Federal Register, Volume 76 Issue 8 (Wednesday, January 12, 2011)

[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Proposed Rules]
[Pages 2029-2035]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-486]

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Proposed Rules
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 76, No. 8 / Wednesday, January 12, 2011 /
Proposed Rules

[[Page 2029]]

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AF86

Small Business Investment Companies--Energy Saving Qualified
Investments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: In this proposed rule, the U.S. Small Business Administration
(SBA) is setting forth the new defined terms, ``Energy Saving Qualified
Investment'' and ``Energy Saving Activities'', for the Small Business
Investment Company (SBIC) Program. The new definitions are being
established to facilitate implementation of a provision of the Energy
Independence and Security Act of 2007 (Energy Act), which allows an
SBIC making an ``energy saving qualified investment'' to obtain SBA
leverage by issuing a deferred interest ``energy saving debenture''.
This rule would also implement a provision of the Energy Act that
provides access to additional SBA leverage for SBICs that have made
Energy Saving Qualified Investments in Smaller Enterprises, as defined
in SBA regulations.

DATES: Comments must be received on or before February 11, 2011.

ADDRESSES: You may submit comments, identified by RIN 3245-AF 86, by
any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail, Hand Delivery/Courier: Sean Greene, Associate
Administrator for Investment, U.S. Small Business Administration, 409
Third Street, SW., Washington, DC 20416.
SBA will post comments on http://www.regulations.gov. If you wish
to submit confidential business information (CBI) as defined in the
User Notice at http://www.regulations.gov, please submit the
information to Carol Fendler, Investment Division, 409 Third Street,
SW., Washington, DC 20416. Highlight the information that you consider
to be CBI and explain why you believe this information should be held
confidential. SBA will review the information and make the final
determination of whether it will publish the information or not.

FOR FURTHER INFORMATION CONTACT: Carol Fendler, Investment Division,
Office of Capital Access, (202) 205-7559 or sbic@sba.gov.

SUPPLEMENTARY INFORMATION:

I. Background Information

The Energy Independence and Security Act of 2007, Public Law 110-
140, Title XII, section 1205(a), amended section 303 of the Small
Business Investment Act of 1958 (SBI Act) by authorizing SBICs licensed
after September 30, 2008, to issue energy saving debentures. Section
1205(b) of the Energy Act amended section 103 of the SBI Act by adding
the new defined terms ``energy saving debenture'' and ``energy saving
qualified investment.'' Section 1206 of the Energy Act amended section
303(b)(2) of the SBI Act to make SBICs licensed after September 30,
2008, eligible for additional leverage if they have made energy saving
qualified investments. An SBIC making maximum use of this provision
could have approximately 11% more leverage outstanding than would be
permitted under the standard leverage eligibility formula.

II. Section by Section Analysis

Section 107.50--Definitions. The Energy Act provides that energy
saving debentures are to be issued at a discount, have a 5-year or 10-
year maturity, and require no interest payment or annual charge for the
first five years. Although an SBIC can use other funds to make an
energy saving qualified investment, an SBIC that issues an Energy
Saving Debenture must use the proceeds only to make an energy saving
qualified investment. To implement these new statutory provisions, SBA
proposes to add ``Energy Saving Qualified Investment'' and ``Energy
Saving Activities'' as defined terms in Sec. 107.50.

``Energy Saving Qualified Investment''

The proposed regulatory definition of Energy Saving Qualified
Investment has several key points. First, as specified in the statute,
an Energy Saving Qualified Investment can only be made by an SBIC
licensed after September 30, 2008. Second, the investment must be made
in a Small Business, as defined in 13 CFR part 107. Third, the
investment must be in the form of a Loan, a Debt Security (a debt
instrument that includes an equity feature, such as warrants or rights
to convert to equity), or an Equity Security. Fourth, the Small
Business must be ``primarily engaged'' in business activities that
reduce the use or consumption of non-renewable energy sources (``Energy
Saving Activities'').

``Energy Saving Activities''

The proposed rule defines Energy Saving Activities primarily by
reference to various criteria established by the Department of Energy
and other Federal agencies to identify energy efficient products and
services and to encourage the provision of renewable energy sources. As
one example, the manufacturing of products that satisfy the criteria
for use of the Energy Star trademark label would qualify as an Energy
Saving Activity. For each type of Energy Saving Activity, the proposed
rule provides a reference to the appropriate Federal program or
Internal Revenue Code section, or a detailed definition that would
allow users to determine whether the manufacture or development of a
specific product, or the provision of a specific service, qualifies
under the definition. SBA believes that reference wherever possible to
existing standards for energy efficient products and services will
ensure that Energy Saving Qualified Investments satisfy the objectives
of the Energy Act. This approach will also allow the definition of
Energy Saving Activities to be more easily updated as energy efficiency
standards expand to include new products and services.
In addition, paragraph (4) of the definition would allow SBA to
determine whether activities not specifically addressed in the proposed
rule are Energy Saving Activities. This approach will provide
flexibility to accommodate activities based on technologies or
practices that may emerge in the future. Paragraph (4) encompasses the
manufacturing of products, provision of services, and conduct of
research and development activities that reduce (or are anticipated to
reduce) the consumption of non-

