13 CFR Part 108 — New Markets Venture Capital (“NMVC”) Program

PART 108—NEW MARKETS VENTURE CAPITAL (“NMVC”) PROGRAM Authority: 15 U.S.C. 689-689q. Source: 66 FR 28609, May 23, 2001, unless otherwise noted. Subpart A—Introduction to Part 108 § 108.10 Description of the New Markets Venture Capital Program. The New Markets Venture Capital (“NMVC”) Program is a developmental venture capital program for the purpose of promoting economic development and the creation of wealth and job opportunities in low-income geographic areas and among individuals living in such areas. SBA selects and then enters into participation agreements with selected newly formed venture capital companies, and provides leverage in the form of debenture guarantees to such companies to allow them to make equity capital investments in smaller enterprises located in low-income geographic areas. SBA also awards grants to such companies and to Specialized Small Business Investment Companies so that they can provide operational assistance to such smaller enterprises in connection with such investments. § 108.20 Legal basis and applicability of this part 108. The regulations in this part implement Part B of Title III of the Small Business Investment Act of 1958, as amended (15 U.S.C. 661 et seq. § 108.30 Amendments to Act and regulations. A NMVC Company is subject to all provisions of the Act and parts 108 and 112 of title 13 of the Code of Federal Regulations. § 108.40 How to read this part 108. (a) Center headings. (b) Capitalizing defined terms. (c) “ You. Subpart B—Definition of Terms Used in This Part 108 § 108.50 Definition of terms. The following definitions apply to this part 108: Act et seq. Affiliate Affiliates Applicant Articles Assistance Assisted Associate (1)(i) An officer, director, employee or agent of a Corporate NMVC Company; (ii) A Control Person, employee or agent of a Partnership NMVC Company; (iii) A managing member of a LLC NMVC Company; (iv) An Investment Adviser/Manager of any NMVC Company, including any Person who contracts with a Control Person of a Partnership NMVC Company to be the Investment Adviser/Manager of such NMVC Company; or (v) Any Person regularly serving a NMVC Company 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 NMVC Company or 10 percent of the membership interests of an LLC NMVC Company, or a limited partner's interest of at least 10 percent of the partnership capital of a Partnership NMVC Company. However, neither a limited partner in a Partnership NMVC Company nor a non-managing member in an LLC NMVC Company is considered an Associate if such Person is an entity Institutional Investor whose investment in the Partnership, including commitments, represents no more than 33 percent of the capital of the NMVC Company and no more than five percent of such Person's net worth. (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 NMVC Company. (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 NMVC Company). (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 NMVC Company provides Financing, then that Associate relationship is considered to exist on the date of the Financing. (11) If any NMVC Company has any ownership interest in another NMVC Company, the two NMVC companies are Associates of each other. Capital Impairment Central Registration Agent CRA 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. Commitment Common Control Community Development Finance Conditionally Approved NMVC Company (1) Has applied for participation as a NMVC Company, and (2) SBA has conditionally approved to participate in the NMVC program for a specified period of time not to exceed two years, subject to the company fulfilling the requirements to be a NMVC Company within that specified period of time. Control Control Person (1) A general partner of a Partnership NMVC Company; (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 NMVC Company, either directly or through an intervening entity; (3) Any Person that— (i) Controls or owns, directly or through an intervening entity, at least 10 percent of a Partnership NMVC Company or any entity described in paragraphs (1) or (2) of this definition; and (ii) Participates in the investment decisions of the general partner of such Partnership NMVC Company; (4) Any Person that controls or owns, directly or through an intervening entity, at least 50 percent of a Partnership NMVC Company or any entity described in paragraphs (1) or (2) of this definition. Corporate NMVC Company. Debentures Debt Securities Developmental Venture Capital Distribution Equity Capital Investments Equity Securities 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 § 108.825). Guaranty Agreement Includible Non-Cash Gains Institutional Investor means: (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 (l)(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 (Public Law 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 whose primary purpose is to manage and invest non-Federal funds on behalf of at least three Institutional Investors described in paragraphs (l)(i) through (l)(ix) of this definition, each of whom must have at least a 10 percent ownership interest in the entity. (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 NMVC Company 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 NMVC Company. 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, not including the value of any equity in his or her most valuable residence, 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 such individual has irrevocably appointed an agent within the United States for the service of process. Investment Adviser/Manager Lending Institution Leverage Leverageable Capital LLC NMVC Company. Loan Loans and Investments Low-Income Enterprise Low-Income Geographic Area (“LI Area”) (1) Any population census tract (or in the case of an area that is not tracted for population census tracts, the equivalent county division, as defined by the Bureau of the Census of the United States Department of Commerce for purposes of defining poverty areas), if— (i) The poverty rate for that census tract is not less than 20 percent; (ii) In the case of a tract— (A) That is located within a metropolitan area, 50 percent or more of the households in that census tract have an income equal to less than 60 percent of the area median gross income; or (B) That is not located within a metropolitan area, the median household income for such tract does not exceed 80 percent of the statewide median household income; or (C) As determined by the Administrator in accordance with § 108.1940 of this part, a substantial population of Low-Income Individuals reside, an inadequate access to investment capital exists, or other indications of economic distress exist in that census tract; or (2) Any area located within— (i) A Historically Underutilized Business Zone (“HUBZone”) as defined in section 3(p) of the Small Business Act and 13 CFR 126.103; (ii) An Urban Empowerment Zone or Urban Enterprise Community (as designated by the Secretary of the United States Department of Housing and Urban Development); or (iii) A Rural Empowerment Zone or Rural Enterprise Community (as designated by the Secretary of the United States Department of Agriculture). Low-Income Individual (1) For metropolitan areas, 80 percent of the area median income; and (2) For nonmetropolitan areas, the greater of— (i) 80 percent of the area median income, or (ii) 80 percent of the statewide nonmetropolitan area median income. Low-Income Investment Management Expenses NAICS Manual New Markets Tax Credit program New Markets Venture Capital Company NMVC Company (1) Has been granted final approval by SBA under § 108.380, and (2) Has entered into a Participation Agreement with SBA. For certain purposes, the Entity General Partner of a Partnership NMVC Company is treated as if it were a NMVC Company (see § 108.160(a)). 