83 FR 26875 - Small Business Investment Companies (SBIC); Early Stage Initiative

SMALL BUSINESS ADMINISTRATION

Federal Register Volume 83, Issue 112 (June 11, 2018)

Page Range		26875-26877
FR Document		2018-12030

The Small Business Administration (SBA) is withdrawing its proposed rule published on September 19, 2016. SBA proposed making changes to its Early Stage Small Business Investment Company (SBIC) initiative, which was launched in 2012. SBA is withdrawing the proposed rule because very few qualified funds applied to the Early Stage SBIC initiative, the costs were not commensurate with the results and the comments to the proposed rule did not demonstrate broad support for a permanent Early Stage SBIC program.

Federal Register, Volume 83 Issue 112 (Monday, June 11, 2018)

[Federal Register Volume 83, Number 112 (Monday, June 11, 2018)]
[Proposed Rules]
[Pages 26875-26877]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-12030]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AG68


Small Business Investment Companies (SBIC); Early Stage 
Initiative

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule; withdrawal.

-----------------------------------------------------------------------

SUMMARY: The Small Business Administration (SBA) is withdrawing its 
proposed rule published on September 19, 2016. SBA proposed making 
changes to its Early Stage Small Business Investment Company (SBIC) 
initiative, which was launched in 2012. SBA is withdrawing the proposed 
rule because very few qualified funds applied to the Early Stage SBIC 
initiative, the costs were not commensurate with the results and the 
comments to the proposed rule did not demonstrate broad support for a 
permanent Early Stage SBIC program.

DATES: SBA is withdrawing the proposed rule published on September 19, 
2016 (81 FR 64075) as of June 11, 2018.

FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment 
and Innovation, (202) 205-7563, theresa.jamerson@sba.gov.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    In the Small Business Investment Act of 1958 (Act), Congress 
created the Small Business Investment Company (SBIC) program to 
``stimulate and supplement the flow of private equity capital and long-
term loan funds which small-business concerns need for the sound 
financing of their business operations and for their growth, expansion, 
and modernization, and which are not available in adequate supply . . . 
.'' 15 U.S.C. 661. Congress intended that the program ``be carried out 
in such manner as to insure the maximum participation of private 
financing sources.'' Id. In accordance with that policy, the U.S. Small 
Business Administration (SBA) does not invest directly in small 
businesses. Rather, through the SBIC program, SBA licenses and provides 
debenture leverage to SBICs. SBICs are privately-owned and 
professionally managed for-profit investment funds that make loans

[[Page 26876]]

to, and investments in, qualified small businesses using a combination 
of privately raised capital and debenture leverage guaranteed by SBA. 
SBA will guarantee the repayment of debentures issued by an SBIC 
(Debentures) up to a maximum amount of $150 million per SBIC based on 
the amount of the SBIC's qualifying private capital, defined in SBA 
regulations as Regulatory Capital (consisting of paid-in capital 
contributions from private investors plus binding capital commitments 
from Institutional Investors, as defined in existing Sec.  107.50). SBA 
will typically provide an SBIC with up to two ``tiers'' of leverage (a 
two-to-one match between leverage and Regulatory Capital).
    The standard Debenture requires semi-annual interest payments. 
Consequently, most SBICs finance later stage small businesses with 
positive operating cash flow, and most structure their investments as 
loans or mezzanine debt in an amount that is at least sufficient to 
cover the SBIC's Debenture interest payments. Early stage companies 
typically do not have positive operating cash flow and therefore cannot 
make current interest or dividend payments. As a result, investments in 
early stage companies do not fit naturally with the structure of 
debenture leverage.
    Early stage businesses without the necessary assets or cash flow 
for traditional bank funding face difficult challenges accessing 
capital. As a result of this capital gap, on April 27, 2012, SBA 
published a final rule (77 FR 25042) to define a new sub-category of 
SBICs. SBA's intent was to license over a 5-year period (fiscal years 
2012 through 2016) venture funds focused on early stage businesses. 
Because Early Stage SBICs present a higher credit risk than traditional 
SBICs, that rule authorized SBA to guarantee Debentures in an amount 
equal to each Early Stage SBIC's Regulatory Capital (one tier of 
leverage, rather than the two tiers typically available to traditional 
SBICs), up to a maximum of $50 million. SBA targeted an allocation of 
$200 million per year ($1 billion total) of its SBIC Debenture 
authorization over these years to this effort.
    In order to determine potential changes needed to attract 
sufficient interest from qualified early stage fund managers to apply 
for the Early Stage SBIC program, SBA sought input from the public 
through an Advance Notice of Proposed Rulemaking (ANPRM) on March 18, 
2015 (80 FR 14034). Based on comments on the ANPRM and additional 
discussions SBA held with industry participants, SBA published a 
proposed rule (81 FR 64075) on September 19, 2016, to make changes to 
make the Early Stage SBIC program more attractive and make the program 
a permanent part of the SBIC program. These changes included: (1) 
Extending the program past FY 2016; (2) modifying Early Stage licensing 
procedures to be more consistent with other SBICs by allowing Early 
Stage SBIC applicants to apply at any time and allowing existing Early 
Stage SBICs to apply for a subsequent license; (3) allowing Early Stage 
SBICs to use a line of credit without SBA's prior approval; and (4) 
increasing the maximum leverage from $50 million to $75 million.

