On Jan. 12, 2011, the U.S. Small Business Administration (SBA) issued a
proposed rule implementing certain provisions of the Energy Independence and
Security Act of 2007 (Energy Act). The Energy Act, among other things, allows an
SBIC making an Energy Saving Qualified Investment (ESQI) to obtain approximately
11% more leverage outstanding than permitted under the standard
leverage-qualifying formula via SBA Energy Saving Debentures, provided the
criteria described below are met.
Energy Saving Debentures are five- or 10-year debentures issued at a discount
so as to be, in effect, “zero coupon” for the first five years. In addition, the
annual SBA charge under § 107.1130(d) is deferred for the first five years for
Energy Saving Debentures. Assuming the investment qualifies as an ESQI, any SBIC
licensed after Sept. 30, 2008, is eligible for Energy Saving Debentures.
Energy Saving Debentures may only be issued if they are used to make an ESQI.
An ESQI is an investment made in a small business that is “primarily engaged” in
business activities that reduce the use or consumption of non-renewable energy
sources (Energy Saving Activities). The ESQI must be an investment in the form
of a loan, a debt security that includes an equity feature, or an equity
Energy Saving Activities are defined by reference to various other criteria
established by federal programs or the Internal Revenue Code. On its Investment
Division webpage, SBA intends to provide links to federal government websites
that will allow users to determine the likelihood that any given activity is an
Energy Saving Activity, including the following sites:
In addition, SBA may consider the merits of certain activities not
specifically addressed or defined by other federal programs through an
examination of various factors such as patents held by the small business,
awards or grants received for the promotion of energy efficiency, and projected
A company is presumed to be primarily engaged in Energy Saving Activities if
at least 50% of its revenues for the most recently completed fiscal year are
derived from such activities. However, SBA may consider the totality of the
circumstances to make this determination, examining the distribution of the
sources of revenue; the number of employees engaged in Energy Saving Activities;
development and current or planned use of intellectual property related to
Energy Saving Activities; and Energy Saving Activities contemplated by a formal
business plan presented to outside investors.
For SBIC Funds, investment in smaller enterprises is incentivized, as total
leverage available will be adjusted by subtracting from the leverage outstanding
the cost basis of ESQI made in smaller enterprises. The amount that can be
subtracted is limited to 33% of the SBIC’s leverageable capital. Certification
must also be obtained from SBA for each investment in a small business that will
utilize Energy Saving Debentures. The level of disclosure required for
certification varies according to whether (i) the small business is engaged in
certain Energy Saving Activities expressly included in the definition of ESQI;
and (ii) the small business is primarily engaged in such activities.
For a complete copy of SBA’s Proposed Rule, click
McGuireWoods’ Private Equity Practice and Energy Groups are dedicated to
keeping clients advised of new legislative and business developments as they
occur. If you have any questions regarding these issues, please feel free to
contact Mark A. Kromkowski (312.849.8170), Geoffrey C. Cockrell (312.849.8272),
your primary attorney at McGuireWoods LLP, or any of the authors.