1940 Act Company et seq. 1980 Act Company Operational Assistance Original Issue Price Participation Agreement (1) Details the company's operating plan and investment criteria; and (2) Requires the company to make investments in Smaller Enterprises at least 80 percent of which Smaller Enterprises are located in LI Areas. Partnership NMVC Company. Person Pool Portfolio Portfolio Concern Principal Office Private Capital Publicly Traded and Marketable et seq. Regulatory Capital Relevant Venture Capital Finance Retained Earnings Available for Distribution SBA 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. Small Business Small Business Investment Company Smaller Enterprise (1) Together with its Affiliates has a net worth of not more than $6.0 million and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two years no greater than $2.0 million; or (2) 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. Specialized Small Business Investment Companies (SSBICs) (1) Invests solely in small business concerns that contribute to a well-balanced national economy by facilitating ownership in such concerns by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages; and (2) Was licensed under section 301(d) of the Small Business Investment Act, as in effect before September 30, 1996. Trust Trust Certificate Rate Trust Certificates (TCs) Trustee Undistributed Net Realized Earnings Unrealized Appreciation Unrealized Depreciation Unrealized Gain (Loss) on Securities Held [66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002] Subpart C—Qualifications for the NMVC Program Organizing a NMVC Company § 108.100 Business form. A NMVC Company must be a newly formed for-profit entity or, subject to § 108.150, a newly formed for-profit subsidiary of an existing entity. It must be organized under State law solely for the purpose of performing the functions and conducting the activities contemplated under the Act. It may be organized as a corporation (“Corporate NMVC Company”), a limited partnership (“Partnership NMVC Company”), or a limited liability company (“LLC NMVC Company”). § 108.110 Qualified management. An Applicant must show, to the satisfaction of SBA, that its current or proposed management team is qualified and has the knowledge, experience, and capability in Community Development Finance or Relevant Venture Capital Finance, necessary for investing in the types of businesses contemplated by the Act, the regulations in this part and its business plan. In determining whether an Applicant's current or proposed management team has sufficient qualifications, SBA will consider information provided by the Applicant and third parties concerning the background, capability, education, training and reputation of its general partners, managers, officers, key personnel, and investment committee and governing board members. The Applicant must designate at least one individual as the official responsible for contact with SBA. § 108.120 Economic development primary mission. The primary mission of a NMVC Company must be economic development of one or more LI Areas. § 108.130 Identified Low Income Geographic Areas. A NMVC Company must identify the specific LI Areas in which it intends to make Developmental Venture Capital investments and provide Operational Assistance under the NMVC program. § 108.140 SBA approval of initial Management Expenses. A NMVC Company must have its Management Expenses approved by SBA at the time of designation as a NMVC Company. (See § 108.520 for the definition of Management Expenses.) § 108.150 Management and ownership diversity requirement. (a) Diversity requirement. (b) Percentage ownership requirement. (c) Non-affiliation requirement. (1) Entities whose overall activities are regulated and periodically examined by state, Federal or other governmental authorities satisfactory to SBA; (2) Entities listed on the New York Stock Exchange; (3) 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: (4) Public or private employee pension funds; (5) Trusts, foundations, or endowments, but only if exempt from Federal income taxation; and (6) Other Institutional Investors satisfactory to SBA. (d) Voting requirement. (e) Requirement to maintain diversity. (1) Notify SBA within 10 days; and (2) Re-establish diversity within six months. [66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001] § 108.160 Special rules for NMVC Companies formed as limited partnerships. (a) Entity General Partner. (2) 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, operating agreement, limited partnership agreement or other similar governing instrument. (3) An Entity General Partner is subject to the same examination and reporting requirements as a NMVC Company under sections 361 and 362 of the Act. The restrictions and obligations imposed upon a NMVC Company by §§ 108.1810, 108.30, 108.410 through 108.450, 108.470, 108.500, 108.510, 108.585, 108.600, 108.680, 108.690 through 108.692, and 108.1910 apply also to an Entity General Partner of a NMVC Company. (4) The general partner(s) of your Entity General Partner(s) will be considered your general partner. (5) 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 § 108.50. (b) Other requirements for Partnership NMVC Companies. (1) You must have a minimum duration of 10 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 NMVC Company may be terminated by a vote of your partners; (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 (b) in your limited partnership agreement. (c) Obligations of a Control Person. (d) Liability of general partner for partnership debts to SBA. (e) Special Leverage requirement. Capitalizing a NMVC Company § 108.200 Adequate capital for NMVC Companies. You must meet the requirements of §§ 108.200-108.230 in order to qualify for designation as a NMVC Company and to receive Leverage. § 108.210 Minimum capital requirements for NMVC Companies. You must have Regulatory Capital of at least $5,000,000 and Leverageable Capital of at least $500,000 to become a NMVC Company. § 108.230 Private Capital for NMVC Companies. (a) General. (b) Contributed capital. (c) Exclusions from Private Capital. (1) Funds borrowed by a NMVC Company from any source. (2) Funds obtained through the issuance of Leverage. (3) Funds obtained directly from any Federal agency or department. (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. (5) A commitment from an investor if SBA determines that the collectability of the commitment is questionable. (d) Limitations on including non-cash capital contributions in Private Capital. (e) Contributions with borrowed funds. (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. [66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002] Subpart D—Application and Approval Process for NMVC Company Designation § 108.300 When and how