CFR Subpart I

CFR Subpart I
in effect

13 C.F.R. § 108.800 Financings in the form of equity interests.

You may not, inadvertently or otherwise: (a) Become a general partner in any unincorporated business; or (b) Become jointly or severally liable for any obligations of an unincorporated business.

13 C.F.R. § 108.820 Financings in the form of guarantees.

(a) General rule. At the request of a Small Business or where necessary to protect your existing investment, you may guarantee the monetary obligation of a Small Business to any non-Associate creditor. (b) Exception. You may not issue a guaranty if: (1) You would become subject to State regulation as an insurance, guaranty or surety business; or (2) The amount of the guaranty plus any direct Financings to the Small Business exceed the overline limitations of § 108.740, except that a pledge of the Equity Securities of the issuer or a subordination of your lien or creditor position does not count toward your overline. (c) Pledge of NMVC Company's assets as guaranty. For purposes of this section, a guaranty with recourse only to specific asset(s) you have pledged is equal to the fair market value of such asset(s) or the amount of the debt guaranteed, whichever is less.

13 C.F.R. § 108.825 Purchasing securities from an underwriter or other third party.

(a) Securities purchased through or from an underwriter. You may purchase the securities of a Small Business through or from an underwriter if: (1) You purchase such securities within 90 days of the date the public offering is first made; (2) Your purchase price is no more than the original public offering price; and (3) The amount paid by you for the securities (less ordinary and reasonable underwriting charges and commissions) has been, or will be, paid to the Small Business, and the underwriter certifies in writing that this requirement has been met. (b) Recordkeeping requirements. You must keep records available for SBA's inspection which show the relevant details of the transaction, including, but not limited to, date, price, commissions, and the underwriter's certifications required under paragraphs (a)(3) and (c) of this section. (c) Underwriter's requirements. The underwriter must certify whether it is your Associate. You may pay reasonable and customary commissions and expenses to an Associate underwriter for the portion of an offering that you purchase. (d) Securities purchased from another NMVC Company or from SBA. You may purchase from, or exchange with, another NMVC Company, Portfolio securities (or any interest therein). Such purchase or exchange may only be made on a non-recourse basis. You may not have more than one-third of your total assets (valued at cost) invested in such securities. If you have previously sold Portfolio securities (or any interest therein) on a recourse basis, you shall include the amount for which you may be contingently liable in your overline computation. (e) Purchases of securities from other non-issuers. You may purchase securities of a Small Business from a non-issuer not previously described in this section if such acquisition is a reasonably necessary part of the overall sound Financing of the Small Business.

13 C.F.R. § 108.700 Compliance with size standards in part 121 of this chapter as a condition of Assistance.

You are permitted to provide financial assistance and management services only to a Small Business. To determine whether an applicant meets the size standards for a Small Business, you may use either the financial size standards in § 121.301(c)(1) of this chapter or the industry standard covering the industry in which the applicant is primarily engaged, as set forth in § 121.301(c)(2) of this chapter.

13 C.F.R. § 108.710 Requirement to finance Low-Income Enterprises.

(a) Low-Income Enterprise Financings. At the close of each of your fiscal years— (1) At least 80 percent of your Portfolio Concerns must be Low-Income Enterprises in which you have an Equity Capital Investment; and (2) For all Financings you have extended, you must have invested at least 80 percent (in total dollars) in Equity Capital Investments in Low-Income Enterprises. (b) Non-compliance with this section. If you have not reached the percentages required in paragraph (a) of this section at the end of any fiscal year, then you must be in compliance by the end of the following fiscal year. However, you will not be eligible for additional Leverage until such time as you reach the required percentages (see § 108.1120).

