[Federal Register: June 8, 2004 (Volume 69, Number 110)] [Rules and Regulations] [Page 32199-32229] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr08jn04-22] [[Page 32199]] ----------------------------------------------------------------------- Part III Department of Agriculture ----------------------------------------------------------------------- Rural-Business Cooperative Service ----------------------------------------------------------------------- Rural Utilities Service ----------------------------------------------------------------------- 7 CFR Part 4290 Rural Business Investment Program; Interim Rule Announcement of Competitive Application Round for the Rural Business Investment Program (RBIP); Notice [[Page 32200]] ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Rural Business-Cooperative Service Rural Utilities Service 7 CFR Part 4290 RIN 0570-AA35 Rural Business Investment Program AGENCY: Rural Business-Cooperative Service and Rural Utilities Service, U.S. Department of Agriculture. ACTION: Interim final rule with request for comments. ----------------------------------------------------------------------- SUMMARY: In this interim final rule with comment period, the U.S. Department of Agriculture (USDA) is adding a new part 4290 to implement the Rural Business Investment Program (RBIP) which is designed to promote economic development and create wealth and job opportunities among individuals living in rural areas and help to meet the equity capital investment needs primarily of smaller enterprises located in such areas. Under the RBIP, for-profit Rural Business Investment Companies (RBIC) will make venture capital investments in rural areas with the objectives of fostering economic development in such areas and returning maximum profits to the RBIC's investors. These regulations set forth the criteria which the USDA will use to select and license RBICs, guarantee its debentures, and make grants to RBICs. DATES: Effective date: This rule is effective on June 8, 2004. Comment date: We will consider comments on the new part 4290 if we receive them at the appropriate address, as provided below, no later than 4 p.m. on July 8, 2004. Late filed comments will be considered to the extent practicable. ADDRESSES: You may submit comments on this rule by any of the following methods: Agency Web site: http://rdinit.usda.gov/regs/; follow the instructions for submitting comments on the Web site. E-mail: comments@usda.gov; include the RIN number (RIN 0570-AA35) in the subject line of the email. Federal e-Rulemaking portal: http://www.regulations.gov; follow the instructions for submitting comments. Mail: Submit written comments via the U.S. Postal Service to Cheryl Thompson, Management Analyst, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742. Hand-delivery/courier: Submit written comments via Federal Express Mail or other courier service requiring a street address to Cheryl Thompson, Management Analyst, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., Washington, DC 20024. FOR FURTHER INFORMATION CONTACT: Special Projects/Programs Oversight Division, U.S. Department of Agriculture, (202) 690-4100. SUPPLEMENTARY INFORMATION: I. Background Section 6029 of the Farm Security and Rural Investment Act of 2002, Pub. L. 107-171, amended the Consolidated Farm and Rural Development Act by adding Subtitle H--Rural Business Investment Program (7 U.S.C. 2009cc et seq.) (the ``Act''). Section 6029 requires the Secretary of the USDA to establish the Rural Business Investment Program (RBIP). Section 384B of the Act, as amended, states that the purpose of the RBIP is-- (1) To promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in those areas by encouraging developmental venture capital investments in smaller enterprises primarily located in rural areas; and (2) To establish a developmental venture capital program with the mission of addressing the unmet equity investment needs of small enterprises located in rural areas. Section 384Q of the Act, as amended, requires the Secretary of Agriculture to enter into an interagency agreement under the Economy Act, 31 U.S.C. 1535, with ``another Federal agency'' that has ``considerable expertise in operating a program under which capital is provided for equity investments in private sector companies.'' The Joint Explanatory Statement of the Conference Committee of the Farm Security and Rural Investment Act of 2002 states on page 150 that, ``Sec. 384 Q requires the Secretary to enter into an interagency agreement with the U.S. Small Business Administration (SBA) to carry out the day-to-day management and operation of the RBIP.'' House Report 107-424. Responsibility for the RBIP on behalf of the USDA has been assigned to the Rural Business-Cooperative Service (RBS), which is one of the USDA agencies reporting to the Under Secretary for Rural Development. The mission of the RBIP is to encourage economic growth, innovation, and entrepreneurship by encouraging privately owned and managed venture capital investment funds to achieve financial success by investing in America's rural enterprises, for the benefit of the businesses and the customers and communities they serve. USDA and SBA believe that the RBIP represents an opportunity to supplement the considerable impact on jobs and economic growth made in rural areas from venture capital financings of the Small Business Investment Company (SBIC) program administered by the SBA. With a rigorous business focus, this new program can contribute significantly to the Federal government's efforts to encourage private risk-taking and investment in rural America. The RBIP will accomplish its mission by: (1) Licensing experienced venture capital fund managers with exceptional ``deal flow'' who are capable of raising equity capital from sophisticated private investors; (2) creating strong multiple lines of defense to manage risk to taxpayers; (3) communicating understandable ground rules to program participants; (4) offering applicants time to raise their required private equity capital; (5) allowing RBICs to develop results based on traditional cycles of venture investing; and (6) focusing on profit maximization as the key to success, while providing for a grant assistance component as provided in the Act. As you read the section-by-section analysis of the regulations in section III of this preamble, you will note that many of the provisions of these regulations are modeled after regulations governing SBA's SBIC and New Markets Venture Capital (NMVC) programs. In addressing the challenge of implementing the RBIP, the USDA was able to draw upon the experience that SBA has gained in administering the SBIC program. The Small Business Investment Act of 1958 created the SBIC program in response to a Federal Reserve study finding that small businesses were generally unable to obtain the long-term debt and equity funds that they needed to succeed. The basic objective of the SBIC program is to attract and supplement private capital, managed by private investment managers, to meet that need. SBA licenses such companies as SBICs, regulates their activities to ensure that they are financially sound and serve the program's public policy objectives, and supplements their private capital by guaranteeing debentures or other securities that they issue. Congress created the NMVC program in December 2000, to address the unmet equity capital needs of small business [[Page 32201]] concerns located in low-income geographic areas. SBA enters into a participation agreement with each NMVCC that details, among other things, the specific low-income areas that it will serve, how it will serve those areas, what results it expects to achieve, and how its success will be measured. Because of the many similarities among the SBIC, NMVC, and RBIP programs, USDA will incorporate into the RBIP those SBIC and NMVC regulations that USDA believes are fundamental to the safety and soundness of the RBIP. II. Justification for Publication of Interim Final Status Rule USDA generally publishes a proposed rule and invites public comment before issuing a final rule pursuant to the Administrative Procedures Act (APA) (5 U.S.C. 553). However, the APA provides for exceptions to the general rule if the agency finds ``good cause'' to omit advance notice and public participation. The ``good cause'' requirement is satisfied when prior public procedure is ``impractical, unnecessary, or contrary to the public interest'' (5 U.S.C. 553(b)). For the following reasons, USDA has determined that it would be impractical, unnecessary and contrary to the public interest to delay the effectiveness of this rule in order to solicit prior public comments. As intended by Congress and noted in the Conference Manager's Report, this program is modeled after two existing SBA programs: the SBIC and NMVC programs, except this program has a rural emphasis. Changes to already existing regulations were made when mandated by statutory differences. All other changes were minimized and were intended to assure technical compliance. While USDA has oversight of this program, SBA has day-to-day management and operation of the program using its staff, procedures, and forms, pursuant to an interagency agreement, as required by the Act. Given the degree of similarity between this program and SBA's SBIC and NMVC programs, little was to be gained from a delay in implementing the program for public comment. USDA has attempted to minimize the administrative burden by adopting as much of the SBA's SBIC and NMVC programs as possible. Accordingly, the interim rule imposes a minimum number of unfamiliar requirements from the SBIC and NMVC programs and the rule should be very familiar to applicants currently participating in either of those programs. We are not publishing this rule as a final rule. Instead, we are waiving notice of proposed rulemaking and publishing this rule as an interim final rule with comment period. As we develop this rule, we welcome comments from the public on all issues set forth in this rule to assist us in fully considering the issues and any associated regulatory impacts. III. Section-by-Section Analysis The following is a section by section analysis of USDA's regulations to add a new part 4290 to Title 7 of the Code of Federal Regulations to implement the Act. Sections 4290.10 through 4290.50 briefly describe the RBIP, state the legal basis for the program, define terms, and provide guidance on how to read part 4290. Section 4290.45 states that pursuant to a delegation of authority, SBA will exercise on behalf of USDA all responsibilities and authorities assigned to the Secretary in the new part 4290, unless specifically stated otherwise in a particular section in part 4290. Section 4290.50 contains the definitions applicable to the program. Most of the defined terms come directly from the Act and USDA did not supplement or modify them. USDA also establishes several new definitions specific to the RBIP. Several of the definitions are based on Title 13 of the Code of Federal Regulations which governs SBA's programs, including the SBIC (13 CFR part 107) and NMVC (13 CFR part 108) programs, and sets forth size standards for determining the size of a smaller enterprise. ``Enterprise'' is a newly defined term that describes all potential recipients of RBIC financings. The term ``primarily operating'' has been adapted from section 384A(13) of the Act to help define rural business concerns. It will be defined as the place where the principal office of the enterprise is located; that term, in turn, is defined as the location where the greatest number of employees is located. The definitions also comprise several terms incorporating the concept of a rural area. They are unique to this program and specify an area located outside a standard metropolitan statistical area or a community with a population of 50,000 or fewer inhabitants. The definition of a ``smaller enterprise'' is different from the definition employed in the SBIC and NMVC programs. In those programs the application of the term was limited to for-profit business concerns as defined by SBA. In the RBIP, the term specifically includes rural business concerns which may include, among other things, non-profit entities. The definition of the phrase, ``subordinated debt with equity features,'' is also unique to this program because, pursuant to section 384A(4) of the Act, this is a type of equity capital that RBICs are permitted to invest in smaller enterprises. ``Urban area'' is also defined in this section in order to implement section 384(I)(c)(3)(C) of the Act, which limits a RBIC's ability to make financings to enterprises located in such areas. Sections 4290.100 through 4290.165 describe the organizational basis for a RBIC. An applicant for a RBIC license must be a newly formed for-profit entity or, subject to Sec. 4290.150, a newly formed for-profit subsidiary of an existing entity. It must be organized under the law of a State solely for the purpose of performing the functions and conducting the activities contemplated under the Act: to make venture capital investments in rural areas with the objectives of fostering economic development in such areas and returning maximum profits to the RBIC's investors and to provide operational assistance to eligible smaller enterprises. It must have qualified management and agree that it will (i) make such investments, (ii) have a plan to invest in rural areas, and (iii) identify particular rural areas in which it proposes to focus its investment activities. USDA models these regulations on similar regulations governing the SBIC and NMVC programs, including the requirements that RBICs must have management and ownership diversity and that USDA will require pre-approval of all management expenses of a RBIC. Sections 4290.200 through 4290.240 address capitalization of a RBIC, including minimum capital requirements, allowable sources of private capital, and limitations on non-cash contributions to capital. These regulations are modeled on similar regulations in the SBIC and NMVC programs. Sections 4290.300 through 4290.330 set forth policies and procedures for the application and approval process for obtaining a RBIC license. USDA will allow submission of applications for participation in the RBIP only during a specific application period to be set forth in a Notice of Funds Availability published in the Federal Register, as opposed to a ``rolling admissions'' process. USDA will use this method of selecting applicants for three reasons. First, the USDA believes this method will enable USDA to achieve the objective of ensuring, to the extent possible and given the applications received, nationwide geographic distribution of developmental venture capital. USDA will compare [[Page 32202]] applications both for quality and other criteria described in the regulations, and for the geographic areas they intend to cover so as to choose the best applications for each geographic area and avoid duplication within specific geographic areas. Second, USDA has a limited amount of funds available with which to license RBICs, based on a one-time authorization of funds. A competitive process will allow USDA to utilize those funds expeditiously and efficiently. Third, USDA believes this procedure will allow it to orderly administer appropriated funds it may