II. Reason for Withdrawal

    In determining whether to publish a final rule, SBA evaluated the 
results of the Early Stage SBIC Initiative, the costs of the initiative 
and the comments received on the proposed rule.
    Between 2012 and June 2016, SBA received 62 applications to the 
Early Stage SBIC program, but licensed only 5 Early Stage SBICs. Those 
applicants that were not licensed failed to meet SBA's licensing 
criteria. Many of the applicants had management teams with limited 
track records and few positive realizations. Although SBA sought to 
increase the number of applicants to the Early Stage SBIC initiative, 
at the end of FY 2016, none of the SBIC applicants utilizing an early 
stage investment strategy in SBA's licensing pipeline sought to issue 
SBA-guaranteed Debentures or to be licensed as an Early Stage SBIC. SBA 
has and will continue to license qualifying early stage venture funds 
that do not intend to issue SBA-guaranteed Debentures. Although venture 
capital funds pursuing an early stage investment strategy are not 
prohibited from applying to the program as a leveraged SBIC, SBIC 
guaranteed Debentures are not well-suited to an early stage investing 
strategy since many early stage investments do not provide ongoing cash 
flows needed to pay the current interest and annual charges associated 
with SBA guaranteed debentures. Based on its evaluation of the Early 
Stage initiative, SBA concluded that there are insufficient qualified 
early stage fund management teams that are interested in using SBA-
guaranteed leverage under the terms needed to make the Early Stage SBIC 
initiative a permanent part of the SBIC program.
    SBA also considered costs in determining whether to withdraw the 
proposed rule. As noted in the April 27, 2012, final rule, due to the 
risk associated with this class of SBICs, SBA increased the annual 
charge for all SBICs issuing Debenture leverage in order to implement 
the Early Stage SBIC initiative. The September 2016 Early Stage SBIC 
proposed rule stated that because Early Stage SBICs invest in early 
stage investments with higher risk, the rule would continue to apply a 
higher annual charge payable by all SBICs issuing SBA-guaranteed 
Debentures. SBA expected to allocate no more than approximately $200 
million in leverage commitments to Early Stage SBICs each year after FY 
2017, which allocation was expected to increase the cost to all SBICs 
issuing SBA-guaranteed debentures by increasing the annual fee payable 
by all such SBICs by approximately 14 basis points. For an SBIC issuing 
$100 million in SBA-guaranteed Debentures, 14 basis points would equate 
to $140,000 per year. SBICs typically issue Debenture leverage over 4 
to 6 years (using multiple commitments) and begin paying back leverage 
as the fund harvests its investments after that period. Based on 
Debenture pools since 1992 that have been fully repaid, the average 
hold period is approximately 6 years. Therefore the 14 basis points 
addition for an SBIC issuing $100 million in SBA-guaranteed Debentures 
would equate to $840,000. If the SBIC held the leverage for the full 
10-year term, this would equate to $1,400,000 for a single SBIC over 
that timeframe. Between FYs 2012 and 2017, SBA approved on average 
$2.28 billion aggregate debenture commitments per year. If an 
additional 14 basis point charge were in effect, SBICs would incur over 
$3.2 million per year in additional fees, or approximately $19 million 
over the average 6 year holding period for SBIC-guaranteed Debentures. 
This is capital that SBICs could otherwise deploy to small businesses. 
Additionally, SBA must expend additional administrative costs to 
oversee these SBICs and to maintain subsidy formulation and re-estimate 
models. SBA received four comment letters on the proposed rule. Among 
other things, these comments requested changes to the payment structure 
of the Early Stage debenture--partial, as opposed to full prepayments--
which structure SBA has determined is not workable. Another comment 
suggested that the amount of leverage SBA intended to allocate to Early 
Stage SBICs on an annual basis was perceived as a limit which placed 
unacceptable risk to management teams that would otherwise be 
interested in applying to the program. As discussed above, in order to 
determine the annual charge as required by the Act, if the proposed 
rule became final, SBA would be required to

