[Federal Register Volume 77, Number 76 (Thursday, April 19, 2012)]
[Rules and Regulations]
[Pages 23373-23380]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9454]
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Federal Register / Vol. 77, No. 76 / Thursday, April 19, 2012 / Rules
and Regulations
[[Page 23373]]
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: Final rule.
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SUMMARY: In this rule, the U.S. Small Business Administration (SBA)
sets forth defined terms for ``Energy Saving Qualified Investment'' and
``Energy Saving Activities'' for the Small Business Investment Company
(SBIC) Program. These definitions are established to implement 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 also implements 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. This final rule includes changes based on public comments
received on the proposed rule published in the Federal Register on
January 11, 2011. Generally, the changes allow a broader range of
potential investments to qualify as Energy Saving Qualified Investments
and reduce the need for SBICs to obtain pre-financing determinations of
eligibility from SBA.
DATES: This rule is effective April 19, 2012.
FOR FURTHER INFORMATION CONTACT: Carol Fendler, Office of Investment,
(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.
On January 11, 2011, SBA published a proposed rule to implement the
SBIC-related provisions of the Energy Act (76 FR 2029). SBA received
eleven sets of comments on the proposed rule, primarily falling into
three areas: (1) Definitions; (2) procedures and timing when SBA must
make a pre-financing determination of eligibility, including the
details of SBA's collaboration with the Department of Energy (DOE); and
(3) impact of the Energy Saving Debenture on SBIC program costs. SBA
discusses the comments in the following section-by-section analysis.
II. Section by Section Analysis
Section 107.50--Definitions. The Energy Act provides that Energy
Saving Debentures are to be issued at a discount with a five- or ten-
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 statutory provisions, SBA
proposed to add ``Energy Saving Qualified Investment'' and ``Energy
Saving Activities'' as defined terms in Sec. 107.50. SBA is finalizing
both definitions with modifications.
``Energy Saving Qualified Investment''
The proposed regulatory definition of Energy Saving Qualified
Investment had several key points. First, as required by 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'').
Four commenters suggested that SBA broaden the criteria under which
a Small Business is presumed to be ``primarily engaged'' in Energy
Saving Activities. In the proposed rule, the presumption applied only
to a Small Business that derived at least 50% of its revenues during
its most recently completed fiscal year from Energy Saving Activities.
The commenters' concern was that a Small Business would not be able to
satisfy a historical revenue-based test if it was either a start-up or
an established company expanding its business to include Energy Saving
Activities. While the proposed rule would have allowed SBA to make a
determination of eligibility in such cases, SBA agrees that a broader
presumption of eligibility would be an effective way to encourage
investment and reduce administrative burden. In considering how to
expand the presumption in the final rule, SBA favored a test that would
be simple to apply and would focus on prospective rather than
historical activity. In the final rule, SBA has retained the proposed
revenue-based presumption while adding a second presumption: a Small
Business is presumed to meet the ``primarily engaged'' test if it will
utilize 100% of the proceeds of a financing to engage in Energy Saving
Activities.
``Energy Saving Activities''
The proposed rule defined Energy Saving Activities largely by
referencing certain criteria established by the Department of Energy
and other Federal agencies to identify energy efficient products and
services and renewable energy sources. As one example, the
[[Page 23374]]
design or manufacturing of products that satisfy the criteria for use
of the Energy Star trademark label would qualify as an Energy Saving
Activity.
Paragraph (1) of the proposed definition provided that Energy
Saving Activities would include not only manufacturing or research and
development of energy-efficient final products, but also ``integral
product components, integral material, or related software''. One
commenter asked SBA to clarify that Small Businesses producing ``supply
chain'' components for products eligible for federal tax credits are
included in the definition of Energy Saving Activities. SBA intended
paragraph (1) of the proposed definition to include the activities of
``supply chain'' Small Businesses. SBA believes the proposed rule was
sufficiently clear on this point and does not require modification.
SBA received a comment to include under the definition of Energy
Saving Activities any Small Business activity that qualifies for either
the Residential Energy Tax Credit or an Advanced Research Project
Agency--Energy (ARPA-E) grant award. With the agreement of DOE, SBA has
added paragraph (1)(v) to the Energy Saving Activities definition to
include those activities, as well as any other technology
commercialization activity that has qualified for a DOE Small Business
Innovation Research (SBIR) or Small Business Technology Transfer (STTR)
award.