[[Page 2030]]

renewable energy, either through the more efficient use of such energy
or by providing energy from renewable sources. An SBIC requesting a
determination by SBA under paragraph (4) will be asked to submit
written information and certifications (see also the discussion of
proposed Sec. 107.610 in this preamble). The proposed definition
identifies the information required to be submitted and the factors
that SBA will take into account in determining whether activities are
Energy Saving Activities, although an SBIC would be free to provide
other information to support its request. Ideally, the claimed energy
savings will have been tested by an independent engineer or other
recognized professional with expertise in the subject technology. The
results of in-house or other non-independent testing may also be
considered if the SBIC can document that tests were designed, performed
and evaluated by qualified personnel following appropriate professional
standards. SBA will also consider such factors as patents held by the
Small Business, grants awarded by Federal or State government agencies,
foundations, etc. to promote energy efficiency or energy savings, and
licenses purchased by the Small Business to make use of energy-saving
technologies developed by others. For research and development-stage
companies that have not yet brought a product or service to market, SBA
will consider projected energy savings, but the SBIC must also provide
evidence supporting the feasibility and commercial potential of the
products or services under development. Finally, SBA will consider
whether an activity that would have been eligible for an energy-related
Federal tax credit in past years should be considered an Energy Saving
Activity, even though the subject credit is not currently available.
SBA welcomes comments regarding additional activities that may be
candidates for inclusion in the Energy Saving Activities definition.
For example, SBA is open to suggestions regarding activities that could
reduce the consumption of non-renewable fuels by reducing the
dependency on automobiles for transportation, such as provision of
telework facilities, carpooling services, or improved transit options.

Electronic Access to Criteria for Evaluation of ``Energy Saving
Activities''

SBA intends to link its Investment Division Web site (http://www.sba.gov/inv) to other government Web sites that will assist users
in determining whether a company providing or developing particular
products or services is engaged in Energy Saving Activities. Some sites
allow users to search for a specific product by name, while others
provide performance criteria or outcomes that a qualifying product or
service must satisfy. The current addresses for these sites are:
1. Energy Star: http://www.energystar.gov/products
2. Federal Energy Management Program: www1.eere.energy.gov/femp/technologies/eep_purchasingspecs.html
3. Renewable Electricity Production Tax Credit (Internal Revenue
Code Section 45): http://www.irs.gov/irb/2010-18_IRB/ar11.html
4. Energy Credit (Internal Revenue Code Section 48): http://
frwebgate.access.gpo.gov/cgi-bin/
usc.cgi?ACTION=RETRIEVE&FILE=$$xa$$busc26.wais&start=1688508&SIZE=98870&
TYPE=PDF
5. Installation-related Federal Tax Credits for Consumer Energy
Efficiency: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index

Determining Whether a Concern is ``Primarily Engaged'' in Energy Saving
Activities

The proposed rule presumes that a company is ``primarily engaged''
in Energy Saving Activities if it derived at least 50% of its total
revenues for its most recently completed fiscal year directly from
Energy Saving Activities. However, SBA recognizes that one of the
objectives of creating the Energy Saving debenture, which does not
require the payment of interest during the first five years following
issuance, may be to allow SBICs to invest in earlier stage enterprises
that do not meet this revenue test for Energy Saving Activities. In
some cases, small businesses may be engaged in research and development
activities with little or no revenues. In other instances, a company
may already have revenue from activities not related to Energy Saving
Activities, but may be heavily engaged in activities that are expected
to produce revenue from Energy Saving Activities in the future.
Therefore, the proposed rule would allow SBA to determine that a small
business is primarily engaged in Energy Saving Activities based on the
totality of the circumstances, as evidenced by such factors as the
distribution of the company's revenues; the percentage of total
employees engaged in Energy Saving Activities; the expenditures (which
may include both amounts expensed and amounts capitalized) allocated to
Energy Saving Activities; activities related to the development and use
of intellectual property held by the company related to Energy Saving
Activities; and Energy Saving Activities contemplated by a business
plan presented to outside investors as part of a formal fund-raising
effort.