[[Page 26877]]

allocate an amount of leverage to Early Stage SBICs on an annual basis. 
Other comments suggested concerns or requested clarifications. It was 
not evident to SBA from these comments that the proposed rule was 
broadly supported by SBIC program stakeholders.
    The withdrawal of the proposed rule does not impact the Early Stage 
regulations contained in 13 CFR part 107 or the five currently licensed 
Early Stage SBICs. Such Early Stage SBICs remain subject to the Act, 
applicable regulations at 13 CFR part 107 and SBA policies.

Executive Order 13771

    The withdrawal of the proposed rule qualifies as a deregulatory 
action under Executive Order 13771. See OMB's Memorandum titled 
``Guidance Implementing Executive Order 13771, Titled `Reducing 
Regulation and Controlling Regulatory Costs''' (April 5, 2017).
    Accordingly, for the reasons stated in the preamble, the proposed 
rule published at 81 FR 64075 on September 16, 2016 is withdrawn.

    Authority:  15 U.S.C. 634(b)(6).

    Dated: May 12, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-12030 Filed 6-8-18; 8:45 am]
 BILLING CODE 8025-01-P

26876 Federal Register / Vol. 83, No. 112 / Monday, June 11, 2018 / Proposed Rules

to, and investments in, qualified small September 19, 2016, to make changes to order to implement the Early Stage SBIC
businesses using a combination of make the Early Stage SBIC program initiative. The September 2016 Early
privately raised capital and debenture more attractive and make the program a Stage SBIC proposed rule stated that
leverage guaranteed by SBA. SBA will permanent part of the SBIC program. because Early Stage SBICs invest in
guarantee the repayment of debentures These changes included: (1) Extending early stage investments with higher risk,
issued by an SBIC (Debentures) up to a the program past FY 2016; (2) modifying the rule would continue to apply a
maximum amount of $150 million per Early Stage licensing procedures to be higher annual charge payable by all
SBIC based on the amount of the SBIC’s more consistent with other SBICs by SBICs issuing SBA-guaranteed
qualifying private capital, defined in allowing Early Stage SBIC applicants to Debentures. SBA expected to allocate no
SBA regulations as Regulatory Capital apply at any time and allowing existing more than approximately $200 million
(consisting of paid-in capital Early Stage SBICs to apply for a in leverage commitments to Early Stage
contributions from private investors subsequent license; (3) allowing Early SBICs each year after FY 2017, which
plus binding capital commitments from Stage SBICs to use a line of credit allocation was expected to increase the
Institutional Investors, as defined in without SBA’s prior approval; and (4) cost to all SBICs issuing SBA-
existing § 107.50). SBA will typically increasing the maximum leverage from guaranteed debentures by increasing the
provide an SBIC with up to two ‘‘tiers’’ $50 million to $75 million. annual fee payable by all such SBICs by
of leverage (a two-to-one match between approximately 14 basis points. For an
II. Reason for Withdrawal
leverage and Regulatory Capital). SBIC issuing $100 million in SBA-
The standard Debenture requires In determining whether to publish a
guaranteed Debentures, 14 basis points
semi-annual interest payments. final rule, SBA evaluated the results of
the Early Stage SBIC Initiative, the costs would equate to $140,000 per year.
Consequently, most SBICs finance later
of the initiative and the comments SBICs typically issue Debenture
stage small businesses with positive
received on the proposed rule. leverage over 4 to 6 years (using
operating cash flow, and most structure
Between 2012 and June 2016, SBA multiple commitments) and begin
their investments as loans or mezzanine
received 62 applications to the Early paying back leverage as the fund
debt in an amount that is at least
Stage SBIC program, but licensed only harvests its investments after that