SBA received, but did not adopt, a comment suggesting that
paragraph (1)(iii) of the definition, which describes activities that
improve ``automobile'' efficiency, should be broadened to include other
means of transport such as trucks, buses, trains, and aircraft. This
provision of the proposed rule was based upon DOE's specific expertise
in energy savings activities related to passenger vehicles, whereas
other transportation alternatives would fall across the purview of
several Federal agencies. SBA expects that many activities aimed at
achieving results similar to those described in paragraph (1)(iii) for
forms of transportation other than automobiles would qualify as Energy
Saving Activities under paragraph (4) of the definition.
SBA received five comments suggesting the definition of Energy
Saving Activities be expanded to specifically include the biomass
preprocess of pyrolysis, which is one method of biomass conversion for
the ultimate production of renewable solid fuels. Based on consultation
with DOE, SBA did not adopt this suggestion, as each preprocess of
biomass is situational and specific and there are currently no approved
standards by which to evaluate all levels of biomass preprocesses and
conversion methods. With the many possible technological permutations,
SBA believes that potential SBIC investments involving pyrolysis or any
type of preprocessing of biomass should be evaluated on a case-by-case
basis under paragraph (4) of the definition.
SBA received one comment to expand the definition of Energy Saving
Activities to include ``earthquake disaster potential and pipeline
safety'' of both non-renewable and renewable energy sources. While SBA
agrees that these are important concerns, they are outside the scope of
activities contemplated by the Energy Act.
SBA received one comment to broaden the definition of Energy Saving
Activities ``* * * to include all forms of commercialization of
R[esearch] &D[evelopment], including `licensing' and `outsourcing' as
well as revenues generated by those activities.'' Paragraphs (1) and
(4) of the proposed definition already encompassed research and
development activities; the commenter's suggestion would also treat the
receipt of licensing fees, royalties, or similar payments as an Energy
Saving Activity if such payments were generated from the results of
previously conducted research and development that would have qualified
as Energy Saving Activities. SBA does not believe that the passive
receipt of payments is appropriate for inclusion in the definition.
Furthermore, if a Small Business generates revenues solely from
licensing or similar activities, it would be ineligible for SBIC
financing under existing Sec. 107.720(b), which prohibits the
financing of a passive business. It should be noted, however, that a
Small Business that outsources the manufacturing of its products may
still qualify for financing (and its activities may qualify as Energy
Saving Activities) if it is actively engaged in product design or
deployment.
Paragraph (1)(v) of the Energy Saving Activities definition in the
proposed rule (redesignated as paragraph (1)(vi) in the final rule)
included activities that meet the standards for receiving Energy
Credits as defined in Internal Revenue Code section 48, among which is
a credit related to qualified fuel cell power plants. In the final
rule, at the suggestion of DOE, SBA has added paragraph (1)(vii) to the
Energy Saving Activities definition, to clarify that the definition
includes the provision of highly efficient conversion systems for fuel
cells that can use renewable or non-renewable fuel.
SBA has also made non-substantive edits to improve the clarity of
paragraphs (1)(viii) and (2)(v) of the Energy Saving Activities
definition. Paragraph (1)(viii) concerns manufacturing or research and
development activities that improve electricity delivery efficiency by
supporting one or more defined smart grid functions; paragraph (2)(v)
concerns deployment of products, services or functionalities for the
same purpose.
Section 107.610--Required Certifications for Loans and Investments.
SBA received two comments on the certification requirements for Energy
Saving Qualified Investments in proposed Sec. 107.610(f), in
particular the requirements in paragraph (f)(2) applicable to
investments for which SBA must make a pre-financing determination of
eligibility. In such cases, the proposed rule would have required
materials submitted to SBA to be certified as true and correct by both
the Small Business and the SBIC to the best of their knowledge. The
commenters pointed out that an SBIC might not be in a position to make
the required certification at the date of submission because due
diligence on the prospective investment would probably still be in its
early stages. SBA agrees that this is a valid concern and has modified
the final rule so that only the Small Business must provide a
certification at the date of submission. As of the closing date of the
Financing all due diligence should be completed, and at that time the
SBIC would be required to certify that, to the best of its knowledge,
it has no reason to believe that the materials submitted to SBA are
incorrect.
