[Federal Register Volume 81, Number 22 (Wednesday, February 3, 2016)]
[Proposed Rules]
[Pages 5666-5676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01986]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245-AG66
Small Business Investment Company Program--Impact SBICs
AGENCY: U.S. Small Business Administration.
ACTION: Notice of proposed rulemaking.
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SUMMARY: In this proposed rule, the U.S. Small Business Administration
(SBA) is defining a new class of small business investment companies
(SBICs) that will seek to generate positive and measurable social
impact in addition to financial return. With the creation of this class
of ``Impact SBICs,'' SBA is seeking to expand the pool of investment
capital available primarily to underserved communities and innovative
sectors as well as support the development of America's growing impact
investing industry. This proposed rule sets forth regulations
applicable to Impact SBICs with respect to licensing, leverage
eligibility, fees, reporting and compliance requirements.
DATES: Comments on the proposed rule must be received on or before
March 4, 2016.
ADDRESSES: You may submit comments, identified by RIN 3245-AG66, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail, Hand Delivery/Courier: Mark Walsh, Associate Administrator
for the Office of Investment and Innovation, 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 Nate T. Yohannes, Office of Investment and Innovation,
409 Third Street SW., Washington, DC 20416. Highlight the information
that you consider to be CBI
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and explain why you believe this information should be held
confidential. SBA will review the information and make the final
determination of whether or not it will publish the information.
FOR FURTHER INFORMATION CONTACT: Nate T. Yohannes, Office of Investment
and Innovation, (202) 205-6714.
SUPPLEMENTARY INFORMATION:
I. Background Information
``Impact investing'' is a term used to describe an investment
approach that combines the pursuit of financial return with the goal of
generating measurable social, environmental or economic impact. The
term ``social impact investing'' is often used synonymously with the
term impact investing, and refers, collectively, to all types of impact
investing, including social, environmental and economic. Impact
investors are active throughout the capital markets, and though their
strategies may vary, according to the Global Impact Investing Network,
a non-profit organization dedicated to increasing the scale and
effectiveness of impact investing, impact investors share three
defining traits. First, impact investors invest with the explicit
intention of generating a positive social impact. This is in contrast
to other types of investors who attempt to avoid generating negative
social impacts or who are entirely indifferent to the social outcomes
resulting from their investments. Second, though their return
requirements vary, impact investors are not grant providers and always
expect a return on their invested capital. Finally, impact investors
share a commitment to measure the effect of their investments on the
employees, customers and communities of the companies in which they
invest. See, The Global Impact Investing Network, About Impact
Investing, http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html.
Impact investing currently constitutes a small segment of global
investment activity. Each year, J.P. Morgan and the Global Impact
Investing Network (``GIIN'') publish an annual survey of leading impact
investors. In their May 2015 findings, available at http://www.thegiin.org/cgi-bin/iowa/resources/research/662.html, 146 survey
respondents reported managing a collective total of $60 billion in
impact investments. Compared with the $64 trillion in global assets
under management, a figure drawn from PricewaterhouseCoopers' (``PwC'')
2014 report Asset Management 2020: A Brave New World, available at
http://www.pwc.com/gx/en/asset-management/publications/asset-management-2020-a-brave-new-world.jhtml, impact investments comprise a
small fraction of invested capital worldwide.
However, the size of the impact industry belies both its growth
potential and that of the broader sustainable finance sector. This is a
sector focused on ``creating economic and social value through
financial models, products and markets that are sustainable over
time.'' See, Center for Responsible Business, Haas School of Business,
University of California Berkeley, Sustainable Finance, http://responsiblebusiness.haas.berkeley.edu/programs/sustainablefinance.html.
The Forum for Sustainable and Responsible Investment estimates that
U.S.-domiciled assets managed using sustainable, responsible or impact
investing strategies increased by a compound annual rate of 33% between
2012 and 2014. If that trend continues, sustainable finance will
continue to outpace overall market growth. According to the 2014 PwC
report, global AUM will grow at a compound annual growth rate of just
nearly 6 percent in coming years.
SBA's formal efforts in the impact investing space began on April
7, 2011, when it announced the launch of the SBIC program's Impact
Investing Initiative (the ``Initiative''), building upon SBA's belief
that targeting capital investments into segments of the U.S. economy
where capital formation gaps exist, such as small businesses located in
low-to-moderate income (``LMI'') and other underserved areas, has the
potential to effect meaningful and sustained economic development
impact in those areas. The Initiative made available $1 billion in
debenture leverage, over the course of 5 years, to SBICs that committed
to deploy at least 50 percent of their total invested capital in
``impact investments.'' Under the Initiative, investments in small
businesses located in LMI areas, economically-distressed areas and
rural areas generally qualified as impact investments, as did
investments in small businesses active in the education and clean
energy sectors.
Since 2011, SBA has made several changes to the Initiative in an
effort to enhance its effectiveness. Most recently, in September 2014,
SBA expanded the scope of the Initiative and renamed it the ``Impact
Investment Fund'' to reflect SBA's commitment to extend its impact
investing efforts beyond the Initiative's initial 5-year term.
This rule follows from that commitment and seeks to recognize,
within the SBIC program's regulations, the important role impact
investors can play in helping the SBIC program achieve its goal of
providing capital and long-term loan funds for the growth, expansion
and modernization of small businesses.
II. Section by Section Analysis
Sec. 107.50--Definitions. SBA proposes to add the defined terms
``Fund-Identified Impact Investment,'' ``Impact Investment,'' ``Impact
SBIC'' and ``SBA-Identified Impact Investment.''
``Fund-Identified Impact Investment,'' ``Impact Investment,'' and
``SBA-Identified Impact Investment''
The definition of ``Impact Investment'' included in this proposed
rule consists of two categories, each of which is also a defined term
in the proposed rule: (1) SBA-Identified Impact Investments, which are
investments in geographic areas and sectors of national priority that
SBA designates in notices published from time to time on SBA's SBIC
program Web site (www.sba.gov/inv); and (2) Fund-Identified Impact
Investments, which are investments that meet an SBIC's own definition
of an ``Impact Investment'' and which an SBIC applicant must propose
and SBA must approve during the licensing process, as described in
proposed Sec. 107.331--Evaluation and selection of Impact SBICs.
``Impact SBIC''
The regulatory definition of an Impact SBIC has several key points.
First, an Impact SBIC must be organized as a limited partnership.
Although the current regulations permit other forms of organization,
the vast majority of existing SBICs are limited partnerships. SBA
believes that having a degree of uniformity in organizational structure
will facilitate a more timely and efficient licensing process for
Impact SBICs.
Second, the ``Impact SBIC'' designation would apply only to SBICs
licensed under this rule as well as those licensees designated as
Impact SBICs after the launch of the Initiative in 2011 and before the
effective date of this rule.
