DATE: May 20, 2002

SUBJECT: Small Business Administration; New Markets Venture Capital (NMVC) Program

SOURCE: Federal Register, May 20, 2002, Vol. 67, No. 97, page 35449

AGENCIES: Small Business Administration (SBA)

ACTION: Proposed Rule

SYNOPSIS: The SBA is proposing to amend its NMVC regulations to make five substantive amendments which SBA believes will result in more efficient and effective delivery of NMVC program benefits to the targeted geographic areas. Also, the proposed rule would make technical changes, correct typographical errors, and clarify language.

EDITOR'S NOTE: The SBA's regulations that would be amended by this proposed rule are in Title 13 of the Code of Federal Regulations (CFR), Chapter 1, Small Business Administration, Part 108, New Markets Venture Capital ("NMVC") Program.

DATES: Comments on the proposed rule must be received no later than June 19, 2002.

ADDRESSES: Send comments to Austin Belton, Director of New Markets Venture Capital, U.S. Small Business Administration, 409 Third Street, SW, 6th Floor, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Peter C. Gibbs, Deputy Director of New Markets Venture Capital, 202-205-7574.

SUPPLEMENTAL INFORMATION: The New Markets Venture Capital Program Act of 2000, part of the Consolidated Appropriations Act of 2001 (Public Law 106-554), was implemented by a final rule published on May 23, 2001 (see the May 23, 2001, FEDERAL CONTRACTS DISPATCH "Small Business Administration (SBA); New Markets Venture Capital Program").

The NMVC program is an equity venture capital program designed to promote the economic development of, and address the unmet equity capital needs of smaller enterprises located in, low-income geographic areas ("LI areas"). After SBA's first year of experience in creating and administering this new program, SBA proposes several substantive changes which it believes will result in more efficient and effective delivery of NMVC program benefits to the targeted LI areas and businesses. SBA believes these changes will result in reduced operational costs for the program to both the government, the NMVC companies, and to the beneficiary small businesses financed by the NMVC companies with SBA leverage.

The following are the five substantive changes SBA is proposing to make to 13 CFR Part 108:

  1. Paragraph (d) of Section 108.230, Private Capital for NMVC Companies, would be revised to allow organizational and management expenses incurred prior to SBA's final approval of the NMVC company to be credited in whole or part against the regulatory capital the NMVC company is required to raise. SBA intends to provide guidance on the limitations by percentage and/or dollar amounts on such expenses that SBA will approve for inclusion in private capital. Other non-cash assets, such as "pre-licensing investments," would still not be allowed for inclusion in private capital.

  2. Paragraph (k) of Section 108.360, Evaluation Criteria, and paragraph (h) of new Section ion 108.2006, Evaluation and Selection of SSBICs [Specialized Small Business Investment Companies], would be revised to allow SBA, when making selections as to which applicants will receive conditional approval, to compare the applications submitted by SSBICs with NMVC company applications from the same or proximate LI areas. This would allow SBA to utilize limited NMVC program appropriations more effectively. Also, the change would increase the potential for achieving the nationwide distribution of the NMVC program's benefits that the New Markets Venture Capital Program Act of 2000 directs. (EDITOR'S NOTE: Paragraph (h) of proposed Section 108.2006 is currently paragraph (b)(5) of Section 108.2000, Operational Assistance Grants to NMVC Companies and SSBICs; this proposed rule would replace current Section 08.2000 with several smaller, more easily readable sections, Sections 108.2000 through 108.2007.)

  3. New Section 108.900, Fees for Management Services Provided to a Small Business by a NMVC Company or its Associate, would establish rules governing fees an NMVC company or its associates may charge for management services provided to small businesses in which the NMVC company invests. Proposed Section 108.900 is based on the small business investment company (SBIC) program regulations at Section 107.900, Management Fees for Services Provided to a Small Business by Licensee or Its Associate, and would govern fees for management services and similar services charged by an NMVC company or its associates to small businesses that the NMVC company finances (for example, negotiating bank debt, sale of the company, or a lease, or structuring an employee stock ownership plan). Paragraph (b) of Section 108.900 would require SBA's prior written approval of all such fees charged. However, proposed paragraph (a) states that Section 108.900 would not apply to operational assistance that an NMVC company or its associate provides to a business that the NMVC company has financed or in which it expects to make a financing, and paragraph (a) further states that the NMVC company may not charge the business a fee for such operational assistance. SBA expects an NMVC company to use its grant funds (both SBA funds and grant matching resources) to cover the costs of providing such operational assistance.

    In addition, paragraph (b)(5) would require that at least 50% of all management service fees paid to an associate (as defined in Section 108.50, Definition of Terms) of an NMVC company by a small business must be allocated back to the NMVC company for its benefit. SBA understands that an NMVC company or its associate (for example, its management company) may want to provide management and other services to the NMVC company's portfolio companies and charge a fee for such services. It may be in the best interests of the small business that the NMVC company or its associate provide such services rather than an outside third party. However, SBA believes that the NMVC company's manager should share equally with the NMVC company the financial benefit (that is, fees) of providing those services, since the relationship of the manager to the NMVC company is what brought about the opportunity for the manager to obtain that financial benefit. In addition, SBA believes that neither the NMVC company itself nor the NMVC program in general is well served if the focus of the NMVC company's manager is on fee generation rather than managing the NMVC company. SBA believes that a 50-50 allocation of such fees between the NMVC company manager and the NMVC company itself strikes an appropriate balance between these objectives and reflects what knowledgeable private investors often require in commercial equity venture capital funds.

  4. The application process for SSBICs would be revised so it is more like the application process for NMVC companies (and so it is easier to compare applications from NMVC companies with SSBICs as specified in Section 108.360 and Section 108.2006 -- see above). For example, one change would require SSBICs to identify specific LI areas they are targeting (paragraph (f) of Section 108.2005, Contents of Plan Submitted by SSBICs). This change would permit comparison with any NMVC applicant for the same LI area and avoiding duplicative coverage of a LI area. The overall results of these changes in Sections 108.2000 through are to ensure even-handed treatment of SSBICs and NMVC companies, maximize the nationwide impact of the NMVC program, and achieve greater administrative efficiency in program administration.

  5. Add a requirement that NMVC companies must use at least 80% of their grant funds (both funds from SBA and grant matching resources) to provide operational assistance to smaller enterprises whose principal office is located in an LI area at the time the operational assistance commenced (proposed paragraph (b) of Section 108.2010, Restrictions on Use of Operational Assistance Grant Funds (current paragraph (b) would be redesignated as paragraph (c)).

    The New Markets Venture Capital Program Act of 2000 explicitly requires that all operational assistance funded by the NMVC program go only to smaller enterprises. The 80% requirement would maximize the impact of the operational assistance funded by SBA on the LI areas targeted for assistance through the NMVC program. This proposed 80% requirement parallels the existing regulatory requirement (see paragraph (a) of Section 108.710, Requirement to finance Low-Income Enterprises), that NMVC companies must use at least 80% of their capital (both funds from SBA and private capital) to make equity capital investments in smaller enterprises located in an LI area at the time the investment is made.

In addition, the proposed rule would make various technical changes, correct typographical errors, and clarify language.

The NMVC program has a one-time no-year appropriation of $52 million to fund newly formed NMVC companies. To date, seven applicants have been selected as conditionally-approved NMVC companies. SBA anticipates a second application round, and the proposed amendments concerning the application process would affect applicants in the second round. The proposed changes that concern participation in the program would apply to all NMVC companies selected through both application rounds and also to SSBICs applying under the second application round.

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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