Energy Saving Debenture

As provided in section 1205(b) of the Energy Act, the energy saving
debenture would be a five- or ten-year debenture issued at a discount
so as to be, in effect, a ``zero coupon'' debenture for the first five
years. SBA leverage fees would be paid as required under current Sec.
107.1130, except for the annual charge in Sec. 107.1130(d) which would
be deferred for the first five years and thereafter be payable semi-
annually along with the debenture interest. For example, an SBIC
issuing a $1,000,000 ten-year debenture with a combined interest rate
and annual charge of 6% would receive roughly $750,000 upon issuance
and would make no payments of interest or annual charge for the first
five years. Starting with the sixth year, the SBIC would make semi-
annual payments of interest and charges on the debenture's face amount
of $1,000,000. At maturity the SBIC would pay the $1,000,000 face
amount of the debenture.
Each SBIC that was licensed after September 30, 2008, and is
eligible to issue debentures under current regulations would be
eligible to issue an energy saving debenture for the purpose of making
an Energy Saving Qualified Investment. No regulatory changes are
necessary to implement this new type of debenture.
Section 107.610--Required Certifications for Loans and Investments.
An SBIC that intends to issue energy saving debentures based on its
Energy Saving Qualified Investments or that intends to seek additional
leverage based on its Energy Saving Qualified Investments in Smaller
Enterprises must have an appropriate certification for each such
investment. Proposed Sec. 107.610(f) makes a distinction between
investments for which SBA needs to make a pre-financing determination
of eligibility and those for which it does not. If the small business
concern is engaged in activities that are specifically included in the
Energy Saving Activities definition, and it is presumed to be
``primarily engaged'' in those activities based on the source of its
revenues, the SBIC only needs to certify the basis for the concern's
eligibility and retain the certification and supporting documentation
in its files. If SBA must make a pre-financing determination as to
whether the concern is engaged in Energy Saving Activities and/or
whether it is ``primarily engaged'' in such

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activities, the proposed rule would require the SBIC to provide SBA
with all available information from the concern that is relevant to
those determinations, along with certifications by the SBIC and the
concern that the submitted information is true and correct. SBA
recognizes the burden that may be inherent in this type of ``total
facts and circumstances'' determination, but believes it is preferable
to offer this option to SBICs rather than to define Energy Saving
Qualified Investments more narrowly.
Section 107.1150--Maximum Amount of Leverage for a Section 301(c)
Licensee. New paragraph (d) implements a provision of the Energy Act
that may provide additional leverage eligibility to SBICs licensed on
or after October 1, 2008, that make Energy Saving Qualified Investments
in Smaller Enterprises. This paragraph adjusts the leverage eligibility
formula in Sec. 107.1150(a) by subtracting from an SBIC's outstanding
leverage the cost basis of Energy Saving Qualified Investments that the
SBIC has made in Smaller Enterprises. The amount that can be subtracted
is limited to 33% of the SBIC's Leverageable Capital. Furthermore, as
required by the Energy Act, only the cost basis of Energy Saving
Qualified Investments that individually do not exceed 20% of the SBIC's
Regulatory Capital may be subtracted, even though SBICs in general can
invest up to 30% of their Regulatory Capital in a single company.

Compliance With Executive Orders 12866, 12988 and 13132, the Paperwork
Reduction Act (44 U.S.C. Ch. 35) and the Regulatory Flexibility Act (5
U.S.C. 601-612)

