Licensee and shall no longer continue in effect as a binding obligation on Licensee's part in the event of such enforcement action. (2) If the Licensee acquires control of the small business concern as the result of enforcement action taken, the Licensee shall immediately notify SBA and shall take steps to divest itself of control within a reasonable period of time pursuant to a plan approved in writing by SBA. In connection therewith, the Licensee shall be free to negotiate with any appropriate person or entity necessary to accomplish relinquishment of control. (h) Licensees with existing plans: Licensees which have control of a small business concern on the effective date of this section, shall bring their plans for divestiture of control into compliance with this section not later than March 31, 1968: Provided, however, That the plan shall provide for relinquishment of such control within a reasonable period of time, but in no event later than March 31, 1975. Such plans shall be filed with SBA not later than April 30, 1968, and will be subject to SBA approval in accordance with the provisions of this section. (1) Additional financing: Whenever a Licensee assumes control of a small concern, and later provides additional financing to it, the Licensee shall within thirty (30) days resubmit its divestiture plan (amended if necessary or appropriate) for SBA review and approval in accordance with the provisions of this section. [Rev. 4, 33 F.R. 326, Jan. 9, 1968, as amended by Amdt. 2, 33 F.R. 20036, Dec. 31, 1968; Amdt. 5, 35 F.R. 4596, Mar. 14, 1970] § 107.902 Voluntary capital decrease. A Licensee shall not voluntarily reduce its paid-in capital and paid-in surplus without prior written SBA approval. A Licensee may not purchase and hold more than 2 percent of any class of its stock without prior written SBA approval. § 107.903 Mergers, consolidations, and reorganizations. Subject to the prior written approval of SBA, a Licensee may participate as a party to a statutory or other type of merger, consolidation, or reorganization with another Licensee or non-Licensee company where the resultant company will qualify as a Licensee. SBA's approval may be conditioned on such reasonable terms and conditions as it determines appropriate. PROHIBITIONS § 107.1001 Prohibited uses of funds. No funds may be provided by a licensee for: (a) Relending, reinvesting, etc. Relending or reinvesting by the small busi⚫ness concern, nor may funds be provided to a small business concern if the business activity of such concern involves directly or indirectly the investing, lending, or other providing of funds to others in exchange for an equity interest or monetary obligation, purchase or discounting of debt obligations, factoring, or long-term leasing of equipment with no provision for maintenance or repair: Provided, however, That, except for commercial banks, savings banks, agricultural credit companies, and savings and loan associations not insured by the Federal Savings and Loan Insurance Corporation, the foregoing prohibition shall not apply to Venture Capital financings (as defined in § 107.3) made to any small business concern, organized less than five (5) years before the date of financing, which is owned, or will be owned in accordance with § 107.812, by individuals whose participation in the free enterprise system is hampered by social or economic disadvantages: And provided, further, That, notwithstanding any other provision of these regulations, a licensee's outstanding financings to such small business concern(s) pursuant to the authorization of the foregoing proviso may not, without 'prior SBA approval in writing, exceed its private paid capital and paid-in surplus as of the close of any full fiscal year.' (b) Financing Licensees. Use, directly or indirectly, to purchase stock in or otherwise to provide capital for a Licensee, or to repay an indebtedness to accomplish such purpose. (c) Investments in unimproved real estate. The acquisition, or payment of obligations relating to the prior acquisition, by a small business concern of land or improved real estate to be held, without prompt and substantial improvement or development, for resale or leasing to others. Improvement or development shall, for the purposes of this paragraph, be deemed prompt and substantial if (1) an amount equivalent to 50 or more per 11940 act companies are reminded that subsections 12(d) (2) and (3) of that act impose additional restrictions on certain investments otherwise permitted by this § 107.1001 (a). (ii) A participant Licensee has unused eligibility under section 303(b) of the Act which is transferred to its capital investment in the MESBIC (the participant Licensee's eligibility being reduced accordingly), but not to exceed the matching ratio under section 303(b) applicable to such investment. (4) MESBIC capitalization attributable to the contribution of a participant Licensee without unused eligibility, or unwilling to have its eligibility reduced in accordance with subparagraph (3) (ii) of this paragraph, will not be eligible for leveraging by SBA. (5) For a definition of Associate of participant Licensees and their wholly or commonly owned MESBICS, see § 107.3(h). [Amdt. 6, 35 F.R. 11463, July 17, 1970] RESTRICTED ACTIVITIES (a) General: The Act does not contemplate that Licensees shall operate business enterprises or function as holding companies exercising control over such enterprises. Accordingly, neither a Licensee, nor a Licensee and its