6197638 Insurance, Securities and Banking, Department of - Notice of Final Rulemaking - State Small Business Credit Initiative
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DEPARTMENT OF INSURANCE, SECURITIES AND BANKING
NOTICE OF FINAL RULEMAKING
The Commissioner of the Department of Insurance, Securities and Banking (“DISB”), pursuant to the authority set forth in Section 105(c) of the 21st Century Financial Modernization Act of 2000, effective June 9, 2001 (D.C. Law 13-308; D.C. Official Code § 26-551.05(c) (2012 Repl. & 2016 Supp.)), hereby gives notice of the adoption of amendments to Chapter 29 (State Small Business Credit Initiative) of Subtitle C (Banking and Financial Institutions), Title 26 (Insurance, Securities, and Banking) of the District of Columbia Municipal Regulations (“DCMR”).
The purpose of this rulemaking is to permit DISB to implement changes to the District of Columbia Innovation Finance Program (“Innovation Finance Program”) and clarify the guidelines for the District of Columbia Collateral Support Program (“Collateral Support Program”) and the District of Columbia Loan Participation Program (“Loan Participation Program”).
The Notice of Emergency and Proposed Rulemaking was published in the D.C. Register on June 17, 2016, at 63 DCR 8581. DISB did not receive any comments from the public concerning the proposed rules during the thirty (30)-day comment period, which expired on July 17, 2016, and no substantive changes were made. These rules were adopted as final on August 2, 2016 and shall become effective upon publication in the D.C. Register.
Chapter 29, STATE SMALL BUSINESS CREDIT INITIATIVE, of Title 26-C DCMR, BANKING AND FINANCIAL INSTITUTIONS, is amended as follows:
Section 2903, ELIGIBLE RECIPIENTS – COLLATERAL SUPPORT PROGRAM, is amended to read as follows:
2903 ELIGIBLE RECIPIENTS – COLLATERAL SUPPORT PROGRAM
2903.1 An Eligible Recipient under the Collateral Support Program shall:
(a) Be a non-public company that is registered in the District and is subject to be taxed under the laws of the District, and continues as such as long as the loan is supported by the District’s collateral support;
(b) Have at closing, or sign an agreement pledging that it will have within six (6) months after funding:
(1) Its principal offices within the District, demonstrated by a lease or a deed; and
(2) At least seventy-five percent (75%) of its employees working in the District, and who continue as such as long as the loan is supported by the District’s collateral support;
(c) Have less than seven hundred and fifty (750) existing employees, including those of its affiliates and subsidiaries.
2903.2 To qualify for Collateral Support, an Eligible Recipient may also be subject to at least one of the following requirements:
(a) Provide proof by the time of funding that District residents are employed in at least fifty percent (50%) of its W-2 and 1099 employee positions;
(b) Sign an agreement by the time of funding pledging that at least fifty percent (50%) of its W-2 and 1099 employee positions will be occupied by District residents within six (6) months of funding;
(c) Provide proof by the time of funding that the Eligible Recipient is at least fifty percent (50%) owned by District residents and provides at least twenty-five percent (25%) of its W-2 and 1099 employee positions to District residents; or
(d) Demonstrate by the time of funding that the Eligible Recipient will, within six months of funding, create or retain at least one District resident job for every one hundred thousand dollars ($100,000) in collateral support that the District provides.
2903.3 If the funding from the District of Columbia to an Eligible Recipient that is not a Certified Business Enterprise is three hundred thousand dollars ($300,000) or more, the Eligible Recipient shall execute a First Source Agreement if District law requires.
2903.4 The Commissioner may waive the provisions in § 2903.1 and, where applicable § 2903.2, and may extend the deadlines, in whole or in part, if the Eligible Recipient demonstrates a reasonable need for waiver, the waiver will not violate the U.S. Department of the Treasury’s SSBCI Guidelines, and the waiver is in the best interest of the District.
2903.5 The Eligible Recipient, and any owner of the Eligible Recipient that has at least a twenty percent (20%) interest in the Eligible Recipient, shall execute covenants pledging to continue to comply with Collateral Support Program requirements of maintaining its principal offices within the District and maintaining the requisite number of its W-2 and 1099 employee positions occupied by District residents.