Executive Order 12866

The Office of Management and Budget has determined that this rule
is a ``significant'' regulatory action under Executive Order 12866. The
Regulatory Impact Analysis is set forth below.
1. Necessity of Regulation
This proposed regulatory action would implement sections 1205 and
1206 of the Energy Independence and Security Act of 2007, Public Law
110-140. The statutory revisions provide an SBIC seeking to make an
``energy saving qualified investment'' with a new SBA leverage option
in the form of an ``energy saving debenture.''
2. Alternative Approaches to Regulation
Because the regulatory definition of Energy Saving Qualified
Investment must be consistent with the statutory definition, SBA had a
limited ability to consider alternatives. The statute defines ``energy
saving qualified investment'' as an ``investment in a small business
concern that is primarily engaged in researching, manufacturing,
developing, or providing products, goods, or services that reduce the
use or consumption of non-renewable energy resources.'' The SBA
considered adopting this statutory definition without modification.
However, SBA did not select this approach due to concerns that without
some interpretation of the broad statutory language, it would be
difficult to evaluate (a) whether qualifying investments would actually
contribute to the energy-saving objectives of the statute and (b) what
constitutes ``primarily engaged''.
In considering alternatives for determining whether a qualifying
investment would likely contribute to the energy-saving objectives of
the statute, the SBA conferred with the Department of Energy (DOE) to
consider two options besides using the broad statutory definition: (1)
Defining a list of specific industries and (2) referencing existing
standards developed for Federal programs that promote energy
efficiency. SBA did not adopt the first option to identify a list of
specific industries because (1) ``energy saving'' efforts take place
across a broad spectrum of industries; (2) the North American
Industrial Classification System (NAICS) codes, typically used to
identify industries, are inadequate for capturing whether a business is
involved in ``energy saving'' across this spectrum; and (3) developing
a static list does not adequately allow for either a full range of
products and services or the rapid growth in this area that might
further the statutory goals. Given the number of Federal programs
already directed towards ``energy saving'' activities, SBA chose to
adopt the second option in order to improve standardization across
agencies, allow growth as DOE and other agencies update program
standards to reflect new ``energy saving'' initiatives, and to address
the broadest spectrum of products and services. Towards those goals,
SBA recognizes that SBICs may wish to invest in Small Businesses that
are manufacturing or researching products or performing services that
have not been identified by existing Federal standards. Therefore, SBA
will also consider other investments on a case by case basis, based on
the SBIC's ability to demonstrate energy savings associated with the
Small Business's activities.
To determine whether a concern is ``primarily engaged'' in Energy
Saving Activities, SBA considered using either a specific quantitative
standard or an evaluation based on total facts and circumstances. For
simplicity, the proposed rule presumes that a business is ``primarily
engaged'' if it derived at least 50% of revenues during its most
recently completed fiscal year from Energy Saving Activities. SBA also
considered a higher percentage requirement, but chose 50% to encourage
energy-saving investments as much as possible while meeting statutory
requirements. Alternatively, an SBIC may ask SBA to determine whether a
concern is ``primarily engaged'' in Energy Saving Activities based on
an evaluation of various factors. As stated in the proposed definition
of Energy Saving Qualified Investments, these factors include ``the
distribution of revenues, employees and expenditures, intellectual
property rights held, and business plans presented to investors as part
of a formal solicitation''. SBA believes the combination of these two
approaches provides a reasonable balance between simplicity and
inclusiveness.
3. Potential Benefits and Costs
SBA anticipates that this rule will provide marginal benefit to
small businesses seeking investments by SBICs under those circumstances
in which the investment structure does not lend itself well to SBA's
standard debenture. Standard debentures require the SBIC to make semi-
annual interest payments, while the energy saving debenture
contemplated by the statute would be issued at a discount, have a 5-
year or 10-year maturity, and require no interest payment or annual
charge for the first five years. This structure is the same as the SBIC
program's currently available low and moderate income (LMI) debenture.
Since the structure of the energy saving debenture mirrors that of
the LMI debenture, in determining this rule's benefit to both SBICs and
small businesses, SBA analyzed the impact of the LMI debenture. The LMI
debenture was first issued in FY 2001. Between FY 2001 and March 31,
2010, SBICs have issued approximately $4.2 billion in debentures, with
less than $45 million in LMI debentures (approximately 1% of all
debenture leverage issued since FY 2001). The proceeds of LMI
debentures can only be used to make LMI financings; however, SBA
estimates that only 2% of LMI financings by SBICs issuing debentures
were funded using the LMI debenture. SBICs placed 21.5% of their
investment dollars in portfolio companies in LMI zones between FY 2001
and July 31, 2010, compared with 21.6% in fiscal years

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1998-2000 when the LMI debenture was not available. The structural
similarities between the LMI debenture and the energy saving debenture
suggest that this rule will have a similarly marginal impact.
In estimating the impact, the SBA also considered available
industry data. The PricewaterhouseCoopers/National Venture Capital
Association MoneyTree ^TM Report indicates that $1.9 billion
in Cleantech investments were made in calendar year 2009, representing
approximately 11% of all venture financings. SBA believes that
Cleantech investments are fairly representative of energy saving
investments. SBA estimates that the percentage of the SBIC portfolio
directed towards Energy Saving Qualified Investments will be similar to
the percentage of Cleantech investments in the venture industry.
However, only SBICs licensed after September 30, 2008, will be eligible
to issue energy saving debentures and many such SBICs will choose to
use the standard debenture to make these types of financings.
Therefore, the SBA estimates that approximately half of the anticipated
SBIC energy saving investments will be performed using the new energy
saving debenture or 5% of all financings by SBICs issuing debentures.
In FY 2009, SBICs issuing debentures provided $1.2 billion in financing
to small businesses.
With respect to potential costs of the regulation to SBICs, the
cost has been incorporated into the program formulation model which
determines the annual fee to keep the debenture program to zero subsidy
cost as required by law. Because the structure of the LMI debenture is
the same as the energy saving debenture, SBA used its performance as a
proxy for the energy saving debenture. SBA's estimate that energy
saving debentures would constitute 5% of total demand for debenture
leverage resulted in an increase to the annual fee of 14.3 basis points
versus formulations with no energy saving debentures. This increase
reflects the additional risk associated with underlying SBIC equity
investments contemplated in the usage of this debenture. Despite this
increase, the annual fee is estimated to remain substantially lower
than the ten year average and far below the statutory maximum of 1.38%.
It should be noted that if the energy saving debenture was formulated
as a stand-alone program (apart from the standard debenture) it is
likely that its annual fee would exceed the statutory maximum. SBA will
review the demand for and performance of the energy saving debenture on
an annual basis to determine if these assumptions should be changed.
Should the actual or anticipated demand for the energy saving debenture
exceed 5% of all debenture leverage issued in any given year, SBA will
consider separately formulating the energy saving debenture as a
separate program so that its higher cost would be borne directly by
users rather than spread among all SBICs.