to apply for designation as a NMVC Company. (a) Notice of Funds Availability (“NOFA”). Federal Register, (b) Application form. § 108.310 Contents of application. Each Applicant must submit a complete application, including the following: (a) Amounts. (1) The specific amount of Regulatory Capital it proposes to raise (which amount must be at least $5,000,000); and (2) The specific amount of binding commitments for contributions in cash or in-kind it proposes to raise, and/or an annuity it proposes to purchase, in accordance with the requirements of § 108.2030, as its matching resources for its Operational Assistance grant award (the aggregate of which must be not less than $1,500,000 or 30 percent of the Regulatory Capital it proposes to raise under paragraph (a)(1) of this section, whichever is greater). (b) Comprehensive business plan. (c) New Markets Tax Credit program. [66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002] § 108.320 Contents of comprehensive business plan. (a) Executive summary. (1) The Applicant; (2) Its strategy for how it proposes to make successful Developmental Venture Capital investments in identified LI Areas; (3) The markets in the LI Areas it proposes to serve; and (4) How it intends to work with community organizations in and be accountable to the residents of identified LI Areas in order to facilitate its Developmental Venture Capital investments. (b) Capacity, skills, and experience of the management team. (c) Market analysis. (d) Operational capacity and investment strategies. (e) Regulatory Capital. (f) Plan for providing Operational Assistance. (g) Matching resources for Operational Assistance grant. (h) Projected amount of investment in LI Areas. (i) Projected impact. (1) A description of the extent to which it will concentrate its Developmental Venture Capital investments and Operational Assistance activities in identified LI Areas; (2) An estimate of the social, economic, and community development benefits to be created within identified LI Areas over the next five years or more as a result of its activities; (3) A description of the criteria to be used to measure the benefits created as a result of its activities; (4) A discussion about the amount of such benefits created that it will consider to constitute successfully meeting the objectives of the NMVC program. (j) Affiliates and business relationships. [66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002] § 108.330 Grant issuance fee. An Applicant must pay to SBA a grant issuance fee of $5,000. An Applicant must submit this fee in advance, at the time of application submission. If SBA does not select an Applicant as a Conditionally Approved NMVC Company or designate an Applicant as a NMVC Company, SBA will refund this fee to the Applicant. Subpart E—Evaluation and Selection of NMVC Companies § 108.340 Evaluation and selection—general. SBA will evaluate and select an Applicant to participate in the NMVC program solely at SBA's discretion, based on SBA's review of the Applicant's application materials, interviews or site visits with the Applicant (if any), and background investigations conducted by SBA and other Federal agencies. SBA's evaluation and selection process is intended to— (a) Ensure that Applicants are evaluated on a competitive basis and in a fair and consistent manner; (b) Take into consideration the unique proposals presented by Applicants; (c) Ensure that each Applicant that SBA designates as a NMVC Company can fulfill successfully the goals of its comprehensive business plan; and (d) Ensure that SBA selects Applicants in such a way as to promote Developmental Venture Capital investments nationwide and in both urban and rural areas. § 108.350 Eligibility and completeness. SBA will not consider any application that is not complete or that is submitted by an Applicant that does not meet the eligibility criteria described in subpart C of this part. SBA, at its sole discretion, may request from an Applicant additional information concerning eligibility criteria or easily completed portions of the application in order to allow SBA to consider that Applicant's application. § 108.360 Evaluation criteria. SBA will evaluate and select an Applicant for participation in the NMVC program by considering the following criteria— (a) The quality of the Applicant's comprehensive business plan in terms of meeting the objectives of the NMVC program; (b) The likelihood that the Applicant will fulfill the goals described in its comprehensive business plan; (c) The capability of the Applicant's management team; (d) The strength and likelihood for success of the Applicant's operations and investment strategies; (e) The need for Developmental Venture Capital investments in the LI Areas in which the Applicant intends to invest; (f) The extent to which the Applicant will concentrate its activities on serving the LI Areas in which it intends to invest, including the ratio of resources that it proposes to invest in such areas as compared to other areas; (g) The Applicant's demonstrated understanding of the markets in the LI Areas in which it intends to focus its activities; (h) The likelihood that and the time frame within which the Applicant will be able to— (1) Raise the Regulatory Capital it proposes to raise for its investments, and (2) Obtain the binding commitments for contributions in cash or in-kind and/or an annuity it proposes to obtain as its matching resources for its Operational Assistance grant award; (i) The strength of the Applicant's proposal to provide Operational Assistance to Smaller Enterprises in which it plans to invest; (j) The extent to which the activities proposed by the Applicant will promote economic development and the creation of wealth and job opportunities in the LI Areas in which it intends to invest and among individuals living in LI Areas; and (k) The strength of the Applicant's application compared to applications submitted by other Applicants and by SSBICs intending to invest in the same or proximate LI Areas. [66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002] § 108.370 Conditional approval. From among the Applicants submitting eligible and complete applications, SBA will select a number of Applicants and will conditionally approve such selected Applicants to participate in the NMVC program. SBA will give each such Conditionally Approved NMVC Company a specific period of time, not to exceed two years, to satisfy the requirements to become a NMVC Company. § 108.380 Final approval as a NMVC Company. (a) General rule. (1) Grant final approval to participate in the NMVC program and designate such company as a NMVC Company, if such Conditionally Approved NMVC Company: (i) Within the specific period of time SBA gave to it when SBA conditionally approved it for participation in the NMVC program, has raised: (A) The amount of Regulatory Capital set forth in its application, pursuant to § 108.310(a)(1); and (B) The amount of matching resources for its Operational Assistance grant award set forth in its application, pursuant to § 108.310(a)(2); and (ii) Enters into a Participation Agreement with SBA; or (2) Revoke SBA's conditional approval of the company, at which time it is no longer a Conditionally Approved NMVC Company and must not participate in the NMVC program or represent itself as a Conditionally