Third, an Impact SBIC must invest at least 50 percent of its
financing dollars in small business concerns that meet the criteria set
forth in the definition of Impact Investment in this rule (referred to
hereafter as the ``50 percent requirement''). SBA believes the 50
percent threshold indicates a significant focus, while still giving
Impact SBICs flexibility in developing their portfolios. Per the
proposed rule, follow-on investments in a portfolio company that
qualified as an ``Impact Investment'' at the time of the SBIC's initial
financing
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would count towards the 50 percent requirement.
An Impact SBIC may satisfy the 50 percent requirement exclusively
through SBA-Identified Impact Investments or Fund-Identified Impact
Investments, but may also satisfy the 50 percent requirement through a
combination of these investments. Per proposed Sec. 107.331, SBA must
approve all Fund-Identified Impact Investment definitions and
strategies during the licensing process, regardless of whether such
investments will be used to meet all or only a portion of the 50
percent requirement.
Sec. 107.301--Impact SBIC licensing fee discount. This section
proposes a 60% reduction in the licensing fees Impact SBIC applicants
must pay under Sec. 107.300. The discount is intended to incentivize
the formation of Impact SBICs. Despite the fee reduction, SBA will
devote neither less time nor fewer resources to the assessment of
Impact SBIC applications than it devotes to the assessment of standard
SBIC applications.
However, Sec. 107.301 would provide that in the event an Impact
SBIC applicant were to ultimately be approved for an SBIC license as
anything other than an Impact SBIC, SBA would be entitled to recover
the value of any discounts the applicant received prior to licensing.
This provision was added to cover cases in which an applicant decides
mid-process, with SBA permission, to seek a standard SBIC license
instead of an Impact SBIC license. These types of changes sometimes
occur during the fundraising process as fund managers adjust to the
expectations of private capital providers. Although licensees
designated as Impact SBICs under the Initiative would be eligible for
fee discounts as of the effective date of this rule, SBA will not
return any fees these licensees paid prior to that date.
Finally, any Impact SBIC, whether licensed under the Initiative or
under this rule, may submit a written request to SBA seeking to convert
to a standard SBIC license. SBA would generally expect to grant such a
request, provided that SBA recovers the value of any discounts the
licensee received.
Sec. 107.310--When and how to apply for licensing as an Early
Stage SBIC. America's impact investment industry includes fund managers
focused on making equity investments in early stage companies. In order
to accommodate these fund managers, proposed Sec. 107.310 permits
applicants to apply simultaneously for an Impact SBIC and Early Stage
SBIC license. Further, such dual applicants will be permitted to submit
their application at any time and will not be subject to the submission
deadlines specified in Early Stage Notices SBA may publish in the
Federal Register. However, those applicants licensed as both Early
Stage and Impact SBICs will be subject to every regulation pertaining
to either type of licensee.
Sec. 107.330--Evaluation and selection of Impact SBIC license
applicants making SBA-Identified Impact Investments. Impact SBIC
license applicants proposing to meet their impact investment
requirements exclusively through SBA-Identified Impact Investments will
be evaluated and selected based on the standards outlined in Sec.
107.305, which are used to assess all SBIC applicants. In addition, SBA
will evaluate the managers' skills and experience in building and
managing a portfolio of impact investments. However, an applicant's
potential to generate social, environmental or economic impact will be
considered relevant only to its eligibility to participate in the SBIC
program as an Impact SBIC and will not serve as a substitute for any of
the factors cited in Sec. 107.305.
Sec. 107.331--Evaluation and selection of Impact SBIC license
applicants making Fund-Identified Impact Investments.
Under proposed Sec. 107.331, Impact SBIC license applicants
seeking approval to make Fund-Identified Impact Investments will be
subject first and foremost to the evaluation process and qualification
standards outlined in Sec. 107.305, which are used to assess all SBIC
applicants. An applicant's potential to generate social, environmental
or economic impact will be considered relevant only to its eligibility
to participate in the SBIC program as an Impact SBIC and will not serve
as a substitute for any of the factors cited in Sec. 107.305.
Using SBA Form 2181 (Applicant Narrative), applicants will be
expected to provide definition(s) of the Fund-Identified Impact
Investments they intend to make for the purposes of complying with the
requirement that 50 percent of the total dollar amount of their
financings be deployed in Impact Investments. Applicants will also be
required to describe, using qualitative and quantitative analysis, the
expected social, environmental or economic impact of their proposed
Fund-Identified Impact Investments.
SBA will review any Fund-Identified Impact Investment
definition(s), along with an applicant's overall investment strategy,
in order to determine whether the proposed definitions and strategy are
consistent with SBA's mission, as well as the letter and spirit of the
SBIC program's regulations. For instance, a Fund-Identified Impact
Investment definition that targets financial intermediaries would not
be approved if SBA determines it risks running afoul of the regulatory
prohibition on financing ``relenders'' or ``reinvestors.''
SBA will next determine whether the applicant's proposed Fund-
Identified Impact Investments are likely to yield a positive impact
when all the potential social, environmental and economic effects of
the investments are considered. SBA's evaluation may consider factors
such as whether the strategy will include investments in Portfolio
Concerns that increase services to low income communities, engage in
environmentally sustainable business practices or manufacture
environmentally sustainable products, or that operate in industries of
national priority other than in the sectors identified by SBA as an
SBA-Identified Impact Investment. The Agency acknowledges that reaching
a definitive and objective conclusion regarding a strategy's overall
impact may be challenging. Impact is often described in qualitative,
rather than quantitative terms. In anticipation of that challenge, the
proposed rule has been drafted to mitigate the risk that SBA would be
put in the position of having to accept or reject a proposed definition
based solely on a value judgment.
Applicants will be expected to make reasonable arguments, supported
by convincing evidence, that their proposed definitions can meet the
impact requirements of this rule. In this regard, the process SBA will
use to evaluate proposed Fund-Identified Impact Investment definitions
differs little from the process used to assess fund manager
qualifications. SBA will use its standard due diligence tools,
including principal interviews and reference calls, to test the
strength of an applicant's proposal and the validity of the evidence
presented therein. Just as a standard SBIC applicant might be rejected
for making unsubstantiated track record claims, so too could a Fund-
Identified Impact Investment definition be turned down if diligence
suggests it lacks credibility.
SBA takes a nuanced approach to its licensing decisions and does
not rely solely on easy-to-measure financial metrics. An applicant's
past financial performance is always carefully weighed against less
tangible factors such as the level of cohesion among the proposed
management team members; the alignment of incentives between the fund
manager and private investors; and
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the quality of the proposed investment strategy, among other variables.