13 C.F.R. § 108.720 Small Businesses that may be ineligible for financing.

(a) Relenders or reinvestors. You are not permitted to finance any business that is a relender or reinvestor. Relenders or reinvestors are businesses whose primary business activity involves, directly or indirectly, providing funds to others, purchasing debt obligations, factoring, or long-term leasing of equipment with no provision for maintenance or repair. (b) Passive Businesses. You are not permitted to finance a passive business. (1) Definition. A business is passive if: (i) It is not engaged in a regular and continuous business operation (for purposes of this paragraph (b), the mere receipt of payments such as dividends, rents, lease payments, or royalties is not considered a regular and continuous business operation); or (ii) Its employees are not carrying on the majority of day to day operations, and the company does not provide effective control and supervision, on a day to day basis, over persons employed under contract; or (iii) It passes through substantially all of the proceeds of the Financing to another entity. (2) Exception for pass-through of proceeds to subsidiary. With the prior written approval of SBA, you may finance a passive business if it is a Small Business and it passes substantially all the proceeds through to one or more subsidiary companies, each of which is an eligible Small Business that is not passive. For the purpose of this paragraph (b) (2), “subsidiary company” means a company in which at least 50 percent of the outstanding voting securities are owned by the Financed passive business. (3) Exception for certain Partnership NMVC companies. With the prior written approval of SBA, if you are a Partnership NMVC Company, you may form one or more wholly owned corporations in accordance with this paragraph (b) (3). The sole purpose of such corporation(s) must be to provide Financing to one or more eligible, unincorporated Small Businesses. You may form such corporation(s) only if a direct Financing to such Small Businesses would cause any of your investors to incur unrelated business taxable income under section 511 of the Internal Revenue Code of 1986, as amended (26 U.S.C. 511). Your investment of funds in such corporation(s) will not constitute a violation of § 108.730(a). (c) Real Estate Businesses. (1) You are not permitted to finance: (i) Any business classified under subsector 5311 (Lessors of Real Estate) of the NAICS Manual; or (ii) Any business listed under subsector 5312 (Offices of Real Estate Agents and Brokers) unless at least 80 percent of the revenue is derived from non-Affiliate sources. (2) You are not permitted to finance a business, regardless of NAICS classification, if the Financing is to be used to acquire or refinance real property, unless the Small Business: (i) Is acquiring an existing property and will use at least 51 percent of the usable square footage for an eligible business purpose; or (ii) Is building or renovating a building and will use at least 67 percent of the usable square footage for an eligible business purpose; or (iii) Occupies the subject property and uses at least 67 percent of the usable square footage for an eligible business purpose. (d) Project Financing. You are not permitted to finance a business if: (1) The assets of the business are to be reduced or consumed, generally without replacement, as the life of the business progresses, and the nature of the business requires that a stream of cash payments be made to the business's financing sources, on a basis associated with the continuing sale of assets. Examples include real estate development projects and oil and gas wells; or (2) The primary purpose of the Financing is to fund production of a single item or defined limited number of items, generally over a defined production period, and such production will constitute the majority of the activities of the Small Business. Examples include motion pictures and electric generating plants. (e) Farm land purchases. You are not permitted to finance the acquisition of farmland. Farmland means land, which is or is intended to be used for agricultural or forestry purposes, such as the production of food, fiber, or wood, or is so taxed or zoned. (f) Public interest. You are not permitted to finance any business if the proceeds are to be used for purposes contrary to the public interest, including but not limited to activities which are in violation of law, or inconsistent with free competitive enterprise. (g) Foreign investment—(1) General rule. You are not permitted to finance a business if: (i) The funds will be used substantially for a foreign operation; or (ii) At the time of the Financing or within one year thereafter, more than 49 percent of the employees or tangible assets of the Small Business are located outside the United States (unless you can show, to SBA's satisfaction, that the Financing was used for a specific domestic purpose). (2) Exception. This paragraph (g) does not prohibit a Financing used to acquire foreign materials and equipment or foreign property rights for use or sale in the United States. (h) Financing NMVC companies or SBICs. You are not permitted to provide funds, directly or indirectly, that the Small Business will use: (1) To purchase stock in or provide capital to a NMVC Company or SBIC; or (2) To repay an indebtedness incurred for the purpose of investing in a NMVC Company or SBIC.

