107.1406 Maximum

107.1407

107.1408

amortization (interpreting 107.301(a)). Short-term loans to protect Licensee's investment (interpreting § 107.301(d)). SBIC financing for radio and TV stations (interpreting § 107.1001 (d)).

107.1409 Purchase of existing notes of portfolio concern (interpreting §§ 107.401 and 107.504).

107.1410 Loans secured by real estate (interpreting § 107.3).

107.1411 Equipment leasing concerns and rental service concerns (interpreting § 107.1001 (a) and (f)). APPENDIX 1-Audit and Examination Guide for Small Business Investment Companies. Revised January 9, 1968.

APPENDIX 2-Instructions for Preparation of the Financial Report, SBA Form 468 (9–67).

APPENDIX 3-Instructions for Preparation of the Program Evaluation Report, SBA Form 684 (1-68). AUTHORITY: The provisions of this Part 107 issued under sec. 308, 72 Stat. 694, as amended; 15 U.S.C. 687.

SOURCE: The provisions of this Part 107 contained in Revision 4, 33 F.R. 326, Jan. 9, 1968, unless otherwise noted.

NOTE: Forms filed with the original document.

REGULATIONS

§ 107.1 Scope of Part 107.

The regulations in this Part 107 implement the functions, powers, and duties conferred on SBA by the Small Business Investment Act of 1958, as amended.

§ 107.2 Information, forms, and instructions.

All SBA forms and instructions for their preparation referred to throughout the regulations in this Part 107 have been filed with the Office of Federal Register along with the original document. Copies may be obtained from SBA, 1441 L Street NW., Washington, D.C. 20416. All applications, reports, or other forms filed with SBA must be completed in accordance with applicable instructions.1

Act. "Act" means the Small Business Investment Act of 1958, as amended. Associate of a Licensee. "Associate of a Licensee" means:

(a) An officer, director, general manager, or investment adviser of such Licensee, or any person or firm regularly serving such Licensee in the capacity of attorney at law; or

(b) Any person which owns or controls, directly or indirectly, 10 or more percent of any class of stock of such Licensee; or

(c) Any officer, director, partner, general manager, employer, or employee of any person described in paragraphs (a) and (b) of this section; or

(d) Any person which directly or indirectly controls, or is controlled by, or is under common control with, a Licensee or any person described in paragraphs (a) and (b) of this section; or

(e) Any close relative of any person described in paragraphs (a) and (b) of this section; or

(f) Any concern in which (1) any person described in paragraphs (a) through (e) of this section is an officer or director or (2) any such person (or group of two or more such persons acting in concert) owns or controls, directly or indirectly, 10 or more percent equity interest (ex

clusive of any interest attributable solely to ownership of equity interests in the Licensee); and

(g) For the purposes of this definition, any person which has held any of the positions or relationships described in paragraphs (a) through (f) of this section within 6 months prior to the date of financing provided by the Licensee, or which holds any such position or relationship within 6 months after the date of such financing, shall be deemed to have such position or relationship as of the date of Licensee's financing.

Close relative. "Close relative" means ancestor, lineal descendant, brother or sister and lineal descendants of either, spouse, father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-inlaw, or sister-in-law.

Control. "Control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Licensee or a small business concern, whether through the ownership of voting securities, by contract, or otherwise.

Debtor Licensee. "Debtor Licensee" means a Licensee indebted to SBA, including SBA guaranties and commitments with respect thereto.

Institutional Lender. "Institutional Lender" and "Lending Institution" means banks, insurance companies, and other concerns whose regular course of business entails the making of commercial and industrial loans or investments.

Investment Adviser. "Investment Adviser" of a Licensee means a person who, pursuant to written contract, regularly furnishes advice to such Licensee with respect to the acquisition. servicing, or disposition of portfolio securities, or securities acquired as assets in liquidation. The provisions of § 107.809 govern Licensee's employment of an Investment Adviser.

License. "License" means the grant of authority, evidenced by a certificate issued by SBA pursuant to section 301 of the Act, authorizing a company to conduct operations solely as a Federal Licensee in accordance with the provisions of the Act and regulations thereunder. Licensee. "Licensee" means a corporation chartered under State law, and granted a license by SBA.

Person. "Person" means a natural person or legal entity.

Portfolio. "Portfolio" means the securities representing a Licensee's total outstanding financing of small business

concerns. It does not include Idle Funds or assets acquired in liquidation.

Portfolio concern. "Portfolio concern" means a small business concern financed by a Licensee in exchange for debt or equity securities which are still outstanding and constitute part of Licensee's Portfolio.

Real estate investment. "Real estate investment" means a Licensee's financing of a small business concern which is classified as a real estate concern under Major Group 65 of the Standard Industrial Classification Manual prepared by the Bureau of the Budget, and available from the U.S. Government Printing Office.

1940 Act Company. "1940 Act Company" means a Licensee which is registered under the Investment Company Act of 1940.

SBA. "SBA" means the Small Business Administration, 1441 L Street NW.,

Washington, D.C. 20416.