As part of its review of the certification requirements in response
to the comments on the proposed rule, SBA noted that proposed paragraph
(f)(1), which concerns Energy Saving Qualified Investments that do not
require a pre-financing determination of eligibility by SBA, required a
certification by the SBIC but not by the concern receiving the
financing. Because not all information can be independently confirmed,
an SBIC must rely to some degree on the integrity of the information
that a concern provides. Therefore, in the final rule, Sec.
107.610(f)(1)(iv) adds a requirement under which a concern receiving
financing must certify, as true and correct to the best of its
knowledge, any information it provided to an SBIC in connection with
the determination that the concern was eligible to receive an Energy
Saving Qualified Investment.
[[Page 23375]]
As discussed earlier in this preamble, SBA has revised the
definition of Energy Saving Qualified Investment by adding a
presumption that a Small Business will be considered ``primarily
engaged'' in Energy Saving Activities if it intends to use all of the
proceeds of a proposed financing for such activities. In connection
with that revision, SBA has added post-investment requirements for
documentation of the actual use of proceeds in Sec. 107.610(f)(5).
Under these provisions, the Small Business must provide the SBIC with
documentation of the use of proceeds no later than six months after the
closing date of the financing; if some or all of the proceeds have not
yet been spent, further updates would be required at six-month
intervals. SBA expects, given the substantial investment amounts
typically involved, that an SBIC would monitor use of proceeds at least
this frequently in the ordinary course of business. The SBIC would be
responsible for reviewing the information submitted by the Small
Business and documenting that it had reasonably determined that the
financing proceeds were used appropriately to fund Energy Saving
Activities.
SBA has also slightly reorganized Sec. 107.610(f) for greater
clarity; in the final rule, Sec. 107.610(f)(2) includes only the
requirements for an SBIC seeking a determination from SBA that an
activity in which a concern is engaged is an Energy Saving Activity.
The requirements for an SBIC seeking a determination from SBA that a
concern is ``primarily engaged'' in Energy Saving Activities appear
separately in Sec. 107.610(f)(3). The requirement for certification by
the SBIC as of the closing date of the financing appears in Sec.
107.610(f)(4).
SBA also received three comments dealing more generally with the
process and timeframe for obtaining a pre-financing determination of
eligibility from SBA. Commenters suggested that SBA allow SBICs to
submit materials electronically and develop an expected timeline for
consideration for SBA to reach a decision in consultation with DOE.
SBA has and will continue to consult with DOE technical experts on
an as-needed basis when evaluating whether certain small business
concerns are primarily engaged in an energy saving activity (per
request of an SBIC as part of the pre-financing determination of
eligibility of use for the Energy Savings Debenture program). As
discussed in the ``Paperwork Reduction Act'' section of this preamble,
SBA will electronically collect information from an SBIC through the
``Financing Eligibility Statement for Usage of Energy Saving
Debenture''.
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. SBA received no comments on this provision and
is finalizing the section as proposed.
Other Comments. In addition to the comments received on specific
provisions of the proposed rule, SBA received four comments suggesting
that SBA report on various topics, including among others: Energy
Saving Debenture usage, number of Small Businesses financed, resulting
breakthroughs in technology, comparative studies quantifying energy
savings, and performance of Small Businesses financed. While SBA is
concerned about minimizing any increases in the reporting burden placed
on SBICs and Small Businesses, SBA recognizes a particular need to
monitor the performance of investments financed with the proceeds of
Energy Saving Debentures, because of their potential impact on fees
charged to all SBICs utilizing debenture leverage. SBA plans to ask
SBICs to identify each financing that is an Energy Saving Qualified
Investment through a certification made at the time of such financing
and through quarterly and annual financial reports to SBA. SBICs will
also be asked to indicate whether an Energy Saving Qualified Investment
was financed with the proceeds of an Energy Saving Debenture or a
standard debenture. With these identifiers, SBA will be able to track
the performance of Energy Saving Qualified Investments and the SBICs
that have made them. SBA expects to make the information collected
available to the public in aggregated form.
Energy Saving Debenture
As discussed in the preamble to the proposed rule, section 1205(b)
of the Energy Act provided for SBA leverage in the form of an ``energy
saving debenture'', which 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 licensed after September 30, 2008, that 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. However, SBA did receive a number of
comments concerning the Energy Saving Debenture.
SBA received two comments stating that SBA should clarify how an
SBIC will be able to calculate the net proceeds it can expect to
receive when it issues an Energy Saving Debenture. The same two
commenters also asked whether the interest rate on an Energy Saving
Debenture could change after issuance if SBA were to include the
debenture in a pool of securities offered for public or private sale,
and if so whether the change might affect the funds available to the
SBIC.