Approved NMVC Company. (b) Exception to requirement to raise matching resources General. (i) Already has raised at least 20 percent of the total amount of required matching resources; and (ii) Has a viable plan that reasonably projects its capacity to raise the remainder of the required amount of matching resources. (2) Request for exception. (3) No applicability to Regulatory Capital. [66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002] Subpart F—Changes in Ownership, Structure, or Control Changes in Control or Ownership of NMVC Company § 108.400 Changes in ownership of 10 percent or more of NMVC Company but no change of Control. You must obtain SBA's prior written approval for any proposed transfer or issuance of ownership interests that results in the ownership (beneficial or of record) by any Person, or group of Persons acting in concert, of at least 10 percent of any class of your stock, partnership capital or membership interests. § 108.410 Changes in Control of NMVC Company (through change in ownership or otherwise). You must obtain SBA's prior written approval for any proposed transaction or event that results in Control by any Person(s) not previously approved by SBA. § 108.420 Prohibition on exercise of ownership or Control rights in NMVC Company 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 meeting of shareholders, partners or members); (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, manager, employee or agent); or (d) Allow ownership or Control to pass to another Person. § 108.430 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. § 108.440 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 NMVC Companies. § 108.450 Notification to SBA of pledge of NMVC Company'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 § 108.400 or § 108.410, as appropriate. Restrictions on Common Control or Ownership of Two or More NMVC Companies § 108.460 Restrictions on Common Control or ownership of two (or more) NMVC Companies. Without SBA's prior written approval, you must not have an officer, director, manager, Control Person, or owner (with a direct or indirect ownership interest of at least 10 percent) who is also: (a) An officer, director, manager, Control Person, or owner (with a direct or indirect ownership interest of at least 10 percent) of another NMVC Company; or (b) An officer or director of any Person that directly or indirectly controls, or is controlled by, or is under Common Control with, another NMVC Company. Change in Structure of NMVC Company § 108.470 SBA approval of merger, consolidation, or reorganization of NMVC Company. You may not merge, consolidate, change form of organization (corporation or partnership) or reorganize without SBA's prior written approval. Any such merger or consolidation will be subject to § 108.440. Subpart G—Managing the Operations of a NMVC Company General Requirements § 108.500 Lawful operations under the Act. You must engage only in the activities contemplated by the Act and in no other activities. § 108.502 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 NMVC Company” or that “Your capital is safe because SBA's experts review proposed investments to make sure they are safe for the NMVC Company.” § 108.503 NMVC Company'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. (c) Responsibility for valuations. (d) Frequency of valuations. (2) On a case-by-case basis, SBA may require you to perform valuations more frequently. (3) You must report material adverse changes in valuations at least quarterly, within thirty 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. § 108.504 Equipment and office requirements. (a) Computer capability. (b) Facsimile capability. (c) Accessible office. § 108.506 Safeguarding the NMVC Company'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. § 108.507 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 that is necessary to make a statement not misleading in light of the circumstances under which the statement was made. § 108.509 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 SBA Assistance. Management and Compensation § 108.510 SBA approval of NMVC Company's Investment Adviser/Manager. You may employ an Investment Adviser/Manager who will be subject to the supervision of your board of directors, managing members, 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 NMVC Company does not indicate approval of that manager for any other NMVC Company. (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. § 108.520 Management Expenses of a NMVC Company. SBA must approve your initial Management Expenses and any increases in your Management Expenses. (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. Cash Management by a NMVC Company § 108.530 Restrictions on investments of idle funds by NMVC Companies. (a) 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) Certificates of deposit with a maturity of one year or less, issued by a federally insured institution; or (4) A deposit account in a federally insured institution, subject to a withdrawal restriction of one year or less; or (5) A checking account in a federally insured institution; or (6) A reasonable petty cash fund. (b) 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. (c) Deposit of funds in Associate institution. Borrowing by NMVC Companies From Non-SBA Sources § 108.550 Prior approval of secured third-party debt of NMVC companies. (a) Definition. (b) General rule. (c) Conditions for SBA approval. (d) Thirty-day approval. (1) You are in regulatory compliance; (2) The security interest in your assets is limited to either those assets being acquired with the borrowed funds or an asset coverage ratio of no more than 2:1; (3) Your request is for approval of a secured line of credit that would not cause your total outstanding borrowings (not including Leverage) to exceed 50 percent of your Leverageable Capital. Voluntary Decrease in Regulatory Capital § 108.585 Voluntary decrease in NMVC Company's Regulatory Capital. You must obtain SBA's prior written approval to reduce your Regulatory Capital by more than two percent in any fiscal year. At all times, you must retain sufficient Regulatory Capital to meet the minimum capital requirements in the Act and § 108.210, and sufficient Leverageable Capital to avoid having excess Leverage in violation of section 355(d) of the Act. Subpart H—Recordkeeping, Reporting, and Examination Requirements for NMVC Companies Recordkeeping Requirements for NMVC Companies § 108.600 General requirement for NMVC Company 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 NMVC Company or LLC NMVC Company, 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 NMVC Company application. (iii) All documents evidencing ownership of the NMVC Company 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). (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 microfilm or computer-scanned or generated copy for the original of any record covered by this paragraph (c). (d) Additional requirement. § 108.610 Required certifications for Loans and Investments. For each of your Loans and Investments, you must have the documents listed in 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) 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. (d) For each Low-Income Investment, a certification by the concern you are financing as to the basis for its qualification as a Low-Income Enterprise. § 108.620 Requirements to obtain information from Portfolio Concerns. All the information required by this section is subject to the requirements of § 108.600 and must be in English. (a) Information for initial Financing decision. (b) Updated financial and community economic development 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; (iii) Verify the use of Financing proceeds; and (iv) Evaluate the community economic development impact of the Financing. (2) The president, chief executive officer, treasurer, chief financial officer, general partner, or proprietor of the Portfolio Concern must certify the information submitted to you. (3) 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. (4) The requirements in this paragraph (b) do not apply when you acquire securities from an underwriter in a public offering (see § 108.825). 