Associates, nor two or more Licensees may, except as hereinafter set forth, assume control over a small business concern pursuant to management agreements, voting trusts, majority representation on the board of directors, or otherwise. (b) Presumption of control: Control over a small business concern will be presumed to exist whenever a Licensee, or a Licensee and its Associates or two or more Licensees acting in concert, own, hold, or control, directly or indirectly, voting securities equivalent to (1) more than 50 percent of the outstanding voting securities, if the voting securities of such concern are held by less than 50 shareholders; or (2) more than 25 percent of the outstanding voting securities or a block of 20 or more percent of the outstanding voting securities which is as large as or larger than the largest other outstanding block of such securities, if the voting securities of such concern are held by 50 or more shareholders. This presumption may be rebutted by the submission of appropriate evidence satisfactory to SBA. (c) Temporary control permitted: A Licensee may acquire temporary control over a small business concern in connection with financing supplied to it only where assumption of control is reasonably necessary for the protection of Licensee's investment. (d) Plan to relinquish or divest control: A Licensee shall not assume control over a small business concern pursuant to paragraph (c) of this section unless it has negotiated and has entered into a fair and reasonable written plan at the time of financing, as a contractual obligation on its part enforceable by the small concern or its shareholders providing for relinquishment of control within a reasonable period of time not exceeding 7 years. Such plan shall contain provisions expressly stating that it is subject to SBA approval under this section and that the parties consider the plan to be fair and reasonable. The plan shall be filed with SBA not later than thirty (30) days after acquisition of control and shall be subject to SBA's postapproval as a condition for the continuance of the License. The plan shall be deemed approved unless Licensee is notified to the contrary by SBA within ninety (90) days after its receipt by SBA. Where the plan appears inadequate or unreasonable, SBA may notify and afford the Licensee and other parties concerned an opportunity to submit evidence as to whether renegotiation of the divestiture plan should be required. SBA approval shall be contingent upon full disclosure of all relevant facts and shall be subject to such conditions as SBA may determine are appropriate. (e) The Licensee shall furnish to SBA with its annual Financial Report, SBA Form 468, a statement (in triplicate) setting forth current prospects for the implementation of the divestiture plan, and additional factors, if any, affecting the status or feasibility of relinquishing control. (f) Subsequent events affecting plan: Where changed circumstances indicate that a workable arrangement no longer exists, SBA may, on its own initiative or upon application by the Licensee or other interested person, notify and afford the Licensee and other parties concerned an opportunity to submit evidence as to whether renegotiation of the divestiture plan should be required. (g) Enforcement actions: (1) Divestiture plans entered into pursuant to this section shall not adversely affect or interfere with enforcement by the Licensee of its legal rights against a concern which has defaulted on its obligations to the Licensee and shall no longer continue in effect as a binding obligation on Licensee's part in the event of such enforcement action. (2) If the Licensee acquires control of the small business concern as the result of enforcement action taken, the Licensee shall immediately notify SBA and shall take steps to divest itself of control within a reasonable period of time pursuant to a plan approved in writing by SBA. In connection therewith, the Licensee shall be free to negotiate with any appropriate person or entity necessary to accomplish relinquishment of control. (h) Licensees with existing plans: Licensees which have control of a small business concern on the effective date of this section, shall bring their plans for divestiture of control into compliance with this section not later than March 31, 1968: Provided, however, That the plan shall provide for relinquishment of such control within a reasonable period of time, but in no event later than March 31, 1975. Such plans shall be filed with SBA not later than April 30, 1968, and will be subject to SBA approval in accordance with the provisions of this section. (1) Additional financing: Whenever a Licensee assumes control of a small concern, and later provides additional financing to it, the Licensee shall within thirty (30) days resubmit its divestiture plan (amended if necessary or appropriate) for SBA review and approval in accordance with the provisions of this section. [Rev. 4, 33 F.R. 326, Jan. 9, 1968, as amended by Amdt. 2, 33 F.R. 20036, Dec. 31, 1968; Amdt. 5, 35 F.R. 4596, Mar. 14, 1970] § 107.902 Voluntary capital decrease. A Licensee shall not voluntarily reduce its paid-in capital and paid-in surplus without prior written SBA approval. A Licensee may not purchase and hold more than 2 percent of any class of its stock without prior written SBA approval. § 107.903 Mergers, consolidations, and reorganizations. Subject to the prior written approval of SBA, a Licensee may participate as a party to a statutory