ceeds 10 percent of such Institutional Investor's net worth, except to the extent that such excess is backed by a letter of credit from another Institutional Investor.

(c) Qualified nonprivate funds. “Qualified nonprivate funds" means:

(1) Funds directly or indirectly invested in any Licensee on or before August 16, 1982 by any Federal agency except SBA, pursuant to a statute explicitly mandating the inclusion of such funds in "Private Capital";

(2) Funds directly or indirectly invested in any Licensee by any Federal agency pursuant to a statute that is enacted after September 4, 1992, explicitly mandating the inclusion of such funds in "Private Capital";

(3) Funds invested in any Licensee by any State or local government entity, including the amount of any guarantee extended by such entity; and

(4) In any section 301(d) Licensee or such applicant, funds invested which are income derived from the investment of grants that have been made by a state or local government agency or instrumentality into a nonprofit corporation or institution exercising discretionary authority with respect to such funds; and funds invested by a State financing agency, or similar agency or instrumentality, to the extent such funds are derived from such agency's income and not from appropriated State or local funds; Provided, however, that for any Licensee or applicant, the funds described in paragraph (CX3) of this definition shall not exceed 33% of Regulatory Capital.

Profit Participation means a specified percentage of a Licensee's Earmarked Profits which is computed in accordance with §107.244 and to which SBA is entitled, by agreement, in consideration for its guarantee of such Licensee's Participating Securities.

Publicly Traded and Marketable means securities that are salable without restriction or that are salable within 12 months pursuant to Rule 144 of the Securities Act of 1933, as amended, by the holder thereof (or in the case of an Inkind Distribution by the distributee thereof), and are of a class which (a) is traded on a regulated stock exchange. or it is listed in the Automated Quotation System of the National As

Dealers

sociation of Securities (NASDAQ), or (c) has, at a minimum, at least two market makers as defined in the relevant sections of the Securities Exchange Act of 1934, as amended, 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 Borrowing means a loan to a Licensee bearing interest at a rate not in excess of the usual rate charged on the date of the loan by banks in the locality in which the Licensee's principal office is located; and/or a Debenture purchased or guaranteed by SBA. See §107.302.

Qualified Investments shall have the meaning set forth in §107.230(c)(4)(iv).

Real Estate Investment means a Licensee's Financing of a Small Concern which is classified as a real estate concern under Industry Numbers 6531, 6541 and 6552 of the SIC Manual. For restrictions governing Real Estate Investments, see §§ 107.101(c) and 107.901(c),

Realized Gain (Loss) on Securities means the amount by which proceeds from the disposition of Loans and Investments are greater than (less than) the cost or other basis permitted by SBA. Disposition of Loans and Investments shall include sale, exchange, write-off, recoveries from prior disposition, or any other such transaction resulting in recognition of a gain or loss.

Redemption Price means the amount required to be paid by the issuer, or successor to the issuer, of Preferred or Participating Securities to repurchase such securities from the holder. The Redemption Price shall be the Original Issue Price less any prepayments or prior redemptions.

Regulatory Capital.-(a) General. Regulatory Capital means Private Capital, excluding non-cash assets contributed to a Licensee or a license applicant and non-cash assets purchased by a license applicant unless such assets have been converted to cash or have been approved by SBA for inclusion in Regulatory Capital. For purposes of this def. inition, sales of contributed non-caah assets with or borrowing against such assets shall not constitute a conversion to cast.

(3) Exclusions. The amount of a com mitment, the collectiblity A WLICA

SBA determines to be questionable, shall also be excluded from Regulatory Capital.

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 may be distributed to investors (including SBA) or transferred to Private Capital.

SBA means the Small Business Administration, 409 Third Street, SW., Washington, DC 20416.

Section 301(c) Licensee means an SBIC organized as a for-profit corporation, a limited liability company or a limited partnership organized in accordance with §107.4, and licensed pursuant to section 301(c) of the Act.

Section 301(d) Licensee means an SBIC organized as a for-profit corporation, a non-profit corporation, a limited liability company or a limited partnership organized in accordance with section 107.4, and licensed pursuant to section 301(d) of the Act. Such Licensees are permitted to provide assistance only to Disadvantaged Concerns.

Short-term financing means Financing for a term of less than five years in accordance with the regulations.

