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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: November 12, 2002

SUBJECT: Small Business Administration; New Markets Venture Capital (NMVC) Program

SOURCE: Federal Register, November 12, 2002, Vol. 67, No. 218, page 68498

AGENCIES: Small Business Administration (SBA)

ACTION: Final Rule

SYNOPSIS: The SBA is amending its NMVC regulations to make five substantive amendments which SBA believes will result in more efficient and effective delivery of NMVC program benefits to the targeted geographic areas. Also, the final rule makes technical changes, correct typographical errors, and clarifies language.

EDITOR'S NOTE: The SBA's regulations being amended by this final rule are in Title 13 of the Code of Federal Regulations (CFR), Chapter 1, Small Business Administration, Part 108, New Markets Venture Capital ("NMVC") Program.

For more on the proposed rule, see the May 20, 2002, FEDERAL CONTRACTS DISPATCH "Small Business Administration; New Markets Venture Capital (NMVC) Program."

EFFECTIVE DATE: December 12, 2002.

FOR FURTHER INFORMATION CONTACT: Austin J. Belton, Director of New Markets Venture Capital, 202-205-7027.

SUPPLEMENTAL INFORMATION: The New Markets Venture Capital Program Act of 2000, part of the Consolidated Appropriations Act of 2001 (Public Law 106-554), was implemented by a final rule published on May 23, 2001 (see the May 23, 2001, FEDERAL CONTRACTS DISPATCH "Small Business Administration (SBA); New Markets Venture Capital Program").

The NMVC program is an equity venture capital program designed to promote the economic development of, and address the unmet equity capital needs of smaller enterprises located in, low-income geographic areas ("LI areas"). On May 20, 2002, after SBA's first year of experience in creating and administering this new program, SBA proposed several substantive changes which it believed would result in more efficient and effective delivery of NMVC program benefits to the targeted LI areas and businesses. SBA believed that these changes would result in reduced operational costs for the program to both the government, the NMVC companies, and to the beneficiary small businesses financed by the NMVC companies with SBA leverage. One comment was received on the proposed rule, and the rule is finalized with a minor editorial correction.

The following are the five substantive changes SBA is making to 13 CFR Part 108:

  1. Paragraph (d) of Section 108.230, Private Capital for NMVC Companies, is revised to allow organizational and management expenses incurred prior to SBA's final approval of the NMVC company to be credited in whole or part against the regulatory capital the NMVC company is required to raise.

  2. Paragraph (k) of Section 108.360, Evaluation Criteria, and paragraph (h) of new Section 108.2006, Evaluation and Selection of SSBICs [Specialized Small Business Investment Companies], allow SBA, when making selections as to which applicants will receive conditional approval, to compare the applications submitted by SSBICs with NMVC company applications from the same or proximate LI areas.

  3. New Section 108.900, Fees for Management Services Provided to a Small Business by a NMVC Company or its Associate, establishes rules governing fees an NMVC company or its associates may charge for management services provided to small businesses in which the NMVC company invests. Section 108.900 is based on the small business investment company (SBIC) program regulations at Section 107.900, Management Fees for Services Provided to a Small Business by Licensee or Its Associate, and governs fees for management services and similar services charged by an NMVC company or its associates to small businesses that the NMVC company finances (for example, negotiating bank debt, sale of the company, or a lease, or structuring an employee stock ownership plan). Paragraph (b) of Section 108.900 requires SBA's prior written approval of all such fees charged. However, paragraph (a) states that Section 108.900 does not apply to operational assistance that an NMVC company or its associate provides to a business that the NMVC company has financed or in which it expects to make a financing, and paragraph (a) further states that the NMVC company may not charge the business a fee for such operational assistance.

    In addition, paragraph (b)(5) requires that at least 50% of all management service fees paid to an associate (as defined in Section 108.50, Definition of Terms) of an NMVC company by a small business must be allocated back to the NMVC company for its benefit.

  4. The application process for SSBICs is revised so it is more like the application process for NMVC companies (and so it is easier to compare applications from NMVC companies with SSBICs as specified in Section 108.360 and Section 108.2006 -- see above). For example, paragraph (f) of Section 108.2005, Contents of Plan Submitted by SSBICs, requires SSBICs to identify specific LI areas they are targeting.

  5. Paragraph (b) of Section 108.2010, Restrictions on Use of Operational Assistance Grant Funds, add a requirement that NMVC companies must use at least 80% of their grant funds (both funds from SBA and grant matching resources) to provide operational assistance to smaller enterprises whose principal office is located in an LI area at the time the operational assistance commenced.

The NMVC program has a one-time no-year appropriation of $52 million to fund newly formed NMVC companies. To date, seven applicants have been selected as conditionally-approved NMVC companies. SBA anticipates future application rounds, and the amendments concerning the application process will affect those seven applicants as well as applicants in those future application rounds.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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