13 C.F.R. Subpart C—Qualifying for an SBIC License
Title 13 - Business Credit and Assistance
Section 301(c) Licensee means a company licensed under section 301(c) of the Act. It may be organized as a for-profit corporation or as a limited partnership created in accordance with the special rules of §107.160. A 1940 Act or 1980 Act Company is eligible to apply for an SBIC license, and an existing Licensee is eligible to apply for SBA's approval to convert to a 1940 Act or 1980 Act Company. In either case, the 1940 Act or 1980 Act Company may elect to be taxed as a regulated investment company under section 851 of the Internal Revenue Code of 1986, as amended (26 U.S.C. 851). However, a Licensee making such election may make Distributions only as permitted under the applicable sections of this part (see the definition of Retained Earnings Available for Distribution, §107.585, and §§107.1540 through 107.1580). With SBA's prior written approval, a Section 301(d) Licensee may operate as the subsidiary of one or more Licensees (participant Licensees), subject to the following: (a) Each participant Licensee must own at least 20 percent of the voting securities of the Section 301(d) Licensee. (b) A participant Licensee must treat its entire capital contribution to the subsidiary as a reduction of its Leverageable Capital. The participant Licensee's remaining Leverageable Capital must be sufficient to support its outstanding Leverage. (c) A participant Licensee may not transfer its Leverage to a subsidiary Section 301(d) Licensee. [63 FR 5865, Feb. 5, 1998] When applying for a license, you must show, to the satisfaction of SBA, that your current or proposed management is qualified and has the knowledge, experience, and capability necessary for investing in the types of businesses contemplated by the Act, these regulations and your business plan. You must designate at least one individual as the official responsible for contact with SBA. If you plan to obtain Leverage, you must have your Management Expenses approved by SBA at the time of licensing. (See §107.520 for the definition of Management Expenses.) (a) Diversity requirement. You must satisfy the requirements in paragraphs (b), (c) and (d) of this section: (1) In order to obtain an SBIC license (unless you do not plan to obtain Leverage), (2) If at the time you were licensed you did not plan to obtain Leverage, but you now wish to be eligible for Leverage, or (3) If SBA so requires as a condition of approval of your transfer of Control under §107.440. (b) Percentage ownership requirement. (1) Except as provided in paragraph (b)(2) of this section, no Person or group of Persons who are Affiliates of one another may own or control, directly or indirectly, more than 70 percent of your Regulatory Capital or your Leverageable Capital. (2) Exception. An investor that is a traditional investment company, as determined by SBA, may own and control more than 70 percent of your Regulatory Capital and your Leverageable Capital. For purposes of this section, a traditional investment company must be a professionally managed firm organized exclusively to pool capital from more than one source for the purpose of investing in businesses that are expected to generate substantial returns to the firm's investors. In determining whether a firm is a traditional investment company for purposes of this section, SBA will also consider: (i) Whether the managers of the firm are unrelated to and unaffiliated with the investors in the firm; (ii) Whether the managers of the firm are authorized and motivated to make investments that, in their independent judgment, are likely to produce significant returns to all investors in the firm; (iii) Whether the firm benefits from the use of the SBIC only through the financial performance of the SBIC; and (iv) Other related factors. (c) Non-affiliation requirement—(1) General rule. At least 30 percent of your Regulatory Capital and Leverageable Capital must be owned and controlled by three Persons unaffiliated with your management and unaffiliated with each other, and whose investments are significant in dollar and percentage terms as determined by SBA. Such Persons must not be your Associates (except for their status as your shareholders, limited partners, or members) and must not Control, be Controlled by, or be under Common Control with any of your Associates. A single “acceptable” Institutional Investor may be substituted for two or three of the three Persons who are otherwise required under this paragraph. The following Institutional Investors are “acceptable” for this purpose: (i) Entities whose overall activities are regulated and periodically examined by state, Federal or other governmental authorities satisfactory to SBA; (ii) Entities listed on the New York Stock Exchange; (iii) Entities that are publicly-traded and that meet both the minimum numerical listing standards and the corporate governance listing standards of the New York Stock Exchange; (iv) Public or private employee pension funds; (v) Trusts, foundations, or endowments, but only if exempt from Federal income taxation; and (vi) Other Institutional Investors satisfactory to SBA. (2) Look-through for traditional investment company investors. SBA, in its sole discretion, may consider the requirement in paragraph (c)(1) of this section to be satisfied if at least 30 percent of your Regulatory Capital and Leverageable Capital is owned and controlled indirectly, through a traditional investment company, by Persons unaffiliated with your management. (d) Voting requirement. (1) Except as provided in paragraph (d)(2) of this section, the