or other type of merger, consolidation, or reorganization with another Licensee or non-Licensee company where the resultant company will qualify as a Licensee. SBA's approval may be conditioned on such reasonable terms and conditions as it determines appropriate. PROHIBITIONS § 107.1001 Prohibited uses of funds. No funds may be provided by a licensee for: (a) Relending, reinvesting, etc. Relending or reinvesting by the small business concern, nor may funds be provided to a small business concern if the business activity of such concern involves directly or indirectly the investing, lending, or other providing of funds to others in exchange for an equity interest or monetary obligation, purchase or discounting of debt obligations, factoring, or long-term leasing of equipment with no provision for maintenance or repair: Provided, however, That, except for commercial banks, savings banks, agricultural credit companies, and savings and loan associations not insured by the Federal Savings and Loan Insurance Corporation, the foregoing prohibition shall not apply to Venture Capital financings (as defined in § 107.3) made to any small business concern, organized less than five (5) years before the date of financing, which is owned, or will be owned in accordance with § 107.812, by individuals whose participation in the free enterprise system is hampered by social or economic disadvantages: And provided, further, That, notwithstanding any other provision of these regulations, a licensee's outstanding financings to such small business concern (s) pursuant to the authorization of the foregoing proviso may not, without prior SBA approval in writing, exceed its private paid capital and paid-in surplus as of the close of any full fiscal year.1 (b) Financing Licensees. Use, directly or indirectly, to purchase stock in or otherwise to provide capital for a Licensee, or to repay an indebtedness to accomplish such purpose. (c) Investments in unimproved real estate. The acquisition, or payment of obligations relating to the prior acquisition, by a small business concern of land or improved real estate to be held, without prompt and substantial improvement or development, for resale or leasing to others. Improvement or development shall, for the purposes of this paragraph, be deemed prompt and substantial if (1) an amount equivalent to 50 or more per 11940 act companies are reminded that subsections 12(d) (2) and (3) of that act impose additional restrictions on certain investments otherwise permitted by this § 107.1001 (a). cent of the financing supplied or committed by Licensee is used for land improvement, new construction, renovation, or other types of improvement or development, and (2) such improvement or development is undertaken within one (1) year from date of acquisition or date of Licensee's financing, whichever is later. (d) Purposes contrary to the public interest. Purposes contrary to the public interest, including but not limited to gambling enterprises and activities, and any purpose which would encourage monopoly or be inconsistent with accepted standards of free competitive enterprise. (e) Foreign investment. Use outside the United States: Provided, however, That a Licensee may provide funds to a small business concern which is subject to state or federal jurisdiction, (1) for use in the domestic production of products for distribution abroad, or to acquire abroad materials for such operation or (2) for use in its branch operations abroad or for transfer to its controlled foreign subsidiary; so long as the major portion of the assets and activities of such concern, after funds are so employed, remains within the territorial jurisdiction of the States. (f) Passive businesses. Any person that is not engaged in a business operation conducted as a regular and continuous activity. (g) Licensee associated supplier. A small business concern which purchases goods or services from a supplier; which supplier is an Associate of the Licensee, if 50 percent or more of the funds (or funds of the small business concern released by such financing) are used by the concern to purchase goods or services from such supplier: Provided, however, That in the case of a MESBIC such limit shall be 75 percent. (h) Real estate. A small business concern which is classified under Major Group 65 (Real Estate) of the Standard Industrial Classification Manual issued by the Bureau of the Budget except for (1) subdividers and developers (other than cemetery subdividers and developers), (2) operative builders, (3) title abstract companies, and (4) agents, brokers and managers: Provided, however, That a Licensee may retain any such investment in its portfolio on the effective date of this paragraph (not consummated in violation of provisions in effect when made). (a) Each Licensee shall maintain at all times an unimpaired capital. An impairment shall be deemed to exist when the retained earnings deficit exceeds fifty (50%) percent of the private paid-in capital and paid-in surplus. Treasury stock shall not be considered as part of private paid-in capital and paid-in surplus. (b) A debtor Licensee shall promptly inform SBA when its retained earnings deficit exceeds thirty-five (35) percent of its combined paid-in capital and paidin surplus. (c) For capital impairment purposes, gains may be recognized by SBA only to the extent permitted in Addendum II (Realization and Use of Income and Gains) to SBA's Audit and Examination Guide for Small Business Investment Companies