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. Reporting Requirements for NMVC Companies § 108.630 Requirement for NMVC companies to file financial statements and supplementary information with SBA (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) Where to file Form 468. (e) Reporting of social, economic, or community development impact information on Form 468. (f) Reporting of community development information. (1) The social, economic or community development benefits achieved as a result of the Financing; (2) How and to what extent such benefits fulfilled the goals of your comprehensive business plan and Participation Agreement; (3) Whether you consider the Financing or the results of the Financing to have fulfilled the objectives of the NMVC program; and (4) Whether, and if so, how you achieved accountability to the residents of the LI Area in connection with that Financing. § 108.640 Requirement to file portfolio financing reports (SBA Form 1031). For each Financing you make (excluding guarantees), you must submit a Portfolio Financing Report on SBA Form 1031 within 30 days of the closing date. § 108.650 Requirement to report portfolio valuations to SBA. You must determine the value of your Loans and Investments in accordance with § 108.503. You must report such valuations to SBA within 90 days of the end of the fiscal year in the case of annual valuations, and within 30 days following the close of other reporting periods. You must report material adverse changes in valuations at least quarterly, within thirty days following the close of the quarter. § 108.660 Other items required to be filed by NMVC Company 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) Reports concerning Operational Assistance grant funds. (f) Other reports. § 108.680 Reporting changes in NMVC Company not subject to prior SBA approval. (a) Changes to be reported for post-approval. (b) Approval by SBA. Examinations of NMVC Companies by SBA for Regulatory Compliance § 108.690 Examinations. All NMVC companies must submit to annual examinations by or at the direction of SBA for the purpose of evaluating regulatory compliance. § 108.691 Responsibilities of NMVC Company 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 § 108.620(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. § 108.692 Examination fees. (a) General. (b) Base fee. (c) Adjustments to base fee. (1) If you have no outstanding regulatory violations at the time of the commencement of the examination and SBA did not identify any violations as a result of the most recent prior examination, you will receive a 15% discount on your base fee; and (2) If you were fully responsive to the letter of notification of examination (that is, you provided all requested documents and information within the time period stipulated in the notification letter in a complete and accurate manner, and you prepared and had available all information requested by the examiner for on-site review), you will receive a 10% discount on your base fee. (d) Delay fee. Subpart I—Financing of Small Businesses by NMVC Companies Determining the Eligibility of a Small Business for NMVC Financing § 108.700 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 meets the size standards for a Small Business, you may use either the financial size standards in § 121.301(c)(1) of this chapter or the industry standard covering the industry in which the applicant is primarily engaged, as set forth in § 121.301(c)(2) of this chapter. § 108.710 Requirement to finance Low-Income Enterprises. (a) Low-Income Enterprise Financings. (1) At least 80 percent of your Portfolio Concerns must be Low-Income Enterprises in which you have an Equity Capital Investment; and (2) For all Financings you have extended, you must have invested at least 80 percent (in total dollars) in Equity Capital Investments in Low-Income Enterprises. (b) Non-compliance with this section. § 108.720 Small Businesses that may be ineligible for financing. (a) Relenders or reinvestors. (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. (3) Exception for certain Partnership NMVC companies. (c) Real Estate Businesses. (i) Any business classified under subsector 5311 (Lessors of Real Estate) of the NAICS Manual; or (ii) Any business listed under subsector 5312 (Offices of Real Estate Agents and Brokers) unless at least 80 percent of the revenue is derived from non-Affiliate sources. (2) You are not permitted to finance a 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) 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 (2) 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. (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) Financing NMVC companies or SBICs. (1) To purchase stock in or provide capital to a NMVC Company or SBIC; or (2) To repay an indebtedness incurred for the purpose of investing in a NMVC Company or SBIC. § 108.730 Financings which constitute conflicts of interest. (a) General rule. (1) Provide Financing to any of your Associates, except for a Small Business that satisfies all of the following conditions: (i) Your Associate relationship with the Small Business is described by paragraph (8) or (9) of the definition of Associate in § 108.50; (ii) No Person triggering the Associate relationship identified in paragraph (a)(1)(i) of this section is a Close Relative or Secondary Relative of any Person described in paragraph (1), (2), (4), or (5) of the definition of Associate in § 108.50; and (iii) No single Associate of yours has either a voting interest or an economic interest in the Small Business exceeding 20 percent, and no two or more of your Associates have either a voting interest or an economic interest exceeding 33 percent. Economic interests shall be computed on a fully diluted basis, and both voting and economic interests shall exclude any interest owned through the NMVC Company. (2) Provide Financing to an Associate of another NMVC Company if one of your Associates has received or will receive any direct or indirect Financing or a Commitment from that NMVC Company or a third NMVC Company (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. (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 § 108.825(c)), 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) Both you and your Associate are NMVC companies. (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, the percentages of the Portfolio Concern's equity set forth in