sufficient to cover the SBIC’s Debenture
5 Early Stage SBICs. Those applicants period. Based on Debenture pools since
interest payments. Early stage
that were not licensed failed to meet 1992 that have been fully repaid, the
companies typically do not have
SBA’s licensing criteria. Many of the average hold period is approximately 6
positive operating cash flow and
therefore cannot make current interest applicants had management teams with years. Therefore the 14 basis points
or dividend payments. As a result, limited track records and few positive addition for an SBIC issuing $100
investments in early stage companies do realizations. Although SBA sought to million in SBA-guaranteed Debentures
not fit naturally with the structure of increase the number of applicants to the would equate to $840,000. If the SBIC
debenture leverage. Early Stage SBIC initiative, at the end of held the leverage for the full 10-year
Early stage businesses without the FY 2016, none of the SBIC applicants term, this would equate to $1,400,000
necessary assets or cash flow for utilizing an early stage investment for a single SBIC over that timeframe.
traditional bank funding face difficult strategy in SBA’s licensing pipeline Between FYs 2012 and 2017, SBA
challenges accessing capital. As a result sought to issue SBA-guaranteed approved on average $2.28 billion
of this capital gap, on April 27, 2012, Debentures or to be licensed as an Early aggregate debenture commitments per
SBA published a final rule (77 FR Stage SBIC. SBA has and will continue year. If an additional 14 basis point
25042) to define a new sub-category of to license qualifying early stage venture charge were in effect, SBICs would
SBICs. SBA’s intent was to license over funds that do not intend to issue SBA- incur over $3.2 million per year in
a 5-year period (fiscal years 2012 guaranteed Debentures. Although additional fees, or approximately $19
through 2016) venture funds focused on venture capital funds pursuing an early million over the average 6 year holding
early stage businesses. Because Early stage investment strategy are not period for SBIC-guaranteed Debentures.
Stage SBICs present a higher credit risk prohibited from applying to the program This is capital that SBICs could
than traditional SBICs, that rule as a leveraged SBIC, SBIC guaranteed otherwise deploy to small businesses.
authorized SBA to guarantee Debentures Debentures are not well-suited to an Additionally, SBA must expend
in an amount equal to each Early Stage early stage investing strategy since many additional administrative costs to
SBIC’s Regulatory Capital (one tier of early stage investments do not provide oversee these SBICs and to maintain
leverage, rather than the two tiers ongoing cash flows needed to pay the subsidy formulation and re-estimate
typically available to traditional SBICs), current interest and annual charges models. SBA received four comment
up to a maximum of $50 million. SBA associated with SBA guaranteed letters on the proposed rule. Among
targeted an allocation of $200 million debentures. Based on its evaluation of other things, these comments requested
per year ($1 billion total) of its SBIC the Early Stage initiative, SBA changes to the payment structure of the
Debenture authorization over these concluded that there are insufficient Early Stage debenture—partial, as
years to this effort. qualified early stage fund management opposed to full prepayments—which
In order to determine potential teams that are interested in using SBA- structure SBA has determined is not
changes needed to attract sufficient guaranteed leverage under the terms workable. Another comment suggested
interest from qualified early stage fund needed to make the Early Stage SBIC that the amount of leverage SBA
managers to apply for the Early Stage initiative a permanent part of the SBIC intended to allocate to Early Stage SBICs
daltland on DSKBBV9HB2PROD with PROPOSALS