receive in subsequent fiscal years by allowing USDA to open up the RBIP to new rounds of applicants. USDA will require applicants for participation in the RBIP to submit an application, similar to the applications for SBA's SBIC and NMVC programs. Key application requirements include management team experience, an indication of the amount of regulatory capital an applicant has raised or proposes to raise, and a comprehensive business plan. The application submission requirements are outlined in section 384D of the Act. Based in part on the experience of other Federal agencies with similar economic development programs, USDA believes these application requirements will allow USDA to ensure that applicants understand the objectives of the RBIP and have a sound plan for accomplishing those objectives and for creating and maintaining a viable investment fund. USDA also will assess a ``grant issuance fee'' for applications to the RBIP. Sections 4290.340 through 4290.390 describe USDA's evaluation criteria and the selection and licensing process for participation in the RBIP. In considering applicants for licensing, USDA will review an applicant's application materials, conduct interviews or site visits (if applicable) with the applicant, and perform background investigations. Most of the specified criteria are set forth in the Act. The Secretary will not consider any application that is not complete or that is submitted by an applicant that does not meet the eligibility criteria in subpart C of this part. The Secretary will perform an initial review of an applicant's management team qualifications to determine whether the team meets the minimum requirements deemed by the Secretary in his or her sole discretion to be critical to successful venture capital investing. From among the applicants that have submitted eligible and complete applications and that have qualified management teams, the Secretary on behalf of USDA and the Administrator on behalf of SBA will select some, all, or none of such applicants to participate in the RBIP. Selection will entitle the applicant to proceed with obtaining a license as a RBIC, but only if and when the applicant meets the conditions set forth in Sec. 4290.390. Sections 4290.400 through 4290.480 describe USDA's requirements in the event of changes in ownership, control, or structure of a RBIC. These regulations are modeled after similar regulations for the SBIC and NMVC programs. Sections 4290.500 through 4290.585 describe USDA's requirements for managing the operations of a RBIC. These regulations are modeled after similar regulations for the SBIC and NMVC programs. Sections 4290.600 through 4290.680 describe USDA's recordkeeping, record retention, reporting, and examination requirements for RBICs. These regulations are modeled after similar regulations for the SBIC and NMVC programs. USDA will require each RBIC to provide reports concerning the economic development impact of each investment it makes, as well as reports on its administration and use of grant funds as required by Circular A-110 of the Office of Management and Budget (OMB), ``Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and other Non-Profit Organizations.'' USDA anticipates that to the extent not inconsistent with USDA's regulations for the RBIP, RBICs' administration and use of grant funds will be subject to OMB Circular A-110. OMB Circular A-110 is optional for use in connection with grants to commercial organizations. USDA will apply it to RBICs in order to take advantage of existing and well-known grant administrative procedures and policies to facilitate USDA's orderly administration of grants to RBICs. Sections 4290.690 through 4290.692 describe USDA's requirements for examinations of RBICs for regulatory compliance. These regulations are modeled after similar regulations for the SBIC and NMVC programs, and require RBICs to submit to annual examinations. Section 4290.700 is key to effectuating the Act's directive to promote rural development. This section requires RBICs to invest at least 75 percent of their financings in rural business concerns and to have more than 50 percent of its investments in smaller enterprises (and, of those, at least 50 percent must be in small business concerns). A separate section (Sec. 4290.740) addresses the need for portfolio diversification. No more than 10 percent of a RBIC's financings may be in urban areas. RBICS are prohibited by Sec. 4290.720 from investing in enterprises that do no more than re-lend or re-invest the RBIC's funds or are passive enterprises, subject to certain highly specific exceptions. Section 4290.730 contains a prohibition on financings which constitute conflicts of interest. Sections Sec. 4290.810 through Sec. 4290.880 address a series of issues involved in structuring eligible RBIC financings. These sections govern various forms and durations of financings, applicable amortization and interest rates, allowable fees and expenses, and the subject of disposing of assets, among other issues. Although these regulations are largely modeled after similar regulations for the SBIC and NMVC programs in several aspects, in other aspects they are unique to the RBIP and highlight its emphasis on rural investment and economic development. Sections 4290.1100 through 4290.1720 describe USDA's requirements and procedures for RBICs to obtain leverage from USDA, the procedures governing USDA's funding of that leverage, and the use of Trust Certificates. These regulations are modeled after similar regulations for the SBIC and NMVC programs. Section 4290.1500 imposes certain constraints on a RBIC's powers to make distributions to its investors. At the same time a RBIC makes such a distribution, it also must make a prepayment to or for the benefit of the third-party holder of the debenture, ratably with the distribution to the RBIC's equity investors. Although this provision differs from existing repayment clauses in existing SBA Investment Division debenture programs, it is consistent with the creditor nature of the Government's exposure (no profit participation), and the cash flow nature of venture investing. This provision will reduce the Government's risk and thereby have a positive effect on the subsidy model and risk profile of the program. Sections 4290.1810 through 4290.1840 describe events of default and capital impairment and USDA's remedies upon such defaults. These regulations are modeled after similar regulations for the SBIC and NMVC programs. Section 4290.1900 concerns termination by a RBIC of its participation in the RBIP. This regulation is modeled after a similar regulation for the SBIC and NMVC programs. [[Page 32203]] Sections 4290.1910 through 4290.1930 address miscellaneous issues, including application for an exemption from regulatory requirements and the effect of regulatory changes on transactions previously consummated. These regulations are modeled after similar regulations for the SBIC and NMVC programs. Section 4290.1940 refers to other USDA regulations applicable to the RBIP. Section 4290.2000 sets forth requirements and procedures for operational assistance grants to RBICs. USDA will award such grants only after receiving and evaluating applications in response to a Notice of Funds Availability published in the Federal Register. Each qualified RBIC will receive a grant. This rule does not cover grants to non-RBICs; USDA will do so at a later date. USDA also will require RBICs to provide reports on its administration and use of grant funds as required by OMB Circular A- 110. USDA anticipates that to the extent not inconsistent with these regulations, RBICs' administration and use of grant funds will be subject to OMB Circular A-110. IV. Justification for Immediate Effective Date of Interim Final Rule Interim rules published by USDA generally take effect 30 days after publication. However the APA provides that when the Agency finds good cause exists, the rule may take effect immediately (see 5 U.S.C. 553(d)(3)). For the reasons set forth in the Justification of Publication for Interim Final Status Rule and in this part, USDA finds that good cause exists for making this interim final rule effective immediately, instead of observing the 30-day period between publication and effective date. Venture capital is needed in rural areas. This is the first authorization for this Department to provide venture capital funds to rural areas. While the SBIC and NMVC programs make a significant impact on non-metropolitan areas, SBA's programs are not exclusively targeted on rural areas. Historically most venture capital funds have not gone to rural areas. Rural areas have suffered significant economic declines over the past years and this program is needed to help offset those declines as soon as possible. The purpose of the 30 day delay in a published rule taking effect is to provide interested and affected members of the public sufficient time to adjust their behavior before the rule takes effect. There is no reason to delay implementation in this case because the interested and affected members of the public that this rule affects are either already participating in SBA's existing SBIC and NMVC programs or are familiar with the provisions of these programs. This program is modeled after and virtually identical to these programs and for that reason will require minimal changes in applicant behavior. Based on the long period of time before any investments can be made by RBICs, it is critical to initiate a fair and competitive application process as soon as possible. Applicants will need several months to assemble a qualified management team, develop their strategic investment objectives, prepare and submit their RBIC applications prior to October 1, 2004, the date which, under current congressional authority, the funding for licensed RBICs becomes available. The subsequent application review and evaluation process will require several more months time before selected applicants can confidently begin raising the requisite capital, which can take up to an additional year before being awarded a RBIC license. All of this has to be done before a licensed RBIC can make its first investment. Additionally, over two years has lapsed since Congress recognized the need for developmental venture capital in rural areas and the Act became law in May 2002. It would be a disservice to the public to unnecessarily delay the implementation of the RBIP any further given that the public already knows the detailed provisions of the authorizing statute and its similarity to the SBIC and NMVC programs and the need for developmental venture capital in rural America. V. Regulatory Compliance Section--Compliance With Executive Orders 12866 (Regulatory Planning and Review), 12988 (Civil Justice Reform) and 13132 (Federalism); Paperwork Reduction Act; Government Paperwork Elimination Act; Intergovernmental Review; Environmental Impact Statement; and Unfunded Mandates Reform Act Compliance With Executive Order 12866 The Office of Management and Budget (OMB) has determined that this rule does not constitute a ``significant'' regulatory action under Executive Order 12866. Therefore, a regulatory assessment is not required. Compliance With Executive Order 12988 USDA certifies that this rule is drafted, to the extent practicable, in accordance with the standards set forth in section 3 of Executive Order 12988. In accordance with this Executive Order: (1) All State and local laws and regulations that are in conflict with this rule will be preempted, (2) no retroactive effect will be given to this rule, and (3) administrative proceedings in accordance with RBS regulations at 7 CFR part 11 must be exhausted before bringing litigation challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time. Compliance With Executive Order 13132 For purposes of Executive Order 13132, USDA has determined that this rule has no federalism implications warranting preparation of a federalism assessment. Intergovernmental Review The Business and Industry loan programs are subject to the provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. RBS will conduct intergovernmental consultation in the manner delineated in 7 CFR part 3015, subpart V. Environmental Impact Statement This document has been reviewed in accordance with 7 CFR part 1940, subpart G, ``Environmental Program.'' RBS has determined that this action does not constitute a major Federal action significantly affecting the quality of the human environment and, in accordance with the National Environmental Policy Act of 1969, 42 U.S.C. 4321 et seq, an Environmental Impact Statement is not required. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. L. 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, RBS must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with ``Federal mandates'' that may result in expenditures to State, local or tribal governments, in the aggregate, or to the private sector, of $100 million or more in any 1 year. When such a statement is needed for a rule, section 205 of UMRA generally requires RBS to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost- effective, or least burdensome alternative that achieves the objectives of the rule. This rule contains no [[Page 32204]] Federal mandates (under the regulatory provisions of title II of the UMRA) for State, local, and tribal governments or the private sector. Thus, this rule does not trigger the requirements of sections 202 and 205 of the UMRA. Compliance With Paperwork Reduction Act USDA has determined that this rule imposes additional reporting or recordkeeping requirements for purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35. The collection of information (``collection'') for the RBIP includes the RBIC application package and reporting and recordkeeping requirements. USDA previously requested from the Office of Management and Budget (``OMB'') an emergency clearance of this collection. OMB reviewed and approved the collection and assigned OMB control number 0570-0051. Simultaneously with the publication of this rule in the Federal Register, USDA will make available to the public the collection on SBA's Web site at http://www.sba.gov/INV/RBIP or you may request a copy by calling Austin J. Belton, Director of New Markets Venture Capital, Investment Division, SBA, at (202) 205-6510. The following is a list of sections of this regulation that describe generally the collection requirements for the RBIP and reasons why USDA believes it needs to collect such information. A. Applying for a License as a RBIC As referenced in Sec. 4290.310 (Contents of application) and Sec. 4290.320 (Contents of a comprehensive business plan), USDA will request information such as basic identifying data and core data, management and organization information, descriptions of past and present performance in developmental venture capital investments in smaller enterprises and in rural areas, technical qualifications of the applicant, descriptions of activities proposed using debentures issued by RBICs, and reporting capabilities. USDA needs this information to evaluate applicants and to ensure that selections are made in furtherance of the RBIP's objectives. USDA understands that the respondents to these requests will be limited to those organizations meeting the requirements set forth in Sec. 4290.100 (Business