SBA expects to receive few, if any, Fund-Identified Impact
Investment definition proposals that are intended solely to obtain the
fee reduction benefits of an Impact SBIC license. The fee reductions in
the proposed rule are not material compared to the amount of capital
raised by an SBIC applicant, and Impact SBIC licensees are subject to
enhanced regulatory reporting requirements. Moreover, fund managers
that have expressed interest in SBA's impact investing efforts have,
to-date, all proposed strategies with clear benefits and no obvious
risk of yielding negative effects. The following are examples of the
types of impact investments being made in the market today and which
SBA anticipates Impact SBICs applying under this section may target:
Healthcare companies that offer affordable, high-quality
services to low-income consumers
Education companies that provide evidence-based, supplemental
learning services designed to enhance student achievement
Energy efficiency and sustainability consulting firms
Agricultural businesses that employ humane and environmentally
sustainable farming practices
Businesses that collect and reprocess industrial waste for
alternative use
Alternative credit scoring firms that enhance access to
financial services for low-income consumers
In addition to approving an applicant's proposed definition of a
Fund-Identified Impact Investment, SBA must be satisfied with the
applicant's impact measurement and assessment plan, which an applicant
must submit in accordance with proposed Sec. 107.331(b). Under this
section, the applicant must outline its plan to comply with proposed
Sec. 107.665, which requires Impact SBICs making Fund-Identified
Impact Investments to obtain an assessment of their impact (1) from an
independent, third-party assessment provider, (2) using an SBA-approved
impact measurement standard, a list of which SBA will publish on its
Web site from time to time, and (3) using an assessment process that is
both transparent and comprehensive.
Impact measurement is a defining characteristic of impact
investors. Without it, impact fund managers and their capital providers
face a much bigger challenge in determining whether their goal of
generating positive social impact has been met. Unfortunately,
determining whether a fund has reached its impact target is far more
complicated than evaluating its financial performance. The process
requires establishing a standard by which the targeted outcomes will be
measured, then crafting an evaluation framework capable of weighing the
resulting measurements to yield an overall assessment of impact.
With regard to measurement, the proposed rule would require Impact
SBICs licensed under this section to measure their impact using one of
several pre-approved measurement standards. At the outset, SBA intends
to approve the use of the three sets of standards listed below,
although SBA may approve additional standards as they become more
widely adopted by the impact investing industry:
--The Impact Reporting and Investment Standards (``IRIS''), an impact
evaluation framework created by GIIN;
--The G4 Sustainability Reporting Standards, produced by the Global
Reporting Initiative (``GRI''); and
--The standards produced and maintained by the Sustainability
Accounting Standards Board (``SASB'').
The purpose of these standards is to establish a common language
companies and investors can use to report the positive and negative
impacts that result from their activities. These standards are part of
a broader industry effort to bring to impact measurement what the
Generally Accepted Accounting Standards (``GAAP'') provide for
financial reporting. When comparing the GAAP-compliant financial
statements of two different companies, an investor can be confident the
same set of rules was used to report items such as revenue, inventory
and operating cash flow in both statements. GAAP does not provide
guidance on how to interpret the data, but it does ensure consistency
in reporting.
Impact measurement standards were developed to offer the same
proposition. Consider the simple example of two Impact SBICs, both of
which are pursuing similar strategies to create high-wage jobs in a
particular region. In the absence of a measurement standard, the tasks
of defining a ``job'' and calculating a ``wage'' are left to the funds
themselves, which leaves room for methodological discrepancies. One
fund may include the value of benefits in its calculation of wages,
while the other restricts its definition to direct cash payments. An
investor trying to determine which fund has been more effective in
reaching its impact goal would have difficulty in this scenario.
Measurement standards help reduce these definitional challenges. Were
the two funds to use IRIS metrics, for instance, they could both rely
on the IRIS definition of a ``full-time'' or ``permanent'' employee and
use the method IRIS has established for calculating the wages of those
employees.
The impact investing industry has yet to coalesce around a single
set of measurement standards and may never do so. However, the three
standards SBA intends to approve were selected, in part, because of
their prominence in the industry and the flexibility they provide for
different types of impact strategies. Of the three, IRIS is likely the
best-known and most widely used set of standards. GRI has a focus on
sustainability, which may provide environmentally focused Impact SBICs
additional flexibility. Finally, SASB's standards are designed
primarily for public corporations and may facilitate reporting for
Impact SBICs with portfolio companies that are already public or intend
to go public.
With clear options available for the measurement of impact, Impact
SBICs can turn to the second component of SBA's proposed evaluation
system, which deals with the assessment of impact. As noted above,
impact measurement standards only provide guidance on how to report
impact data. They are silent on how to interpret that data. Returning
to the example above, the two fund managers may report IRIS-compliant
employee and wage data to their investors, but an assessment framework
is needed to determine what constitutes a ``strong'' level of
employment growth, what threshold determines a wage is ``high'', or how
to weigh the growth in wages against the growth in employment when
evaluating the funds' overall impact.
As with financial performance, each individual investor is
empowered to reach his or her own conclusions about what constitutes
``success'' with regard to impact. While numbers, such as an internal
rate of return, cannot be easily manipulated by a fund manager,
investors could receive biased reports on impact returns if a fund
manager were to selectively choose metrics and the weighting associated
with those metrics. The use of independent and transparent assessment
systems not only helps reduce the risk of selective reporting, but it
also promotes the use of best practices across the industry.
For these reasons, SBA considers the assessment component of its
proposed impact evaluation system critical to the credibility of the
program. Impact SBIC
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applicants seeking a license under this section of the proposed rule
must identify the assessment providers they expect to use to fulfill
their reporting requirements and describe the systems those providers
employ. Further, the applicant must provide evidence that each
assessment provider is independent, that the criteria and weightings
the providers use are publicly available and that each provider is
capable of conducting a comprehensive assessment of the Impact SBIC's
impact. A comprehensive assessment is one capable of evaluating the
social, environmental and economic impacts of the applicant's proposed
strategy.
One assessment system SBA has already approved for use under its
current Impact Investment Fund policy is the Global Impact Investment
Ratings System (``GIIRS''), a product of the non-profit organization B
Lab, which uses a standard set of IRIS impact metrics. GIIRS was
created to bring to the impact investment industry the kind of
consistent and comparable rating reports traditional finance has had
for decades in the form of mutual fund ratings or credit ratings. With
each investment fund they rate, B Lab staff collects a standard set of
IRIS impact metrics from each company in the portfolio. That data is
then run through the GIIRS assessment criteria, each of which is
assigned a specific weight. The end result is a ratings report with an
overall impact score and scores for each individual sub-component of
the overall assessment. Since each rating uses the same set of core
metrics, assessment criteria and weightings, one investment fund's
score can be compared to that of another.
With each new Impact SBIC licensed under this section, SBA will
build a portfolio of investment strategies and impact reports that it
hopes will help guide future applicants to the program. Both to
facilitate that learning process and to ensure program transparency,
Section 107.331(d) allows the Agency to publish information about the
investment strategies and assessment systems the Impact SBICs licensed
under this section have employed.