SIC Manual means the latest issue of the Standard Industrial Classification Manual, prepared by the Office of Management and Budget, and available from the U.S. Government Printing Office.4

Small Concern means a small business concern as defined in section 103(5) of the Act (including affiliates as defined in §121.401 of this title), which for purposes of size eligibility meets the applicable criteria set forth in § 121.802(a)(2) of part 121 of this title.

Smaller Concern means a concern that together with its affiliates does not have net worth in excess of $6.0 million, and does not have average net income after Federal income taxes (excluding any carry-over losses) for the preceding two years in excess of $2.0 million; or a concern that together with its affiliates, meets the size standard in effect at the time of the Financing for the industry in which it is then

As of January 1991, the latest edition of the SIC Manual was 1987.

primarily engaged, and excluding its affiliates meets the size standard in effect at the time of the Financing for the industry in which it is then primarily engaged.

Subdivider and Developer. “Subdivider and Developer" means a Small Concern whose primary business involves the acquisition of unimproved land and its subsequent improvement for the purpose of selling vacant lots to others.

Trust means the legal entity created for the purpose of holding guaranteed Debentures or Participating Securities 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 Participating Securities are issued by the Secretary of the Treasury taking into consideration the current average market yield on outstanding marketable obligations of the United States with maturities comparable to the maturities of the Trust Certificates being guaranteed by SBA, adjusted to the nearest one-eighth of one percent.

Trust Certificates (TCs) means certificates issued by SBA, its agent or Trustee and representing ownership of all or a fractional part of a Trust or Pool of Debentures or Participating Securities.

Trustee means the trustees or trustees of a Trust.

Undistributed Net Realized Earnings means Undistributed Realized Earnings less Non-cash Gains/Income as reported on SBA Form 468.

Undistributed Realized Earnings means the cumulative sum of Net Investment Income plus Realized Gain (Loss) on Sale of Securities, less the cumulative sum of Distributions of Earned Prioritized Payments and Other Distributions made from Retained Earnings Available for Distribution.

Unincorporated Licensee: See Licensee. Unrealized Appreciation means the amount by which a Licensee's valuation of Loans and Investments, as determined by its Board of Directors or General Partner(s) in accordance with Licensee's valuation policies, exceeds the cost basis thereof.

Unrealized Depreciation means the amount by which a Licensee's valu

ation of Loans and Investments, as determined by its Board of Directors or General Partner(s) in accordance with Licensee's valuation policies, is below the cost basis thereof.

Unrealized Gain (Loss) on Securities Held means the amount by which a Licensee's aggregate valuation of its Loans and Investments is above (below) their aggregate cost basis, and is equal to the sum of the Unrealized Appreciation and Unrealized Depreciation on all Loans and Investments, net of estimated future income tax expense or estimated realizable future income tax benefit, as appropriate.

Venture Capital Financing shall have the meaning set forth in §107.230(c)(3). [48 FR 45017, Sept. 30, 1983, as amended at 49 FR 13864, Apr. 9, 1984; 49 FR 43541, Oct. 29, 1984; 51 FR 40001, Nov. 4, 1986; 55 FR 28169, July 10, 1990; 55 FR 40357, Oct. 2, 1990; 56 FR 13583, Apr. 3, 1991; 56 FR 31777, July 11, 1991; 57 FR 49389, Nov. 2, 1992; 59 FR 16916, 16943, Apr. 8, 1994]

$107.4 Limited partnership SBIC.

(a) General. A limited partnership organized under State law solely for the purpose of performing the functions and conducting the activities contemplated under the Act may apply for a license pursuant to section 301(c) or section 301 (d) of the Act.

(b) Application. The following requirements shall apply to an application submitted by or on behalf of a limited partnership:

(1) Number of General Partners. A Licensee shall have as its general partners at least two individuals; or one or more corporations (including limited liability corporations), or one or more partnerships (including limited partnerships), or any combination of individuals, and/or corporations, and/or partnerships. General partners of a general partner of an Unincorporated Licensee shall be considered for all purposes to be general partners of such Licensee. For the status of limited partners of a limited partnership that serves as a general partner of a Licensee, see the definition of Control Person in §107.3.