form); Sec. 4290.110 (Qualified management); Sec. 4290.120 (Plan to invest in rural areas); and Sec. 4290.150 (Management and ownership diversity requirement). Based upon USDA's knowledge of the industry, USDA estimates that approximately 25 applicants will apply to participate in the RBIP. Respondents will need to submit the information referenced in Sec. Sec. 4290.310 and 4290.320 only at the time of application to participate in the RBIP. USDA estimates that it will take respondents 291.75 hours to complete an application and to fulfill the reporting and record keeping requirements referenced below. B. RBIC Reporting and Recordkeeping Requirements As referenced in Sec. Sec. 4290.600 to 4290.680, USDA will request financial information including, but not limited to, financial statements, economic impact and economic development information, and portfolio financing reports and valuations. USDA needs this information to evaluate the performance and success of RBICs in fulfilling the objectives of their participation agreements and their actual venture capital investments in smaller enterprises located in rural areas. C. Request for Comments With regard to each collection of information discussed above and contained in the collection itself, USDA is seeking your comment on the following issues: (a) Whether the information USDA will request on the application is necessary for USDA's proper implementation and measurement of the performance of the RBIP; (b) The accuracy of the burden estimate (time estimated to complete each collection of information request); (c) Ways to minimize the burden estimates, and (d) Ways to enhance the quality of the information being collected. Please send written comments on or before August 9, 2004, on the data collection requirements to Austin J. Belton, Director of New Markets Venture Capital, Investment Division, SBA, 409 Third Street, SW., Washington, DC 20416. Government Paperwork Elimination Act USDA is committed to compliance with the Government Paperwork Elimination Act, which requires Government agencies in general to provide the public the option of submitting information or transacting business electronically to the maximum extent possible. List of Subjects in 7 CFR Part 4290 Community development, Government securities, Grant programs-- business, Securities, Small businesses. 0 For the reasons stated in the preamble, the Secretary is amending 7 CFR chapter XLII by adding part 4290 to read as follows: PART 4290--RURAL BUSINESS INVESTMENT COMPANY (``RBIC'') PROGRAM Subpart A--Introduction to Part 4290 Sec. 4290.10 Description of the Rural Business Investment Company Program. 4290.20 Legal basis and applicability of this part 4290. 4290.30 Amendments to Act and regulations. 4290.40 How to read this part 4290. 4290.45 Responsibility for implementing this part 4290. Subpart B--Definition of Terms Used in Part 4290 4290.50 Definition of terms. Subpart C--Qualifications for the RBIC Program Organizing a RBIC 4290.100 Business form. 4290.110 Qualified management. 4290.120 Plan to invest in Rural Areas. 4290.130 Identified Rural Areas. 4290.140 Approval of initial Management Expenses. 4290.150 Management and ownership diversity requirement. 4290.160 Special rules for Partnership RBICs and LLC RBICs. 4290.165 Obligations of Control Persons. Capitalizing a RBIC 4290.200 Adequate capital for RBICs. 4290.210 Minimum capital requirements for RBICs. 4290.230 Private Capital for RBICs. 4290.240 Limitations on non-cash capital contributions in Private Capital. Subpart D--Application and Approval Process for RBIC Licensing 4290.300 When and how to apply for a RBIC License. 4290.310 Contents of application. 4290.320 Contents of comprehensive business plan. 4290.330 Grant issuance fee. Subpart E--Evaluation and Selection of RBICs 4290.340 Evaluation and selection--general. 4290.350 Eligibility and completeness. 4290.360 Initial review of Applicant's management team's qualifications. 4290.370 Evaluation criteria. 4290.380 Selection. 4290 390 Licensing as a RBIC. Subpart F--Changes in Ownership, Structure, or Control Changes in ControL or Ownership of a RBIC 4290.400 Changes in ownership of 10 percent or more of RBIC but no change of Control. [[Page 32205]] 4290.410 Changes in Control of RBIC (through change in ownership or otherwise). 4290.420 Prohibition on exercise of ownership or Control rights in RBIC before approval. 4290.430 Notification of transactions that may change ownership or Control. 4290.440 Standards governing prior approval for a proposed transfer of Control. 4290.450 Notification of pledge of RBIC's shares. Restrictions on Common Control or Ownership of Two or More RBICs 4290.460 Restrictions on Common Control or ownership of two (or more) RBICs. Change in Structure of RBIC 4290.470 Prior approval of merger, consolidation, or reorganization of RBIC. 4290.480 Prior approval of changes to RBIC's business plan. Subpart G--Managing the Operations of a RBIC General Requirements 4290.500 Lawful operations under the Act. 4290.502 Representations to the public. 4290.503 RBIC's adoption of an approved valuation policy. 4290.504 Equipment and office requirements. 4290.506 Safeguarding the RBIC's assets/Internal controls. 4290.507 Violations based on false filings and nonperformance of agreements with the Secretary or SBA. 4290.508 Compliance with non-discrimination laws and regulations applicable to federally-assisted programs. 4290.509 Employment of USDA or SBA officials. Management and Compensation 4290.510 Approval of RBIC's Investment Adviser/Manager. 4290.520 Management Expenses of a RBIC. Cash Management by a RBIC 4290.530 Restrictions on investments of idle funds by RBICs. Secured Borrowing by RBICs 4290.550 Prior approval of secured third-party debt of RBICs. Voluntary Decrease in Regulatory Capital 4290.585 Voluntary decrease in RBIC's Regulatory Capital. Subpart H--Recordkeeping, Reporting, and Examination Requirements for RBICs Recordkeeping Requirements for RBICs 4290.600 General requirement for RBIC to maintain and preserve records. 4290.610 Required certifications for Loans and Investments. 4290.620 Requirement to obtain information from Portfolio Concerns. Reporting Requirements for RBICs 4290.630 Requirements for RBICs to file financial statements and supplementary information with the Secretary (SBA Form 468). 4290.640 Requirement to file portfolio financing reports with the Secretary (SBA Form 1031). 4290.650 Requirement to report portfolio valuations to the Secretary. 4290.660 Other items required to be filed by RBIC with the Secretary. 4290.680 Reporting changes in RBIC not subject to prior approval. Examinations of RBICS by the Secretary for Regulatory Compliance 4290.690 Examinations. 4290.691 Responsibilities of RBIC during examination. 4290.692 Examination fees. Subpart I--Financing of Enterprises by RBICs Determining Eligibility of an Enterprise for RBIC Financing 4290.700 Requirements concerning types of Enterprises to receive Financing. 4290.720 Enterprises that may be ineligible for Financing. 4290.730 Financings which constitute conflicts of interest. 4290.740 Portfolio diversification (``overline'' limitation). 4290.760 How a change in size or activity of a Portfolio Concern affects the RBIC and the Portfolio Concern. Structuring RBIC Financing of Eligible Enterprises--Types of Financings 4290.800 Financings in the form of Equity Securities. 4290.810 Financings in the form of Loans. 4290.815 Financings in the form of Debt Securities. 4290.820 Financings in the form of guarantees. 4290.825 Purchasing securities from an underwriter or other third party. 4290.830 Minimum term of Financing. 4290.835 Exception to minimum term of Financing. 4290.840 Maximum term of Financing. 4290.845 Maximum rate of amortization on Loans and Debt Securities. 4290.850 Restrictions on redemption of Equity Securities. 4290.860 Financing fees and expense reimbursements a RBIC may receive from an Enterprise. 4290.880 Assets acquired in liquidation of Portfolio securities. Limitations on Disposition of Assets 4290.885 Disposition of assets to RBIC's Associates or to competitors of Portfolio Concerns. 4290.900 Management fees for services provided to an Enterprise by RBIC or its Associate. Subpart J--Financial Assistance for RBICs (Leverage) General Information About Obtaining Leverage 4290.1100 Type of Leverage and application procedures. 4290.1120 General eligibility requirements for Leverage. 4290.1130 Leverage fees payable by RBIC. 4290.1140 RBIC's acceptance of remedies under Sec. 4290.1810. Maximum Amount of Leverage for Which a RBIC is Eligible 4290.1150 Maximum amount of Leverage for a RBIC. Conditional Commitments To Reserve Leverage for a RBIC 4290.1200 Leverage commitment to a RBIC--application procedure, amount, and term. 4290.1220 Requirement for RBIC to file financial statements at the time of request for a draw. 4290.1230 Draw-downs by RBIC under Leverage commitment. 4290.1240 Funding of RBIC's draw request through sale to third party. Distributions by RBICs With Outstanding Leverage 4290.1500 Restrictions on distributions to RBIC investors while RBIC has outstanding Leverage. Funding Leverage by Use of Trust Certificates (``TCs'') 4290.1600 Secretary's authority to issue and guarantee Trust Certificates. 4290.1610 Effect of prepayment or early redemption of Leverage on a Trust Certificate. 4290.1620 Functions of agents, including Central Registration Agent, Selling Agent and Fiscal Agent. 4290.1630 Regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates. 4290.1640 Secretary's access to records of the CRA, Brokers, Dealers and Pool or Trust assemblers. Miscellaneous 4290.1700 Secretary's transfer of interest in a RBIC's Leverage security. 4290.1710 Secretary's authority to collect or compromise claims. 4290.1720 Characteristics of Secretary's guarantee. Subpart K--RBIC's Noncompliance With Terms of Leverage 4290.1810 Events of default and the Secretary's remedies for RBIC's noncompliance with terms of Debentures. Computation of RBIC's Capital Impairment 4290.1830 RBIC's Capital Impairment definition and general requirements. 4290.1840 Computation of RBIC's Capital Impairment Percentage. Subpart L--Ending Operations as a RBIC 4290.1900 Termination of participation as a RBIC. Subpart M--Miscellaneous 4290.1910 Non-waiver of rights or terms of Leverage security. 4290.1920 RBIC's application for exemption from a regulation in this part 4290. 4290.1930 Effect of changes in this part 4290 on transactions previously consummated. [[Page 32206]] 4290.1940 Integration of this part with other regulations applicable to USDA's programs. Subpart N--Requirements for Operational Assistance Grants to RBICs 4290.2000 Operational Assistance grants to RBICs. Authority: 7 U.S.C. 1989 and 2009cc et seq. Subpart A--Introduction to Part 4290 Sec. 4290.10 Description of the Rural Business Investment Company Program. The Rural Business Investment Company (``RBIC'') Program is a Developmental Venture Capital program for the purpose of promoting economic development and the creation of wealth and job opportunities in Rural Areas and among individuals living in such Areas. To this end, the Secretary will select and license RBIC Applicants that will agree to address the unmet Equity Capital needs of Smaller Enterprises primarily located in Rural Areas. Sec. 4290.20 Legal basis and applicability of this part 4290. The regulations in this part implement Subtitle H of the Consolidated Farm and Rural Development Act, as amended (7 U.S.C. 2009cc et seq.) (``Act''). All RBICs must comply with all applicable regulations, accounting guidelines and valuation guidelines for RBICs. Sec. 4290.30 Amendments to Act and regulations. A RBIC is subject to all existing and future provisions of the Act and part 4290 of title 7 of the Code of Federal Regulations. Sec. 4290.40 How to read this part 4290. (a) Center Headings. Center headings are descriptive and are used for convenience only. They have no regulatory effect. (b) Capitalizing defined terms. Terms defined in Sec. 4290.50 have initial capitalization in this part 4290. (c) ``You.'' The pronoun ``you'' as used in this part 4290 means a RBIC unless otherwise noted. (d) Forms. All references in this part to forms, and instructions for their preparation, are to the current issue of such forms. Sec. 4290.45 Responsibility for implementing this part 4290. The Secretary has delegated to the U.S. Small Business Administration (SBA), pursuant to an agreement under the Economy Act (31 U.S.C. 1535), the authority to implement the RBIC program, including implementing and enforcing the regulations in this part 4290. Therefore, unless specifically stated otherwise, SBA will exercise on behalf of the Secretary all responsibilities and authorities assigned to the Secretary in this part 4290. Subpart B--Definition of Terms Used in Part 4290 Sec. 4290.50 Definition of terms. Act means Subtitle H of the Consolidated Farm and Rural Development Act, as amended (7 U.S.C. 2009cc et seq.). Administrator means the Administrator of SBA. Affiliate or Affiliates has the meaning set forth in title 13 CFR 121.103. Applicant means any entity submitting an application to be licensed as a RBIC. Articles mean articles of incorporation or charter and bylaws for a Corporate RBIC, the certificate and limited partnership agreement for a Partnership RBIC, and the operating agreement or other organizational documents for an LLC RBIC. Assistance or Assisted means Financing of or management services rendered to a Portfolio Concern by or through a RBIC pursuant to the Act and this part. Associate of a RBIC means any of the following: (1)(i) An officer, director, employee or agent of a Corporate RBIC; (ii) A Control Person, employee or agent of a Partnership RBIC; (iii) A managing member of an LLC RBIC; (iv) An Investment Adviser/Manager of any RBIC, including any Person who contracts with a Control Person of a RBIC to be the Investment Adviser/Manager of such RBIC; or (v) Any Person regularly serving a RBIC on retainer in the capacity of attorney at law. (2) Any Person who owns or controls, or who has entered into an agreement to own or control, directly or indirectly, at least 10 percent of any class of stock of a Corporate RBIC or 10 percent of the membership interests of an LLC RBIC, or a limited partner's interest of at least 10 percent of the partnership capital of a Partnership RBIC. However, neither a limited partner in a Partnership RBIC nor a non- managing member in an LLC RBIC is considered an Associate if such Person is an Entity Institutional Investor whose investment in the Partnership, including commitments, represents no more than 33 percent of the capital of the RBIC and no more than five percent of such Person's net worth. (3) Any officer, director, partner (other than a limited partner), manager, agent, or employee of any Associate described in paragraph (1) or (2) of this definition. (4) Any Person that directly or indirectly Controls, or is Controlled by, or is under Common Control with, a RBIC. (5) Any Person that directly or indirectly Controls, or is Controlled by, or is under Common Control with, any Person described in paragraphs (1) and (2) of this definition. (6) Any Close Relative of any Person described in paragraphs (1), (2), (4), and (5) of this definition. (7) Any Secondary Relative of any Person