However, the provisions of paragraph (d) will not release SBA from
its responsibility to protect the confidential business information of
its licensees. SBA intends only to publish general descriptions of the
investment strategies it has approved and will not reveal any details
that might compromise an applicant or licensee's confidential business
information. Similarly, the Agency will make public the names of
assessment providers it has approved and descriptions of the assessment
systems those providers use, but will not reveal the results of any
individual impact assessment.
Sec. 107.502--Representations to the public. SBA is proposing to
add new paragraphs (b) and (c) to this section, which would require
Impact SBIC license applicants and Impact SBICs to identify themselves
as impact investment funds when marketing their funds to prospective
investors. This requirement is meant to ensure that investors are made
aware that the Impact SBIC applicant intends to participate, or that a
licensed Impact SBIC is participating, in the SBIC program as an Impact
SBIC. Requiring Impact SBICs to identify themselves as such will also
help deter applicants whose sole interest in obtaining an Impact SBIC
license is to benefit from the associated fee discounts.
Sec. 107.610--Required certifications for Loans and Investments.
Proposed new paragraph (g) would provide for new certifications by
Impact SBICs and the small businesses in which they make Impact
Investments, certifying the basis for which each investment qualifies
as an Impact Investment. As with most of the existing certifications in
this section, the Impact certifications would be retained in the SBIC's
files and be available for SBA's review.
The paragraph would require different levels of certification
depending on the type of Impact Investment. SBA-Identified Impact
Investments will be based on certifications from both the Impact SBIC
and its portfolio concerns; Fund-Identified Impact Investments will
only require the certification of the Impact SBIC. Since SBA-Identified
Impact Investments will be based on definitions in federal regulation
and will generally depend on specific statistics collected at the
company level, it is reasonable to expect the leaders of those
businesses to certify the accuracy of their information. By contrast,
Fund-Identified Impact Investments may be based on sector data or other
information outside the control of the small business being financed.
Therefore, for Impact SBICs making Fund-Identified Impact Investments,
the regulation places the full certification burden on the Impact SBIC.
As noted above, per the proposed rule, follow-on financings in
Impact Investments would count towards the 50 percent requirement, and
therefore, SBA will not require Impact SBICs to re-certify the
investment as part of a follow-on financing. SBA believes that
requiring Impact SBICs to re-certify their follow-on financings as
Impact Investments might deter them from making long-term capital
commitments out of concern that future financings might not count
towards the ``50 percent requirement.'' Nonetheless, SBA is soliciting
comments from the public on whether such follow-on investments should
count towards the 50 percent requirement only if the Impact SBIC re-
certifies the investment as an Impact Investment at the time a follow-
on investment is made.
Sec. 107.665--Measurement and reporting requirements for Impact
SBICs making Fund-Identified Impact Investments. This proposed section
would require Impact SBICs making Fund-Identified Impact Investments to
obtain independent assessments of the social, environmental and
economic impact of their investment strategy. Unless the licensee
obtains SBA approval to do otherwise, these assessments must be
prepared in manner consistent with the plan approved during the
licensing process.
Impact SBICs subject to this section will face penalties if they
fail to obtain impact assessments, but SBA will neither penalize nor
reward an Impact SBIC based solely on the results of those impact
assessments. One purpose of permitting Impact SBICs to make Fund-
Identified Impact Investments is to encourage innovative approaches to
social, environment and economic challenges. Penalizing licensees that
fail to meet their impact goals, despite their best efforts, would be
counterproductive. Instead, the Agency trusts that successful fund
managers will earn their rewards in the market place, using the
strength of their financial and social returns to attract private
capital. SBA will also look favorably on subsequent Impact SBIC
applicants with a record of strong social and financial performance. By
contrast, Impact SBICs with poor impact assessments are more likely to
face difficulty raising private capital and obtaining a subsequent
Impact SBIC license.
Sec. 107.693--Impact SBIC examination fee discount. This new
proposed section would allow a 10% reduction in the examination ``base
fee'' that would otherwise be applicable to Impact SBICs under existing
Sec. 107.692. SBA will devote neither less time nor fewer resources to
the examination of Impact SBIC licensees as a result of this discount.
Under the proposed rule, licensees designated as Impact SBICs prior to
the effective date of this rule will be eligible for fee discounts on a
going-forward basis, but SBA will not return fees already paid.
Sec. 107.1120--General eligibility requirements for Leverage.
Proposed
[[Page 5671]]
new paragraph (l) would provide for a new certification by Impact SBICs
seeking an SBA leverage commitment or draw. The Impact SBIC would be
required to certify that it will invest at least 50 percent of the
aggregate dollar amount of its financings in Impact Investments, in
compliance with the Impact Investment and Impact SBIC definitions in
Sec. 107.50. This prospective certification is consistent with the
other certifications required by Sec. 107.1120. SBA intends to monitor
Impact SBICs' performance in making Impact Investments to ensure that
they are making investments that meet this requirement.
Sec. 107.1810--Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures. SBA is proposing two changes in
this section that would apply only to Impact SBICs. First, under
proposed Sec. 107.1810(f)(13), it would be an event of default if an
Impact SBIC fails to meet the requirement to invest at least 50 percent
of its financing dollars in Impact Investments, as defined in proposed
Sec. 107.50. If the Impact SBIC fails to cure to SBA's satisfaction,
SBA could invoke the remedies in existing Sec. 107.1810(g), which
includes the right to declare outstanding debenture leverage
immediately due and payable. SBA would generally not expect to invoke
such remedies if an Impact SBIC's failure to meet the 50 percent
requirement appears to be temporary.
Second, under proposed Sec. 107.1810(f)(14), it would be an event
of default if an Impact SBIC licensed under an SBA-approved plan to
make Fund-Identified Impact Investments fails to obtain an acceptable
independent, third-party assessment to measure the social,
environmental or economic impact of the fund's Impact Investment
strategy within the time frames required by proposed Sec. 107.665. If
the Impact SBIC fails to cure to SBA's satisfaction, SBA could invoke
the remedies in existing Sec. 107.1810(g), which include the right to
declare outstanding debenture leverage immediately due and payable.
Sec. 107.1940--Impact SBIC licensee noncompliance with
regulations. SBA proposes creating in this new section a series of
actions the Agency may take with respect to Impact SBICs that fail to
meet the 50 percent requirement and Fund-Identified Impact SBICs that
fail to meet assessment requirements. Regardless of whether an Impact
SBIC has outstanding leverage, if an event of default would have been
triggered under proposed Sec. 107.1810(f)(13) or (14), SBA will have
the authority, upon written notice, to take any or all of the following
actions: (1) Convert the licensee's Impact SBIC license to a standard
SBIC license (including, in SBA's discretion, requiring the licensee to
notify its private investors of the conversion); and (2) require the
licensee to return to SBA up to the full dollar amount of any licensing
or examinations fee discounts it has received prior to the date of the
written notice. However, SBA will be authorized to take these actions
only after giving the licensee at least 15 days to resolve its non-
compliance and only after the licensee fails to resolve its non-
compliance within the time period given.