(2) General Partner. A general partner which is a corporation, limited liability company or limited partnership (an "Entity General Partner") shall be or

ganized under state law solely for service as such and its Articles or Certificate of Incorporation or Limited Partnership Agreement or other similar governing instrument (which, in each case, shall accompany the license application) shall specify that no person shall serve as an officer, director or general partner without SBA's approval. No Entity General Partner may serve as such for any other Licensee and where an Entity General Partner is a limited partnership, such partnership shall be subject to the number of general partners defined in paragraph (b)(1) of this section. An Entity General Partner is subject to the same examination and reporting requirements as a Licensee under section 310(b) of the Act. The restrictions and obligations imposed upon a Licensee by §§ 107.210 through 107.263, and 107.601, 107.603, 107.701, 107.702, 107.703, 107.709, 107.801, 107.802, 107.803, 107.1001, 107.1002, and 107.1004 apply also to an Entity general partner of a Licensee.

(3) Articles of Partnership. The Articles shall be transmitted to SBA with the application and shall provide that

(i) The partnership shall have a minimum duration of not less than the longer of ten years or two years following the maturity of the last-maturing security issued by the partnership evidencing Leverage from SBA. After 10 years and provided all Leverage has been repaid or redeemed and provided that all amounts due SBA, its agency, or trustee have been paid, the partnership may be terminated by a vote of the Licensee's partners. (For purposes of this provision SBA shall not be considered a partner.)

(ii) No general partner may be removed or replaced by the limited partners without prior written approval of SBA; and

(iii) Any transferee of, or successor in interest to, a general partner shall have only the rights and liabilities of a limited partner pending SBA's written approval of such transfer or succession.

(c) Obligations of a Control Person. All Control Persons are bound by the disciplinary provisions of sections 313 and 314 of the Act and by the conflict-of-interest rules under section 312 of the Act. The term Licensee, as used in §§ 107.602, 107.701 and 107.1004 includes a

Control Person of a Licensee. The term Licensee as used in §107.1101 includes only a general partner. The conditions specified in §§ 107.210 through 107.263 shall apply to all general partners; the conditions specified in §107.210(e) shall apply to all Control Persons. The events of default enumerated in the preceding sentence shall be deemed to have been agreed to by the Unincorporated Licensee.

(d) Liability of general partner for partnership debts to SBA. Subject to section 314 of the Act, the general partner of an Unincorporated Licensee shall not be liable solely by reason of its status as a general partner for repayment of any debts owed by the Licensee to SBA unless SBA, in the exercise of reasonable investment prudence, and with regard to the financial soundness of such Unincorporated Licensee, shall determine otherwise prior to the purchase or guaranty of such Unincorporated Licensee's debentures.

(e) Reorganization of Corporate Licensee. A corporate Licensee wishing to reorganize as an Unincorporated Licensee, or an Unincorporated Licensee wishing to reorganize as a Corporate Licensee, may apply to SBA for approval pursuant to §107.803 of these Regulations.

(f) Special Leverage requirement. Prior to the extension of any Leverage, an Unincorporated Licensee shall furnish SBA with evidence that it qualifies as a partnership for tax purposes, either by a ruling from the Internal Revenue Service, or by any opinion of counsel.

[48 FR 45017, Sept. 30, 1983, as amended at 55 FR 40357, Oct. 2, 1990; 56 FR 13583, Apr. 3, 1991; 59 FR 16945, Apr. 8, 1994]

OPERATIONAL REQUIREMENTS

$107.101 Operational requirements. All Licensees shall comply with the following requirements:

(a) Management. Each Licensee shall have and maintain qualified management (or an Investment Adviser/Manager pursuant to § 107.709) in charge of its operations who will be available during normal business hours to the public. Any manager of a Licensee shall be deemed an officer thereof. When applying for a license or for Leverage, a Licensee must demonstrate,

to the satisfaction of SBA, that its management has the knowledge, experience and capability necessary for investing in the types of businesses contemplated by the Act, these regulations, and Licensee's Plan of Operations. Neither management, nor any board of directors, nor any general partner shall be controlled either directly or indirectly by investors of qualified non-private funds.

(b) Office. The Licensee shall maintain a reasonably accessible office, which will display the license, and the name of the Licensee, have a listed telephone number, and be open to the public during regular business hours.

(c) Diversified investment policy-real estate and motion pictures. Unless specifically authorized in writing by SBA:

(1) General rule. No Licensee shall maintain more than one-third of its portfolio, as of the close of any full fiscal year, in: (i) Permitted real estate investments, or (ii) investments in Small Concerns engaged in motion picture production and distribution (classified under Industry Nos. 7813, 7814, 7823, and 7824 of the SIC Manual). For further provisions governing real estate investments, see §107.901(c). For statement of general policy concerning motion picture specialist-Licensees, see 42 FR 60729, November 29, 1977.