described in paragraphs (1), (2), (4), and (5) of this definition. (8) Any concern in which-- (i) Any person described in paragraphs (1) through (6) of this definition is an officer; general partner, or managing member; or (ii) Any such Person(s) singly or collectively Control or own, directly or indirectly, an equity interest of at least 10 percent (excluding interests that such Person(s) own indirectly through ownership interests in the RBIC). (9) Any concern in which any Person(s) described in paragraph (7) of this definition singly or collectively own (including beneficial ownership) a majority equity interest, or otherwise have Control. As used in this paragraph (9), ``collectively'' means together with any Person(s) described in paragraphs (1) though (7) of this definition. (10) For the purposes of this definition, any Associate relationship described in paragraphs (1) through (7) of this definition that exists at any time within six months before or after the date that a RBIC provides Financing, will be considered to exist on the date of the Financing. Capital Impairment has the meaning set forth in Sec. 4290.1830(b). Central Registration Agent or CRA means one or more agents appointed for the purpose of issuing Trust Certificates (TCs) and performing the functions enumerated in Sec. 4290.1620 and performing similar functions for Debentures funded outside the pooling process. Close Relative of an individual means: (1) A current or former spouse; (2) A father, mother, guardian, brother, sister, son, daughter; or (3) A father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Commitment means a written agreement between a RBIC and an Enterprise that obligates the RBIC to provide Financing (except a guarantee) to that Enterprise in a fixed or determinable sum, by a fixed or determinable future date. In this context [[Page 32207]] the term ``agreement'' means that there has been agreement on the principal economic terms of the Financing. The agreement may include reasonable conditions precedent to the RBIC's obligation to fund the Commitment, but these conditions must be outside the RBIC's control. Common Control means a condition such that two or more Persons, either through ownership, management, contract, or otherwise, are under the Control of one group or Person. Two or more RBICs are presumed to be under Common Control if they are Affiliates of each other by reason of common ownership or common officers, directors, or general partners; or if they are managed or their investments are significantly directed either by a common independent Investment Advisor/Manager or managerial contractor, or by two or more such advisors or contractors that are Affiliates of each other. This presumption may be rebutted by evidence satisfactory to the Secretary. Community Development Finance means debt or equity-type investments in Rural Areas. Control means the possession, direct or indirect, of the power to direct or cause, or the power to stop or hinder (also referred to as ``negative Control''), the direction of the management and policies of a RBIC or other concern, whether through the ownership of voting securities, by contract, or otherwise. Control Person means any Person that controls a RBIC, either directly or through an intervening entity. A Control Person includes: (1) A general partner of a Partnership RBIC; (2) Any Person serving as a general partner (in the case of a partnership), an officer or director (in the case of a corporation), or a manager (in the case of a limited liability company) of any entity that controls a RBIC, either directly or through an intervening entity; (3) Any Person that-- (i) Controls or owns, directly or through an intervening entity, at least 10 percent of a Partnership RBIC, a LLC RBIC, or any entity described in paragraphs (1) or (2) of this definition; and (ii) Participates in the investment decisions of a general partner of such Partnership RBIC or of a managing member of such LLC RBIC; (4) Any Person that controls or owns, directly or through an intervening entity, at least 50 percent of a RBIC or any entity described in paragraphs (1) or (2) of this definition. Corporate RBIC has the meaning set forth in the definition of RBIC in this section. Debenture means a debt obligation issued by RBICs pursuant to section 384E of the Act and held or guaranteed by the Secretary. Debt Securities means instruments evidencing a loan with an option or any other right to acquire Equity Securities in an Enterprise or its Affiliates, or a loan which by its terms is convertible into an equity position. Consideration must be paid for all options acquired. Developmental Venture Capital means Equity Capital invested in Rural Business Concerns, with an objective of fostering economic development in Rural Areas. Distribution means any transfer of cash or non-cash assets to the Secretary, the Secretary's agent or Trustee, or to partners in a Partnership RBIC, or to shareholders in a Corporate RBIC, or to members in an LLC RBIC. Capitalization of Retained Earnings Available for Distribution constitutes a Distribution to the RBIC's partners, shareholders, or members. Enterprise means a Person engaged in a business or commercial activity which charges for the goods and services it provides, whether such Person is operating for profit or is subject to any legal restrictions on the distribution of profits to its owners, members, or suppliers of its equity or quasi-equity capital. An Enterprise includes: (1) A public, private, or cooperative for-profit or non-profit organization; (2) A for-profit or nonprofit business controlled by an Indian tribe on a Federal or State reservation or other federally recognized Indian tribal group; or (3) Any other Person. Entity General Partner has the meaning set forth in Sec. 4290.160. Entity Managing Member has the meaning set forth in Sec. 4290.160. Equity Capital means Equity Securities or Subordinated Debt With Equity Features. Equity Securities means stock of any class in a corporation, stock options, warrants, limited partnership interests in a limited partnership, membership interests in a limited liability company, or joint venture interests. Farm Credit System Institution means an institution defined in section 1.2(a) of the Farm Credit Act of 1971 (12 U.S.C. 2002(a)). Financing or Financed means outstanding financial assistance provided to a Portfolio Concern by a RBIC, whether through: (1) Loans, with or without a right to acquire Equity Securities; (2) Debt Securities; (3) Equity Securities; (3) Subordinated Debt With Equity Features; (4) Guarantees; or (5) Purchases of securities of an Enterprise through or from an underwriter as permitted by Sec. 4290.825. Guaranty Agreement means the contract entered into by the Secretary which is a guarantee backed by the full faith and credit of the United States Government as to timely payment of principal and interest on Debentures and the Secretary's rights in connection with such guarantee. Includible Non-Cash Gains means those non-cash gains (as reported on SBA Form 468) that are realized in the form of Publicly Traded and Marketable securities or investment grade debt instruments. For purposes of this definition, investment grade debt instruments means those instruments that are rated ``BBB'' or ``Baa'', or better, by Standard & Poor's Corporation or Moody's Investors Service, respectively. Non-rated debt may be considered to be investment grade if a RBIC obtains a written opinion from an investment banking firm acceptable to the Secretary stating that the non-rated debt instrument is equivalent in risk to the issuer's investment grade debt. Institutional Investor means Entity Institutional Investor or Individual Institutional Investor, each defined as follows: (1) Entity Institutional Investors. Any of the following entities if the entity has a net worth (exclusive of unfunded commitments from investors) of at least $1 million, or such higher amount as is specified in this paragraph (1). (See also Sec. 4290.230(c)(4) for limitations on the amount of an Entity Institutional Investor's commitment that may be included in Private Capital.) (i) A State or National bank, Farm Credit System Institution, trust company, savings bank, or savings and loan association. (ii) An insurance company. (iii) A 1940 Act Investment Company or Business Development Company (each as defined in the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 et seq.). (iv) A holding company of any entity described in paragraph (l)(i), (ii) or (iii) of this definition. (v) An employee benefit or pension plan established for the benefit of employees of the Federal government, any State or political subdivision of a State, or any agency or instrumentality of such government unit. (vi) An employee benefit or pension plan (as defined in the Employee [[Page 32208]] Retirement Income Security Act of 1974, as amended (Public Law 93-406, 88 Stat. 829), excluding plans established under Sec. 401(k) of the Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended). (vii) A trust, foundation or endowment exempt from Federal income taxation under the Internal Revenue Code of 1986, 26 U.S.C. 1, as amended. (viii) A corporation, partnership or other entity with a net worth (exclusive of unfunded commitments from investors) of more than $10 million. (ix) A State, a political subdivision of a State, or an agency or instrumentality of a State or its political subdivision. (x) An entity whose primary purpose is to manage and invest non- Federal funds on behalf of at least three Institutional Investors described in paragraphs (l)(i) through (ix) of this definition, each of whom must have at least a 10 percent ownership interest in the entity. (xi) Any other entity that the Secretary determines to be an Institutional Investor. (2) Individual Institutional Investor. (i) Any of the following individuals if he/she is also a permanent resident of the United States: (A) An individual who is an Accredited Investor (as defined in the Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose commitment to the RBIC is backed by a letter of credit from a State or National bank acceptable to the Secretary. (B) An individual whose personal net worth is at least $2 million and at least ten times the amount of his or her commitment to the RBIC. The individual's personal net worth must not include the value of any equity in his or her most valuable residence. (C) An individual whose personal net worth, not including the value of any equity in his or her most valuable residence, is at least $10 million. (ii) Any individual who is not a permanent resident of the United States but who otherwise satisfies paragraph (2)(i) of this definition provided such individual has irrevocably appointed an agent within the United States for the service of process. Investment Adviser/Manager means any Person who furnishes advice or assistance with respect to operations of a RBIC under a written contract executed in accordance with the provisions of Sec. 4290.510. Lending Institution means a concern that is operating under regulations of a state or Federal licensing, supervising, or examining body, or whose shares are publicly traded and listed on a recognized stock exchange or is listed in the Automated Quotation System of the National Association of Securities Dealers (NASDAQ) and which has assets in excess of $500 million; and which, in either case, holds itself out to the public as engaged in the making of commercial and industrial loans and whose lending operations are not for the purpose of financing its own or an Associate's sales or business operations. Leverage means financial assistance provided to a RBIC by the Secretary either through the purchase or guaranty of a RBIC's Debentures and any other SBA financial assistance evidenced by a security of the RBIC. Leverageable Capital means Regulatory Capital, excluding unfunded commitments. LLC RBIC has the meaning set forth in the definition of RBIC in this section. Loan means a transaction evidenced by a debt instrument with no provision for you to acquire Equity Securities. Loans and Investments means Portfolio securities, assets acquired in liquidation of Portfolio securities, operating Enterprises acquired, and notes and other securities received, as set forth in the Statement of Financial Position on SBA Form 468. Management Expenses has the meaning set forth in Sec. 4290.520. NAICS Manual means the latest issue of the North American Industrial Classification System (NAICS) Manual, prepared by the Office of Management and Budget, and available from the U.S. Government Printing Office, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA, 15250-7954. 1940 Act Company means a RBIC which is registered under the Investment Company Act of 1940. 1980 Act Company means a RBIC which is registered under the Small Business Investment Incentive Act of 1980. Operational Assistance means management, marketing, and other technical assistance that assists a Smaller Enterprise with its business development. Original Issue Price means the price paid by the purchaser for securities at the time of issuance. Participation Agreement means an agreement between the Secretary and an Applicant licensed as a RBIC pursuant to Sec. 4290.390 of this part, that details the RBIC's operating plan and investment criteria and requires the RBIC to operate pursuant to the Act and this part. Partnership RBIC has the meaning set forth in the definition of RBIC in this section. Person means a natural person or legal entity. Pool means an aggregation of guaranteed Debentures approved by the Secretary. Portfolio means the securities representing a RBIC's total outstanding Financings of Enterprises. It does not include idle funds or assets acquired in liquidation of Portfolio securities. Portfolio Concern means any Enterprise Assisted by a RBIC. Principal Office means the location where the greatest number of the Enterprise's employees at any one location perform their work. However, for those Enterprises whose ``primary industry'' (see 13 CFR 121.107) is service or construction (see 13 CFR 121.201), the determination of principal office excludes the Enterprise's employees who perform the majority of their work at job-site locations to fulfill specific contract obligations. Private Capital has the meaning set forth in Sec. 4290.230. Publicly Traded and Marketable means securities that are salable without restriction or that are salable within 12 months pursuant to Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by the holder thereof, and are of a class which is traded on a regulated stock exchange, or is listed in NASDAQ, or has, at a minimum, at least two market makers as defined in the relevant sections of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et seq.), and in all cases the quantity of which can be sold over a reasonable period of time without having an adverse impact upon the price of the stock. Qualified Non-private Funds means: (1) Funds directly or indirectly invested in any RBIC or Applicant on or after May 13, 2002 by any Federal agency other than USDA under a provision of law explicitly mandating the inclusion of those funds in the definition of ``Private Capital;'' and (2) The aggregate amount of funds invested in any Applicant or RBIC by one or more States, or any political subdivisions, agencies