investors required for you to satisfy diversity may not delegate their voting rights to any Person who is your Associate, or who Controls, is Controlled by, or is under Common Control with any of your Associates, without prior SBA approval. (2) Exception. Paragraph (d)(1) of this section does not apply to investors in publicly-traded Licensees, to proxies given to vote in accordance with specific instructions for single specified meetings, or to any delegation of voting rights to a Person who is neither a diversity investor in the Licensee nor affiliated with management of the Licensee. (e) Requirement to maintain diversity. If you were required to have management-ownership diversity at any time, you must maintain such diversity while you have outstanding Leverage or Earmarked Assets. To maintain management-ownership diversity, you may continue to satisfy the diversity requirement as in effect at the time it was first applicable to you or you may satisfy the management-ownership diversity requirement as currently in effect. If, at any time, you no longer have the required management-ownership diversity, you must: (1) Notify SBA within 10 days; and (2) Re-establish diversity within six months. For the consequences of failure to re-establish diversity, see §§107.1810(g) and 107.1820(f). [65 FR 71055, Nov. 29, 2000] A limited partnership organized under State law solely for the purpose of performing the functions and conducting the activities contemplated under the Act may apply for a license under section 301(c) or section 301 (d) of the Act (“Partnership Licensee”). (a) Number of Licensee's General Partners. If you are a Partnership Licensee, you must have as your general partner(s) at least two individuals, or at least one corporation, partnership, or limited liability company (LLC), or any combination of individuals, corporations, partnerships, or LLCs. (b) Entity General Partner of Licensee. A general partner which is a corporation, limited liability company or partnership (an “Entity General Partner”) shall be organized under state law solely for the purpose of serving as the general partner of one or more Licensees. (1) SBA must approve any person who will serve as an officer, director, manager, or general partner of the Entity General Partner. This provision must be stated in an Entity General Partner's Certificate of Incorporation, member agreement, Limited Partnership Agreement or other similar governing instrument which must, in each case, accompany the license application. (2) An Entity General Partner is subject to the same examination and reporting requirements as a Licensee under section 310(b) of the Act. The restrictions and obligations imposed upon a Licensee by §§107.1800 through 107.1820, and 107.30, 107.410 through 107.450, 107.470, 107.475, 107.500, 107.510, 107.585, 107.600, 107.680, 107.690 through 107.692, 107.865, and 107.1910 apply also to an Entity General Partner of a Licensee. (3) The general partner(s) of your Entity General Partner(s) will be considered your general partner. (4) If your Entity General Partner is a limited partnership, its limited partners may be considered your Control Person(s) if they meet the definition for Control Person in §107.50. (5) If your Entity General Partner is a limited partnership, it is subject to paragraph (a) of this section. (c) Other requirements for Partnership Licensees. If you are a Partnership Licensee: (1) You must have a minimum duration of ten years or two years following the maturity of your last-maturing Leverage security, whichever is longer. After 10 years, if all Leverage has been repaid or redeemed and all amounts due SBA, its agent, or Trustee have been paid, the Partnership Licensee may be terminated by a vote of your partners. (For purposes of this provision SBA is not considered a partner.); (2) None of your general partner(s) may be removed or replaced by your limited partners without prior written approval of SBA; (3) Any transferee of, or successor in interest to, your general partner shall have only the rights and liabilities of a limited partner pending SBA's written approval of such transfer or succession; and (4) You must incorporate all the provisions in this paragraph (c) in your Limited Partnership Agreement. (d) Obligations of a Control Person. All Control Persons are bound by the disciplinary provisions of sections 313 and 314 of the Act and by the conflict-of-interest rules under section 312 of the Act. The term Licensee, as used in §§107.30, 107.460, and 107.680 includes all of the Licensee's Control Persons. The term Licensee as used in §107.670 includes only the Licensee's general partner(s). The conditions specified in §§107.1800 through 107.1820 and §107.1910 apply to all general partners. (e) Liability of general partner for partnership debts to SBA. Subject to section 314 of the Act, your general partner is not liable solely by reason of its status as a general partner for repayment of any Leverage or debts you owe to SBA unless SBA, in the exercise of reasonable investment prudence, and with regard to your financial soundness, determines otherwise prior to the purchase or guaranty of your Leverage. (f) Reorganization of Licensee. A corporate Licensee wishing to reorganize as a Partnership Licensee, or a Partnership Licensee wishing to reorganize as a Corporate Licensee, may apply to SBA for approval under §107.470. (g) Special Leverage requirement. Before your first issuance of Leverage, you must furnish SBA with evidence that you qualify as a partnership for tax purposes, either by a ruling from the Internal Revenue Service, or by an opinion of counsel.