SBIC program, SBA sought input from program. on an annual basis was perceived as a
the public through an Advance Notice SBA also considered costs in limit which placed unacceptable risk to
of Proposed Rulemaking (ANPRM) on determining whether to withdraw the management teams that would
March 18, 2015 (80 FR 14034). Based on proposed rule. As noted in the April 27, otherwise be interested in applying to
comments on the ANPRM and 2012, final rule, due to the risk the program. As discussed above, in
additional discussions SBA held with associated with this class of SBICs, SBA order to determine the annual charge as
industry participants, SBA published a increased the annual charge for all required by the Act, if the proposed rule
proposed rule (81 FR 64075) on SBICs issuing Debenture leverage in became final, SBA would be required to

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Federal Register / Vol. 83, No. 112 / Monday, June 11, 2018 / Proposed Rules 26877

allocate an amount of leverage to Early this AD to address the unsafe condition NM–076–AD’’ at the beginning of your
Stage SBICs on an annual basis. Other on these products. comments. We specifically invite
comments suggested concerns or DATES: We must receive comments on comments on the overall regulatory,
requested clarifications. It was not this proposed AD by July 26, 2018. economic, environmental, and energy
evident to SBA from these comments ADDRESSES: You may send comments, aspects of this NPRM. We will consider
that the proposed rule was broadly using the procedures found in 14 CFR all comments received by the closing
supported by SBIC program 11.43 and 11.45, by any of the following date and may amend this NPRM based
stakeholders. methods: on those comments.
The withdrawal of the proposed rule • Federal eRulemaking Portal: Go to We will post all comments we
does not impact the Early Stage http://www.regulations.gov. Follow the receive, without change, to http://
regulations contained in 13 CFR part instructions for submitting comments. www.regulations.gov, including any
107 or the five currently licensed Early • Fax: 202–493–2251. personal information you provide. We
Stage SBICs. Such Early Stage SBICs • Mail: U.S. Department of will also post a report summarizing each
remain subject to the Act, applicable Transportation, Docket Operations, M– substantive verbal contact we receive
regulations at 13 CFR part 107 and SBA 30, West Building Ground Floor, Room about this NPRM.
policies. W12–140, 1200 New Jersey Avenue SE, Discussion
Executive Order 13771 Washington, DC 20590.
• Hand Delivery: Deliver to Mail Agência Nacional de Aviação Civil
The withdrawal of the proposed rule address above between 9 a.m. and 5 (ANAC), which is the aviation authority
qualifies as a deregulatory action under p.m., Monday through Friday, except for Brazil, has issued Brazilian AD
Executive Order 13771. See OMB’s Federal holidays. 2017–04–01, effective April 25, 2017
Memorandum titled ‘‘Guidance For service information identified in (referred to after this as the Mandatory
Implementing Executive Order 13771, this NPRM, contact Embraer S.A., Continuing Airworthiness Information,
Titled ‘Reducing Regulation and Technical Publications Section (PC or ‘‘the MCAI’’), to correct an unsafe
Controlling Regulatory Costs’’’ (April 5, 060), Av. Brigadeiro Faria Lima, 2170— condition for certain Embraer S.A.
2017). Putim—12227–901 São Jose dos Model ERJ 190 airplanes. The MCAI
Accordingly, for the reasons stated in Campos—SP—Brazil; telephone: +55 12 states:
the preamble, the proposed rule 3927–5852 or +55 12 3309–0732; fax: This [Brazilian] AD was prompted by
published at 81 FR 64075 on September +55 12 3927–7546; email: distrib@ reports of bushing migration and loss of nut
16, 2016 is withdrawn. embraer.com.br; internet: http:// torque on the engine pylon lower inboard