As discussed elsewhere in this preamble, the cash received by an
SBIC issuing an Energy Saving Debenture would be the face value of the
debenture discounted by the present value of the interest and annual
Charge for the five-year discount period. SBA currently maintains a
calculator that an SBIC can use to estimate the net proceeds of an LMI
debenture, which has the same structure as the Energy Saving Debenture.
The LMI calculator can be accessed through http://www.sba.gov/content/lmi-debenture-calculator.
SBA does not anticipate that Energy Saving Debentures will be
pooled. SBICs can expect the interest rate on such debentures to remain
fixed for their entire term.
SBA received two comments stating that SBICs planning to use Energy
Saving Debentures must be able to understand how SBA intends to
apportion availability. Beginning in fiscal year 2012, SBA expects to
hold annual Energy Saving Debenture allocations on a semi-annual basis,
authorizing up to half of the overall annual allocation amount in the
first allocation period and the remainder in the second period. SBA
will limit the maximum initial Energy Saving Debenture allocation for
an individual
[[Page 23376]]
SBIC to an amount equal to the SBIC's Regulatory Capital (i.e., one
tier of leverage) in any fiscal year. If aggregate demand at one tier
of leverage is greater than the amount available, SBA will scale back
SBICs' leverage requests as necessary. An SBIC that received an
allocation of Energy Saving Debenture leverage in the first allocation
period may seek an additional allocation in the second period, subject
to availability.
Finally, SBA received two comments regarding the impact of the
Energy Saving Debenture on program costs; these comments are discussed
in the section of this preamble concerning compliance with Executive
Order 12866.
Electronic Access to Criteria for Evaluation of ``Energy Saving
Activities''
As discussed in the preamble to the proposed rule, SBA intends to
link its Investment Division Web site (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 repeated here for the
convenience of the reader:
1. Energy Star
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
III. Justification for Immediate Effective Date
The Administrative Procedure Act (APA), 5 U.S.C. 553(d)(3),
requires that ``publication or service of a substantive rule shall be
made not less than 30 days before its effective date, except * * * as
otherwise provided by the agency for good cause found and published
with the rule.''
The purpose of this provision is to provide interested and affected
members of the public sufficient time to adjust their behavior before
the rule takes effect. In the case of this rulemaking, however, there
should be no need for any member of the public, including any SBIC, to
make any changes in order to prepare for the rule taking effect. This
rule implements changes to the SBIC program to encourage financings in
Energy Saving Qualified Investments, which are expected to contribute
to the important goal of reducing U.S. dependence on non-renewable
fuels. Any further delay in making leverage available to SBICs in the
form of Energy Saving Debentures will only hold back the potential
benefits of investment in small business engaged in Energy Saving
Activities. SBA therefore finds that there is good cause for making
this rule effective immediately instead of observing the 30-day period
between publication and effective date.
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
OMB has determined that this rule is a ``significant'' regulatory
action under Executive Order 12866. In the proposed rule, SBA set forth
its initial regulatory impact analysis, which addressed the following:
Necessity of the regulation; alternative approaches to the proposed
rule; and the potential benefits and costs of the regulation. SBA
received comments which addressed both alternative approaches to and
potential costs of the regulation. Those comments are discussed in the
final Regulatory Impact Analysis set forth below:
1. Necessity of Regulation
This regulatory action implements 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 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
[[Page 23377]]
a specific quantitative standard or an evaluation based on total facts
and circumstances. For simplicity, the proposed rule presumed 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. As a result of comments received, SBA supplemented
this historical test with an alternative, prospective test; in the
final rule, a Small Business that will use 100% of the financing
proceeds for Energy Saving Activities will also be presumed to be
``primarily engaged'' in such activities. SBA believes this change will
encourage SBICs to make Energy Saving Qualified Investments by reducing
the associated administrative burden. As in the proposed rule, an SBIC
may also ask SBA to determine whether a concern is ``primarily
engaged'' in Energy Saving Activities based on an evaluation of various
factors, including ``the distribution of revenues, employees and
expenditures, intellectual property rights held, and business plans
presented to investors as part of a formal solicitation''.
