shall independent Board members include close relatives (as defined in § 107.716(b) (5)) of any such person.

(4) Diversity of ownership. At least 3 stockholders, who are not close relatives of each other, as defined in § 107.716(b) (5), shall each own 10 or more percent of the Proposed Operator's stock: Provided, however, That this requirement will not apply if the existence of reasonable diversity of ownership is demonstrated in other ways, or the Proposed Operator is a subsidiary of a commercial bank, or other corporation having diversity of ownership to an extent acceptable to SBA.

(5) Office. Adequate provision must be made for the maintenance of a reasonably accessible office, which will display the name of the Licensee and be open to the public during regular business hours. The office must be adequately staffed so that persons wishing to communicate or enter into negotiations with the Licensee will be able to do so in the temporary absence of the officer responsible for operations.

(6) Need for licensee. A satisfactory showing must be made demonstrating a bona fide need for Proposed Operator's services in the Operating Area. If there is a concentration of Licensees in such Area, such showing must include the submission of relevant data as to the existence of types of local business or industry to which SBIC financing can be provided on a profitable basis.

(7) Real estate. Adequate provision must be made assuring that the Proposed Operator will not place more than onethird of its portfolio in real estate investments (i.e., in small business concerns classified in Major Group 65 of the Standard Industrial Classification, as amended, issued by the Bureau of the Budget).

(8) Conflict-of-interest transactions. Adequate provision must be made verifying that debt or equity financing of affiliates or other transactions of a type that would be subject to the provisions of § 107.716 relating to conflicts of interest, are not contemplated by the Proposed Operator in the normal course of its operations.

(9) Operations and capital. (i) A projection of income and expense by calendar quarters must be furnished for the first 2 years of operation, indicating that the Proposed Operator will be able ade

quately to support its projected operating expenses. Where the officer responsible for operations is to be compensated at prevailing salary levels, SBA will presumptively regard $300,000 of paid-in capital and paid-in surplus from private sources as the minimum capitalization required for such purpose. This presumption may be rebutted by the presentation of appropriate evidence establishing to SBA's satisfaction the existence of special circumstances which would justify its approval of a lower capitalization. If the total amount of Licensee's paid-in capital and paidin surplus (including for this purpose subordinated debentures issued to SBA under § 107.301) is less than the sum of $600,000 at the time the license is issued, such paid-in capital and paid-in surplus shall be increased to at least $600,000 during the first 2 years of operation by the issuance of an additional amount of subordinated debentures, or otherwise.

(ii) Proposed capitalization shall include authorized capital stock in excess of the amount proposed for immediate issuance, so that stock will be available for portfolio small business concerns which elect to exercise the option provided for in § 107.507 pursuant to the Act.

(10) Borrowed funds. The Proposed Operator must certify in writing that none of the original shareholders that will own 10 or more percent of its stock will use borrowed funds in purchasing said stock, unless such shareholder's net worth is equal to at least twice the amount borrowed. SBA may require the submission of balance sheets from shareholders so using borrowed funds.

(e) Investigation of proponents. Submission of a Proposal shall constitute authority to SBA to proceed with consideration thereof and to conduct, without liability on the part of SBA or anyone acting on its behalf, any investigation or inquiry deemed necessary in its discretion concerning any matter, person, or entity referred to in the Proposal.

(f) Opinion of counsel (1) Substance of opinion. Counsel for the Proponents or the Proposed Operator shall submit as part of the Proposal an opinion that the Proposed Operator is or can be chartered under State Law to conduct (in the territory in which its operations are to be carried on) only the activities described under Title III of the Act, in

accordance with the subject to the provisions and purpose of the Act and SBA regulations prescribed thereunder.

(2) Operating area beyond State of incorporation. In the event that the Operating Area is to include any region or regions beyond the jurisdiction of the State of incorporation, counsel of the Proponents or the Proposed Operator shall also submit as part of the Proposal an opinion that the Proposed Operator can, consistent with the provisions of its charter, the Act, and SBA regulations thereunder, obtain the issuance of all necessary permits, franchises or other legal authority from such other State or States as may be required to effectuate said purpose.

(3) Ineligible attorney. The opinion required by subparagraphs (1) or (2) of this paragraph shall not be rendered by an attorney who is to be an officer, director, or shareholder owning 10 or more percent of the stock of the Proposed Operator, or by a law partner or law firm with which such attorney is associated.

