) With respect to a Partnership Licensee, upon written notice, to require you to remove the person(s) responsible for such occurrence and/or to remove the general partner of Licensee, which general partner shall then be replaced in accordance with Licensee's Articles by a new general partner approved by SBA; and/or (3) With respect to either a Corporate or Partnership Licensee, to obtain the appointment of SBA or its designee as your receiver under section 311(c) of the Act for the purpose of continuing your operations. The appointment of a receiver to liquidate a Licensee is not within such consent, but is governed instead by the relevant provisions of the Act. (j) Additional SBA remedies applicable to Debentures issued by Early Stage SBICs. (1) To prohibit you from making any additional investments except for investments under legally binding commitments you entered into before such payment by SBA and, subject to SBA's prior written approval, investments that are necessary to protect your investments; (2) Until all Leverage is repaid and amounts related thereto are paid in full, to prohibit Distributions by you to any party other than SBA, its agent or Trustee; (3) To require all your commitments from investors to be funded at the earliest time(s) permitted in accordance with your Articles; (4) To review and re-determine your approved Management Expenses; and (5) To the appointment of SBA or its designee as your receiver under section 311(c) of the Act for the purpose of continuing your operations. [61 FR 3189, Jan. 31, 1996, as amended at 74 FR 33916, July 14, 2009; 77 FR 25054, Apr. 27, 2012; 91 FR 9, Jan. 2, 2026] § 107.1820 Conditions affecting issuers of Preferred Securities and/or Participating Securities. (a) Applicability of this section. (b) Removal Conditions. (1) Insolvency or extreme Capital Impairment. (i) You are not considered to have a condition of extreme Capital Impairment during the first eight years following your first issuance of Participating Securities. (ii) This paragraph (b)(1) does not give you an additional opportunity to cure if you have already had an opportunity to cure your Capital Impairment under paragraph (e)(3) of this section. (2) Voluntary assignment. (3) Bankruptcy. (4) Transfer of Control. (5) Fraud. (6) Fraudulent transfers. (c) Contingent Removal Conditions. (1) Willful conflicts of interest. (2) Willful or repeated noncompliance. (3) Failure to comply with restrictions under paragraph (f) of this section. (d) SBA remedies for Removal Conditions and Contingent Removal Conditions. (1) With respect to a Corporate Licensee, upon written notice, to require you to replace, with individuals approved by SBA, one or more of your officers and/or such number of directors as is sufficient to constitute a majority of your board of directors; or (2) With respect to a Partnership Licensee, upon written notice, to require you to remove the person(s) responsible for such occurrence and/or to remove your general partner, who shall then be replaced in accordance with your Articles by a new general partner approved by SBA; and/or (3) With respect to either a Corporate or Partnership Licensee, to the appointment of SBA or its designee as your receiver under section 311(c) of the Act for the purpose of continuing your operations. The appointment of a receiver to liquidate a Licensee is not within such consent, but is governed instead by the relevant provisions of the Act. (e) Restricted Operations Conditions. (1) Removal Conditions or Contingent Removal Conditions. (2) Failure to maintain Regulatory Capital. (3) Capital or Liquidity Impairment. (4) Improper Distributions. (5) Excessive Management Expenses. (6) Failure to make payment. (7) Noncompliance. (8) Failure to maintain diversity. (9) Failure to meet investment requirements. (10) Nonperformance. (11) Noncooperation under paragraph (g) of this section. (f) SBA remedies for Restricted Operations Conditions. (1) To prohibit you from making any additional investments except for investments under legally binding commitments you entered into before such notice and, subject to SBA's prior written approval, investments that are necessary to protect your investments; (2) Until all Leverage is redeemed and amounts due are paid, to prohibit Distributions by you to any party other than SBA, its agent or Trustee; (3) To require all your commitments from investors to be funded at the earliest time(s) permitted in accordance with your Articles; and (4) To review and re-determine your approved Management Expenses. (g) Repeated non-substantive violations. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998; 91 FR 9, Jan. 2, 2026] Editorial Note: At 91 FR 9, Jan. 2, 2026, § 107.1820 was amended in part by revising paragraph (d)(9), effective Feb. 2, 2026, however, the amendment could not be incorporated because the paragraph does not exist. Computation of Licensee's Capital Impairment § 107.1830 Licensee's Capital Impairment—definition and general requirements. (a) Applicability of this section. (b) Significance of Capital Impairment condition. (c) Definition of Capital Impairment condition. (1) For Section 301(d) Licensees, 75 percent. (2) For Section 301(c) Licensees, the appropriate percentage from the following table: Maximum Permitted Capital Impairment Percentages for Section 301( c If the percentage of equity capital investments (at cost) in your portfolio is: And your ratio of outstanding leverage to leverageable capital is: Then your maximum permitted capital impairment percentage is: 67% 100% or less 70 Over 100% but not over 200% 60 Over 200% 50 At least 40% but under 67% 100% or less 55 Over 100% but not over 200% 50 Over 200% 40 Under 40% 100% or less 45 Over 100% but not over 200% 40 Over 200% 35 (d) Phase-in of maximum permitted Capital Impairment Percentages for Section 301(c) Licensees. (1) Your Capital Impairment Percentage does not exceed 50 percent; and (2) You have not reached your first fiscal year end occurring after April 25, 1995. (e) Quarterly computation requirement and procedure. (f) SBA's right to determine Licensee's Capital Impairment condition. [61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998; 88 FR 46012, July 18, 2023] § 107.1840 Computation of Licensee's Capital Impairment Percentage. (a) General. (b) Preliminary impairment test. (1) The sum of Undistributed Net Realized Earnings, as reported on SBA Form 468, and Includible Non-Cash Gains. (2) Unrealized Gain (Loss) on Securities Held. (c) How to compute Capital Impairment Percentage. (2) Add together your Undistributed Net Realized Earnings, your Includible Non-cash Gains, and either your Unrealized Loss on Securities Held or your Adjusted Unrealized Gain. (3) If the sum in paragraph (c)(2) of this section is zero or greater, your Capital Impairment Percentage is zero. (4) If the sum in paragraph (c)(2) of this section is less than zero, drop the negative sign, divide by your Regulatory Capital (excluding Treasury Stock), and multiply by 100. The result is your Capital Impairment Percentage. (d) How to compute your Adjusted Unrealized Gain. (2) Determine your Unrealized Appreciation on Publicly Traded and Marketable securities. This is your “Class 1 Appreciation”. (3) Determine your Unrealized Appreciation on securities that are not Publicly Traded and Marketable and meet the following criteria, which must be substantiated to the satisfaction of SBA (this is your “Class 2 Appreciation”): (i) The Small Business that issued the security received a significant subsequent equity financing by an investor whose objectives were not primarily strategic and at a price that conclusively supports the Unrealized Appreciation; (ii) Such financing represents a substantial investment in the form of an arm's length transaction by a sophisticated new investor in the issuer's securities; and (iii) Except as provided for Early Stage SBICs in § 107.1845, such financing occurred within 24 months of the date of the Capital Impairment computation, or the Small Business's pre-tax cash flow from operations for its most recent fiscal year was at least 10 percent of the Small Business's average contributed capital for such fiscal year. (4) Except as provided for Early Stage SBICs in § 107.1845, perform the appropriate computation from the following table: Adjusted Unrealized Gain Before Estimated Tax Effects If: And: Then adjusted unrealized gain Class 1 Appreciation ≤Net Appreciation Class 1 Appreciation + Class 2 Appreciation ≤Net Appreciation (80% × Class 1 Appreciation) + (50% × Class 2 Appreciation). Class 1 Appreciation ≤Net Appreciation Class 1 Appreciation + Class 2 Appreciation >Net Appreciation (80% × Class 1 Appreciation) + [(50% × (Net Appreciation − Class 1 Appreciation)]. Class 1 Appreciation >Net Appreciation 80% × Net Appreciation. (5) Reduce the gain computed in paragraph (d)(4) of this section by your estimate of related future income tax expense. Subject to any adjustment required by paragraph (d)(6) of this section, the result is your Adjusted Unrealized Gain for use in paragraph (c)(2) of this section. (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. [61 FR 3189, Jan. 31, 1996, as amended at 77 FR 25054, Apr. 27, 2012; 88 FR 46013, July 18, 2023] § 107.1845 Determination of Capital Impairment Percentage for Early Stage SBICs. This section applies to Early Stage SBICs only. Except as modified by this section, all provisions of § 107.1840 apply to an Early Stage SBIC. (a) To determine your Class 2 Appreciation under § 107.1840(d)(3), SBA will use the following provisions instead of § 107.1840(d)(3)(iii): (1) Such financing occurred within 24 months of the date of the Capital Impairment computation. At the end of the 24 month period following the financing, you may request SBA's written approval to retain the use of the original Class 2 Appreciation on the investment for up to 24 additional months. (2) In considering your request, SBA may obtain its own valuation of the investment, require you to obtain a valuation performed by an independent third party acceptable to SBA, and may consider any other information that it deems relevant. To the extent that the valuation and any other relevant information conclusively support the original Class 2 appreciation, SBA may approve an extension to use all or part of the original Class 2 Appreciation for up to an additional 24 months (the “extension period”). (3) At the end of any extension period, you may submit a new request to retain the use of the original Class 2 Appreciation, repeating the steps in paragraphs (a)(1) and (2) of this section. (4) SBA may reconsider