SBA included these additional remedies to address two areas of
concern. First, the events of default proposed under Sec. 107.1810(f)
would only apply to Impact SBICs with outstanding leverage. As a
result, Impact SBICs that are licensed as non-leveraged funds or those
that pre-pay their leverage in full would not be subject to any
remedies if they were to fall out of compliance with the 50 percent
requirement or, as applicable, the assessment requirement. Second, the
fee discounts proposed under this rule generally reward Impact SBIC
applicants and licensees for future, rather than past behavior. For
instance, an Impact SBIC will be eligible for a 60 percent discount on
its licensing fee based on its proposal to deploy at least 50 percent
of its capital in Impact Investments. Without the provisions proposed
under this section, SBA would have limited authority to recover those
benefits or otherwise take action against the fund if it fails to
follow through on that commitment.
Compliance With Executive Orders 12866, 12988, 13132, 13563, 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. Need for Regulation
The Small Business Investment Act of 1958, as amended, established
the SBIC program to ``stimulate and supplement the flow of private
equity capital and long-term loan funds'' to U.S.-based small
businesses. 15 U.S.C. 661. As part of that effort, the Act contains
several provisions aimed at promoting the flow of capital to several
special categories of small business, including those located in low
income geographic areas, those engaged in energy-saving activities and
``smaller'' businesses.15 U.S.C. 683(b)(2)(C), 683(b)(2)(D), 683(d).
Over the past several years, SBA's focus on achieving these
economic development goals has yielded results, but progress has come
at a slower pace than anticipated. Despite the recent growth in the
number of SBIC-financed businesses located in LMI areas, which rose
from 216 in fiscal year (``FY'') 2012 to 229 in FY 2014, the program
has yet to return to the high level achieved in FY 2011, during which
SBICs financed 351 businesses located in LMI areas. The LMI Debenture,
a leverage instrument meant to help facilitate these types of
investments, is rarely used. Similarly, there has yet to be a single
draw of SBA's Energy Savings Debenture, which has been available since
2012 to help finance small businesses involved in reducing the use of
non-renewable energy sources.
The proposed rule was crafted to enhance the SBIC program's
effectiveness in channeling much-needed capital to these and other
underserved segments of the U.S. economy. From an overall economic
development perspective, SBA believes that capital investments made
into small businesses located in LMI and other underserved areas have
the potential to have the most meaningful and sustained impact due to
the capital formation gaps in those areas.
2. Alternative Approaches to Regulation
SBA considered several alternatives to the proposed regulation,
each of which will be discussed below. First, SBA considered pursuing
its impact investment objectives solely through existing policy
initiatives. Based on extensive feedback received from SBIC fund
managers, lower-middle market industry representatives, impact
investment fund managers, impact policy thought leaders and others, SBA
rejected this alternative. SBA's existing impact investing policies
impose additional burdens without providing sufficient incentives to
attract Impact SBIC fund managers to the program. Further, given that
SBIC licensees have operational lives of ten years or more, the market
will be reluctant to embrace SBA's impact investing efforts unless the
Agency demonstrates a lasting commitment to the space by promulgating
regulations.
SBA faced a challenge in developing a definition of an ``Impact
Investment'' that dealt appropriately with the subjectivity inherent in
any non-financial measure of performance. Initially, SBA considered
restricting the
[[Page 5672]]
definition of an Impact Investment to financings that meet requirements
already outlined in federal regulations, such as Energy-Savings
Investments, LMI Investments or investments in rural areas. These
investments are aligned with federal policy priorities and are easy to
define and monitor. The original Impact Investment Initiative policy
launched in 2011 was structured in this manner and was slow to attract
applicants. Given the nascence of the impact investing industry, which
supports a diverse range of investment strategies, SBA determined a
more accommodative approach would be more effective.
The proposed rule has been drafted to allow Impact SBIC applicants
to make SBA-Identified Impact Investments, which target federal
priority areas, or make Fund-Identified Impact Investments that align
with their own definitions of impact. This approach expands the reach
of SBA's impact investing efforts beyond the limited sub-set of
investments that meet existing regulatory criteria. The Agency also
recognizes the complexities Fund-Identified Impact Investments may
introduce to the SBIC licensing and monitoring process.
SBA had to carefully consider the bases on which it would approve
an Impact SBIC's proposed Fund-Identified Impact Investment definition.
One option the Agency considered was to outline, as part of this
regulation, a series of sector-specific eligibility requirements that
Fund-Identified Impact Investments would have to satisfy. Working with
colleagues at the U.S. Department of Education, SBA staff made an
initial attempt at preparing guidelines for investments in the
education sector but quickly discovered the impracticality of the
approach. Even within a single sector, there exists such a tremendous
diversity of economic activity that establishing requirements specific-
enough to be useful would require an inordinate commitment of time and
resources.
An alternative approach would be to remove SBA from the approval
process altogether and give Impact SBIC applicants complete latitude to
pursue Fund-Identified Impact Investments of their choice. Under this
approach, SBA would evaluate Impact SBICs using its existing licensing
process without any additional consideration of the impact-related
aspects of the applicant's proposal. A key advantage of this approach
is that it would allow SBA to fully cede the definitional challenge of
impact to fund managers and their private investors. It would also
ensure the program remains open to innovative impact strategies.
SBA will always encourage applicants to propose innovative
investment strategies, but the Agency must retain the ability to review
and approve proposed Fund-Identified Impact Investment definitions. Not
only must the Agency ensure that SBICs are making investments that are
consistent with the letter and spirit of program regulations, but it
must also consider the reputation of the SBIC program within the
private investor community. The statute underlying the SBIC program,
known as the Small Business Investment Act, makes clear that the
program should be implemented in a manner that ``insure[s] the maximum
participation of private financing sources.'' 15 U.S.C. 661. Were SBA
to ignore an applicant's proposed Fund-Identified Impact Investment
definitions, private impact investors might take the Agency's approach
as a signal of indifference to market development.
In fact, the approach SBA has taken reflects the Agency's interest
in not only enhancing the impact of the SBIC program, but also
promoting industry best practices. SBA is as concerned with the process
used to make Fund-Identified Impact Investments as it is with the
outcomes of those investments. Each Impact SBIC applicant will have the
burden of demonstrating, with qualitative or quantitative analysis,
that its investment strategy will, in aggregate, generate a measurable
positive impact. SBA staff will supplement their evaluation of the
applicant's analysis and its other application materials with the
results obtained using the standard tools of due diligence, such as
interviews with the management team, reference calls, consultations
with industry experts, public record searches and other research.
As long as a fund manager is qualified and its definition does not
run afoul of the Agency's mission, statutes, regulations or policies,
SBA intends to give applicants substantial leeway in defining their
Fund-Identified Impact Investments. The measurement and assessment
requirements of the proposed rule ensure that even those Impact SBICs
that fail to meet their targeted social returns will contribute to
market development. Measuring results, good and bad, contributes to the
industry's understanding of the relationship between financial and
social returns and helps investors identify the most talented managers.