Authority: 15 U.S.C. 634(b)(6). www.flyembraer.com. You may view and outboard link fittings. We are issuing this
this service information at the FAA, [Brazilian] AD to prevent loss of integrity of
Dated: May 12, 2018. the engine pylon lower link fittings, which
Transport Standards Branch, 2200 could result in separation of the engine from
Linda E. McMahon,
South 216th St., Des Moines, WA. For the wing.
Administrator.
information on the availability of this This [Brazilian] AD requires modifications
[FR Doc. 2018–12030 Filed 6–8–18; 8:45 am] material at the FAA, call 206–231–3195. of the attaching parts of the left handle (LH)
BILLING CODE 8025–01–P and right handle (RH) pylon lower link
Examining the AD Docket fittings, inboard and outboard positions.
You may examine the AD docket on
You may examine the MCAI in the
DEPARTMENT OF TRANSPORTATION the internet at http://
AD docket on the internet at http://
www.regulations.gov by searching for
www.regulations.gov by searching for
Federal Aviation Administration and locating Docket No. FAA–2018–
and locating Docket No. FAA–2018–
0509; or in person at the Docket
0509.
14 CFR Part 39 Management Facility between 9 a.m.
and 5 p.m., Monday through Friday, Related Service Information Under 1
[Docket No. FAA–2018–0509; Product
Identifier 2017–NM–076–AD] except Federal holidays. The AD docket CFR Part 51
contains this NPRM, the regulatory Embraer S.A. has issued Embraer
RIN 2120–AA64 evaluation, any comments received, and Service Bulletin 190–54–0016, Revision
other information. The street address for 04, dated December 7, 2017; and
Airworthiness Directives; Embraer S.A. the Docket Operations office (telephone:
Airplanes Embraer Service Bulletin 190LIN–54–
800–647–5527) is in the ADDRESSES 0008, Revision 02, dated May 9, 2018.
AGENCY: Federal Aviation section. Comments will be available in The service information describes
Administration (FAA), DOT. the AD docket shortly after receipt. procedures for modification of the
ACTION: Notice of proposed rulemaking FOR FURTHER INFORMATION CONTACT: attaching parts of the LH and RH pylon
(NPRM). Krista Greer, Aerospace Engineer, lower link fittings, inboard and
International Section, Transport outboard positions. These documents
SUMMARY: We propose to adopt a new Standards Branch, FAA, 2200 South are distinct since they apply to different
airworthiness directive (AD) for certain 216th St., Des Moines, WA 98198; airplane models. This service
Embraer S.A. Model ERJ 190 airplanes. telephone and fax 206–231–3221. information is reasonably available
This proposed AD was prompted by SUPPLEMENTARY INFORMATION: because the interested parties have
daltland on DSKBBV9HB2PROD with PROPOSALS

reports of bushing migration and loss of access to it through their normal course
nut torque on the engine pylon lower Comments Invited
of business or by the means identified
inboard and outboard link fittings. This We invite you to send any written in the ADDRESSES section.
proposed AD would require relevant data, views, or arguments about
modification of the attaching parts of this proposal. Send your comments to FAA’s Determination and Requirements
the left-hand (LH) and right-hand (RH) an address listed under the ADDRESSES of This Proposed AD
pylon lower link fittings, inboard and section. Include ‘‘Docket No. FAA– This product has been approved by
outboard positions. We are proposing 2018–0509; Product Identifier 2017– the aviation authority of another

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Document Created: 2018-11-02 11:58:53
Document Modified: 2018-11-02 11:58:53

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Proposed rule; withdrawal.
Dates		SBA is withdrawing the proposed rule published on September 19, 2016 (81 FR 64075) as of June 11, 2018.
Contact		Theresa Jamerson, Office of Investment and Innovation, (202) 205-7563, [email protected]
FR Citation		83 FR 26875
RIN Number		3245-AG68