Executive Order 12988

This action meets applicable standards set forth in section 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or presumptive effect.

Executive Order 13132

The rule will not have substantial direct effects on the States, or
the distribution of power and responsibilities among the various levels
of government. Therefore, for the purposes of Executive Order 13132,
Federalism, SBA determines that this proposed rule has no federalism
implications warranting the preparation of a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

SBA has determined that this proposed rule imposes additional
reporting and recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C., chapter 35. This collection of information includes
three different reporting requirements: (1) Information needed for SBA
to determine whether a Small Business is ``primarily engaged'' in
Energy Saving Activities, (2) information needed for SBA to determine
whether a particular activity is an ``Energy Saving Activity'', and (3)
identification of a completed financing as an Energy Saving Qualified
Investment on the Portfolio Financing Report. As a result of proposed
changes in this rule, SBA will also amend an existing approved
information collection, Portfolio Financing Report, SBA Form 1031 (OMB
Control Number 3245-0078). The titles, descriptions and respondent
descriptions of the information collections provisions are discussed
below with an estimate of the annual reporting burden. Included in the
estimate is the time for reviewing instructions, searching existing
data sources, gathering and maintaining the data needed, and completing
and reviewing each collection of information.
SBA invites comments on: (1) Whether the proposed collection of
information is necessary for the proper performance of SBA's functions,
including whether the information will have a practical utility; (2)
the accuracy of SBA's estimate of the burden of the proposed
collections of information, including the validity of the methodology
and assumptions used; (3) ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) ways to minimize
the burden of the collection of information on respondents, including
through the use of automated collection techniques, when appropriate,
and other forms of information technology.
Please send comments by the closing date for comment for this
proposed rule to Wendy Liberante, Office of Management and Budget,
Office of Information and Regulatory Affairs, 725 17th Street, NW.,
Washington, DC 20503 and to Harry Haskins, Deputy Associate
Administrator for Investment, Office of Investment, Small Business
Administration, 409 Third Street, SW., Washington, DC 20416.
A. ``Primarily Engaged'' and ``Energy Saving Activity'' Determinations
Title: Financing Eligibility Statement for Usage of Energy Saving
Debentures [no SBA form number].
Summary: The Financing Eligibility Statement for Usage of Energy
Saving Debentures will be used by SBICs requesting either or both of
the SBA determinations that may be requested under the proposed rule:
(1) Whether a Small Business is ``primarily engaged'' in Energy Saving
Activities, as described in the proposed definition of ``Energy Saving
Qualified Investment'' in Sec. 107.50 and as used in Sec.
107.610(f)(2)(i), and/or (2) whether a particular activity in which a
Small Business is engaged is an ``Energy Saving Activity'', as
described in the proposed definition of that term and as used in Sec.
107.610(f)(2)(ii). The SBIC must provide supporting evidence of the
Small Business's eligibility based on the factors listed in the
proposed rule.
Need and Purpose: Section 1205 of the Energy Independence and
Security Act of 2007 makes SBA leverage in the form of a deferred
interest ``energy saving debenture'' available to SBICs licensed after
September 30, 2008 for the purpose of making Energy Saving Qualified
Investments. The proposed rule identifies various criteria under which
a financing can qualify as an Energy Saving Qualified Investment;
however, SBA recognizes that some proposed investments will need to be
individually reviewed by SBA to determine whether they fulfill the
energy saving objectives of the statute.