13 C.F.R. § 108.730 Financings which constitute conflicts of interest.

(a) General rule. You must not self-deal to the prejudice of a Small Business, the NMVC Company, its shareholders or partners, or SBA. Unless you obtain a prior written exemption from SBA for special instances in which a Financing may further the purposes of the Act despite presenting a conflict of interest, you must not directly or indirectly: (1) Provide Financing to any of your Associates, except for a Small Business that satisfies all of the following conditions: (i) Your Associate relationship with the Small Business is described by paragraph (8) or (9) of the definition of Associate in § 108.50; (ii) No Person triggering the Associate relationship identified in paragraph (a)(1)(i) of this section is a Close Relative or Secondary Relative of any Person described in paragraph (1), (2), (4), or (5) of the definition of Associate in § 108.50; and (iii) No single Associate of yours has either a voting interest or an economic interest in the Small Business exceeding 20 percent, and no two or more of your Associates have either a voting interest or an economic interest exceeding 33 percent. Economic interests shall be computed on a fully diluted basis, and both voting and economic interests shall exclude any interest owned through the NMVC Company. (2) Provide Financing to an Associate of another NMVC Company if one of your Associates has received or will receive any direct or indirect Financing or a Commitment from that NMVC Company or a third NMVC Company (including Financing or Commitments received under any understanding, agreement, or cross dealing, reciprocal or circular arrangement). (3) Borrow money from: (i) A Small Business Financed by you; (ii) An officer, director, or owner of at least a 10 percent equity interest in such business; or (iii) A Close Relative of any such officer, director, or equity owner. (4) Provide Financing to a Small Business to discharge an obligation to your Associate or free other funds to pay such obligation. This paragraph (a)(4) does not apply if the obligation is to an Associate Lending Institution and is a line of credit or other obligation incurred in the normal course of business. (b) Rules applicable to Associates. Without SBA' s prior written approval, your Associates must not, directly or indirectly: (1) Borrow money from any Person described in paragraph (a)(3) of this section. (2) Receive from a Small Business any compensation in connection with Assistance you provide (except as permitted under § 108.825(c)), or anything of value for procuring, attempting to procure, or influencing your action with respect to such Assistance. (c) Applicability of other laws. You are also bound by any restrictions in Federal or State laws governing conflicts of interest and fiduciary obligations. (d) Financings with Associates—(1) Financings with Associates requiring prior approval. Without SBA's prior written approval, you may not Finance any business in which your Associate has either a voting equity interest or total equity interests (including potential interests) of at least five percent, except as otherwise permitted under paragraph (a)(1) of this section. (2) Other Financings with Associates. If you and an Associate provide Financing to the same Small Business, either at the same time or at different times, you must be able to demonstrate to SBA's satisfaction that the terms and conditions are (or were) fair and equitable to you, taking into account any differences in the timing of each party's financing transactions. (3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A Financing that falls into one of the following categories is exempt from the prior approval requirement in paragraph (d)(1) of this section or is presumed to be fair and equitable to you for the purposes of paragraph (d)(2) of this section, as appropriate: (i) Your Associate is a Lending Institution that is providing financing under a credit facility in order to meet the operational needs of the Small Business, and the terms of such financing are usual and customary. (ii) Your Associate invests in the Small Business on the same terms and conditions and at the same time as you. (iii) Both you and your Associate are NMVC companies. (e) Use of Associates to manage Portfolio Concerns. To protect your investment, you may designate an Associate to serve as an officer, director, or other participant in the management of a Small Business. You must identify any such Associate in your records available for SBA's review under § 108.600. Without SBA's prior written approval, the Associate must not: (1) Have any other direct or indirect financial interest in the Portfolio Concern that exceeds, or has the potential to exceed, the percentages of the Portfolio Concern's equity set forth in paragraph (a)(1) of this section. (2) Receive any income or anything of value from the Portfolio Concern unless it is for your benefit, with the exception of director's fees, expenses, and distributions based upon the Associate's ownership interest in the Concern. (f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940 or 1980 Act Company and you receive an exemption from the Securities and Exchange Commission for a transaction described in this section, you need not obtain SBA's approval of the transaction. However, you must promptly notify SBA of the transaction. (g) Restriction on options obtained by NMVC Company's management and employees. Your employees, officers, directors, managing members or general partners, or the general partners of the management company that is providing services to you or to your general partner, may obtain options in a Financed Small Business only if: (1) They participate in the Financing on a pari passu basis with you; or (2) SBA gives its prior written approval; or (3) The options received are compensation for service as a member of the board of directors of the Small Business, and such compensation does not exceed that paid to other outside directors. In the absence of such directors, fees must be reasonable when compared with amounts paid to outside directors of similar companies.

13 C.F.R. § 108.740 Portfolio diversification (“overline” limitation).

(a) Without SBA's prior written approval, you may provide Financing or a Commitment to a Small Business only if the resulting amount of your aggregate outstanding Financings and Commitments to such Small Business and its Affiliates does not exceed 10 percent of the sum of: (1) Your Regulatory Capital as of the date of the Financing or Commitment; plus (2) The total amount of leverage projected in your participation agreement with SBA; plus (3) Any permitted Distribution(s) you made during the five years preceding the date of the Financing or Commitment which reduced your Regulatory Capital. (b) For the purposes of paragraph (a) of this section, you must measure each outstanding Financing at its current cost plus any amount of the Financing that was previously written off.