Small business concern. "Small business concern" means a concern (including affiliates as defined in § 121.3-2), which for purposes of size eligibility, meets the applicable size standards and criteria set forth in § 121.3-11 of Part 12 of this chapter.

Venture Capital. For purposes of this part, the following types of financings will be considered Venture Capital:

(a) Common and Preferred Stock with no repurchase requirement for 5 years, except as may be specifically approved by SBA under 107.901 for purposes of relinquishing control of a small business concern.

(b) Any right to purchase such stock.

(c) Debentures or loans (whether or not convertible or having stock purchase rights) which carry an effective interest rate of not to exceed 10 percent, are subordinated (including security interests against the assets of the small concern) by their terms to all borrowings of the small concern from other institutional lenders, and have no part amortized during the first 3 years.

written SBA approval. A general manager, or common manager, shall be deemed an officer of such Licensee.

(b) Office. The Licensee shall maintain a reasonably accessible office, which will display the name of the Licensee and be open to the public during regular business hours. The License certificate shall be displayed in a prominent place in the principal office.

(c) Diversified investment policy. Unless specifically authorized in writing by SBA, a Licensee shall not maintain more than one-third of its portfolio, as of the close of any full fiscal year, in any small business concern or concerns classified under any single Major Group of the Standard Industrial Classification Manual issued by the Bureau of the Budget. Prepayments of outstanding financings or similar events occurring beyond the control of the Licensee, within the fiscal year, shall be disregarded for purposes of determining whether the Licensee meets the foregoing requirement as of the close of its fiscal year.

(d) Minimum capital. Every Licensee shall have a combined private paid-in capital and paid-in surplus in an amount (1) not less than $150,000, and (2) adequate to assure a reasonable prospect that the company will be operated soundly and profitably, and managed actively and prudently in accordance with the Act and Regulations.

(e) Borrowed funds. Shareholders owning 10 or more percent of any class of Licensee's stock may not use borrowed funds in purchasing said stock, unless the net worth of each such shareholder is equal to at least twice the amount borrowed.

(f) Time-limit for compliance. Existing Licensees shall bring themselves into compliance with the requirements of paragraphs (a) and (b) of this section not later than June 30, 1968.

PROCEDURE FOR OBTAINING LICENSE § 107.102 License application.

The license application shall be submitted on SBA Form No. 415 in accordance with accompanying instructions. A license fee of $500 shall be paid to SBA simultaneously with the filing of such application.

§ 107.103 Public notice.

SBA shall cause notice to be published in the FEDERAL REGISTER setting forth relevant information concerning the fil

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ing of the application for license. The notice shall include the name and location of the proposed Licensee, the area (or areas) in which it is to commence operations, the names and addresses of its Agent for Correspondence and of its officers, directors, and owners of 10 or more percent of its capital stock, and such other information as SBA may deem appropriate. The notice shall provide an opportunity to submit written comments within a designated period of time. A similar notice as prescribed by SBA, shall be published in a newspaper of general circulation in the city or local area (or areas) where the proposed Licensee is to commence operations, and a copy thereof shall be furnished to SBA within 10 days after such publication. § 107.104 Transferability of license.

A license is not transferable in any manner except under circumstances expressly approved in writing by SBA. § 107.105 Surrender of license.

A Licensee shall not surrender its license without prior written approval of SBA. Request for such approval shall be accompanied by Licensee's offer of immediate payment of all debts owing to SBA, or by a plan satisfactory to SBA for the fair and orderly liquidation of such obligations. Upon receipt of Licensee's request, SBA may remove Licensee's name from its published lists of Licensees, and may conduct an examination of the Licensee to ascertain the state of its affairs. In granting its approval, SBA may impose such terms and conditions as it may determine appropriate.

BORROWING BY LICENSEE

(b) The term, "total funds available for investment," shall mean total shortterm assets and total loans and investments of a Licensee required (in accordance with the Instructions for Preparation of the Financial Report, SBA Form 468 (9-67)) to be set forth as Items 8 and 14, respectively, on Page 1 of the Financial Report, SBA Form 468 (9-67), submitted by such Licensee. Venture capital investments, as defined in § 107.3, shall be valued on the same basis as Licensee's assets comprising its "total funds available for investment."

(c) Maintenance of venture capital ratio: A Licensee indebted pursuant to section 303 (b) (2) of the Act shall maintain at least the ratio required by (b) thereof as of March 31 and September 30 of each year: Provided, however, That subject to SBA approval a Licensee may temporarily maintain a lesser ratio. Approval may be granted to the extent necessary in appropriate cases, including prepayments of venture capital investments, raising of additional private capital, and loan funds recently provided to the Licensee.

§ 107.203 SBA sale of securities evidencing loan to Licensee.

SBA may, in its discretion and upon such terms and conditions and for such consideration as shall be deemed to be reasonable, sell, assign, transfer or otherwise dispose of any debenture, or other evidence of debt or security held in connection with any loan made by SBA under the Act.

ment shall be permitted. Amortization during the first 5 years shall not be required at the rate exceeding an accumulated average of 20 percent of principal per year.