SBA confronted two key questions as it considered how to create a
robust measurement and assessment process. First, what means should SBA
use to assess the impact of Fund-Identified Impact Investments? Second,
what consequences, if any, should Impact SBICs face based on the result
of their impact assessments?
With regard to the first question, SBA could have assumed the full
burden of evaluating each Fund-Identified Impact Investment to
determine its impact. This alternative was rejected because SBA staff
lack sufficient time, resources and expertise to properly evaluate the
full range of potential Fund-Identified Impact Investments. A second
alternative was to leverage the expertise of Impact SBIC fund managers
themselves and allow them to prepare their own assessments. While it
may be appropriate to have Impact SBIC applicants argue the merits of
their Fund-Identified Impact Investment definitions during the
licensing process, SBA considered it imprudent to allow Impact SBICs to
evaluate their own success.
The proposed rule instead requires Impact SBICs to obtain
independent, third-party impact evaluations based on industry-adopted
standards. The use of independent third parties helps reduce the bias
inherent in a fund's own impact evaluation and relieves SBA of the
potentially significant burden of assessing a wide range of impact
investment strategies.
With regard to the second question, SBA has chosen not to penalize
licensees based on the results of their impact assessments. As noted
above, assessments provide private capital with greater transparency
regarding an applicant's track record of generating impact. Given that
most fund managers seek to follow their first investment vehicle with a
second, the assessment process itself creates sufficient risk that
investors will decline to invest in a second fund. Accordingly, SBA
does not believe that an Impact SBIC should incur regulatory penalties
based on the results of an impact assessment.
3. Potential Benefits and Costs
The proposed rule offers two primary benefits to SBA and its
stakeholders. First, it offers the potential to enhance the overall
social, environmental and economic impact of the SBIC program. Existing
SBICs already have tremendous impact on America's small business
economy. In FY 2014, SBICs together invested nearly $5.5 billion in
more than 1,000 small business concerns, helping them to grow and
modernize their operations. The introduction of Impact SBICs will
increase the portion of those annual financings that are
[[Page 5673]]
intentionally directed towards economically-distressed communities and
companies taking innovative approaches to social problems.
SBA also hopes the proposed rule will support the development of
the impact investing industry more broadly. The rule has been drafted
to incorporate impact investing best practices, especially with regard
to the measurement and assessment of impact. As more and more SBA- and
Fund-Identified Impact Investments are made, the SBIC program will have
more data to contribute to the industry on the balance between
financial and social performance.
In terms of costs, Impact SBICs are anticipated to have an
additional 3% higher loss rate than regular SBICs, due to the risks
that may be associated with Impact Investments contemplated under the
proposed rule. Although SBA is targeting $200 million in commitments
per year in terms of licensing, the number of Impact SBICs that SBA may
license or the amount of debenture leverage commitments that may be
approved for Impact SBICs in any year is subject to the limitations set
forth in annual appropriations acts or in other statutes or
regulations. In addition, both newly licensed Impact SBICs and
previously licensed Impact SBICs have the opportunity to receive new
leverage commitments in any year. The SBIC program subsidy model for FY
2017 has been formulated to reflect the provision proposed in this rule
that Impact SBICs are allowed to be licensed as Early Stage SBICs.
Early Stage SBICs are expected to have approximately a 10% higher loss
rate than regular SBICs. The resulting fee of 34.7 basis points for FY
2017 remains well within historical ranges for the SBIC Debenture
annual fee.
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 proposed 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.
Executive Order 13563
In drafting this proposed rule, SBA considered the input of impact
investment industry experts on ways to facilitate the growth of
private-sector led impact investing as a strategy to create jobs and
strengthen communities. With the assistance of the White House Office
of Social Innovation and Civic Participation, which included a White
House hosted event in June 2014 (see, https://www.whitehouse.gov/blog/2014/06/25/executive-actions-accelerate-impact-investing-create-jobs-and-strengthen-communities), SBA held roundtable discussions with
representatives from endowments, foundations, institutional asset
managers, high net worth individuals, investment funds, standard SBICs,
existing Impact SBICs, not-for-profit entities, banks, and other
federal government agencies. The roundtables covered topics such as:
(1) Increasing the flow of private capital toward sustainable business
models; (2) supporting private sector investment in high-impact sectors
and underserved communities; (3) making innovative impact enterprises
investment-ready; (4) removing regulatory barriers that keep capital on
the sidelines; and (5) growing the impact economy through policy
interventions.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this rulemaking proposes additional
reporting requirements as defined by the Paperwork Reduction Act.
Specifically, as discussed above, all Impact SBICs utilizing a Fund-
Identified Impact strategy would be required to submit to SBA
independent, third-party evaluations of the impacts of such
investments. This proposed rule would also codify two other reporting
requirements that are already imposed on Impact SBICs based on the
terms and conditions of the Impact Investment Fund established by SBA
on April 11, 2011, as amended on September 25, 2014, available at
https://www.sba.gov/content/impact-investment-fund-overview. First, at
the time of application, Impact SBIC applicants are currently required
to outline in their proposed investment strategy whether a particular
strategy is an ``Impact Investment.'' This requirement is not being
changed by this rule; it is merely being codified in the regulations.
Furthermore, this requirement is already approved as part of SBA Form
2181, Appendix 2 (OMB Control Number 3245-0062). Second, as part of
reporting on their portfolio financings, Impact SBICs are also
currently required to identify whether a completed financing is an
Impact Investment. Therefore, this requirement is also not being
imposed for the first time by this rule but rather merely being
codified in the regulations. To make it easier for SBICs to meet this
requirement, SBA recently proposed adding two questions to the
Portfolio Financing Report (an existing information collection approved
under OMB Control Number 3245-0078), to enable Impact SBICS to
specifically identify whether a particular investment qualifies as an
SBA-Identified or Fund Identified investment. This particular change
will be made in conjunction with other revisions to Form 1031 as a
result of other amendments to the SBIC program in the proposed rule,
Small Business Investment Companies; Passive Business Expansion &
Technical Clarifications. (RIN: 3245-AG67) (80 FR 60077, October 5,
2015). The description, number of respondents, and the purpose of the
information collection that would be imposed by this rule is 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 the requirements for the collection of information.
A. Impact Evaluations
Title: Independent, Third-Party Impact Evaluations.
Summary: The proposed rule requires Impact SBICs licensed to make
Fund-Identified Impact Investments to submit two impact evaluations to
SBA. Each assessment must be completed by an independent third-party
based on industry standards. One assessment is due within two years of
licensing, while the second must be submitted between the 5th and 7th
year after licensing. These independent evaluations are required only
of Impact SBICs that make Fund-Identified Impact Investments. Impact
SBICs that restrict themselves to SBA-Identified Impact Investments
bear no additional reporting burden beyond what is required of all
SBICs.