[[Page 2033]]

SBA will use the submitted information to make those determinations.
Description of Respondents: Small business investment companies
will submit this form to obtain a determination from SBA as to whether
a proposed financing is an Energy Saving Qualified Investment. There
are approximately 300 active SBICs; only about 10% of these were
licensed after September 30, 2008, and are eligible to issue energy
saving debentures to make Energy Saving Qualified Investments. Based on
anticipated new licensing activity, SBA is estimating the number of
eligible SBICs at 60. Assuming each of these SBICs will invest in five
companies per year, that 5% of all investments will be in energy-saving
companies, and that one-third of those will require SBA to make a pre-
financing determination of eligibility, SBA estimates five responses
per year.
SBA estimates the burden of this collection of information as
follows: An applicant will complete this collection once for each
prospective Energy Saving Qualified Investment that requires SBA to
make a pre-financing determination of eligibility. SBA estimates that
the time needed to complete this collection will average 10 hours. SBA
estimates that the cost to complete this collection will be
approximately $150 per hour. Total estimated aggregate burden is 50
hours per annum costing a total of $7,500 for the year.
B. Portfolio Financing Report
Title: Portfolio Financing Report, SBA Form 1031 (OMB Control
Number 3245-0078).
Summary: SBA Form 1031 is a currently approved information
collection form. SBA regulations (Sec. 107.640) require SBICs to
submit a Portfolio Financing Report on SBA Form 1031 for each financing
that an SBIC provides to a small business concern. The form is SBA's
primary source of information for compiling statistics on the SBIC
program as a provider of capital to small businesses. SBA also uses the
information provided on Form 1031 to evaluate SBIC compliance with
regulatory requirements. SBA proposes to revise the form by adding one
new question, which would ask the SBIC to use a pull-down menu to
identify whether a completed financing was an Energy Saving Qualified
Investment. SBA's financial reporting software would automatically
transfer this designation to the SBA Form 468 (SBIC Financial
Statements), the source of data needed to determine eligibility for
additional leverage based on Energy Saving Qualified Investments under
Sec. 107.1150(d)(2)(i).
Need and Purpose: Section 1206 of the Energy Independence and
Security Act of 2007 increases the maximum amount of leverage
potentially available to an SBIC licensed on or after October 1, 2008,
that makes Energy Saving Qualified Investments. Proposed Sec.
107.1150(d) adjusts the basic leverage eligibility formula in Sec.
107.1150(a) by subtracting from an SBIC's outstanding leverage the cost
basis of Energy Saving Qualified Investments that the SBIC has made in
Smaller Enterprises. The amount that can be subtracted is limited to
33% of the SBIC's Leverageable Capital. SBA will use the information
submitted on Form 1031 to track Energy Saving Qualified Investments
that an SBIC may use in its leverage eligibility calculation, as well
as for overall program evaluation purposes.
Description of Respondents: All SBICs are currently required to
submit SBA Form 1031 within 30 days after closing an investment. The
current estimate of 3,700 responses per year is not affected by this
proposed rule. SBA proposes to add a single additional field to the
form to identify whether the investment is an Energy Saving Qualified
Investment.
SBA estimates the burden of this collection of information as
follows: An SBIC making an Energy Saving Qualified Investment will
select that descriptor from a pull-down menu on SBA Form 1031. There is
no incremental burden attributable to completion of this additional
field. An SBIC will complete SBA Form 1031 for each of its completed
financing transactions. The currently approved hour burden for this
collection is 12 minutes per response (0.2 hours), at a cost of $5.00
per response (based on $25.00 per hour). The total estimated burden is
740 hours per annum at an aggregate cost of $18,500.
The recordkeeping requirements under the proposed rule relate to
the information that an SBIC must maintain in its files to support the
required certifications for Energy Saving Qualified Investments under
Sec. 107.610(f)(1). SBA expects that SBICs will be able to obtain the
necessary documentation with minimal effort. The SBIC would first
document that the contemplated investment is in a company that provides
products or services included in the definition of Energy Saving
Activities, generally by referring to one of the government web sites
discussed in this preamble. Second, the SBIC would document that the
company derives at least 50 percent of its revenues from the sales of
these products or services; the company would have this information
available in the ordinary course of business.

Compliance with the Regulatory Flexibility Act, 5 U.S.C. 601-612

When an agency promulgates a rule, the Regulatory Flexibility Act
(5 U.S.C. 601-612) requires the agency to prepare an initial regulatory
flexibility analysis (IRFA) which will describe the potential economic
impact of the rule on small entities and alternatives that may minimize
that impact. Section 605 of the RFA allows an agency to certify a rule,
in lieu of preparing an IRFA, if the rulemaking is not expected to have
a significant economic impact on a substantial number of small
entities. This proposed rule affects all SBICs issuing debentures, of
which there are approximately 160, most of which are small entities.
Therefore, SBA has determined that this proposed rule will have an
impact on a substantial number of small entities. However, SBA has
determined that the impact on entities affected by the rule will not be
significant. The energy saving qualified investment definition
identifies the type of investment for which an SBIC will be permitted
to seek SBA funding in the form of an ``energy saving debenture''; this
instrument, because of its deferred interest feature, is expected to
provide SBICs with greater flexibility in structuring qualified
investments. The energy saving debenture is expected to increase the
annual fee charged on all new debenture commitments by approximately 14
basis points; however, the fee would continue to remain low by
historical standards. Accordingly, the Administrator of the SBA hereby
certifies that this rule will not have a significant impact on a
substantial number of small entities. SBA welcomes comment from members
of the public who believe there will be a significant impact either on
SBICs, or on companies that receive funding from SBICs.