paragraph (a)(1) of this section. (2) 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) Restriction on options obtained by NMVC Company's management and employees. (1) They participate in the Financing on a pari passu (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. § 108.740 Portfolio diversification (“overline” limitation). (a) Without SBA's prior written approval, you may provide Financing or a Commitment to a Small Business only if the resulting amount of your aggregate outstanding Financings and Commitments to such Small Business and its Affiliates does not exceed 10 percent of the sum of: (1) Your Regulatory Capital as of the date of the Financing or Commitment; plus (2) The total amount of leverage projected in your participation agreement with SBA; plus (3) Any permitted Distribution(s) you made during the five years preceding the date of the Financing or Commitment which reduced your Regulatory Capital. (b) For the purposes of paragraph (a) of this section, you must measure each outstanding Financing at its current cost plus any amount of the Financing that was previously written off. [66 FR 28609, May 23, 2001, as amended at 76 FR 63545, Oct. 12, 2011] § 108.760 How a change in size or activity of a Portfolio Concern affects the NMVC Company and the Portfolio Concern. (a) Effect on NMVC Company of a change in size of a Portfolio Concern. (1) Subject to the overline limitations of § 108.740, 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 NMVC Company'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 § 108.740. Structuring NMVC Company's Financing of Eligible Small Businesses § 108.800 Financings in the form of equity interests. You may not, inadvertently or otherwise: (a) Become a general partner in any unincorporated business; or (b) Become jointly or severally liable for any obligations of an unincorporated business. § 108.820 Financings in the form of guarantees. (a) General rule. (b) Exception. (1) You would become subject to State regulation as an insurance, guaranty or surety business; or (2) The amount of the guaranty plus any direct Financings to the Small Business exceed the overline limitations of § 108.740, 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. (c) Pledge of NMVC Company's assets as guaranty. § 108.825 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 NMVC Company or from SBA. (e) Purchases of securities from other non-issuers. Limitations on Disposition of Assets § 108.885 Disposition of assets to NMVC Company's Associates. Except with SBA's prior written approval, you are not permitted to dispose of assets (including assets acquired in liquidation) to any Associate. As a prerequisite to such approval, you must demonstrate that the proposed terms of disposal are at least as favorable to you as the terms obtainable elsewhere. Management Services and Fees § 108.900 Fees for management services provided to a Small Business by a NMVC Company or its Associate. (a) General. (b) SBA approval. (c) Permitted management services 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; (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; and (5) At least 50 percent of any management services fees paid to your Associate by a Small Business for management services provided by the Associate is allocated back to you for your benefit. (d) Fees for service as a board member. (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. (f) Recordkeeping requirements. [67 FR 68503, Nov. 12, 2002] Subpart J—SBA Financial Assistance for NMVC Companies (Leverage) General Information About Obtaining Leverage § 108.1100 Type of Leverage and application procedures. (a) Type of Leverage available. (b) Applying for Leverage. (c) Where to send your application. § 108.1120 General eligibility requirement for Leverage. To be eligible for Leverage, you must be in compliance with the Act, the regulations in this part, and your Participation Agreement. § 108.1130 Leverage fees payable by NMVC Company. There is no fee for the issuance of Debentures by a NMVC Company. § 108.1140 NMVC Company's acceptance of SBA remedies under § 108.1810. If you issue Leverage, you automatically agree to the terms and conditions in § 108.1810 as it exists at the time of issuance. The effect of these terms and conditions is the same as if they were fully incorporated in the terms of your Leverage. Maximum Amount of Leverage for Which a NMVC Company Is Eligible § 108.1150 Maximum amount of Leverage for a NMVC Company. The face amount of a NMVC Company's outstanding Debentures may not exceed 150 percent of its Leverageable Capital. Conditional Commitments by SBA To Reserve Leverage for a NMVC Company § 108.1200 SBA's Leverage commitment to a NMVC Company—application procedure, amount, and term. (a) General. (b) Applying for a Leverage commitment. (c) Limitations on the amount of a Leverage commitment. Federal Register (d) Term of Leverage commitment. § 108.1220 Requirement for NMVC Company to file financial statements at the time of request for a draw. (a) If you submit a request for a draw against SBA's Leverage commitment more than 90 days since your submission of an annual Form 468 or a Form 468 (Short Form), you must: (1) Give SBA a financial statement on Form 468 (Short Form); and (2) File a statement of no material adverse change in your financial condition since your last filing of Form 468. (b) You will not be eligible for a draw if you are not in compliance with this section. § 108.1230 Draw-downs by NMVC Company under SBA's Leverage commitment. (a) NMVC Company's authorization of SBA to guarantee securities. (b) Limitations on amount of draw. Federal Register (c) Effect of regulatory violations on NMVC Company'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 or your Participation Agreement 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 § 108.1220 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 § 108.630(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) and your Participation Agreement, 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 NMVC Company; (ii) An officer of a corporate general partner of the NMVC Company; (iii) An individual who is authorized to act as or for a general partner of the NMVC Company; or (iv) An individual who is authorized to act as or for a member-manager of the NMVC Company. (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)(4) 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 § 108.1810. § 108.1240 Funding of NMVC Company's draw request through sale to third-party. (a) NMVC Company's authorization of SBA to arrange sale of securities to third-party. (1) The sale of your Debenture to a third-party at a rate approved by SBA; and (2) The purchase of your security from the third-party and the pooling of your security with other securities with the same maturity date. (b) Sale of Debentures to a third-party. Funding Leverage by use of SBA Guaranteed Trust Certificates (“TCs”) § 108.1600 SBA authority to issue and guarantee Trust Certificates. (a) Authorization. (b) SBA authority to arrange public or private fundings of Leverage. (c) Pass-through provisions. (d) Formation of a Pool or Trust holding Leverage Securities. § 108.1610 Effect of prepayment or early redemption of Leverage on a Trust Certificate. (a) The rights, if any, of a NMVC Company to prepay any