Description and Number of Respondents: Only those Impact SBICs
licensed to make Fund-Identified Impact Investments will be required to
complete this requirement.
Annual Estimated Number of Responses: SBA estimates that it may
receive approximately 2 responses each year based on an annual average
of 6 Impact SBICs requiring assessments during years 1-2 and again in
years 5-7 of their lifecycle.
[[Page 5674]]
Estimated Annual Hour and Cost Burden: Impact SBICs licensed to
make Fund-Identified Impact Investments will be required to obtain an
impact evaluation and may incur costs. SBA estimates that it may have
approximately 6 Impact SBICs making Fund-Identified Impact Investments
in any given year. One independent provider charges between $3,500 and
$7,500 for a full portfolio rating, depending on the size of the fund
and the number of portfolio companies. Two ratings completed at the
maximum price of $7,500 would require an Impact SBIC to spend a total
of $15,000 over the course of its 10 year fund life. On an annualized
basis, the cost would be $1,500 per year. The total annual cost burden
for the estimated 6 Impact SBICs making Fund-Identified Impact
Investments is $9,000.
The hourly burden for these respondents would be negligible, as the
assessment work would be completed by an independent third-party. The
total time required to contact the provider and initiate an assessment
is estimated at a total of 24 hours per assessment. Impact SBICs
subject to the third-party assessment requirement must submit a total
of two assessments over the course of their 10 year fund life. On an
annualized basis, these applicants each will spend 4.8 hours per year.
With an estimated 6 Impact SBICs making Fund-Identified Impact
Investments in the portfolio at any given time, the total annual hourly
burden is estimated at 28.8 hours.
Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency promulgates a rule, the Regulatory Flexibility Act
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 proposed rule would affect all SBICs issuing debentures, of
which there are currently 193, most of which are small entities.
Therefore, SBA has determined that this proposed rule would 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. SBA keeps the SBIC program at a zero subsidy cost to
taxpayers by charging up front and annual fees on its leverage. SBA
calculates the annual fee each year using historical data to assess the
appropriate fee to keep the program at zero subsidy cost. Because SBA
expects Impact SBICs to be riskier than standard SBICs, SBA adjusted
the SBIC debenture program budget formulation model which determines
the annual fee needed to keep the debenture program at a zero subsidy
cost.
The projected leverage allocation to Impact SBICs would increase
the annual fee charged to all SBICs seeking new debenture commitments
by approximately 6.1 basis points. The annual fee would remain in line
with historical levels. Since 2000, the annual fee has ranged from a
high of 100 basis points (1 percent) to a low of 29 basis points, with
a 15-year median of 83 basis points. The annual fee for FY 2015 is
approximately 74.2 basis points. Although the cost will vary in the
future based on economic factors and assumptions used to develop the
annual fee, SBA expects the fee to remain under 1 percent, comparable
to historical annual fees and below the statutory maximum of 1.38
percent. 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, Licensing fees,
Examination fees, 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
0
1. The authority citation for part 107 is revised to read as follows:
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g,
687m.
0
2. Amend Sec. 107.50 by adding in alphabetical order definitions of
``Fund-Identified Impact Investment,'' ``Impact Investment,'' ``Impact
SBIC'' and ``SBA-Identified Impact Investment'' to read as follows:
Sec. 107.50 Definition of terms.
* * * * *
Fund-Identified Impact Investment means a Financing by an Impact
SBIC that meets the definition of an Impact Investment proposed by the
SBIC and approved by SBA in writing at the time of licensing, as
described in Sec. 107.331.
* * * * *
Impact Investment means an SBA-Identified Impact Investment or
Fund-Identified Impact Investment.
Impact SBIC means any Section 301(c) Partnership Licensee that must
make at least 50 percent of all of its Loans and Investments (in
dollars) in Impact Investments and is designated by SBA as an ``Impact
SBIC.''
* * * * *
SBA-Identified Impact Investment means a Financing that meets SBA's
definition of an Impact Investment, which SBA will publish from time to
time on its Web site and which will include geographies and sectors of
national priority.
* * * * *
0
3. Add Sec. 107.301 to read as follows:
Sec. 107.301 Impact SBIC licensing fee discount.
(a) All applicants seeking to be licensed as an Impact SBIC will
receive a 60 percent discount, rounded to the nearest one-hundred
dollars, on any fees to which they are subject under Sec. 107.300.
(b) In the event an applicant seeking to be licensed as an Impact
SBIC is licensed as anything other than an Impact SBIC, SBA reserves
the right to recover, prior to licensing, the full dollar amount of any
licensing fee discounts the applicant has received.
0
4. In Sec. 107.310, designate the existing text as paragraph (a) and
add paragraph (b) to read as follows:
Sec. 107.310 When and how to apply for licensing as an Early Stage
SBIC.
* * * * *
(b) Impact SBIC applicants. An applicant may elect to apply
simultaneously for licensing as both an Early Stage SBIC and an Impact
SBIC. Such applicants may apply as described in Sec. 107.300 at any
time and are not subject to the submission deadlines set forth in
paragraph (a) of this section. Applicants seeking a dual license must
comply with the regulations in this part pertaining to Early Stage
SBICs and Impact SBICs, and to any requirements, other than submission
deadlines, specified in the most recently published Early Stage Notice
in the Federal Register.
0
5. Add Sec. Sec. 107.330 and 107.331 to read as follows:
Sec. 107.330 Evaluation of Impact SBIC license applicants.
SBA will evaluate each applicant seeking to be licensed as an
Impact SBIC based on the same factors applicable to
[[Page 5675]]
other license applicants, as set forth in Sec. 107.305, with
particular emphasis on the managers' skill and experience in
originating, evaluating, executing and monitoring Impact Investments
consistent with the applicant's investment strategy.
Sec. 107.331 Evaluation of Fund-Identified Impact Investments and
measurement plans.
If an applicant intends to qualify for an Impact SBIC license based
on investments in Fund-Identified Impact Investments, SBA will evaluate
the applicant's proposed definition(s) of a Fund-Identified Impact
Investment and its plan to comply with the measurement and reporting
requirements of Sec. 107.665, and will approve the same in writing at
the time of licensing based the applicant's satisfaction of the
following:
(a) Fund-Identified Impact Investments. Using the submitted
application materials, any interviews with the applicant's management
team, the results of public record searches and any other due diligence
conducted by SBA, SBA will assess the likelihood that the applicant's
proposed investment strategy and Fund-Identified Impact Investment
definition(s) will generate, in the aggregate, beneficial social,
environmental or economic impacts. SBA's evaluation may consider
factors such as whether the strategy will include investments in
Portfolio Concerns that increase services to low income communities,
engage in environmentally sustainable business practices or manufacture
environmentally sustainable products, or that operate in industries of
national priority other than in the sectors identified by SBA as an
SBA-Identified Impact Investment.