(g) Notice to proceed or notice of insufficiency. After due consideration of a Proposal, SBA shall notify the Proponents either:

(1) That they may proceed with all action necessary to qualify and enable the Proposed Operator to execute and submit a License Application. Such action shall be completed and a License Application submitted by the Proposed Operator within 90 days from the date of said notice, unless such period is extended by SBA; or

(2) That such Proposal is insufficient. (i) If SBA determines that the sufficiency of such Proposal cannot be established through further information or action, it shall declare the matter closed and so notify the Proponents.

(ii) If SBA determines that the sufficiency of such Proposal may be established through further information or action, it shall simultaneously with transmission of notice to that effect to the Proponents, allot a period of time within which they may endeavor to establish its sufficiency and resubmit said Proposal.

(iii) A resubmitted Proposal which is again determined by SBA to be insufficient, or a rejected Proposal not resubmitted within the allotted period, shall

be declared permanently closed and the Proponents so notified by SBA. [Amdt. 6, 30 F.R. 3635, Mar. 19, 1965] § 107.103 Charter requirements.

The charter of a Licensee shall constitute a grant by a State, in the form of a permit or certificate of incorporation, or amendment, or otherwise, evidencing and attesting to its existence or continued existence as a corporate entity. The powers and authority of a Licensee may be granted and expressed in any manner consistent with the corporation laws of such State and the requirements of appropriate State officials charged with administrative responsibilities in connection therewith, but each such charter must in any event contain the following provision:

This corporation is organized and chartered solely for the purpose of operating under the Small Business Investment Act of 1958, as amended, and will operate in the manner and shall have the powers, responsibilities, and be subject to the limitations provided by said Act and the regulations issued by the Small Business Administration thereunder.

[Amdt. 6, 30 F.R. 3636, Mar. 19, 1965] § 107.104

Post-licensing operations beyond State of incorporation.

In the event that a Licensee desires, after the issuance of its License, to conduct operations beyond the jurisdiction of its State of incorporation to an extent requiring registration or other compliance with the laws of other States involved, it must apply for prior SBA approval of the proposed change in Operating Area as a post-licensing amendment under § 107.704 (d). After receiving such approval, it shall me incumbent upon the Licensee to obtain, consistent with the provisions of its charter, the Act and SBA regulations thereunder, the issuance of all necessary permits, franchises or other legal authority from such other State or States in order to effectuate said purpose.

[Amdt. 6, 30 F.R. 3637, Mar. 19, 1965]

within 90 days after the issuance of said notice, be prepared and submitted in accordance with instructions therein contained or otherwise issued by SBA.

(b) Prerequisites. Prior to the issuance of a License, the Proposed Operator shall have:

(1) Executed and submitted a License Application, including such additional information, statements and representations as may otherwise be required by SBA;

(2) Received a corporate charter or franchise under State law to operate as a Licensee;

(3) Submited satisfactory evidence that, exclusive of funds required for organizational expenses, it has paid-in capital and paid-in surplus equal to at least $300,000 in cash or funds invested in accordance with the last sentence of section 308(b) of the Act of § 107.710: Provided, however, That any SBA commitment to purchase subordinated debentures under § 107.301(b) may, for the purposes of this section, be considered as part of such paid-in capital and paidin surplus; and

(4) Tendered a License fee of $100 to SBA simultaneously with the filing of the License Application.

[Amdt. 6, 30 F.R., 3637, Mar. 19, 1965]

§ 107.202 Authority to operate.

Only upon issuance by SBA of a License to the Proposed Operator, shall such corporation be authorized to operate under the Act.

[Amdt. 6, 30 F.R., 3637, Mar. 19, 1965] § 107.203

Transferability of license.

A License is not transferable in any manner except under circumstances expressly approved in writing by SBA. [Amdt. 6, 30 F.R. 3637, Mar. 19, 1965] § 107.205 License surrender.

A Li

(a) Prior approval of SBA. censee shall not surrender its license without prior written approval of SBA. Any request by a Licensee for approval of the surrender of a license shall be accompanied by a plan of dissolution. Such plan shall include provisions for the liquidation of assets, distribution thereof to shareholders, the surrender of the corporate charter, and the termination of the Licensee's existence as a corporate body. The plan shall provide for its consummation within a reasonable period of time and shall be subject to the approval of SBA. The surrender of the

license shall become effective upon a determination by SBA that the provisions of the plan have been consummated.