List of Subjects in 13 CFR Part 107

Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons stated in the preamble, SBA proposes to amend part
107 of title 13 of the Code of Federal Regulations as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

1. The authority citation for part 107 continues to read as
follows:

Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d,
687g, 687m and Pub. L.

[[Page 2034]]

106-554, 114 Stat. 2763; and Pub. L. 111-5, 123 Stat. 115.

2. Amend Sec. 107.50 by adding definitions of ``Energy Saving
Activities'' and ``Energy Saving Qualified Investment'', to read as
follows:

Sec. 107.50 Definitions of terms.

* * * * *
Energy Saving Activities means any of the following:
(1) Manufacturing or research and development of products, integral
product components, integral material, or related software that meet
one or more of the following:
(i) Improves residential energy efficiency as demonstrated by
meeting Department of Energy and Environmental Protection Agency
criteria for use of the Energy Star trademark label;
(ii) Improves commercial energy efficiency as demonstrated by being
in the upper 25% of efficiency for all similar products as designated
by the Department of Energy's Federal Energy Management Program;
(iii) Improves automobile efficiency or reduces petroleum
consumption through the use of advanced batteries, power electronics,
or electric motors; advanced combustion engine technology; or advanced
materials technologies, such as lightweighting;
(iv) Improves industrial energy efficiency through combined heat
and power (CHP) prime mover or power generation technologies, heat
recovery units, absorption chillers, desiccant dehumidifiers, packaged
CHP systems, more efficient process heating equipment, more efficient
steam generation equipment, or heat recovery steam generators for
industrial application;
(v) Reduces the consumption of non-renewable energy by providing
renewable energy sources, as demonstrated by meeting the standards,
applicable to the year in which the investment is made, for receiving a
Renewable Electricity Production Tax Credit as defined in Internal
Revenue Code Section 45 or an Energy Credit as defined in Internal
Revenue Code Section 48; or
(vi) Improves electricity delivery efficiency by supporting the
smart grid functions as identified in 42 U.S.C. 17386(d) by delivering
a product, service, or functionality that serves one or more of the
following operational domains: equipment manufacturing, customer
systems, advanced metering infrastructure, electric distribution
systems, electric transmission systems, or grid cyber security.
(2) Installation and/or inspection services associated with the
deployment of energy saving products as identified by meeting one or
more of the following standards:
(i) Deploys products that qualify, in the year in which the
investment is made, for installation-related Federal Tax Credits for
Consumer Energy Efficiency;
(ii) Deploys products related to commercial energy efficiency as
demonstrated by deploying commercial equipment that is in the upper 25%
of efficiency for all similar products as designated by the Department
of Energy's Federal Energy Management Program;
(iii) Deploys combined heat and power products, goods, or services;
(iv) Deploys products that qualify, in the year in which the
investment is made, for receiving a Renewable Electricity Production
Tax Credit as defined in Internal Revenue Code Section 45 or an Energy
Credit as defined in Internal Revenue Code Section 48; or
(v) Deploys a product, service, or functionality that improves
electricity delivery efficiency by supporting the smart grid functions
as identified in 42 U.S.C. 17386(d) serving one or more of the
following operational domains: equipment manufacturing, customer
systems, advanced metering infrastructure, electric distribution
systems, electric transmission systems, or grid cyber security.
(3) Auditing and/or consulting services performed with the
objective of identifying potential improvements of the type described
in paragraph (1) or (2) of this definition.
(4) Other manufacturing, service, or research and development
activities that use less energy to provide the same level of energy
service or reduce the consumption of non-renewable energy by providing
renewable energy sources, as determined by SBA. A Licensee must obtain
such determination in writing prior to providing Financing to a Small
Business. SBA will consider factors including but not limited to:
(i) Results of energy efficiency testing performed in accordance
with recognized professional standards, preferably by a qualified
third-party professional, such as a certified energy assessor, energy
auditor, or energy engineer;
(ii) Patents or grants awarded to or licenses held by the Small
Business related to Energy Saving Activities listed in subsection (1)
or (2) in this definition;
(iii) For research and development of products or services that are
anticipated to reduce the consumption of non-renewable energy, written
evidence from an independent certified third-party professional of the
feasibility, commercial potential, and projected energy savings of such
products or services;
(iv) Eligibility of the product or service for a Federal tax credit
cited in this definition that is not available in the year in which the
investment is made, but was available in a previous year.
Energy Saving Qualified Investment means a Financing which:
(1) Is made by a Licensee licensed after September 30, 2008;
(2) Is in the form of a Loan, Debt Security, or Equity Security,
each as defined in this section; and
(3) Is made to a Small Business that is primarily engaged in Energy
Saving Activities. A Small Business that derived at least 50% of its
revenues during its most recently completed fiscal year from Energy
Saving Activities is presumed to be primarily engaged in such
activities. Alternatively, a Licensee licensed after September 30, 2008
may request a determination from SBA prior to the provision of
Financing as to whether a Small Business is primarily engaged in Energy
Saving Activities. SBA will consider the distribution of revenues,
employees and expenditures, intellectual property rights held, and
Energy Saving Activities described in a business plan presented to
investors as part of a formal solicitation in making its determination.
* * * * *
3. Amend Sec. 107.610 by revising the last sentence of the
introductory text and adding paragraph (f) to read as follows:

