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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: June 20, 2000

FROM: Barry McVay, CPCM

SUBJECT: Small Business Administration (SBA); Small Business Investment Companies

SOURCE: Federal Register, June 20, 2000, Vol. 65, No. 119, page 38223

AGENCIES: Small Business Administration (SBA)

ACTION: Proposed Rule

SYNOPSIS: SBA is proposing to amend its regulations to implement a provision of the Small Business Investment Improvement Act of 1999 (Public Law 106-9) that excludes certain types of consideration paid to a small business investment company (SBIC) by a small business from "cost of money" limitations.

EDITOR'S NOTE: The SBA's regulations being amended are in Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration; Chapter 1, Small Business Administration; Part 107, Small Business Investment Companies.

DATES: Submit comments on or before July 20, 2000.

ADDRESSES: Send comments to Don A. Christensen, Associate Administrator for Investment, U.S. Small Business Administration, 409 3rd Street, SW, Suite 6300, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Leonard W. Fagan, Investment Division, 202-205-7583.

SUPPLEMENTAL INFORMATION: Public Law 106-9, enacted April 5, 1999, amended Section 308(i)(2) of the Small Business Investment Act of 1958 to provide that certain types of consideration paid to an SBIC by a small business are excluded from the regulatory limitations on "cost of money" established by the SBA -- specifically, any consideration consisting of "contingent obligations" which grant the SBIC an interest in the "equity or increased future revenue" of the small business.

To implement this change, SBA is proposing to revise Section 107.855, Interest Rate Ceiling and Limitations on Fees Charged to Small Businesses ("Cost of Money"), as follows:

• Paragraph (g) covers "Charges Excluded from the Cost of Money." Paragraph (g)(12) excludes "royalty payments received under any LMI [low and moderate income] investment if the royalty is based on improvement in the performance of the small business after the date of the financing." This proposed rule would delete the words "received under any LMI investment if the royalty is" so that it would read "royalty payments based on improvement in the performance of the small business after the date of the financing."
  
  In conjunction with the proposed change to paragraph (g)(12), the definition of a "debt security" in paragraph (a) of Section 107.815, Financings in the Form of Debt Securities, would be revised to add "...or a loan with a right to receive royalties that are excluded from the cost of money pursuant to Sec. 107.855(g)(12)" (the term is now defined as "instruments evidencing a loan with an option or any other right to acquire equity securities in a small business or its affiliates, or a loan which by its terms is convertible into an equity position"). This change would apply to the Section 107.855(g)(12) loans the lower cost of money ceiling applicable to debt securities rather than the higher ceiling applicable to loans with no upside potential.
  
  
• Paragraph (g)(13) would be added, which would exclude "gains realized on the disposition of equity securities issued by the small business." SBA states in its introduction to the proposed rule that "this provision has been added as a clarification, since SBA's longstanding practice has been to exclude such gains from the cost of money limits. For example, if an SBIC receives warrants that qualify as equity securities, or converts debt to an equity security, any gains realized on the disposition of these interests do not count against the cost of money ceiling."
  
  
• Paragraph (i) would be removed. Paragraph (i) excludes one-time "bonuses" at the end of the loan term from the cost of money. The proposed revision to paragraph (g)(12) would provide a broader exclusion of contingent payments from the cost of money, so paragraph (i) would be redundant.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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