or instrumentalities thereof, including any guarantee extended by such entities. Regulatory Capital means Private Capital, excluding non-cash assets contributed to a RBIC or an Applicant unless such assets have been converted to cash or have been approved by the Secretary for inclusion in Regulatory Capital. For purposes of this definition, sales of contributed non-cash assets with recourse or borrowings against such assets shall not constitute a conversion to cash. [[Page 32209]] Relevant Venture Capital Finance means Equity Capital in Rural Business Concerns or benefiting Rural Areas. Retained Earnings Available for Distribution means Undistributed Net Realized Earnings less any Unrealized Depreciation on Loans and Investments (as reported on SBA Form 468), and represents the amount that a RBIC may distribute to investors as a profit Distribution, or transfer to Private Capital. Rural Area means an area that is located outside a standard metropolitan statistical area, or within a community that has a population of 50,000 or less inhabitants. As used in this definition, ``community'' means any area outside of a metropolitan statistical area (MSA) or any territory within an MSA that is not within an urbanized area, all as defined by the Bureau of the Census of the United States Department of Commerce (Census Bureau) at the last decennial census. Rural Business Concern means an Enterprise whose Principal Office is located in a Rural Area. Rural Business Concern Investment means a Financing in a Rural Business Concern whose Principal Office was located in a Rural Area at the time of the initial Financing. Rural Business Investment Company or RBIC means a corporation organized as required by Sec. 4290.100 (Corporate RBIC), a limited partnership organized as required by Sec. Sec. 4290.100 and 4290.160 (Partnership RBIC), or a limited liability company organized as required by Sec. Sec. 4290.100 and 4290.160 (LLC RBIC), that has been licensed as a RBIC pursuant to Sec. 4290.390. SBA means the U.S. Small Business Administration, an agency of the Federal Government headquartered at 409 Third Street, SW, Washington, DC 20416. Secondary Relative of an individual means: (1) A grandparent, grandchild, or any other ancestor or lineal descendent who is not a Close Relative; (2) An uncle, aunt, nephew, niece, or first cousin; or (3) A spouse of any person described in paragraph (1) or (2) of this definition. Secretary means the Secretary of Agriculture. Small Business Concern means a for-profit Smaller Enterprise that meets the definition of ``business concern'' in 13 CFR 121.105 and that, together with its Affiliates, meets the small business size standards set forth in 13 CFR 121.201 or 13 CFR 121.301(c) for the industry in which it is primarily engaged on the date the Financing is made (the term ``primarily engaged'' for purposes of this definition is defined in 13 CFR 121.107). Small Business Concern Investments means a Financing in the form of Equity Capital in an Enterprise that qualified as both a Smaller Enterprise and a Small Business Concern at the time of the initial Financing. Small Business Investment Company or SBIC means a Licensee, as that term is defined in 13 CFR 107.50. Smaller Enterprise means any Rural Business Concern that, together with its Affiliates and by itself-- (1) Meets the size standard established by SBA in 13 CFR 121.201, corresponding to each type of economic activity or industry described in the NAICS Manual for the industry in which it is primarily engaged on the date on which the Financing is made (the term ``primarily engaged'' for purposes of this definition is defined in 13 CFR 121.107); or (2) Has-- (i) A net financial worth of not more than $6,000,000 as of the date on which the Financing is made; and (ii) An average net income for the two year period preceding the date on which the Financing is made of not more than $2,000,000, after Federal income taxes (excluding any carryover losses), except that, for purposes of this clause, if the Rural Business Concern is not required by law to pay Federal income taxes at the enterprise level, but is required to pass income through to the shareholders, partners, beneficiaries, or other equitable owners of the Rural Business Concern, its net income is determined by allowing a deduction in an amount equal to the total of-- (A) If it is not required by law to pay State (and local, if any) income taxes at the enterprise level, the net income (determined without regard to this paragraph (2)(ii)(A)) multiplied by the marginal State income tax rate (or by the combined State and local income tax rates, as applicable) that would have applied if the Rural Business Concern were a corporation; and (B) The net income (so determined) less any deduction for State (and local) income taxes calculated under paragraph (2)(ii)(A) of this definition multiplied by the marginal Federal income tax rate that would have applied if the Rural Business Concern were a corporation. Smaller Enterprise Investment means a Financing in the form of Equity Capital in an Enterprise that qualified as a Smaller Enterprise at the time of the initial Financing. State means each of the 50 States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Virgin Islands of the United States, American Samoa, the Commonwealth of the Northern Mariana Islands, the Trust Territory of the Pacific Islands, and the Federated States of Micronesia. Subordinated Debt means a debt of a debtor, common to more than one creditor, that is the subject of an agreement between two groups of creditors (whose claims would otherwise be in parity) setting forth the circumstances under which the claims of one group (senior creditors) shall be satisfied out of the resources of the common debtor that would otherwise be available for the payment of the claims of the other group (junior creditors). Subordinated Debt With Equity Features means a Subordinated Debt obligation that gives to the junior creditor such additional compensation as warrants, conversion rights, any other interest in the debtor's equity, profits, increased future revenue, or a royalty interest. Trust means a legal entity created for the purpose of holding guaranteed Debentures and the guaranty agreement related thereto, receiving, holding and making any related payments, and accounting for such payments. Trust Certificate Rate means a fixed rate determined at the time Debentures are pooled. Trust Certificates (TCs) means certificates issued by the Secretary, the Secretary's agent or Trustee and representing ownership of all or a fractional part of a Trust or Pool of Debentures. Trustee means the trustee or trustees of a Trust. Undistributed Net Realized Earnings means Undistributed Realized Earnings less Non-cash Gains/Income, each as reported on SBA Form 468. Unrealized Appreciation means the amount by which a RBIC's valuation of each of its Loans and Investments, as determined by its board of directors, general partner(s), or managing member(s) in accordance with the RBIC's valuation policies, exceeds the cost basis thereof. Unrealized Depreciation means the amount by which a RBIC's valuation of each of its Loans and Investments, as determined by its board of directors, general partner(s), or managing member(s) in accordance with the RBIC's valuation policies, is below the cost basis thereof. Unrealized Gain (Loss) on Securities Held means the sum of the Unrealized Appreciation and Unrealized Depreciation on all of a RBIC's Loans and Investments, less estimated future income tax expense or estimated [[Page 32210]] realizable future income tax benefit, as appropriate. Urban Area means an area containing a city (or its equivalent), or any equivalent geographic area determined by the Census Bureau and adopted by the Secretary for purposes of this definition (about which the Secretary will publish a document in the Federal Register from time to time), which had a population of over 150,000 in the last decennial census and the urbanized areas containing or adjacent to that city, both as determined by the Census Bureau for the last decennial census. Urban Area Investment means a Financing in an Enterprise whose Principal Office was located in an Urban Area at the time of the initial Financing. USDA means the U.S. Department of Agriculture, a department of the Federal government headquartered at 1400 Independence Avenue, SW., Washington, DC 20250. Subpart C--Qualifications for the RBIC Program Organizing a RBIC Sec. 4290.100 Business form. (a) Newly-formed for-profit. An Applicant for a RBIC license must be a newly formed for-profit entity or, subject to Sec. 4290.150, a newly formed for-profit subsidiary of an existing entity. It must be organized under the law of a State. An Applicant may be organized as a corporation (``Corporate RBIC''), a limited partnership (``Partnership RBIC''), or a limited liability company (``LLC RBIC''). (b) Purpose. An Applicant must be organized solely for the purpose of performing the functions and conducting the activities contemplated under the Act: making Developmental Venture Capital investments and providing Operational Assistance to eligible Smaller Enterprises. (c) Articles. The RBIC's Articles-- (1) Must specify in general terms: (i) The purposes for which the RBIC is formed; (ii) The name of the RBIC; (iii) The Rural Area or Areas in which it will operate; (iv) The place where the RBIC's headquarters will be located; and (v) The amount and classes of the RBIC's ownership interests. (2) May contain any other provisions consistent with the Act that the RBIC may determine is appropriate to adopt to regulate its business and the conduct of its affairs. (3) Are subject to the Secretary's approval. (d) Duration. (1) Partnership RBICs. If you are a Partnership RBIC: (i) You must have a minimum duration of 10 years, or two years following the maturity of your last-maturing Leverage security, whichever is longer. After 10 years, if all Leverage has been repaid or redeemed and all amounts due the Secretary, his or her agent, or Trustee have been paid, the Partnership RBIC may be terminated by a vote of your partners; (ii) None of your general partner(s) may be removed or replaced by your limited partners without prior written approval of the Secretary; (iii) Any transferee of, or successor in interest to, your general partner shall have only the rights and liabilities of a limited partner prior to the Secretary's written approval of such transfer or succession; and (iv) You must incorporate all the provisions in this paragraph (d) in your limited partnership agreement. (2) LLC RBICs. If you are a LLC RBIC, you must have a minimum duration of 10 years, or two years following the maturity of your last- maturing Leverage security, whichever is longer. After 10 years, if all Leverage has been repaid or redeemed and all amounts due the Secretary, his or her agent, or Trustee have been paid, the LLC RBIC may be terminated by a vote of your members. (3) Corporate RBICs. If you are a Corporate RBIC, you must have a duration of not less than 30 years unless earlier dissolved by the shareholders, except that the Corporate RBIC must not dissolve until at least two years following the maturity of your last-maturing Leverage security. Sec. 4290.110 Qualified management. An Applicant must show, to the satisfaction of the Secretary, that its current or proposed management team is qualified and has the knowledge, experience, and capability in Community Development Finance or Relevant Venture Capital Finance, necessary for investing in the types of Enterprises contemplated by the Act, regulations in this part, and its business plan. In determining whether an Applicant's current or proposed management team has sufficient qualifications, the Secretary will consider information provided by the Applicant and third parties concerning the background, capability, education, training and reputation of its general partners, managers, officers, key personnel, and investment committee and governing board members. The Applicant must designate at least one individual as the official responsible for contact with the Secretary. Sec. 4290.120 Plan to invest in Rural Areas. An Applicant must agree that if licensed as a RBIC, it will make Developmental Venture Capital investments in Enterprises that will create wealth and job opportunities in Rural Areas and among individuals living in those areas. Sec. 4290.130 Identified Rural Areas. A RBIC must identify the specific Rural Area or Areas in which it intends to make Developmental Venture Capital investments and provide Operational Assistance under the RBIC program. The scope of the identified areas must be consistent with Applicant's business plan, especially as the plan relates to the Applicant's ability to operate actively, soundly, and profitably in such areas. Sec. 4290.140 Approval of initial Management Expenses. A RBIC must have its Management Expenses approved by the Secretary at the time it is licensed. (See Sec. 4290.520 for the definition of Management Expenses.) Sec. 4290.150 Management and ownership diversity requirement. (a) Diversity requirement. You must have diversity between management and ownership in order to be licensed as a RBIC and to maintain your license. To establish diversity, you must meet the requirements in paragraphs (b) and (c) of this section. (b) Percentage ownership requirement. No Person or group of Persons who are Affiliates of one another may own or control, directly or indirectly, more than 70 percent of your Regulatory Capital or your Leverageable Capital. (c) Non-affiliation requirement. At least 30 percent of your Regulatory Capital and Leverageable Capital must be owned and controlled by Persons unaffiliated with your management and unaffiliated with each other, and whose investments are significant in dollar and percentage terms as determined by the Secretary. Such Persons must not be your Associates (except for their status as your shareholders, limited partners or members) and must not Control, be Controlled by, or be under Common Control with any of your Associates. A single ``acceptable'' Institutional Investor may be substituted for two or three of the three investors who are otherwise required. The following Institutional Investors are ``acceptable'' for this purpose: (1) Entities whose overall activities are regulated and periodically examined by State, Federal or other governmental authorities satisfactory to the Secretary; [[Page 32211]] (2) Entities listed on the New York Stock Exchange; (3) Entities that are publicly-traded and that meet both the minimum numerical listing standards and the corporate governance listing standards of the New York Stock Exchange; (4) Public or private employee pension funds; (5) Trusts, foundations, or endowments, but only if exempt from Federal income taxation; and (6) Other Institutional Investors satisfactory to the Secretary. (d) Voting requirement. The investors relied upon to satisfy the diversity requirement may not delegate their voting rights to any Person who is your Associate, or who Controls, is Controlled by, or is under Common Control with any of your Associates, without prior approval by the Secretary. (e) Requirement to maintain diversity. You must maintain management-ownership diversity while you are a RBIC. If, at any time, you no longer