its approval to retain the use of the original Class 2 Appreciation at any time based on information that may affect the value of an investment. (b) Any time you submit a request for SBA approval to retain the use of the original Class 2 Appreciation under paragraph (a) of this section, you may also request SBA's written approval to modify your computation of Adjusted Unrealized Gain under § 107.1840(d)(4) as provided in paragraph (c) of this section. (c) If SBA determines that the appreciation on an investment, based on its current fair value, is at least two times the original Class 2 Appreciation on the investment, SBA may allow you, based on relevant information, to compute your Adjusted Unrealized Gain for the duration of the extension period as follows: (1) Compute Adjusted Unrealized Gain in accordance with § 107.1840(d)(4). (2) If your result in paragraph (c)(1) of this section was computed using the first line of the table in § 107.1840(d)(4): (i) Calculate 50 percent of the original Class 2 Appreciation on the individual investment that is the subject of this paragraph (c), and (ii) Add it to the result from paragraph (c)(1) of this section to determine your Adjusted Unrealized Gain. (3) If your result in paragraph (c)(1) of this section was computed using the second line of the table in § 107.1840(d)(4): (i) Calculate 50 percent of the original Class 2 Appreciation on the individual investment that is the subject of this paragraph (c). (ii) Subtract your Class 1 Appreciation from your Net Appreciation, and multiply the result by 50 percent. (iii) Add the lesser of (c)(3)(i) and (ii) of this section to the result from paragraph (c)(1) of this section to determine your Adjusted Unrealized Gain. [77 FR 25054, Apr. 27, 2012, as amended at 88 FR 46013, July 18, 2023] § 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. (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 § 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 ((Total Assets−Liabilities excluding SBA Leverage−Other Assets) + Unfunded Private Commitments)/Outstanding Leverage, or a Capital Impairment Percentage approaching your threshold set forth in § 107.1830. (7) You default on your interest payment and fail to pay within 30 days of the date it is due. ( Note: (8) Outstanding or unresolved regulatory matters. (b) Requirements for Licensees on the Watchlist. (1) You must submit Portfolio Company Financing Reports (SBA Form 1031s), required under § 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 § 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 § 107.300. (c) Removal from the Watchlist. (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. (8) A completed regulatory examination acceptable to SBA. (d) Watchlist communications Notification to Licensee. (2) Watchlist status disclosure. (3) Removal from Watchlist status notification. [88 FR 46013, July 18, 2023, as amended at 89 FR 3549, Jan. 19, 2024] Subpart K—Ending Operations as a Licensee § 107.1900 Surrender of license. You may not surrender your license without SBA's prior written approval. Your request for approval must be accompanied by an offer of immediate repayment of all of your outstanding Leverage (including any prepayment penalties thereon), or by a plan satisfactory to SBA for the orderly liquidation of the Licensee. Subpart L—Miscellaneous § 107.1910 Non-waiver of SBA's rights or terms of Leverage security. SBA's failure to exercise or delay in exercising any right or remedy under the Act or the regulations in this part does not constitute a waiver of such right or remedy. SBA's failure to require you to perform any term or provision of your Leverage does not affect SBA's right to enforce such term or provision. Similarly, SBA's waiver of, or failure to enforce, any term or provision of your Leverage or of any event or condition set forth in § 107.1810 or § 107.1820 does not constitute a waiver of any succeeding breach of such term or provision or condition. § 107.1920 Licensee's application for exemption from a regulation in this part 107. You may file an application in writing with SBA to have a proposed action exempted from any procedural or substantive requirement, restriction, or prohibition to which it is subject under this part, unless the provision is mandated by the Act. SBA may grant an exemption for such applicant, conditionally or unconditionally, provided the exemption would not be contrary to the purposes of the Act. Your application must be accompanied by supporting evidence which demonstrates to SBA's satisfaction that: (a) The proposed action is fair and equitable; and (b) The exemption requested is reasonably calculated to advance the best interests of the SBIC program in a manner consonant with the policy objectives of the Act and the regulations in this part. § 107.1930 Effect of changes in this part 107 on transactions previously consummated. The legality of a transaction covered by the regulations in this part is governed by the regulations in this part in effect at the time the transaction was consummated, regardless of later changes. Nothing in this part bars SBA enforcement action with respect to any transaction consummated in violation of provisions applicable at the time, but no longer in effect.

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