DATE: October 22, 2002

SUBJECT: Small Business Administration; Small Business Investment Companies

SOURCE: Federal Register, October 22, 2002, Vol. 67, No. 204, page 64789

AGENCIES: Small Business Administration (SBA)

ACTION: Final Rule

SYNOPSIS: The SBA is amending its regulations to permit a Small Business Investment Company (SBIC) to assume control over a small business concern, without notice to the SBA, and to retain such control for a period of up to seven years, or longer with SBA's approval. Also, the rule allows an SBIC to sell equity securities in a portfolio concern to a competitor of that portfolio concern.

EDITOR'S NOTE: The SBA's regulations being amended by this rule are in Title 13 of the Code of Federal Regulations (CFR), Chapter 1, Small Business Administration, Part 107, Small Business Investment Companies, Section 107.865, Control of a Small Business by a Licensee.

For more on the proposed rule, see the May 17, 2002, FEDERAL CONTRACTS DISPATCH "Small Business Administration; Small Business Investment Companies."

EFFECTIVE DATE: November 21, 2002.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Director, Office of Licensing and Program Standards, Investment Division, Office of Capital Access, 202-205-7559, e-mail: carol.fendler@sba.gov.

SUPPLEMENTAL INFORMATION: The Small Business Investment Corrections Act of 2000 (Public Law 106-554) amended the Small Business Investment Act of 1958 to clarify that a small business concern controlled by venture capital firms, including licensed SBICs, does not cease to qualify as independently owned and operated.

On May 17, 2002, SBA published a proposed rule to simplify Section 107.865, which governs control of a small business, and bring it into conformity with the 2000 amendment. Also, the proposed rule would remove a regulatory restriction on the right of an SBIC to sell securities of a small business to a competitor of that business.

Six respondents submitted comments on the proposed rule. As a result of the comments, the period during which an SBIC is permitted to exercise control over a small business has been extended from the proposed five years to seven years.

The following are the texts of paragraphs (a), (b), and (d) of Section 107.865, which are revised by this final rule:

     107.865, Control of a Small Business by a Licensee.
          (a) In General. You, or you and your Associates, (in the latter case, the "Investor Group") may exercise control over a Small Business for purposes connected to your investment, through ownership of voting securities, management agreements, voting trusts, majority representation on the board of directors, or otherwise. The period of such control will be limited to the seventh anniversary of the date on which such control was initially acquired or, any earlier date specified by the terms of any investment agreement.
          (b) Presumption of Control. Control over a small business based on ownership of voting securities will be presumed to exist whenever you or the Investor Group own or control, directly or indirectly:
               (1) At least 50 percent of the outstanding voting securities, if there are fewer than 50 shareholders; or
               (2) More than 25 percent of the outstanding voting securities, if there are 50 or more shareholders; or
               (3) A block of at least 20 percent of the outstanding voting securities, if there are 50 or more shareholders and no other party holds a larger block.
      *  *  *     
          (d) Extension of Control. With SBA's prior written approval you, or the Investor Group, may retain control for such additional period as may be reasonably necessary to complete divestiture of control, or to ensure the financial stability of the portfolio company.

In addition, paragraph (e), which addresses "Control Certifications", and paragraph (f), which addresses "Control Acquired Through Enforcement Actions", are removed because they are no longer necessary, and current paragraph (g), which addresses "Additional Financing for Businesses Under Licensee's Control", is redesignated as paragraph (e). Paragraph (c), which addresses "Rebuttals to Presumption of Control", is unchanged.

Also, paragraph (b) of Section 107.885, Disposition of Assets to Licensee's Associates or to Competitors of Portfolio Concern, is removed. Paragraph (b) required an SBIC that controls a small business to obtain SBA's prior approval before selling the small business's equity securities to a competitor of the small business. However, SBA anticipates that SBICs may exit from an investment by a sale to a strategic investor. Since SBA believes control of such situations is best left to negotiations between the SBIC and the small business, SBA has removed paragraph (b).

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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