Debenture is established by the terms of such security, 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. (c) Any prepayment of a Debenture pursuant to the terms of the Guaranty Agreement relating to such security shall reduce the SBA guarantee of timely payment of principal and interest on a TC in proportion to the amount of principal that such prepaid Debenture 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 shall accrue only through the date of prepayment. (f) In the event that all Debentures 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, that in the case of the prepayment of a Debenture pursuant to the provisions of the Guaranty Agreement relating to the Debenture, the CRA shall pass through pro rata to the holders of the TCs any such prepayments including any prepayment penalty paid by the obligor NMVC Company pursuant to the terms of the Debenture. § 108.1620 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 as well as negotiating the terms and conditions of sales or periodic offerings of Debentures and/or TCs on behalf of NMVC companies. (iii) Directing and coordinating periodic sales of Debentures and/or TCs. (iv) Arranging for the production of Offering Circulars, 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. (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 NMVC companies; (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; (vi) Hold, safeguard, and release all Debentures 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, 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. § 108.1630 SBA regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates. (a) Brokers and Dealers. (b) 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, SBA will suspend such broker or dealer 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 or TCs may be terminated. (c) Termination/suspension proceedings. § 108.1640 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 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 § 108.1700 Transfer by SBA of its interest in a NMVC Company'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 held by or on behalf of SBA. Upon notice by SBA, a NMVC Company will make all payments of principal and interest as shall be directed by SBA. A NMVC Company will be liable for all damage or loss which SBA may sustain by reason of such disposal, up to the amount of the NMVC Company's liability under such security, plus court costs and reasonable attorney's fees incurred by SBA. § 108.1710 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 obligations held or guaranteed by SBA, and all legal or equitable rights accruing to SBA. § 108.1720 Characteristics of SBA's guarantee. If SBA agrees to guarantee a NMVC Company's Debentures, such guarantee will be unconditional, irrespective of the validity, regularity or enforceability of the Debentures or any other circumstances that 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. Subpart K—NMVC Company's Noncompliance With Terms of Leverage § 108.1810 Events of default and SBA's remedies for NMVC Company'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 363(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 paragraph (h) of this section. (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 363 (c) of the Act. (f) Events of default with opportunity to cure. (1) Excessive Management Expenses. (2) Improper Distributions. (i) Distributions permitted under § 108.585; and (ii) Payments from Retained Earnings Available for Distribution based on either the shareholders' or members' pro-rata interests or the provisions for profit distributions in your partnership agreement, as appropriate. (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. (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 363(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 NMVC Company, 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 NMVC Company or an LLC NMVC Company, upon written notice, to require you to remove the person(s) responsible for such occurrence and/or to remove the general partner or manager of the NMVC Company, which general partner or manager shall then be replaced in accordance with NMVC Company's Articles by a new general partner or manager approved by SBA; and/or (3) With respect to a Corporate or Partnership or LLC NMVC Company, to obtain the appointment of SBA or its designee as your receiver under section 363(c) of the Act for the purpose of continuing your operations. The appointment of a receiver to liquidate a NMVC Company is not within such consent, but is governed instead by the relevant provisions of the Act. Computation of NMVC Company's Capital Impairment § 108.1830 NMVC Company's Capital Impairment definition and general requirements. (a) Significance of Capital Impairment condition. (b) Definition of Capital Impairment condition. (c) Quarterly computation requirement and procedure. (d) SBA's right to determine NMVC Company's Capital Impairment condition. § 108.1840 Computation of NMVC Company'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 your 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 I 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) Such financing occurred within 24 months of the date of the Capital Impairment computation, or the Small Business' pre-tax cash flow from operations for its most recent fiscal year was at least 10 percent of the Small Business' average contributed capital for such fiscal year. (4) Perform the appropriate computation from the table in § 107.1840(d)(4) of this chapter. (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, you must 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. Subpart L—Ending Operations as a NMVC Company § 108.1900 Termination of participation as a NMVC Company. You may not terminate your participation as a NMVC Company 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 NMVC Company. Subpart M—Miscellaneous § 108.1910 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 § 108.1810 does not constitute a waiver of any succeeding breach of such term or provision or condition. § 108.1920 NMVC Company's application for exemption from a regulation in this part 108. (a) General. (b) Contents of application. (1) The proposed action is fair and equitable; and (2) The exemption requested is reasonably calculated to advance the best interests of the NMVC program in a manner consistent with the policy objectives of the Act and the regulations in this part. § 108.1930 Effect of changes in this part 108 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. § 108.1940 Procedures for designation of additional Low-Income Geographic Areas (a) General. (b) Criteria. (1) A substantial number of Low-Income Individuals reside in that census tract (or equivalent county division). (2) As adequately supported by studies or other analyses or reliable data, that census tract (or equivalent county division) has a pattern of unmet needs for investment capital. (3) As adequately supported by studies or other analyses or reliable data, that census tract (or equivalent county division) has indications of economic distress. (c) Procedure for designation. Federal Register (2) In making a final decision on whether to designate a particular census tract (or equivalent county division) as an additional LI Area, SBA will consider evidence submitted by