(b) Conditions of SBA approval. SBA will not approve a plan of dissolution leading to surrender of a license of any Licensee having paid-in capital and paid-in surplus from private sources of as much as $300,000 (excluding organizational expenses) unless it can be demontrated to the satisfaction of SBA that:

(1) (i) There has been no major change in the Board of Directors of the Licensee or in parties owning, holding or controlling, directly or indirectly, 10 or more percent of its stock within 1 year previous to the date of application for approval of the surrender and plan of dissolution; and

(ii) The Licensee has not within the preceding 2 years consummated a voluntary reduction of paid-in capital and paid-in surplus pursuant to § 107.704(b) (2) by an offer for tenders addressed to its shareholders; and

(iii) Substantial efforts have been made to operate the Licensee successfully but due to conditions peculiar to the Licensee, it has been unable to accomplish the purposes of the Act; and

(iv) A 20 percent reserve consisting of cash plus funds invested pursuant to § 107.710 is to be maintained against Licensee's outstanding equity investments and long-term loans for the purpose of meeting possible requirements for additional financing of existing portfolio concerns. Such reserve shall be in addition to 100 percent coverage of Licensee's outstanding commitments and other legal obligations; or

(2) It would be in the best interest of the SBIC program to allow the Licensee to dissolve and surrender its license. [Amdt. 3, 30 F.R. 2652, Mar. 2, 1965]

Interpretation. Any understanding, express or implied, by which the stockholders of a dissolving SBIC will act in concert to exchange the assets of such SBIC for the securities of another corporation, is not permitted. See 107.1009.

CAPITAL REQUIREMENTS

§ 107.301 Subordinated debentures; minimum capital.

(a) Minimum use of Government funds. In considering whether to issue a License to a Proposed Operator SBA will, in addition to all other requirements and criteria, give preference to those Proposals which contemplate the minimum use of Governinent funds.

The management of a Proposed Operator or of a Licensee should plan and encourage the maximum investment of private funds.

(b) Minimum capital; subordinated debentures. A Proposed Operator must have a paid-in capital and paid-in surplus from private sources of at least $150,000 (exclusive of organizational expenses), in cash or eligible Government securities. To the extent that additional funds are not available to the Proposed Operator from private sources on reasonable terms, it may request SBA, in the License Application, to agree to purchase Subordinated Debentures in the following amounts:

(1) In the amount required to meet the $300,000 statutory minimum, or

(2) In such greater amount, up to but not exceeding $700,000, as the Proposed Operator may match with paid-in capital and paid-in surplus from private

sources.

(c) Subordinated debentures issued after licensing. On or before February 27, 1968, or four years after the issuance of its license, whichever is later, a Licensee may request SBA to agree to purchase its Subordinated Debentures in an amount which, when added to any Subordinated Debentures previously issued to SBA, will not exceed the lesser of: (1) $700,000, or

(2) Its paid-in capital and paid-in surplus from private sources.

Provided, however, That a Licensee with paid-in capital and paid-in surplus from private sources in excess of $2,000,000 may request SBA to purchase its Subordinated Debentures in an aggregate amount of more than $400,000 only after it has borrowed the maximum amount of funds available to it pursuant to § 107.402.

(d) Availability of private funds. In connection with any request for such funds, the Licensee shall submit evidence satisfactory to SBA that such funds are not available on reasonable terms from private sources.

(e) Commitment. SBA may issue a commitment for such funds. Such commitment will expire one year from the date it is issued, but in no case later than February 27, 1969, or five years after the date of issuance of the license, whichever is later. The commitment, as well as the Subordinated Debenture itself, shall be treated as part of the paidin capital and paid-in surplus of a

Licensee for purposes of §§ 107.301, 107.402, and 107.708 (a).

(f) Terms of commitment. A commitment fee shall be computed against the amount committed but not disbursed. Such fee will be at the rate of onetwelfth of one percent for each 30-day period or fraction thereof, beginning with the first day after the first thirty days following the date of the commitment. The fee shall be due and payable upon billing. The fee shall not apply to any amount for which disbursement is requested during the initial 30-day period following the date of the commitment. Thereafter, the fee will terminate, as to the amount requested to be disbursed, at the end of the 30-day period during which request for disbursement is made. The date which appears on the SBA form used to request the disbursement shall be deemed to be the date the disbursement is requested, but if ten days or more have elapsed between the date of the form and the date of its receipt in the Office of Investment Assistance, Investment Division, Small Business Administration, Washington, D.C. 20416, SBA may, in its discretion, consider that the request was made as of the date of such receipt. Disbursement of funds be subject to § 107.709 (a) and (b).