2903.6 An Eligible Recipient shall not be:
(a) An executive officer, director, or principal shareholder of the financial institution or qualified non-profit organization enrolling the loan;
(b) A member of the immediate family of an executive officer, director, or principal shareholder of the financial institution or qualified non-profit organization enrolling the loan;
(c) A related interest of such an executive officer, director, principal shareholder, or member of the immediate family;
(d) A business engaged in speculative activities that develop profits from fluctuations in price rather than through normal course of trade, such as wildcatting for oil or dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business;
(e) A business that earns more than half of its annual net revenue from lending activities, unless the business is a non-bank or non-bank holding company or Community Development Financial Institution;
(f) A business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or
(g) A business engaged in activities that are prohibited by federal or District of Columbia law.
2903.7 For the purpose of these Eligible Recipient restrictions, as described in § 2903.6 (a), (b) and (c) above, the terms “executive officer,” “director,” “principal shareholder,” “immediate family,” and “related interest” refer to the same relationship to a financial institution lender or qualified non-profit organization as the relationship described in 12 C.F.R. part 215, or any successor to such part.
2903.8 An Eligible Recipient under the Collateral Support Program shall certify that no principal of the Eligible Recipient has been convicted of a sex offense against a minor as such term is defined in Section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911).
2903.9 For the purposes of the certifications required under § 2902.2(d) and § 2903.8, “principal” is defined as:
(a) If a sole proprietorship, the proprietor;
(b) If a partnership, each managing partner and each partner who holds twenty percent (20%) or more ownership interest in the partnership; or
(c) If a corporation, limited liability company, association, or a development company, each director, each of the five (5) most highly compensated executives, officers, or employees of the entity, and each direct or indirect holder of twenty percent (20%) or more of the ownership stock or stock equivalent of the entity.
2903.10 An Eligible Recipient’s breach of the continuing eligibility requirements in § 2903.1 and, where applicable § 2903.2, may result in a penalty being assessed to the Eligible Recipient not to exceed the amount of the initial collateral support provided at funding.
2903.11 An Eligible Recipient’s breach of the continuing eligibility requirements in § 2903.1 and, where applicable § 2903.2, that occurred without the Eligible Lender’s assistance shall not impact the cash collateral account pledged to the Lender.
2903.12 An Eligible Lender shall be required to return the cash collateral provided by the District if at the time of funding the Eligible Recipient failed to meet the eligibility criteria in § 2903.1 and, where applicable § 2903.2, and the Eligible Lender knew that the Eligible Recipient failed to meet the eligibility criteria at the time of funding.
Section 2904, LOAN REQUIREMENTS – COLLATERAL SUPPORT PROGRAM, is amended to read as follows:
2904 LOAN REQUIREMENTS – COLLATERAL SUPPORT PROGRAM
2904.1 Loans or investments facilitated by the Collateral Support Program shall be used for a business purpose, including working capital, inventory, expansion, renovations, start-up costs, and refinancing. The entire proceeds of the loan or investment shall be used within the District.
2904.2 The loan proceeds from the Collateral Support Program shall not be used:
(a) To repay delinquent federal or District of Columbia income taxes unless the Eligible Recipient has a payment plan in place with the relevant taxing authority;
(b) To repay taxes held in trust or escrow; for example, payroll or sales taxes;
(c) To reimburse funds owed to any owner, including any equity injection or injection of capital for the business’s continuance;
(d) To purchase any portion of the ownership interest of any owner of the business;
(e) To acquire or hold passive investments;
(f) For refinancing of existing debt, other than a refinancing permitted by § 2904.9;
(g) For legal or illegal gambling; or
(h) For evangelizing, proselytizing, or lobbying.
2904.3 Personal guarantees must be given by any individual holding twenty percent (20%) or more ownership interest in the Eligible Recipient.
2904.4 An Eligible Lender shall apply to file a loan for enrollment in the Collateral Support Program by:
(a) Delivering to DISB a copy of the District SSBCI Program Enrollment Form executed by an authorized officer of the Eligible Lender;
(b) Delivering to DISB documentation of the residency of the Eligible Recipient’s employees;
(c) Providing DISB with any other documentation and information related to the loan that DISB requires; and
(d) Complying with any other enrollment procedures that DISB may reasonably require in writing.