any requester, SBA's own research, any public comments submitted, and any other information deemed relevant by SBA. (3) If SBA designates a particular census tract (or equivalent county division) as an additional LI Area, SBA will publish a notice in the Federal Register Subpart N—Requirements and Procedures for Operational Assistance Grants to NMVC Companies and SSBICs § 108.2000 Operational Assistance Grants to NMVC Companies and SSBICs. (a) NMVC Companies. (b) SSBICs. [67 FR 68503, Nov. 12, 2002] § 108.2001 When and how SSBICs may apply for Operational Assistance grants. (a) Notice of Funds Availability (“NOFA”). Federal Register, (b) Application form. [67 FR 68503, Nov. 12, 2002] § 108.2002 Eligibility of SSBICs to apply for Operational Assistance grants. An SSBIC is eligible to apply for an Operational Assistance grant if: (a) It intends to increase its Regulatory Capital, as in effect on December 21, 2000, and to make Low-Income Investments in the amount of such increase; (b) It intends to raise binding commitments for contributions in cash or in-kind, and/or to purchase an annuity, in an amount not less than 30 percent of the intended increase in its Regulatory Capital described in paragraph (a) of this section; and (c) It has a plan describing how it intends to use the requested grant funds to provide Operational Assistance to Smaller Enterprises in which it has made or expects to make Low-Income Investments after December 21, 2000. [67 FR 68503, Nov. 12, 2002] § 108.2003 Grant issuance fee for SSBICs. An SSBIC must pay to SBA a grant issuance fee of $5,000. An SSBIC must submit this fee in advance, at the time of application submission. If SBA does not award a grant to the SSBIC, SBA will refund this fee to the SSBIC. [67 FR 68503, Nov. 12, 2002] § 108.2004 Contents of application submitted by SSBICs. Each application submitted by an SSBIC for an Operational Assistance grant must contain the information specified in the application packet provided by SBA, including the following information: (a) Amounts. (b) Plan. [67 FR 68503, Nov. 12, 2002] § 108.2005 Contents of plan submitted by SSBICs. (a) Plan for providing Operational Assistance. (b) Matching resources for Operational Assistance grant. (c) Identification of LI Areas. (d) Projected allocation of investments among identified LI Areas. (e) Track record of management team in obtaining public policy results through investments. (f) Market analysis. (g) Regulatory Capital. (h) Projected impact. (1) An estimate of the social, economic, and community development benefits to be created within identified LI Areas over the next five years or more as a result of its activities; (2) A description of the criteria to be used to measure the benefits created as a result of its activities; and (3) A discussion about the amount of such benefits created that it will consider to constitute successfully meeting the objectives of the NMVC program. [67 FR 68503, Nov. 12, 2002] § 108.2006 Evaluation and selection of SSBICs. SBA will evaluate and select an SSBIC for an Operational Assistance grant award under the NMVC program solely at SBA's discretion, based on SBA's review of the SSBIC's application materials, interviews or site visits with the SSBIC (if any), and information in SBA's records relating to the SSBIC's regulatory compliance status and track record as an SSBIC. SBA's evaluation and selection process is intended to ensure that SSBIC requests are evaluated on a competitive basis and in a fair and consistent manner. SBA will evaluate and select SSBICs for an Operational Assistance grant award by considering the following criteria: (a) The strength of the SSBIC's application, including the strength of its proposal to provide Operational Assistance to Smaller Enterprises in which it intends to invest; (b) The SSBIC's regulatory compliance status and past track record in being able to accomplish program goals through its investment activity; (c) The likelihood that and the time frame within which the SSBIC will be able to raise the Regulatory Capital it intends to raise and obtain the matching resources described in § 108.2005(b) and (g); (d) The need for Low-Income Investments in the LI Areas in which the SSBIC intends to invest; (e) The SSBIC's demonstrated understanding of the markets in the LI Areas in which it intends to invest; (f) The extent to which the activities proposed by the SSBIC will promote economic development and the creation of wealth and job opportunities in the LI Areas in which it intends to invest and among individuals living in LI Areas; (g) The likelihood that the SSBIC will fulfill the goals described in its application and meet the objectives of the NMVC program; and (h) The strength of the SSBIC's application compared to applications submitted by other SSBICs and by Applicants intending to invest in the same or proximate LI Areas. [67 FR 68503, Nov. 12, 2002] § 108.2007 Grant award to SSBICs. An SSBIC selected for an Operational Assistance grant award will receive a grant award only if, by a date established by SBA, it increases its Regulatory Capital in the specific amount set forth in its application, pursuant to § 108.2004(a), and raises matching resources for the grant in the amount required by § 108.2030(d)(2). [67 FR 68503, Nov. 12, 2002] § 108.2010 Restrictions on use of Operational Assistance grant funds. (a) Restrictions applicable only to SSBICs. (b) Restrictions applicable only to NMVC Companies. (c) Restrictions applicable to NMVC Companies and SSBICs. [66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001, as amended at 67 FR 68505, Nov. 12, 2002] § 108.2020 Amount of Operational Assistance grant. (a) Amount of grant to NMVC Company. (b) Amount of grant to SSBIC. (c) Pro rata reductions. [66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002] § 108.2030 Matching requirements. (a) General. (b) Allowable sources. (2) Neither a NMVC Company nor a SSBIC may use funds or other resources that it has used to satisfy a legal requirement for obtaining funds under any other Federal program, to satisfy the matching resources requirements described in this part. (3) A portion of Private Capital may be designated as matching resources if the designated funds are used to purchase an annuity pursuant to paragraph (c)(2)(iv) of this section or are otherwise segregated in a manner acceptable to SBA. (c) Type and form of matching resources. (2) Matching resources may be in the form of: (i) Cash; (ii) In-kind contributions; (iii) Binding commitments for cash or in-kind contributions that may be payable over a multiyear period acceptable to SBA (but not to exceed the term of the Operational Assistance grant from SBA and in no event more than 10 years); and/or (iv) An annuity, purchased with funds other than Regulatory Capital, from an insurance company acceptable to SBA and that may be payable over a multiyear period acceptable to SBA (but not to exceed the term of the Operational Assistance grant from SBA and in no event more than 10 years). (d) Amount of matching resources NMVC Companies. (2) SSBICs. [66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002] § 108.2040 Reporting and recordkeeping requirements. (a) NMVC Companies. (b) SSBICs. [66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]

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