13 C.F.R. § 108.760 How a change in size or activity of a Portfolio Concern affects the NMVC Company and the Portfolio Concern.

(a) Effect on NMVC Company of a change in size of a Portfolio Concern. If a Portfolio Concern no longer qualifies as a Small Business you may keep your investment in the concern and: (1) Subject to the overline limitations of § 108.740, you may provide additional Financing to the concern up to the time it makes a public offering of its securities. (2) Even after the concern makes a public offering, you may exercise any stock options, warrants, or other rights to purchase Equity Securities which you acquired before the public offering, or fund Commitments you made before the public offering. (b) Effect of a change in business activity occurring within one year of NMVC Company's initial Financing—(1) Retention of Investment. Unless you receive SBA's written approval, you may not keep your investment in a Portfolio Concern, small or otherwise, which becomes ineligible by reason of a change in its business activity within one year of your initial investment. (2) Request for SBA 's approval to retain investment. If you request that SBA approve the retention of your investment, your request must include sufficient evidence to demonstrate that the change in business activity was caused by an unforeseen change in circumstances and was not contemplated at the time the Financing was made. (3) Additional Financing. If SBA approves your request to retain an investment under paragraph (b)(2) of this section, you may provide additional Financing to the Portfolio Concern to the extent necessary to protect against the loss of the amount of your original investment, subject to the overline limitations of § 108.740. (c) Effect of a change in business activity occurring more than one year after the initial Financing. If a Portfolio Concern becomes ineligible because of a change in business activity more than one year after your initial Financing you may: (1) Retain your investment; and (2) Provide additional Financing to the Portfolio Concern to the extent necessary to protect against the loss of the amount of your original investment, subject to the overline limitations of § 108.740.

13 C.F.R. § 108.900 Fees for management services provided to a Small Business by a NMVC Company or its Associate.

(a) General. This section applies to management services that you or your Associate provide to a Small Business during the term of a Financing or prior to a Financing. It does not apply to management services that your Associate provides to a Small Business that you do not finance. It also does not apply to Operational Assistance that you or your Associate provide to a Smaller Enterprise that you have Financed or in which you expect to make a Financing, for which neither you nor your Associate may charge the Smaller Enterprise. (b) SBA approval. You must obtain SBA's prior written approval of any management services fees and other fees described in this section that you or your Associate charge. (c) Permitted management services fees. You or your Associate may provide management services to a Small Business financed by you if: (1) You or your Associate have entered into a written contract with the Small Business; (2) The fees charged are for services actually performed; (3) Services are provided on an hourly fee, project fee, or other reasonable basis; (4) You can demonstrate to SBA, upon request, that the rate does not exceed the prevailing rate charged for comparable services by other organizations in the geographic area of the Small Business; and (5) At least 50 percent of any management services fees paid to your Associate by a Small Business for management services provided by the Associate is allocated back to you for your benefit. (d) Fees for service as a board member. You or your Associate may charge a Small Business Financed by you for services provided as members of the Small Business' board of directors. The fees must not exceed those paid to other outside board members. In the absence of such board members, fees must be reasonable when compared with amounts paid to outside directors of similar companies. Fees may be in the form of cash, warrants, or other payments. At least 50 percent of any such fees paid to your Associate by a Small Business for service by the Associate as a board member must be allocated back to you for your benefit. (e) Transaction fees. (1) You or your Associate may charge reasonable transaction fees for work performed such as preparing a Small Business for a public offering, private offering, or sale of all or part of the business, and for assisting with the transaction. Fees may be in the form of cash, notes, stock, and/or options. At least 50 percent of any such fees paid to your Associate by a Small Business for transactions work done by the Associate must be allocated back to you for your benefit. (2) Your Associate may charge market rate investment banking fees to a Small Business on that portion of a Financing that you do not provide. (f) Recordkeeping requirements. You must keep a record of hours spent and amounts charged to the Small Business, including expenses charged.

13 C.F.R. § 108.885 Disposition of assets to NMVC Company's Associates.

Except with SBA's prior written approval, you are not permitted to dispose of assets (including assets acquired in liquidation) to any Associate. As a prerequisite to such approval, you must demonstrate that the proposed terms of disposal are at least as favorable to you as the terms obtainable elsewhere.

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