(b) Measurement and reporting plan. During licensing, each
applicant seeking an Impact SBIC license under Sec. 107.331 must
identify the assessment provider(s) and assessment system(s) it intends
to use in order to comply with the requirements of Sec. 107.665. Using
the submitted application materials, any interviews with the
applicant's management team, the results of public record searches and
any other due diligence conducted by SBA, SBA will assess the
applicant's proposed measurement and reporting plan based on the
following factors:
(1) The applicant's proposed assessment system(s) must employ at
least one approved measurement standard, from a list of approved
standards published by SBA on its Web site from time to time.
(2) The applicant's proposed assessment system must comply with the
following:
(i) The assessment system's criteria and weightings are publicly
available; and
(ii) The assessment system is capable of producing an assessment of
the social, environmental and/or economic effects of impact
investments.
(3) The applicant's proposed assessment provider(s) must each be an
independent, third-party. An assessment provider will not be considered
an independent third-party if any of the following conditions exist at
the time of licensing or assessment:
(i) The assessment provider is an Associate of the Impact SBIC or
any of its Portfolio Concerns; or
(ii) The assessment provider is materially financed by an
association that represents the interests of the specific industry in
which the Impact SBIC or its Portfolio Concerns are engaged.
(c) Publication. SBA may periodically publish on its Web site:
(i) General descriptions of impact investment strategies pursued by
Impact SBICs licensed to make Fund-Identified Impact Investments; and
(ii) Detailed descriptions of the assessment systems SBA has
approved for use by Impact SBICs licensed to make Fund-Identified
Impact Investments.
0
6. In Sec. 107.502, designate the existing text as paragraph (a) and
add paragraphs (b) and (c) to read as follows:
Sec. 107.502 Representations to the public.
* * * * *
(b) Impact SBIC applicants must declare their intention to apply
for an Impact SBIC license in any solicitation to investors.
(c) Impact SBIC licensees must indicate that they have obtained an
Impact SBIC license from SBA in any solicitation to investors.
0
7. Amend Sec. 107.610 by adding paragraphs (g) and (h) to read as
follows:
Sec. 107.610 Required certifications for Loans and Investments.
* * * * *
(g) For each SBA-Identified Impact Investment:
(i) A certification by the concern, dated as of the date of
application for SBIC financing, as to the basis for its qualification
as an Impact Investment; and
(ii) A certification by the Impact SBIC, made contemporaneously
with the certification of the concern, that the concern qualifies as an
Impact Investment as of the date of the concern's certification and the
basis for such qualification.
(h) For each Fund-Identified Impact Investment, a certification by
the Impact SBIC, as of the date of the financing, that the concern
qualifies as a Fund-Identified Impact Investment under the
definition(s) approved in writing by SBA and the basis for such
qualification.
0
8. Add Sec. 107.665 to read as follows:
Sec. 107.665 Measurement and reporting requirements for Impact SBICs
making Fund-Identified Impact Investments.
Impact SBICs that SBA approved in writing to make Fund-Identified
Impact Investments must obtain an assessment of their impact investment
strategy from an independent, third-party provider within two years
after licensing and again between five and seven years after licensing.
Without prior written SBA approval, the Impact SBIC may not use an
assessment system(s) or assessment provider(s) different from those the
Impact SBIC identified and SBA approved during the licensing process.
Each assessment must be submitted to SBA within 30 days of its
completion.
0
9. Add Sec. 107.693 to read as follows:
Sec. 107.693 Impact SBIC examination fee discount.
An Impact SBIC will receive a 10% discount on its examination base
fee, rounded to the nearest one-hundred dollars, subject to the
following:
(a) The discount will be calculated based on the examination base
as determined prior to any adjustments provided for under Sec.
107.692.
(b) Impact SBICs also licensed as Early Stage SBICs are entitled to
any additional discounts, but exempt from any premium, that Early Stage
SBICs would otherwise be required to pay under Sec. 107.692.
0
10. Amend Sec. 107.1120 by adding paragraph (l) to read as follows:
Sec. 107.1120 General eligibility requirements for Leverage.
* * * * *
(l) If you are an Impact SBIC, certify in writing that, in
accordance with Sec. 107.1810(f)(13), at least 50 percent of the
aggregate dollar amount of your Financings will qualify as Impact
Investments defined in Sec. 107.50.
0
11. Amend Sec. 107.1810 by adding paragraphs (f)(13) and (14) to read
as follows:
Sec. 107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
* * * * *
(f) * * *
(13) Failure by an Impact SBIC to meet investment requirements. You
are
[[Page 5676]]
an Impact SBIC and, beginning on the first fiscal quarter end when your
cumulative total Financings (in dollars) are at least equal to your
Regulatory Capital, you have not made at least 50 percent of such
Financings to Small Businesses that at the time of your initial
Financing were Impact Investments.
(14) Failure by an Impact SBIC to meet assessment requirements. You
are an Impact SBIC making Fund-Identified Impact Investments and you
fail to obtain an independent, third-party assessment within two years
of your licensing date and, again, between five and seven years from
your licensing date, pursuant to the requirements under Sec. 107.665.
* * * * *
0
12. Add Sec. 107.1940 to read as follows:
Sec. 107.1940 Impact SBIC licensee noncompliance with regulations.
(a) For any occurrence (as determined by SBA) of one or more of the
events in this paragraph (a), SBA may avail itself of one or more of
the remedies in paragraph (b) of this section.
(1) Failure by an Impact SBIC to meet investment requirements. You
are an Impact SBIC and, beginning on the first fiscal quarter end when
your cumulative total Financings (in dollars) are at least equal to
your Regulatory Capital, you have not made at least 50 percent of such
Financings to Small Businesses that at the time of your initial
Financing were Impact Investments.
(2) Failure by an Impact SBIC to meet assessment requirements. You
are an Impact SBIC making Fund-Identified Impact Investments and you
fail to obtain an independent, third-party assessment within two years
of your licensing date and, again, between five and seven years from
your licensing date, pursuant to the requirements under Sec. 107.665.
(b) SBA may exercise any or all of the following rights:
(1) Convert your Impact SBIC license to a standard SBIC license
(including, in SBA's discretion, requiring you to promptly notify your
investors of the conversion); and
(2) Require you to refund to SBA up to the full dollar amount of
any licensing or examination fee discounts you have received prior to
the date of your written notice.
(c) SBA may invoke the remedies in paragraph (b) of this section
only if:
(1) It has given you at least 15 days to cure the noncompliance;
(2) You fail to cure the noncompliance to SBA's satisfaction within
the allotted time.
Dated: October 7, 2015.
Maria Contreras-Sweet,
Administrator.
Editorial Note: This document was received for publication by
the Office of the Federal Register on January 29, 2016.
[FR Doc. 2016-01986 Filed 2-2-16; 8:45 am]
BILLING CODE 8025-01-P