have the required management-ownership diversity, you must: (1) Notify the Secretary within 10 days; and (2) Re-establish diversity within six months after loss of diversity. Sec. 4290.160 Special rules for Partnership RBICs and LLC RBICs. (a) Entity General Partner or Entity Managing Member. (1) A general partner of a Partnership RBIC which is a corporation, limited liability company or partnership (an ``Entity General Partner''), or a managing member of an LLC RBIC which is a corporation, limited liability company, or partnership (an ``Entity Managing Member'') shall be organized under State law solely for the purpose of serving as the general partner or managing member of one or more RBICs, and shall be organized for profit. (2) The Secretary must approve any person who will serve as an officer, director, manager, or general partner of the Entity General Partner or Entity Managing Member and of an entity that Controls the Entity General Partner or Entity Managing Member. This provision must be stated in an Entity General Partner's or Entity Managing Member's articles of incorporation or charter and bylaws if a corporation, operating agreement if a limited liability company, or partnership agreement if a partnership. (3) An Entity General Partner or Entity Managing Member is subject to the same examination and reporting requirements as a RBIC under sections 384K and 384L of the Act. The restrictions and obligations imposed upon a RBIC by Sec. Sec. 4290.1810, 4290.30, 4290.410 through 4290.450, 4290.470, 4290.500, 4290.510, 4290.585, 4290.600, 4290.680, 4290.690 through 4290.692, and 4290.1910 apply also to an Entity General Partner or Entity Managing Member of a RBIC. (4) The general partner(s) of your Entity General Partner(s) or Entity Managing Member(s) will be considered your general partner. (5) If your Entity General Partner or Entity Managing Member is a limited partnership, its limited partners may be considered your Control Person(s) if they meet the definition for Control Person in Sec. 4290.50. (b) Liability of general partner of Partnership RBIC. Subject to section 384O(b) of the Act, your general partner(s) is not liable solely by reason of its status as a general partner for repayment of any Leverage or debts you owe to the Secretary unless the Secretary, in the exercise of reasonable investment prudence, and with regard to your financial soundness, determines otherwise prior to the purchase or guaranty of your Leverage. The conditions specified in Sec. 4290.1810 and Sec. 4290.1910 apply to all general partners. (c) Special Leverage requirement for Partnership RBICs and LLC RBICs. Before your first issuance of Leverage, you must furnish the Secretary with evidence that you qualify as a partnership for tax purposes, either by a ruling from the Internal Revenue Service or by an opinion of counsel. Sec. 4290.165 Obligations of Control Persons. All Control Persons are bound by the provisions of sections 384O and 384P of the Act and by the conflict-of-interest rules under Sec. 4290.730. The term RBIC, as used in Sec. Sec. 4290.30, 4290.460, and 4290.680, includes all of the RBIC's Control Persons. Capitalizing a RBIC Sec. 4290.200 Adequate capital for RBICs. You must meet the requirements of Sec. Sec. 4290.200 through 4290.230 in order to qualify as a RBIC and to receive Leverage. Sec. 4290.210 Minimum capital requirements for RBICs. (a) General Rule. You must have Regulatory Capital of at least $10,000,000, or such lesser amount (but not less than $5,000,000) as the Secretary may prescribe by notice published from time to time in the Federal Register, and Leverageable Capital of at least $500,000, to become a RBIC. (b) Exception. (1) The Secretary in his or her sole discretion and based on a showing of special circumstances and good cause may license an Applicant with Regulatory Capital of at least $2,500,000, but only if the Applicant: (i) Has satisfied all eligibility criteria for licensing as a RBIC as described in Sec. 4290.390(a) of this part, except the capital requirement specified in paragraph (a)(1) of that section, as determined solely by the Secretary; (ii) Has a viable business plan reasonably projecting profitable operations; and (iii) Has a reasonable timetable for achieving Regulatory Capital of at least $10,000,000. (2) A RBIC licensed under this exception is not eligible to receive Leverage until it has complied with paragraph (a) of this section. Sec. 4290.230 Private Capital for RBICs. (a) General. Private Capital means the contributed capital of a RBIC, plus unfunded binding commitments by Institutional Investors (including commitments evidenced by a promissory note) to contribute capital to a RBIC. (b) Contributed capital. For purposes of this section, contributed capital means the paid-in capital and paid-in surplus of a Corporate RBIC, the members' contributed capital of a LLC RBIC, or the partners' contributed capital of a Partnership RBIC, in each case subject to the limitations in paragraph (c) of this section. (c) Exclusions from Private Capital. Private Capital does not include: (1) Funds borrowed by an Applicant or a RBIC from any source. (2) Funds obtained through the issuance of Leverage. (3) Funds obtained directly or indirectly from the Federal government or any State (including by a political subdivision, agency or instrumentality of the Federal government or a State), except that the following categories of such funds are not excluded from Private Capital-- (i) Funds obtained directly or indirectly from the business revenues (excluding any governmental appropriation) of any federally- chartered or government-sponsored enterprise established prior to May 13, 2002; (ii) Funds invested by an employee welfare benefit plan or pension plan; and (iii) Qualified Non-private Funds in an amount not to exceed 33 percent of the total Private Capital of any Applicant or RBIC, provided, however, that in no event may any investor or [[Page 32212]] investors of Qualified Non-private Funds have the power to Control, directly or indirectly, the management, board of directors, general partners, or members of the RBIC. (4) Any portion of an unfunded commitment from an Institutional Investor with a net worth of less than $10 million that exceeds 10 percent of such Institutional Investor's net worth. (5) An unfunded commitment from an investor if the Secretary determines that the collectibility of the commitment is questionable. (d) Non-cash capital contributions. Capital contributions in a form other than cash are subject to the limitations in Sec. 4290.240 of this part. (e) Contributions with borrowed funds. You may not accept any capital contribution made with funds borrowed by a Person seeking to own an equity interest (whether direct or indirect, beneficial or of record) of at least 10 percent of your Private Capital. This exclusion does not apply if: (1) Such Person's net worth is at least twice the amount borrowed; or (2) The Secretary gives his or her prior written approval of the capital contribution. Sec. 4290.240 Limitations on non-cash capital contributions in Private Capital. Non-cash capital contributions to a RBIC or Applicant are included in Private Capital only if they are approved by the Secretary and they fall into one of the following categories: (a) Direct obligations of, or obligations guaranteed as to principal and interest by, the United States having a term of no more than one year. (b) Services rendered or to be rendered to you, priced at no more than their fair market value. (c) Other non-cash assets approved by the Secretary. Subpart D--Application and Approval Process for RBIC Licensing Sec. 4290.300 When and how to apply for a RBIC License. (a) Notice of Funds Availability (``NOFA''). The Secretary will publish a NOFA in the Federal Register advising potential applicants of the availability of funds for the RBIC program and inviting the submission of applications. The NOFA may specify limitations, special rules, procedures, and restrictions for a particular funding round. When submitting its application, an Applicant must comply with both this part 4290 and any requirements specified in the NOFA, including the opening and closing dates for submission of an application. (b) Application form. An Applicant must apply for a RBIC license using the application packet provided by the Secretary. Upon receipt of a completed application packet, the Secretary may request clarifying or technical information on the materials submitted as part of the application. Sec. 4290.310 Contents of application. Each Applicant must submit a complete application, including the following: (a) Management team experience. The Applicant must provide information generally as to the background, capability, education, reputation and training of its management team, including general partners, managers, officers, key personnel, and investment committee and governing board members. The Applicant also must provide information specifically on these individuals' qualifications and reputation in the areas of Community Development Finance and/or Relevant Venture Capital Finance, including the impact of these individuals' activities in these areas. (b) Amount of Regulatory Capital. The Applicant must indicate the amount of Regulatory Capital it has raised or proposes to raise, which amount must satisfy the requirements of Sec. 4290.210(a) of this part, unless the Applicant indicates that it has raised or proposes to raise at least $2,500,000 and is applying for an exception pursuant to Sec. 4290.210(b) of this part and includes in its application-- (1) A showing of special circumstances and good cause for the exception: (2) Will satisfy all eligibility criteria for licensing as a RBIC as set forth in Sec. 4290.390(a) of this part, except the capital requirement specified in paragraph (a)(1) of that section, as determined solely by the Secretary; (3) Has a viable business plan reasonably projecting profitable operations; and (4) Has a reasonable timetable for achieving Regulatory Capital in an amount that satisfies the requirements of Sec. 4290.210(a) of this part. (c) Comprehensive business plan. The Applicant must submit a comprehensive business plan covering at least a five-year period, addressing the specific items described in Sec. 4290.320, and which demonstrates that the Applicant has the capacity to operate successfully as a RBIC. Sec. 4290.320 Contents of comprehensive business plan. (a) Plan for Developmental Venture Capital investing. The Applicant must describe its plans and strategies for how it proposes to make successful Developmental Venture Capital investments in identified Rural Areas. (b) Working with Rural Area community-based organizations. The Applicant must describe how it intends to work with community-based organizations and local entities (including local economic development companies, local lenders, and local investors) in order to facilitate its Developmental Venture Capital investments. (c) Market analysis. The Applicant must provide an analysis of the Rural Areas in which it intends to focus its Developmental Venture Capital investments and Operational Assistance to Smaller Enterprises, demonstrating that the Applicant understands the market and the unmet Equity Capital needs in such areas and how its activities will meet these unmet needs and will have a positive economic impact on those areas. The Applicant also must analyze the extent of the demand in such areas for Developmental Venture Capital investments and any factors or trends that may affect the Applicant's ability to make effective Developmental Venture Capital investments. (d) Operational capacity and investment strategies. The Applicant must submit information concerning its policies and procedures for underwriting and approving its Developmental Venture Capital investments, monitoring its portfolio, and maintaining internal controls and operations. (e) Plan to raise Regulatory Capital. The Applicant must include a detailed description of how it plans to raise its Regulatory Capital if it has not yet done so at the time of application. The Applicant must discuss its potential sources of Regulatory Capital, the estimated timing for raising such funds, and the extent of the expressions of interest to commit such funds to the Applicant. (f) Plan for providing Operational Assistance. The Applicant must describe how it plans to use its grant funds to provide Operational Assistance to Smaller Enterprises in which it makes or expects to make Developmental Venture Capital investments. Its plan must address the types of Operational Assistance it proposes to provide, and how it plans to provide the Operational Assistance through the use of licensed professionals, when necessary, either from its own staff or from outside entities. (g) Projected amount of investment in Rural Areas. The Applicant must [[Page 32213]] describe how it proposes to meet the requirements set forth in Sec. 4290.700. An Applicant must project the amount of its total Regulatory Capital and Leverage that it proposes to invest in Smaller Enterprises and in Rural Business Concerns that are not Smaller Enterprises. The Applicant also must describe the amount of its total Regulatory Capital and Leverage that it proposes to invest in Urban Area Investments. (h) Projected impact. The Applicant must describe the criteria and economic measurements to be used to evaluate whether and to what extent it has met the objectives of the RBIC program. It must include: (1) A description of the extent to which it will concentrate its Developmental Venture Capital investments and Operational Assistance activities in identified Rural Areas; (2) An estimate of the economic development benefits to be created within identified Rural Areas over the next five years or more as a result of its activities; (3) A description of the criteria to be used to measure the benefits created as a result of its activities; (4) A discussion about the amount of such benefits created that it will consider to constitute successfully meeting the objectives of the RBIC program. (i) Affiliates and business relationships. The Applicant must submit information describing the management and financial strength of any parent or holding entity, affiliated firm or entity, or any other firm or entity essential to the success of the Applicant's business plan. Sec. 4290.330 Grant issuance fee. The Applicant must pay to the Secretary a grant issuance fee of $5,000. An Applicant must submit this fee in advance, at the time of application submission. Subpart E--Evaluation and Selection of RBICs Sec. 4290.340 Evaluation and selection--general. The Secretary on behalf of USDA and the Administrator on behalf of SBA, in their sole discretion, will evaluate and select an Applicant to participate in the RBIC program based on a review of the Applicant's application materials, interviews or site visits with the Applicant (if any), and background investigations conducted by the Secretary and other Federal agencies. The Secretary's evaluation and selection process is intended to-- (a) Ensure that Applicants are evaluated on a competitive basis and in a fair and consistent manner; (b) Take into consideration the unique proposals presented by Applicants; (c) Ensure that each Applicant licensed as a RBIC can fulfill successfully the goals of its