Sec. 107.610 Required certifications for Loans and Investments.

* * * Except for information and documentation prepared under
paragraph (f)(2) of this section, you must keep these documents in your
files and make them available to SBA upon request.
* * * * *
(f) For each Energy Saving Qualified Investment:
(1) If a pre-Financing determination of eligibility by SBA is not
required under the definition of Energy Saving Activities or Energy
Saving Qualified Investment:
(i) A certification by you, dated as of the closing date of the
Financing, as to the basis for the qualification of the Financing as an
Energy Saving Qualified Investment; and
(ii) Supporting documentation of the Energy Saving Activities
engaged in by

[[Page 2035]]

the concern and the percentage of its revenues derived from Energy
Saving Activities during its most recently completed fiscal year.
(2) If a pre-Financing determination of eligibility by SBA is
required under the definition of Energy Saving Activities or Energy
Saving Qualified Investment:
(i) If the concern did not derive at least 50% of its revenues
during its most recently completed fiscal year from Energy Saving
Activities, submit to SBA in writing all available information
concerning the factors considered under paragraph (3) of the definition
of ``Energy Saving Qualified Investment'' in Sec. 107.50, certified by
both you and the concern to be true and correct to the best of your
knowledge.
(ii) If you are requesting a determination by SBA that the
activities in which the concern is primarily engaged are Energy Saving
Activities, submit to SBA in writing a description of the product or
service being provided or developed, including all available
documentation of the energy savings produced or anticipated, addressing
the factors considered under paragraph (4) of the definition of
``Energy Saving Activities'' in Sec. 107.50 and certified by both you
and the concern to be true and correct to the best of your knowledge.
4. Amend Sec. 107.1150 by adding a sentence at the end of
paragraph (c) introductory text and adding paragraph (d) to read as
follows:

Sec. 107.1150 Maximum amount of Leverage for a Section 301(c)
Licensee.

* * * * *
(c) * * * Any investment that you use as a basis to seek additional
leverage under this paragraph (c) cannot also be used to seek
additional leverage under paragraph (d) of this section.
* * * * *
(d) Additional Leverage based on Energy Saving Qualified
Investments in Smaller Enterprises. (1) Subject to SBA's credit
policies, if you were licensed on or after October 1, 2008, you may
have outstanding Leverage in excess of the amounts permitted by
paragraphs (a) and (b) of this section in accordance with this
paragraph (d). Any investment that you use as a basis to seek
additional Leverage under this paragraph (d) cannot also be used to
seek additional Leverage under paragraph (c) of this section.
(2) To determine whether you may request a draw that would cause
you to have outstanding Leverage in excess of the amount determined
under paragraph (a) of this section:
(i) Determine the cost basis, as reported on your most recent
filing of SBA Form 468, of any Energy Saving Qualified Investments in a
Smaller Enterprise that individually do not exceed 20% of your
Regulatory Capital.
(ii) Calculate the amount that equals 33% of your Leverageable
Capital.
(iii) Subtract from your outstanding Leverage the lesser of
(d)(1)(i) or (d)(1)(ii).
(iv) If the amount calculated in paragraph (d)(1)(iii) is less than
the maximum Leverage determined under paragraph (a) of this section,
the difference between the two amounts equals your additional Leverage
availability.

Dated: January 6, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-486 Filed 1-11-11; 8:45 am]
BILLING CODE 8025-01-P