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Electronic Code of Federal Regulations

e-CFR Data is current as of December 17, 2014

Title 13Chapter IPart 107Subpart J → §107.1840


Title 13: Business Credit and Assistance
PART 107—SMALL BUSINESS INVESTMENT COMPANIES
Subpart J—Licensee's Noncompliance With Terms of Leverage


§107.1840   Computation of Licensee's Capital Impairment Percentage.

(a) General. This section contains the procedures you must use to determine your Capital Impairment Percentage if you have outstanding Leverage issued after April 25, 1994. You must compare your Capital Impairment Percentage to the maximum permitted under §107.1830(c) to determine whether you have a condition of Capital Impairment.

(b) Preliminary impairment test. If you satisfy the preliminary impairment test, your Capital Impairment Percentage is zero and you do not have to perform any more procedures in this §107.1840. Otherwise, you must continue with paragraph (c) of this section. You satisfy the test if the following amounts are both zero or greater:

(1) The sum of Undistributed Net Realized Earnings, as reported on SBA Form 468, and Includible Non-Cash Gains.

(2) Unrealized Gain (Loss) on Securities Held.

(c) How to compute your Capital Impairment Percentage. (1) If you have an Unrealized Gain on Securities Held, compute your Adjusted Unrealized Gain using paragraph (d) of this section. If you have an Unrealized Loss on Securities Held, continue with paragraph (c)(2) of this Section.

(2) Add together your Undistributed Net Realized Earnings, your Includible Non-cash Gains, and either your Unrealized Loss on Securities Held or your Adjusted Unrealized Gain.

(3) If the sum in paragraph (c)(2) of this section is zero or greater, your Capital Impairment Percentage is zero.

(4) If the sum in paragraph (c)(2) of this section is less than zero, drop the negative sign, divide by your Regulatory Capital (excluding Treasury Stock), and multiply by 100. The result is your Capital Impairment Percentage.

(d) How to compute your Adjusted Unrealized Gain. (1) Subtract Unrealized Depreciation from Unrealized Appreciation. This is your “Net Appreciation”.

(2) Determine your Unrealized Appreciation on Publicly Traded and Marketable securities. This is your “Class 1 Appreciation”.

(3) Determine your Unrealized Appreciation on securities that are not Publicly Traded and Marketable and meet the following criteria, which must be substantiated to the satisfaction of SBA (this is your “Class 2 Appreciation”):

(i) The Small Business that issued the security received a significant subsequent equity financing by an investor whose objectives were not primarily strategic and at a price that conclusively supports the Unrealized Appreciation;

(ii) Such financing represents a substantial investment in the form of an arm's length transaction by a sophisticated new investor in the issuer's securities; and

(iii) Except as provided for Early Stage SBICs in §107.1845, such financing occurred within 24 months of the date of the Capital Impairment computation, or the Small Business's pre-tax cash flow from operations for its most recent fiscal year was at least 10 percent of the Small Business's average contributed capital for such fiscal year.

(4) Except as provided for Early Stage SBICs in §107.1845, perform the appropriate computation from the following table:

Adjusted Unrealized Gain Before Estimated Tax Effects

If: And: Then adjusted unrealized gain
before taxes is:
Class 1 Appreciation ≤Net AppreciationClass 1 Appreciation + Class 2 Appreciation ≤Net Appreciation(80% × Class 1 Appreciation) + (50% × Class 2 Appreciation).
Class 1 Appreciation ≤Net AppreciationClass 1 Appreciation + Class 2 Appreciation >Net Appreciation(80% × Class 1 Appreciation) + [(50% × (Net Appreciation − Class 1 Appreciation)].
Class 1 Appreciation >Net Appreciation80% × Net Appreciation.

(5) Reduce the gain computed in paragraph (d)(4) of this section by your estimate of related future income tax expense. Subject to any adjustment required by paragraph (d)(6) of this section, the result is your Adjusted Unrealized Gain for use in paragraph (c)(2) of this section.

(6) If any securities that are the source of either Class 1 or Class 2 Appreciation are pledged or encumbered in any way, you must reduce the Adjusted Unrealized Gain computed in paragraph (d)(5) of this section by the amount of the related borrowing or other obligation, up to the amount of the Unrealized Appreciation on the securities.

[61 FR 3189, Jan. 31, 1996, as amended at 77 FR 25054, Apr. 27, 2012]



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