(g) Terms of subordinated debentures. Such Subordinated Debentures shall contain such terms and conditions, as shall be determined by SBA. Interest shall be at the rate of five percent per annum and maturities shall not exceed

twenty years. The debentures may be prepaid at any time without penalty, subject, however, to the requirements of § 107.1001. Amortization of the debentures shall commence no later than the beginning of the second half of their term.

Interpretations. Repayment of subordinated debentures must not reduce capital below minimum. See § 107.1001. Retained earnings may qualify as capital for purposes of borrowing from SBA. § 107.1007.

See

Section 302 (of the Act) funds may temporarily exceed maximum in event of merger between SBICS. See 107.1008.

Section 302 (of the Act) funds may be used to retire indebtedness to SBA under section 303 (of the Act). See § 107.1012. § 107.302 Licensee's stock.

(a) Consideration. A Licensee may issue any of its securties for (1) cash, (2) direct obligations of, or obligations guaranteed as to principal and interest

by, the United States, (3) securities of which it is the issuer, in connection with a reclassification approved by SBA, (4) services previously rendered to the Licensee, (5) physical assets to be currently employed in the operation of the Licensee, (6) as a dividend, and (7) in connection with a statutory or other type of merger or consolidation with another Licensee or non-Licensee company approved by SBA pursuant to § 107.702(c): Provided, however, That any shares of stock issued as part of the initial minimum capital required by § 107.202(c) may be issued only in consideration of the simultaneous payment of cash or upon the simultaneous transfer to the Licensee of securities permitted by § 107.202(c). A Licensee may issue its stock for Equity Securities of a small business concern pursuant to the provisions of section 304 (c) of the Act.

(b) Options. A Licensee may, after the effective date hereof, grant stock options upon its stock to an individual if: (1) The exercise price of the option is not less than the fair market value of the stock at the time such option is issued; and (2) majority approval of Licensee's stockholders is first obtained: Provided, however, That the validity of any stock option granted by a Licensee pursuant to a stock option plan or agreement adopted prior to the effective date hereof shall be governed by the former provisions of this paragraph (b) in effect at the time such plan or agreement was adopted.

[Rev. 3, 29 F.R. 16946, Dec. 10, 1964, as amended by Amdt. 13, F.R. 13005, Oct. 13, 1965]

§ 107.303 Capital impairment.

(a) Prohibition. Each Licensee shall maintain at all times an unimpaired capital.

(b) Definition. An impairment shall be deemed to exist when the retained earnings deficit exceeds fifty percent (50%) of the combined fully paid capital stock issued and outstanding and paid-in surplus. For the purpose of this determination, subordinated debentures issued to SBA pursuant to section 302 (a) of the Act will not be considered a part of capital and surplus.

BORROWING BY SBIC

§ 107.401 Limits on Licensee borrowing. (a) Debt limit. Without the prior consent of SBA, the ratio of the total amount of outstanding indebtedness of

(a) Maximum amount. To the extent that the Licensee is unable to borrow or otherwise secure operating funds from private sources, on reasonable terms, SBA may lend or agree to lend to or guarantee for such Licensee funds for such purpose up to a total amount outstanding at any one time not in excess of 50 percent of the paid-in capital and paid-in surplus of such Licensee, including as a part of such capital and surplus any outstanding balance due SBA under subordinated debentures purchased by SBA under the provisions of section 302 (a) of the Act, or $4,000,000, whichever is less. With respect to guaranteed loans these maximum limitations apply to the guaranteed part thereof.

(b) Availability of private funds. SBA loans or guaranties under this section may be obtained only if such funds are not available on a nonguaranteed basis from private sources on reasonable terms. Satisfactory evidence of such unavailability must be presented to SBA.

(c) Types of loans.—(1) Guaranteed loans. In the event that such loans are not available to the Licensee from private sources on a nonguaranteed basis, the Licensee shall then endeavor to obtain such funds from a private source subject to SBA guaranty of principal and accrued interest. These loans may have terms of up to 15 years at interest rates and subject to guaranty fees varying with the term of the loan and with the extent of the SBA guaranty. These loans may be subject to agreements of nonhypothecation or be secured by such collateral as may be determined by SBA.

(2) Direct loans. In the event that the Licensee is unable to obtain such funds either exclusively from private sources or from private sources subject. to SBA guaranty, SBA may then approve a direct loan to the Licensee. These loans may have terms of up to 15 years;