printed in Appendix 1 as part of the regulations of this part. (d) In the case of a MESBIC an impairment of capital shall be deemed to exist when the retained earnings deficit equals or exceeds private paid-in capital and paid-in surplus. Except with prior SBA written approval, no debtor MESBIC shall pledge, assign, hypothecate, or otherwise encumber any of its portfolio securities or other assets, or create or allow to be created any mortgage, lien, or other encumbrance thereon, while it has a retained earnings deficit of fifty percent (50%) or more of its private paid-in capital and paid-in surplus. A debtor MESBIC with a retained earnings deficit of fifty percent (50%) of its private paidin capital and paid-in surplus shall immediately notify SBA and shall be deemed to have authorized SBA to take such measures as may be appropriate to perfect a security interest in favor of SBA in its assets. SBA may direct the MESBIC to take such actions as SBA considers necessary to perfect such a security interest. [Rev. 4, 33 F.R. 326, Jan. 9, 1968, as amended by Amdt. 5, 35 F.R. 4596, Mar. 14, 1970; Amdt. 7, 36 F.R. 18859, Sept. 23, 1971] (a) The Act contemplates that a Licensee shall conduct active operations to meet the needs for financing of small business concerns in its area. Accordingly, inactivity on the part of a Licensee constitutes a violation of these regulations. (b) A Licensee which on March 31 of any year has more than twenty-five (25) percent of its assets in Idle Funds (section 308(b) of the Act and § 107.808) shall be presumed inactive if it has not, during the past 12-month period, provided new or additional financing aggregating at least twenty-five (25) percent of an average of the amount of its said Idle Funds on such March 31 and on the immediately preceding September 30. It shall promptly file with SBA a written report setting forth the reasons for its inactivity. The foregoing presumption may be rebutted by the submission of appropriate written evidence satisfactory to SBA. § 107.1004 Conflicts of interest. (a) General. Self-dealing to the prejudice of a small business concern, or of a Licensee or its shareholders, or of SBA, is prohibited. (b) Prohibitions. Except where a written exemption may be granted by SBA in special instances in furtherance of the purposes of the Act (1) A Licensee shall not, directly or indirectly, provide financing to any of its Associates. (2) A Licensee shall not, directly or indirectly, provide financing to an Associate of another Licensee if an Assoclate of the first Licensee receives, has received, or is about to receive (including receipt pursuant to any understanding, agreement, or cross-dealing, reciprocal or circular arrangement) any direct or indirect financing or a commitment for financing from such other Licensee or a third Licensee. (3) No Licensee or any of its Associates shall directly or indirectly borrow money from (i) a concern financed by such Licensee or (ii) an officer, director, or owner of 10 or more percent equity interest in such concern, or a close relative of such officer, director, or equity owner. (4) No Licensee shall directly or indirectly provide financing to a small business concern if the financing is used to provide funds to discharge or to free other funds for use in discharging an obligation of such concern to an Associate of the Licensee. (5) No Licensee shall directly or indirectly provide financing to a small business concern, except as permitted by § 107.1001(g), if the financing is used to provide funds or to free other funds for use in purchasing property from an Associate of the Licensee. (6) Where a Licensee provides financing to a small business concern which also receives financing from an Associate of such Licensee within a period of 1 year prior or subsequent thereto, the terms of Licensee's financing shall not be less favorable to the Licensee than those applicable to the financing supplied by its Associate. Licensee shall retain written evidence of such financing by the Licensee and its Associate as part of its records available for examination by SBA. (7) Subparagraphs (4) and (6) of this paragraph shall not be applicable to transactions by Associates in the normal course of business involving lines of credit or short-term financing. (c) Fees or other compensation. No Associate of a Licensee shall receive, directly or indirectly, from a small business concern any fees or compensation in connection with financing supplied by such Licensee, or any money or thing of value for procuring, attempting to procure, or influencing Licensee's action with respect thereto, except only for bona fide services performed by him at the request of such concern and paid in the manner hereinafter set forth. A reasonable sum for necessary incidental services and costs, including such items as title examination, appraisal, credit report, survey, closing fees and expenses, may be collected by the Licensee and paid to an Associate of the Licensee for services actually rendered by him at the request of the small concern. Such sum shall be approved by the Licensee, and written evidence of the transaction shall be retained as part of Licensee's records available for examination by SBA. (d) Public notice. Prior to an exemption being granted by SBA under paragraph (b) of this section, the Licensee shall publish in a newspaper of general circulation in the locality most directly affected by the transaction, notice thereof as specified by SBA and shall furnish |