(2) Licensees other than real estate specialists. Where a Licensee does not operate as an approved real estate specialist subject to paragraph (c)(3) of this section, its investments in Small Concerns classified under Major Groups 15, 65 and/or 70 of the SIC Manual shall not exceed one-third of its Portfolio in any one such Major Group, nor two-thirds for any combination of such Major Groups, as of the close of any full fiscal year.

(3) Real estate specialists. Where a Licensee maintains more than one-third of its Portfolio in Real Estate Investments pursuant to an investment policy approved by SBA, the total of its investments in Small Concerns classified under Major Group 15 (Building Construction-General Contractors and Operative Builders) and Major Group 70 (Hotels, Rooming Houses, Camps and Other Lodging Places) of the SIC Manual shall not exceed twenty percent of

its Portfolio as of the close of any full fiscal year.

(4) Prepayments. Prepayments of outstanding Financing or similar events occurring beyond the control of the Licensee within the fiscal year shall be disregarded in determining whether the Licensee meets the foregoing requirements as of the close of its fiscal year. (d) General capital requirements. Each company shall have at licensing, and thereafter shall maintain Regulatory Capital adequate to assure a reasonable prospect that the company will be operated soundly and profitably over the long term, and managed actively and prudently in accordance with its articles or partnership agreement and within the context of its Plan of Operations, as approved by SBA. In this regard, SBA shall determine the ability of the company to be economically viable, both prior to licensing and prior to approving any request for financing, taking into consideration the income and losses which the company anticipates on its Loans and Investments, and the experience and qualifications of the company's owner's and managers. Compliance with these requirements shall be determined within the context of capital impairment and other regulations that relate to safety and soundness.

(e) Minimum Capital. Any company licensed after April 8, 1994, shall have Regulatory Capital in U.S. dollars sufficient to meet the requirements of paragraph (d) of this section, but in no case shall a Licensee have Regulatory Capital (not including commitments to invest in a Licensee) less than the following minimum levels:

(1) In the case of a section 301(c) Licensee, Private Capital of at least $2,500,000; Provided however, That the $2,500,000 requirement shall not apply with respect to any Licensee licensed before October 2, 1990, nor with respect to any license application on file with SBA before October 2, 1990, nor with respect to any license granted on the basis of such application. Any such Licensee or license applicant is permitted to have such Private Capital as is required by regulation in effect prior to October 2, 1990.

(2) In order to be eligible for Leverage under these regulations after De

cember 3, 1992, any section 301(c) Licensee licensed before October 2, 1990, or whose license application was on file with SBA before October 2, 1990, will be required to have increased its private capital at the time of the application for leverage after December 31, 1992, by 25 percent of the difference between its Private Capital on October 2, 1990 and $2,500,000 (the difference); and at the time of the application for leverage after December 31, 1993 by 50 percent of the difference; and at the time of the application for leverage after December 31, 1994 by 75 percent of the difference; and at the time of the application for leverage after December 31, 1995 and thereafter by 100 percent of the difference; Provided however; That any such section 301(c) Licensee is eligible to apply for Leverage if it can demonstrate to SBA's satisfaction that it has been profitable for three out of its last four fiscal years preceding the date of application for Leverage and, on the average has been profitable for all such fiscal years. In verifying a Licensee's profitability, SBA will review the Licensee's Annual Audited Financial Statements contained in its Annual Report, SBA Form 468, filed in accord with applicable regulations. Profitability will be measured in terms of combined Income (Net Investment Income (Loss) plus Realized Gain (Loss) on Sale of Securities); Provided further, however, That any such section 301(c) Licensee is eligible to apply for Leverage needed to refinance any debenture outstanding on October 2, 1990, as follows:

(i) Any such debenture which matures on or before December 31, 1995 may be refinanced, one time only, for a term of not more than ten years, and

(ii) Any such debenture which matures after December 31, 1995, may be refinanced, one time only, for a term of three years.

(3) In the case of a section 301(d) Licensee, Private Capital of at least $1,500,000; Provided however, That the $1,500,000 requirement shall not apply with respect to any Licensee licensed before October 2, 1990, nor with respect to any license application on file with SBA before October 2, 1990, nor with respect to any license granted on the basis of such application. Any such Li