comprehensive business plan; and (d) Ensure that the Secretary selects Applicants in such a way as to promote nationwide geographic distribution of Developmental Venture Capital investments. Sec. 4290.350 Eligibility and completeness. The Secretary will not consider any application that is not complete or that is submitted by an Applicant that does not meet the eligibility criteria described in subpart C of this part. The Secretary at his or her sole discretion, may request from an Applicant additional information concerning eligibility criteria or easily completed portions of the application in order to facilitate consideration of its application. Sec. 4290.360 Initial review of Applicant's management team's qualifications. The Secretary will review the information submitted by the Applicant concerning the qualifications of the Applicant's management team to determine in his or her sole discretion whether the team meets the minimum requirements deemed by the Secretary to be critical to successful venture capital investing. In making this determination, the Secretary will consider, among other things, the general business reputation of the owners and managers of the Applicant. Only those Applicants considered to have a management team qualified for venture capital investing will be further considered for selection as a RBIC. Sec. 4290.370 Evaluation criteria. Of those Applicants whose management team is considered qualified for venture capital investing and who have submitted an eligible and complete application, the Secretary on behalf of USDA and the Administrator on behalf of SBA, in their sole discretion, will evaluate and select an Applicant for participation in the RBIC program by considering the following criteria-- (a) Whether the Applicant's management team has the knowledge, experience, and capability necessary to manage a sound, economically viable RBIC and to comply with the Act; (b) The quality of the Applicant's comprehensive business plan in terms of meeting the objectives of the RBIC program; (c) The likelihood that the Applicant will achieve the goals described in its comprehensive business plan; (d) The strength and likelihood for success of the Applicant's operations and investment strategies, including whether the Applicant has projected adequate profitability and financial soundness; (e) Whether the Applicant will be able to operate soundly and profitably over the long term; (f) Whether the Applicant will be able to operate actively in its identified Rural Areas in accordance with its business plan; (g) The need for Developmental Venture Capital investments in the Rural Areas in which the Applicant intends to invest; (h) The extent to which the Applicant will concentrate its activities on serving Smaller Enterprises and Small Business Concerns located in the Rural Areas in which it intends to invest, including the ratio of resources that it proposes to invest in such Enterprises as compared to other Enterprises; (i) The Applicant's demonstrated understanding of the markets in the Rural Areas in which it intends to focus its activities; (j) The likelihood that and the time frame within which the Applicant will be able to raise the Regulatory Capital it proposes to raise for its investments; (k) The strength of the Applicant's proposal to provide Operational Assistance to Smaller Enterprises in which it plans to invest; (l) The extent to which the activities proposed by the Applicant will promote economic development and the creation of wealth and job opportunities in the Rural Areas in which it intends to invest and among individuals living in such Areas; and (m) The strength of the Applicant's application compared to applications submitted by other Applicants intending to invest in the same or proximate Rural Areas. Sec. 4290.380 Selection. From among the Applicants that have submitted eligible and complete applications, the Secretary on behalf of USDA and the Administrator on behalf of SBA, in their sole discretion, will select some, all, or none of such Applicants to participate in the RBIC program. Selection will entitle the Applicant to proceed with obtaining a license as a RBIC but only if the Applicant also meets the conditions set forth in Sec. 4290.390. Sec. 4290.390 Licensing as a RBIC. (a) Eligibility criteria for licensing as a RBIC. Each selected Applicant must [[Page 32214]] meet the following conditions before it is eligible to be licensed as a RBIC: (1) Raise, within a time period specified by the Secretary but not to exceed 12 months after selection under Sec. 4290.380 the specific amount of Regulatory Capital that the Applicant had projected in its application that it would raise (see Sec. 4290.210 for additional information); (2) Raise $500,000 in Leverageable Capital as required by Sec. 4290.210; (3) Complete and submit to the Secretary all legal and other documentation concerning the RBIC, including but not limited to its Articles and updated financial information concerning the RBIC in order to qualify for a Leverage commitment; and (4) Enter into a Participation Agreement with the Secretary. (b) Licensing as a RBIC. If the selected Applicant has satisfactorily met all the conditions specified in paragraph (a) of this section, as determined within the sole discretion of the Secretary, then the Secretary on behalf of USDA and the Administrator on behalf of SBA will license the Applicant as a RBIC. (c) Failure to meet eligibility criteria for licensing. Each selected Applicant that does not meet the eligibility criteria for licensing described in paragraph (a) of this section, within a time period specified by the Secretary, will not be licensed as a RBIC. Failure to meet any of those conditions, including but not limited to failure to raise the projected Regulatory Capital within the required time period, will cause the Applicant's selection to lapse. The Secretary will not restore the selection of such an Applicant after the expiration of that time period. After the expiration of that time period, an Applicant that is not licensed as a RBIC must cease to represent itself as a participant or potential participant in the RBIC program. (d) Effect of a RBIC license. The Participation Agreement executed by the Secretary with each Applicant licensed as a RBIC will include the following: (1) Approval to operate as a RBIC under the Act; (2) A commitment of Leverage; and (3) An Operational Assistance grant award. Subpart F--Changes in Ownership, Structure, or Control Changes in Control or Ownership of RBIC Sec. 4290.400 Changes in ownership of 10 percent or more of RBIC but no change of Control. You must obtain the Secretary's prior written approval for any proposed transfer or issuance of ownership interests that results in the ownership (beneficial or of record) by any Person, or group of Persons acting in concert, of at least 10 percent of any class of your stock, partnership capital or membership interests. Sec. 4290.410 Changes in Control of RBIC (through change in ownership or otherwise). You must obtain the Secretary's prior written approval for any proposed transaction or event that results in Control by any Person(s) not previously approved by the Secretary. Sec. 4290.420 Prohibition on exercise of ownership or Control rights in RBIC before approval. Without the Secretary's prior written approval, no change of ownership or Control may take effect and no officer, director, employee or other Person acting on your behalf shall: (a) Register on your books any transfer of ownership interest to the proposed new owner(s); (b) Permit the proposed new owner(s) to exercise voting rights with respect to such ownership interest (including directly or indirectly procuring or voting any proxy, consent or authorization as to such voting rights at any meeting of shareholders, partners or members); (c) Permit the proposed new owner(s) to participate in any manner in the conduct of your affairs (including exercising control over your books, records, funds or other assets; participating directly or indirectly in any disposition thereof; or serving as an officer, director, partner, manager, employee or agent); or (d) Allow ownership or Control to pass to another Person. Sec. 4290.430 Notification of transactions that may change ownership or Control. You must promptly notify the Secretary as soon as you have knowledge of transactions or events that may result in a transfer of Control or ownership of at least 10 percent of your Regulatory Capital. If the effect of a particular transaction or event is unclear, you must report all pertinent facts to the Secretary. Sec. 4290.440 Standards governing prior approval for a proposed transfer of Control. The Secretary's approval of a proposed transfer of Control is contingent upon full disclosure of the real parties in interest, the source of funds for the new owners' interest, and other data requested by the Secretary. As a condition of approving a proposed transfer of control, the Secretary may: (a) Require an increase in your Regulatory Capital; (b) Require the new owners or the transferee's Control Person(s) to assume, in writing, personal liability for your Leverage, effective only in the event of their direct or indirect participation in any transfer of Control not approved by the Secretary; or (c) Require compliance with any other conditions set by the Secretary, including compliance with the requirements for minimum capital and management-ownership diversity in effect at such time for new RBICs. Sec. 4290.450 Notification of pledge of RBIC's shares. (a) You must notify the Secretary in writing, within 30 calendar days, of the terms of any transaction in which: (1) Any Person, or group of Persons acting in concert, pledges shares of your stock (or equivalent ownership interests) as collateral for indebtedness; and (2) The shares pledged constitute at least 10 percent of your Regulatory Capital. (b) If the transaction creates a change of ownership or Control, you must comply with Sec. 4290.400 or Sec. 4290.410, as appropriate. Restrictions on Common Control or Ownership of Two or More RBICs Sec. 4290.460 Restrictions on Common Control or ownership of two (or more) RBICs. Without the Secretary's prior written approval, you must not have an officer, director, manager, Control Person, or owner (with a direct or indirect ownership interest of at least 10 percent) who is also: (a) An officer, director, manager, Control Person, or owner (with a direct or indirect ownership interest of at least 10 percent) of another RBIC; or (b) An officer or director of any Person that directly or indirectly controls, or is controlled by, or is under Common Control with, another RBIC. Change in Structure of RBIC Sec. 4290.470 Prior approval of merger, consolidation, or reorganization of RBIC. You may not merge, consolidate, change form of organization [[Page 32215]] (corporation, limited liability company, or limited partnership) or reorganize without the Secretary's prior written approval. Any such merger, consolidation, or change of form is subject to Sec. 4290.440. Sec. 4290.480 Prior approval of changes to RBIC's business plan. Without the Secretary's prior written approval, no change in your business plan, upon which you were selected and licensed as a RBIC, may take effect. Subpart G--Managing the Operations of a RBIC General Requirements Sec. 4290.500 Lawful operations under the Act. You must engage only in the activities permitted by the Act and in no other activities. Sec. 4290.502 Representations to the public. You may not represent or imply to anyone that the Secretary, the U.S. Government, or any of its agencies or officers has approved any ownership interests you have issued, obligations you have incurred, or Financings you have made. You must include a statement to this effect in any solicitation provided to investors. Example: You may not represent or imply that ``USDA stands behind the RBIC'' or that ``Your capital is safe because the Secretary's experts review proposed investments to make sure they are safe for the RBIC.'' Sec. 4290.503 RBIC's adoption of an approved valuation policy. (a) Valuation guidelines. You must prepare, document and report the valuations of your Loans and Investments in accordance with the Valuation Guidelines for SBICs issued by SBA. These guidelines may be obtained from SBA's Investment Division or at http://www.sba.gov/INV/valuation.pdf. (b) The Secretary's approval of valuation policy. You must have a written valuation policy approved by the Secretary for use in determining the value of your Loans and Investments. You must either: (1) Adopt without change the model valuation policy set forth in section III of the Valuation Guidelines for SBICs; or (2) Obtain the Secretary's prior written approval of an alternative valuation policy. (c) Responsibility for valuations. Your board of directors, managing member(s), or general partner(s) will be solely responsible for adopting your valuation policy and for using it to prepare valuations of your Loans and Investments for submission to the Secretary. If the Secretary reasonably believes that your valuations, individually or in the aggregate, are materially misstated, he or she reserves the right to require you to engage, at your expense, an independent third party acceptable to the Secretary to substantiate the valuations. (d) Frequency of valuations. (1) You must value your Loans and Investments at the end of the second quarter of your fiscal year, and again at the end of your fiscal year. (2) On a case-by-case basis, the Secretary may require you to perform valuations more frequently. (3) You must report material adverse changes in valuations at least quarterly, within 30 days following the close of the quarter. (e) Review of valuations by independent public accountant. (1) For valuations performed as of the end of your fiscal year, your independent public accountant must review your valuation procedures and the implementation of such procedures, including adequacy of documentation. (2) The independent public accountant's report on your audited annual financial statements (SBA Form 468) must include a statement that your valuations were prepared in accordance with your approved valuation policy. Sec. 4290.504 Equipment and office requirements. (a) Computer capability. You must have a personal computer with access to the Internet and be able to use this equipment to prepare reports, for which you will receive the necessary software, and transmit such reports to the Secretary. In addition, you must have the capability to send and receive electronic mail. (b) Facsimile capability. You must be able to receive facsimile messages 24 hours per day at your primary office. (c) Accessible office. You must maintain an office that is convenient to the public and is open for business during normal working hours. Sec. 4290.506 Safeguarding the RBIC's assets/Internal controls. You must adopt a plan to safeguard your assets and monitor the reliability of your financial data, personnel, Portfolio, funds and equipment. You must provide your bank and custodian with a certified copy of your resolution or other formal document describing your control procedures. Sec. 4290.507 Violations based on false filings and nonperformance of agreements with the Secretary or SBA. The following shall constitute a violation of this part: (a) Nonperformance. Failure