Title 13: Business Credit and Assistance
PART 107—SMALL BUSINESS INVESTMENT COMPANIES
Subpart C—Qualifying for an SBIC License
Organizing an SBIC
§ 107.100 Organizing a Section 301(c) Licensee.
§ 107.115 1940 Act and 1980 Act Companies.
§ 107.120 Special rules for a Section 301(d) Licensee owned by another Licensee.
§ 107.130 Requirement for qualified management.
§ 107.140 SBA approval of initial Management Expenses.
§ 107.150 Management-ownership diversity requirement.
§ 107.160 Special rules for Licensees formed as limited partnerships.
Capitalizing an SBIC
§ 107.200 Adequate capital for Licensees.
You must meet the requirements of this §107.200 to qualify for a license, to continue as a Licensee, and to receive Leverage.
(a) You must have enough Regulatory Capital to provide reasonable assurance that:
(1) You will operate soundly and profitably over the long term; and
(2) You will be able to operate actively in accordance with your Articles and within the context of your business plan, as approved by SBA.
(b) In SBA's sole discretion, you must be economically viable, taking into consideration actual and anticipated income and losses on your Loans and Investments, and the experience and qualifications of your owners and managers.
§ 107.210 Minimum capital requirements for Licensees.
(a) Companies licensed on or after October 1, 1996. A company licensed on or after October 1, 1996 must have Leverageable Capital of at least $2,500,000 and must meet the applicable minimum Regulatory Capital requirement:
(1) Licensees other than Participating Securities issuers. A Licensee that does not wish to be eligible to apply for Participating Securities must have Regulatory Capital of at least $5,000,000. As an exception to this general rule, SBA in its sole discretion and based on a showing of special circumstances and good cause may license an applicant with Regulatory Capital of at least $3,000,000, but only if the applicant:
(i) Has satisfied all licensing standards and requirements except the minimum capital requirement, as determined solely by SBA;
(ii) Has a viable business plan reasonably projecting profitable operations; and
(iii) Has a reasonable timetable for achieving Regulatory Capital of at least $5,000,000.
(2) Participating Securities issuers. A Licensee that wishes to be eligible to apply for Participating Securities must have Regulatory Capital of at least $10,000,000, unless it demonstrates to SBA's satisfaction that it can be financially viable over the long term with a lower amount. Under no circumstances can the Licensee have Regulatory Capital of less than $5,000,000.
(b) Companies licensed before October 1, 1996. A company licensed before October 1, 1996 must meet the minimum capital requirements applicable to such company, as required by the regulations in effect on September 30, 1996. See §107.1120(c)(2) for Leverage eligibility requirements.
[63 FR 5866, Feb. 5, 1998]
§ 107.230 Permitted sources of Private Capital for Licensees.
Private Capital means the contributed capital of a Licensee, plus unfunded binding commitments by Institutional Investors (including commitments evidenced by a promissory note) to contribute capital to a Licensee.