3. Potential Benefits and Costs
As stated in the proposed rule, SBA initially estimated demand for
Energy Saving Debentures at approximately 5 percent of the overall SBIC
debenture program. This estimate was based on SBA's analysis of SBICs'
usage of the ``low and moderate income'' (LMI) debenture, which has the
same structure as the Energy Saving Debenture, and on venture capital
industry data for ``Cleantech'' investments, which SBA believes are
fairly representative of energy saving investments. SBA estimated that
level of demand would result in an increase to the annual fee of 14.3
basis points versus a formulation with no Energy Saving Debentures.
When calculating the SBA Fiscal Year 2012 budget, SBA found that the
same level of demand would increase the annual fee for SBIC licensees
by 15.5 basis points versus a formulation with no Energy Saving
Debentures. This increase reflects an overall increase in the size of
the SBIC program while taking into account the additional risk
associated with SBIC equity investments contemplated in the usage of
the Energy Saving Debenture.
SBA received two comments stating that Energy Saving Debentures
should not be combined with standard debentures when calculating the
annual fee charged to all debenture users. The commenters expressed
concern that all SBIC debenture issuers would be required to subsidize
the higher-risk Energy Saving Debenture, including those SBICs whose
access to the Energy Saving Debenture is prohibited because they were
licensed before October 1, 2008.
SBA understands the commenters' concern about spreading the costs
of the Energy Saving Debenture across the entire debenture program. In
order to limit the impact of fee increases, SBA has decided to cap the
amount of Energy Saving Debentures available in a given fiscal year at
5 percent of the overall SBIC program debenture program level for the
year, even if demand proves to be higher. However, SBA does not believe
it is feasible to accommodate the commenters' request to separate the
Energy Saving Debenture from the standard debenture. On a stand-alone
basis, the annual fee for the Energy Saving Debenture would exceed the
statutory maximum of 1.38%, meaning that SBA would be unable to
implement the statutory provisions of the Energy Act. SBA will review
the demand for and performance of the Energy Saving Debenture on an
annual basis to determine whether the modeling assumptions underlying
this Regulatory Impact Analysis should be changed.
Executive Order 12988
This action meets applicable standards set forth in sections 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
For the purposes of Executive Order 13132, SBA has determined that
this final rule will not have substantial, direct effects on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Therefore, for the purposes of Executive
Order 13132, Federalism, SBA has determined that this final 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 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 (an existing information
collection approved under OMB Control Number 3245-0078). The
descriptions of respondents and the titles and purpose of the
information collections 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.
A. ``Primarily Engaged'' and ``Energy Saving Activity'' Determinations
Title: Financing Eligibility Statement for Usage of Energy Saving
Debentures, SBA Form 2428.
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 Sec. 107.610(f)(2)
and/or (f)(3) of the rule: (1) Whether a particular activity in which a
Small Business is engaged is an Energy Saving Activity, and (2) whether
a Small Business is ``primarily engaged'' in Energy Saving Activities.
The Small Business must provide supporting evidence of the Small
Business's eligibility based on the factors listed in the proposed
rule. SBA received no comments specifically related to the proposed
information collection. However, as a result of two comments received
on the proposed certification requirement in Sec. 107.610(f), SBA has
eliminated that requirement as it would have related to the SBIC. Only
the Small Business providing the information must certify that the
information is true and correct.
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. This final 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. SBA will use the submitted
information to make those determinations.
Description of Respondents: SBICs will submit this form to obtain a
[[Page 23378]]
determination from SBA as to whether a proposed financing is an Energy
Saving Qualified Investment. There are approximately 294 active SBICs;
only about 17% of these are debenture SBICs that 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 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. 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 has revised 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).
This revised form was approved by OMB on March 16, 2011.
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. In this rule, 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 required to submit SBA
Form 1031 within 30 days after closing an investment. The current
estimate of 2,800 responses per year is not affected by this rule. SBA
has added one 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 $7.00
per response (based on $35.00 per hour). The total estimated burden is
560 hours per annum at an aggregate cost of $19,600.
The recordkeeping requirements under the final 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% of its revenues from the sales of these
products or services, or, that the company will utilize 100% of the
proceeds from the financing for Energy Saving Activities; 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
(RFA) (5 U.S.C. 601-612) requires the agency to prepare an initial
regulatory flexibility analysis (IRFA) which describes 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 final rule affects all SBICs issuing
debentures, of which there are approximately 160, most of which are
small entities. Therefore, SBA has determined that this 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
15.5 basis points during fiscal year 2012; however, the fee would
continue to remain well below the statutorily set maximum fee.