to perform any of the requirements of any Debenture or of any written agreement with the Secretary or SBA. (b) False statement. In any document submitted to the Secretary or SBA: (1) Any false statement knowingly made; or (2) Any misrepresentation of a material fact; or (3) Any failure to state a material fact. (4) A material fact is any fact that is necessary to make a statement not misleading in light of the circumstances under which the statement was made. Sec. 4290.508 Compliance with non-discrimination laws and regulations applicable to federally-assisted programs. In conducting your operations and providing Assistance to your Portfolio Concerns, you must comply with Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d-1 et seq.), the Age Discrimination Act of 1975 (Pub. L. 94-135, Title III), and Title V of the Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.) and the following regulations promulgated by USDA to implement and enforce such laws: 7 CFR part 15. Sec. 4290.509 Employment of USDA or SBA officials. (a) Without the Secretary's prior written approval, for a period of two years after the date of your most recent issuance of Leverage or after the receipt of any assistance as defined in paragraph (b) of this section, you are not permitted to employ, offer employment to, or retain for professional services, any person who: (1) Served as an officer, attorney, agent, or employee of SBA or USDA within one year before such date; and (2) In that capacity, occupied a position or engaged in activities which, in SBA's or the Secretary's determination, involved discretion with respect to the issuing of Leverage or the granting of such assistance. (b) For purposes of this section, ``assistance'' means financial, contractual, grant, managerial, or other aid, including licensing, certifications, and other eligibility determinations made by USDA or SBA, and any express decision to compromise or defer possible litigation or other adverse action. [[Page 32216]] Management and Compensation Sec. 4290.510 Approval of RBIC's Investment Adviser/Manager. (a) General. You may employ an Investment Adviser/Manager who will be subject to the supervision of your board of directors, managing member(s), or general partner(s). If you have Leverage or plan to seek Leverage, you must obtain the Secretary's prior written approval of the management contract. Approval of an Investment Adviser/Manager for one RBIC does not indicate approval of that manager for any other RBIC. (b) Management contract. The contract must: (1) Specify the services the Investment Adviser/Manager will render to you and to your Portfolio Concerns; and (2) Indicate the basis for computing Management Expenses. (c) Material change to approved management contract. Any proposed material change must be approved by both you and the Secretary in advance. If you are uncertain whether the change is material, submit the proposed revision to the Secretary. Sec. 4290.520 Management Expenses of a RBIC. The Secretary must approve your initial Management Expenses and any increases in your Management Expenses. (a) Definition of Management Expenses. Management Expenses include: (1) Salaries; (2) Office expenses; (3) Travel; (4) Business development, including finders' fees; (5) Office and equipment rental; (6) Bookkeeping; and (7) Expenses related to developing, investigating and monitoring investments. (b) Management Expenses do not include services provided by specialized outside consultants, outside lawyers and independent public accountants, if they perform services not generally performed by a venture capital company. Cash Management by a RBIC Sec. 4290.530 Restrictions on investments of idle funds by RBICs. (a) Permitted investments of idle funds. Funds not invested in Portfolio Concerns must be maintained in: (1) Direct obligations of, or obligations guaranteed as to principal and interest by, the United States, which mature within 15 months from the date of the investment; or (2) Repurchase agreements with federally insured institutions, with a maturity of seven days or less. The securities underlying the repurchase agreements must be direct obligations of, or obligations guaranteed as to principal and interest by, the United States. The securities must be maintained in a custodial account at a federally insured institution; or (3) Certificates of deposit with a maturity of one year or less, issued by a federally insured institution; or (4) A deposit account in a federally insured institution, subject to a withdrawal restriction of one year or less; or (5) A checking account in a federally insured institution; or (6) A reasonable petty cash fund. (b) Deposit of funds in excess of the insured amount. (1) General rule. You are permitted to deposit in a federally insured institution funds in excess of the institution's insured amount, but only if the institution is ``well capitalized'' in accordance with the definition set forth in regulations of the Federal Deposit Insurance Corporation (12 CFR 325.103). (2) Exception. You may make a temporary deposit (not to exceed 30 days) in excess of the insured amount, in a transfer account established to facilitate the receipt and disbursement of funds or to hold funds necessary to honor Commitments issued. (c) Deposit of funds in Associate institution. A deposit in, or a repurchase agreement with, a federally insured institution that is your Associate is not considered a Financing of such Associate under Sec. 4290.730, provided the terms of such deposit or repurchase agreement are no less favorable than those available to the general public. Secured Borrowing by RBICs Sec. 4290.550 Prior approval of secured third-party debt of RBICs. (a) Definition. In this Sec. 4290.550, ``secured third-party debt'' means any debt that is secured by any of your assets and not guaranteed by the Secretary, including secured guarantees and other contingent obligations that you voluntarily assume and secured lines of credit. (b) General rule. You must get the Secretary's written approval before you incur any secured third-party debt or refinance any debt with secured third-party debt, including any renewal of a secured line of credit, increase in the maximum amount available under a secured line of credit, or expansion of the scope of a security interest or lien. For purposes of this paragraph (b), ``expansion of the scope of a security interest or lien'' does not include the substitution of one asset or group of assets for another, provided the asset values (as reported on your most recent annual SBA Form 468) are comparable. (c) Conditions for approval. As a condition of granting its approval under this Sec. 4290.550, the Secretary may impose such restrictions or limitations as he or she deems appropriate, taking into account your historical performance, current financial position, proposed terms of the secured debt and amount of aggregate debt you will have outstanding (including Leverage). The Secretary will not favorably consider any requests for approval which include a blanket lien on all your assets, or a security interest in your investor commitments in excess of 125 percent of the proposed borrowing. (d) Thirty-day approval. Unless the Secretary notifies you otherwise within 30 days after he or she receives your request, you may consider your request automatically approved if: (1) You are in regulatory compliance; (2) The security interest in your assets is limited to either those assets being acquired with the borrowed funds or an asset coverage ratio of no more than 2:1; (3) Your request is for approval of a secured line of credit that would not cause your total outstanding borrowings (not including Leverage) to exceed 50 percent of your Leverageable Capital. Voluntary Decrease in Regulatory Capital Sec. 4290.585 Voluntary decrease in RBIC's Regulatory Capital. You must obtain the Secretary's prior written approval to reduce your Regulatory Capital by more than two percent in any fiscal year. At all times, you must retain sufficient Regulatory Capital to meet the minimum capital requirements in the Act and Sec. 4290.210, and sufficient Leverageable Capital to avoid having excess Leverage in violation of section 384E(d) of the Act. Subpart H--Recordkeeping, Reporting, and Examination Requirements for RBICs Recordkeeping Requirements for RBICs Sec. 4290.600 General requirement for RBIC to maintain and preserve records. (a) Maintaining your accounting records. You must establish and maintain your accounting records using SBA's standard chart of accounts for SBICs, unless the Secretary approves otherwise. You may obtain this chart of accounts from SBA or at http://www.sba.gov/INV/chartof.pdf. [[Page 32217]] (b) Location of records. You must keep the following records at your principal place of business or, in the case of paragraph (b)(3) of this section, at the branch office that is primarily responsible for the transaction: (1) All your accounting and other financial records; (2) All minutes of meetings of directors, stockholders, executive committees, partners, members, or other officials; and (3) All documents and supporting materials related to your business transactions, except for any items held by a custodian under a written agreement between you and a Portfolio Concern or lender, or any securities held in a safe deposit box, or by a licensed securities broker in an amount not exceeding the broker's per-account insurance coverage. (c) Preservation of records. You must retain all the records that are the basis for your financial reports. Such records must be preserved for the periods specified in this paragraph (c) and must remain readily accessible for the first two years of the preservation period. (1) You must preserve for at least 15 years or, in the case of a Partnership RBIC or LLC RBIC, at least two years beyond the date of liquidation: (i) All your accounting ledgers and journals, and any other records of assets, asset valuations, liabilities, equity, income, and expenses; (ii) Your Articles, bylaws, minute books, and RBIC application; and (iii) All documents evidencing ownership of the RBIC including ownership ledgers and ownership transfer registers. (2) You must preserve for at least six years all supporting documentation (such as vouchers, bank statements, or canceled checks) for the records listed in paragraph (b)(l) of this section. (3) After final disposition of any item in your Portfolio, you must preserve for at least six years: (i) Financing applications and Financing instruments; (ii) All loan, participation, and escrow agreements; (iii) All certifications listed in Sec. 4290.610 of this part; (iv) Any capital stock certificates and warrants of the Portfolio Concern that you did not surrender or exercise; and (v) All other documents and supporting material relating to the Portfolio Concern, including correspondence. (4) You may substitute a microfilm or computer-scanned or generated copy for the original of any record covered by this paragraph (c). (d) Additional requirement. You must comply with the recordkeeping and record retention requirements set forth in Circular A-110 of the Office of Management and Budget. (OMB Circulars are available from the addresses listed in 5 CFR 1310.3 and at http://www.whitehouse.gov/omb/circulars/index.html.) Sec. 4290.610 Required certifications for Loans and Investments. For each of your Loans and Investments, you must have the documents listed in this section. You must keep these documents in your files and make them available to the Secretary upon request. (a) For each Financing made to a Rural Business Concern or Smaller Enterprise, a certification by the Portfolio Concern stating the basis for its qualification as a Rural Business Concern or Smaller Enterprise. (b) For each Financing made to a Small Business Concern, Size Status Declaration (SBA Form 480), executed both by you and by the Portfolio Concern certifying that the concern is a Small Business Concern. For securities purchased from an underwriter in a public offering, you may substitute a prospectus showing that the concern is a Small Business Concern. (c) A certification by the Portfolio Concern that it will not discriminate in violation of Title VI of the Civil Rights Act of 1964, the Age Discrimination Act of 1975, and Title V of the Equal Credit Opportunity Act. (d) A certification by the Portfolio Concern of the intended use of the proceeds. For securities purchased from an underwriter in a public offering, you may substitute a prospectus indicating the intended use of proceeds. Sec. 4290.620 Requirements to obtain information from Portfolio Concerns. All the information required by this section is subject to the requirements of Sec. 4290.600 and must be in English. (a) Information for initial Financing decision. Before extending any Financing, you must require the Enterprise to submit such financial statements, plans of operation (including intended use of financing proceeds), cash flow analyses, projections, and such economic development information about the Enterprise, as are necessary to support your investment decision. The information submitted must be consistent with the size and type of the Enterprise and the amount of the proposed Financing. (b) Updated financial and economic development information. (1) The terms of each Financing must require the Portfolio Concern to provide, at least annually, sufficient financial and economic development information to enable you to perform the following required procedures: (i) Evaluate the financial condition of the Portfolio Concern for the purpose of valuing your investment; (ii) Determine the continued eligibility of the Portfolio Concern; (iii) Verify the use of Financing proceeds; (iv) Evaluate the economic development impact of the Financing; and (v) In the case of any Portfolio Concern that is not a Rural Business Concern, the number and percentage of its employees residing in Rural Areas. (2) The president, chief executive officer, treasurer, chief financial officer, general partner, or proprietor of the Portfolio Concern must certify the information submitted to you. (3) For financial and valuation purposes, you may accept a complete copy of the Federal income tax return filed by the Portfolio Concern (or its proprietor) in lieu of financial statements, but only if appropriate for the size and type of the Enterprise involved. (4) The requirements in this paragraph (b) do not apply when you acquire securities from an underwriter in a public offering (see Sec. 4290.825). In that case, you must keep copies of all reports furnished by the Portfolio Concern to the holders of its securities. (c) Information required for examination purposes. You must obtain any information requested by the Secretary's examiners for the purpose of verifying the certifications made by a Portfolio Concern under Sec. 4290.610. In this regard, your Financing documents must contain provisions requiring the Portfolio Concern to give you and/or the Secretary's examiners access to its books and records for such purpose. Reporting Requirements for RBICs Sec. 4290.630 Requirement for RBICs to file financial statements and supplementary information with the Secretary (SBA Form 468). (a) Annual filing of SBA Form 468. For each fiscal year, you must submit financial statements and supplementary information pr