(b) Maximum interest rate and related charges. The maximum annual cost to a small business concern for average outstanding net funds advanced or guaranteed by the Licensee shall not exceed the lesser of:

(1) The maximum allowable cost prescribed by applicable State or local law;

or

(2) Fifteen (15%) percent. Cost shall include all interest and discount as well as all fees, commissions, charges, etc. (other than charges for management consulting services duly rendered), against such concern at the time of the financing. Such fees, charges, etc. shall be treated as additional discount for this purpose.

(c) Twenty (20%) percent limitation. (1) Without prior written SBA approval, the aggregate amount of obligations and securities acquired and for which commitments or guarantees may be issued by any Licensee for any single small business concern (including affiliated concerns as defined in Part 121 of this chapter) shall not exceed twenty (20%) percent of Licensee's combined paid-in capital and paid-in surplus.

(2) For this purpose, the combined paid-in capital and paid-in surplus of any SBIC licensed prior to January 1, 1968, shall consist of (i) its paid-in capital and paid-in surplus and (ii) the following portions of the funds outstanding from SBA through the issuance of subordinated debentures as of January 1, 1968, or on January 1 of each of the following calendar years, whichever is less: (a) One hundred (100%) percent, during 1968; (b) seventy-five (75%) percent, during 1969; (c) fifty (50%) percent, during 1970; (d) twenty-five (25%) percent, during 1971; and (e) zero, during 1972 and thereafter: Provided, however, That a reduction of Licensee's investment limit as a result of the operation of this subparagraph shall not impair the validity of any prior investment or commitment made in accordance with applicable provisions in effect at the time such investment or commitment was entered into.

(3) The twenty (20%) percent limitation of Licensee's investments in a single concern shall apply to the amount

of funds disbursed and commitments issued to a portfolio concern, as distinguished from the face amount of the portfolio security. However, a writedown in carrying value of a portfolio security shall not reduce the amount which is computed against the limitation.

(d) Short-term financing to protect investment. Short-term advances may be made to a portfolio concern when reasonably necessary to protect Licensee's existing long-term investment in such concern, but the sum of such advances and the outstanding amount of its previous investment shall not exceed the 20 percent limit prescribed by paragraph (c) of this section. Such short-term advances may not be made if the purpose is to take care of the normal short-term requirements of the small business

concern.

(e) Size status declaration. No financing (or management consulting services) shall be provided by a Licensee to any business concern unless (1) the Licensee and such concern have executed SBA Form 480, Size Status Declaration, including Licensee's determination that applicable size standards have been met, or (2) at the request of the Licensee or such concern, SBA has determined that the latter is a small business concern. The Licensee shall retain the completed SBA Form 480 as part of its records available for examination by SBA.

(f) Settlement statement. Upon the making of each financing of a small business concern, Licensee shall prepare a settlement statement describing the amount and purpose of financing, the type of security or other instrument evidencing Licensee's financing, interest rate, the amount of discount, fees, commissions, and charges and the percentage of actual or potential ownership in the small business concern represented by the Licensee-held financing documents and accompanying rights. The original of the settlement statement shall be furnished to the small business concern and a receipted copy thereof, together with the financial statements of such concern, shall be retained by the Licensee as a part of its records available for examination by SBA.

(g) Nondiscrimination. Debtor Licensees shall require small business concerns financed by them after January 9, 1968, to certify on SBA Form No. 652-D that they will not illegally discriminate in their operations, employment practices or facilities, as set forth in Part 113 of

this chapter. Such certification shall be retained by the Licensee as a part of its records available for examination by SBA.

EQUITY CAPITAL

§ 107.302 Equity capital.

(a) "Equity capital" means funds received by an incorporated small business concern from a Licensee as the consideration for the issuance of Equity Securities by such concern to such Licensee.

(b) Equity Securities means:

(1) Certificates of stock of any class with or without a right to convert to another class of stock or containing rights or privileges in the nature of stock warrants or options.

(2) Instruments which evidence a debt and which provide a right or privilege to convert all or any portion of the debt instruments into stock of the small business concern, or provide nondetachable or detachable stock purchase warrants or options, or provide both a right or privilege to convert all or any part of the debt instruments into stock and also detachable stock purchase warrants or options.

§ 107.303

Stock options or warrants; conversion rights.

(a) The total cost of all shares of stock which may be acquired through the exercise of options, warrants, or conversion rights shall not exceed the amount of Equity Capital supplied to the small business concern.

(b) Where short-term financing is furnished by a Licensee to protect its interests in previously acquired Equity Securities issued by a portfolio concern, such short-term financing may also incorporate stock acquisition rights on terms and conditions similar to those provided for in connection with the original financing.

(c) Stock purchase warrants or options issued in connection with Equity Securities shall expire not later than 10 years from the date of the issuance of such Equity Securities.

§ 107.304 Refinancing; first refusal on new indebtedness.

Whenever a Licensee provides Equity Capital to a small business concern, it may require such concern to (a) refinance any or all of its outstanding indebtedness so that the Licensee is the only holder of any evidence of indebted