(a) Contributed capital. For purposes of this section, contributed capital means the paid-in capital and paid-in surplus of a Corporate Licensee, or the partners' contributed capital of a Partnership Licensee, in either case subject to the limitations in paragraph (b) of this section.
(b) Exclusions from Private Capital. Private Capital does not include:
(1) Funds borrowed by a Licensee from any source.
(2) Funds obtained through the issuance of Leverage.
(3) Funds obtained directly or indirectly from any Federal, State, or local government agency or instrumentality, except for:
(i) Funds invested by a public pension fund;
(ii) Funds obtained from the business revenues (excluding any governmental appropriation) of any federally chartered or government-sponsored corporation established before October 1, 1987, to the extent that such revenues are reflected in the retained earnings of the corporation; and
(iii) “Qualified Non-private Funds” as defined in paragraph (d) of this section.
(4) Any portion of a commitment from an Institutional Investor with a net worth of less than $10 million that exceeds 10 percent of such Institutional Investor's net worth and is not backed by a letter of credit from a State or National bank acceptable to SBA.
(c) Non-cash capital contributions. Capital contributions in a form other than cash are subject to the limitations in §107.240.
(d) Qualified Non-private Funds. Private Capital includes “Qualified Non-private Funds” as defined in this paragraph (d); however, investors of Qualified Non-private Funds must not control, directly or indirectly, a Licensee's management, or its board of directors or general partner(s). Qualified Non-private Funds are:
(1) Funds directly or indirectly invested in any Licensee on or before August 16, 1982 by any Federal agency except SBA, under a statute explicitly mandating the inclusion of such funds in “Private Capital”;
(2) Funds directly or indirectly invested in any Licensee by any Federal agency under a statute that is enacted after September 4, 1992, explicitly mandating the inclusion of such funds in “Private Capital”;
(3) Funds invested in any Licensee or license applicant by one or more State or local government entities (including any guarantee extended by such entities) in an aggregate amount that does not exceed 33 percent of Regulatory Capital; and
(4) Funds invested in or committed in writing to any Section 301(d) Licensee prior to October 1, 1996, from the following sources:
(i) A State financing agency, or similar agency or instrumentality, if the funds invested are derived from such agency's net income and not from appropriated State or local funds; and
(ii) Grants made by a state or local government agency or instrumentality into a nonprofit corporation or institution exercising discretionary authority with respect to such funds, if SBA determines that such funds have taken on a private character and the nonprofit corporation or institution is not a mere conduit.
(e) You may not accept any capital contribution made with funds borrowed by a Person seeking to own an equity interest (whether direct or indirect, beneficial or of record) of at least 10 percent of your Private Capital. This exclusion does not apply if:
(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.
[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 64 FR 70995, Dec. 20, 1999]
§ 107.240 Limitations on including non-cash capital contributions in Private Capital.
Non-cash capital contributions to a Licensee or license applicant are included in Private Capital only if they fall into one of the following categories:
(a) Direct obligations of, or obligations guaranteed as to principal and interest by, the United States.
(b) Services rendered or to be rendered to you, priced at no more than their fair market value.
(c) Tangible assets used in your operations, priced at no more than their fair market value.
(d) Shares in a Disadvantaged Business received by a subsidiary Section 301(d) Licensee from its parent Licensee, valued at the lower of cost or fair value.
(e) Other non-cash assets approved by SBA.
§ 107.250 Exclusion of stock options issued by Licensee from Management Expenses.
Stock options issued by any Licensee, including a 1940 or 1980 Act Company, are not considered compensation and therefore do not count as part of a Licensee's Management Expenses.
Applying for an SBIC License
§ 107.300 License application form and fee.
The license application must be submitted on SBA Form 415 together with a processing fee computed as follows:
(a) All license applicants will pay a base fee of $10,000.
(b) All applicants who will be Partnership Licensees will pay an additional $5,000 fee, for a total of $15,000.
(c) All applicants who will be issuing Participating Securities will pay an additional $5,000 fee, for a total of $15,000, or a total fee of $20,000 if they also intend to be Partnership Licensees.
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