Accordingly, the Administrator of the SBA hereby certifies that this
rule will not have a significant impact on a substantial number of
small entities.
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 amends part 107 of
title 13 of the Code of Federal Regulations as follows:
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
0
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. 106-554, 114 Stat. 2763; and Pub. L. 111-5,
123 Stat. 115.
0
2. Amend Sec. 107.50 by adding in alphabetical order definitions of
[[Page 23379]]
``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 or 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 consumption of non-
renewable fuels through the use of advanced batteries, power
electronics, or electric motors; advanced combustion engine technology;
alternative fuels; 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, heat recovery steam generators, or more
efficient use of water recapture, purification and reuse for industrial
application;
(v) Advances commercialization of technologies developed by
recipients of awards from the Department of Energy under the Advanced
Research Projects Agency--Energy, Small Business Innovation Research,
or Small Business Technology Transfer programs;
(vi) 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;
(vii) Reduces the consumption of non-renewable energy for electric
power generation as described in Internal Revenue Code Section
48(c)(1)(A) by providing highly efficient energy conversion systems
that can use renewable or non-renewable fuel through fuel cells; or
(viii) Improves electricity delivery efficiency by supporting one
or more of the smart grid functions as identified in 42 U.S.C.
17386(d), by means of a product, service, or functionality that serves
one or more of the following smart grid operational domains: Equipment
manufacturing, customer systems, advanced metering infrastructure,
electric distribution systems, electric transmission systems, storage
systems, and 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
Residential 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 one or more of the smart
grid functions as identified in 42 U.S.C. 17386(d), and that serves one
or more of the following smart grid operational domains: Equipment
manufacturing, customer systems, advanced metering infrastructure,
electric distribution systems, electric transmission systems, or grid
cyber security.
(3) Auditing 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) above;
(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; and
(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;
(3) Is made to a Small Business that is primarily engaged in Energy
Saving Activities. A Licensee must obtain 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. However, a Small Business is presumed to
be primarily engaged in Energy Saving Activities, and no pre-Financing
determination by SBA is required, if:
(i) The Small Business derived at least 50% of its revenues during
its most recently completed fiscal year from Energy Saving Activities;
or
(ii) The Small Business will utilize 100% of the Financing proceeds
received from a Licensee to engage in Energy Saving Activities.
* * * * *
0
3. Amend Sec. 107.610 by revising the last sentence of the
introductory text and adding paragraph (f) to read as follows:
[[Page 23380]]
Sec. 107.610 Required certifications for Loans and Investments.
* * * Except for information and documentation prepared under
paragraphs (f)(2) and (3) 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;
(ii) Supporting documentation of the Energy Saving Activities
engaged in by the concern;
(iii) Supporting documentation of either the percentage of its
revenues derived from Energy Saving Activities during the concern's
most recently completed fiscal year, which must be at least 50 percent,
or the concern's intended use of the Financing proceeds, all of which
must be used for Energy Saving Activities; and
(iv) A certification by the concern, dated as of the closing date
of the Financing, that any information it provided to you in connection
with this paragraph (f)(1) is true and correct to the best of its
knowledge.
(2) If, prior to providing Financing, you must obtain a
determination from SBA that the activities in which a concern is
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 the concern to be true and correct to the best of its
knowledge.
(3) If, prior to providing Financing, you must obtain a
determination from SBA that the concern is ``primarily engaged'' in
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 the concern to be true and correct to the best of
its knowledge.
(4) For each Financing closed after you obtain a determination from
SBA under paragraph (f)(2) or (3) of this section, a certification by
you, dated as of the closing date of the Financing, that to the best of
your knowledge, you have no reason to believe that the materials
submitted are incorrect.
(5) For each Financing closed based on supporting documentation of
the concern's intended use of proceeds for Energy Saving Activities
under paragraph (f)(1)(iii) of this section:
(i) Documentation by the concern, dated no later than six months
after the closing of the Financing, of the proceeds used to date for
Energy Saving Activities, with further updates provided at six month
intervals until 100 percent of the Financing proceeds have been
accounted for; and
(ii) Documentation that you have reviewed the information submitted
by the concern under paragraph (f)(5)(i) of this section and have
reasonably determined that 100 percent of the Financing proceeds were
used for Energy Saving Activities.
0
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)(2)(i) or (ii).
(iv) If the amount calculated in paragraph (d)(2)(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: February 9, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-9454 Filed 4-18-12; 8:45 am]
BILLING CODE 8025-01-P