2904.5 DISB shall review the loan and related transaction documents that memorialize the terms and conditions of the loan, and DISB shall issue a final approval if the loan, Eligible Lender, Eligible Recipient, and other aspects of the transaction are determined to comply and satisfy all applicable requirements.
2904.6 If DISB issues a final approval of the loan, the Eligible Lender and Eligible Recipient shall execute all documentation requested by DISB to memorialize the terms and conditions of the loan to be enrolled in the Collateral Support Program.
2904.7 The Eligible Lender, Eligible Recipient, and all other parties to the transaction shall execute all of the documents required to close or settle the transaction. The terms, conditions, and material language of the executed documents shall be consistent with those upon which DISB issued a final approval.
2904.8 The loan shall be considered enrolled in the Collateral Support Program when DISB receives copies of all executed transaction documents that it previously approved and submits a funding request to the Office of the Chief Financial Officer.
2904.9 A loan or line of credit refinanced from a different lender may be enrolled in the Collateral Support Program. Loans or lines of credit with the same lender or its affiliate may be refinanced and enrolled in the Collateral Support Program if the loans and lines of credit meet the following conditions:
(a) The new loan or line of credit includes the advancement of new monies to a small business borrower (excluding closing costs);
(b) The new credit supported with Collateral Support Program funding is based on new underwriting of the small business’s ability to repay and a new approval by the Eligible Lender;
(c) The proceeds from the new credit are only used to satisfy the outstanding balance of a loan or line of credit that has already matured or otherwise termed and the prior debt was used for an eligible business purpose, as defined above; and
(d) The new credit has not been extended for the sole purpose of refinancing existing debt owed to the same financial institution lender.
2904.10 If the outstanding balance of a loan that is not a line of credit is reduced to zero (0), that loan shall no longer be considered an Enrolled Loan in the Collateral Support Program.
2904.11 If a loan that is a line of credit has an outstanding balance of zero (0) for twelve (12) consecutive months, it will no longer be considered an Enrolled Loan in the Collateral Support Program, unless, before the expiration of the twelve (12) month period, the Eligible Lender has reaffirmed in writing to the Eligible Recipient that the line of credit will remain open and the Eligible Recipient has acknowledged that reaffirmation in writing to the Eligible Lender and DISB.
2904.12 To renew an enrolled line of credit or extend the maturity date of an enrolled line of credit the following shall occur:
(a) An Eligible Lender shall send notice to DISB of the renewal or extension;
(b) The Eligible Recipient shall consent to the extension in writing;
(c) DISB shall receive a new enrollment form; and
(d) DISB shall approve the extension.
2904.13 If an enrolled line of credit is not renewed or extended, it shall no longer be considered enrolled in the Collateral Support Program after its maturity date has passed.
2904.14 If an enrolled line of credit has an outstanding balance of zero (0) for twelve (12) consecutive months, it shall no longer be enrolled in the Collateral Support Program, unless, before the expiration of the twelve (12) month period, the Eligible Lender has reaffirmed in writing to the Eligible Recipient that the line of credit shall remain open and the Eligible Recipient has acknowledged that reaffirmation in writing to the Eligible Lender and DISB.
Section 2912, ELIGIBLE RECIPIENTS – LOAN PARTICIPATION PROGRAM, is amended to read as follows:
2912 ELIGIBLE RECIPIENTS – LOAN PARTICIPATION PROGRAM
2912.1 An Eligible Recipient under the Loan Participation Program shall:
(a) Be a non-public company that is registered in the District and is subject to tax under the laws of the District and continues as such as long as the Loan Participation Program supports the loan;
(b) Have at closing, or sign an agreement pledging that it will have within six (6) months after funding:
(1) Its principal offices within the District, demonstrated by a lease or a deed; and
(2) At least seventy-five percent (75%) of its employees working in the District and who continue as such as long as the District’s portion of the loan participation is outstanding; and
(c) Have less than seven hundred and fifty (750) existing employees, including those of its affiliates and subsidiaries.
2912.2 To qualify for Loan Participation, an Eligible Recipient may also be subject to at least one of the following requirements:
(a) Provide proof by the time of funding that District residents are employed in at least fifty percent (50%) of its W-2 and 1099 employee positions;
(b) Sign an agreement by the time of funding pledging that at least fifty percent (50%) of its W-2 and 1099 employee positions will be occupied by District residents within six (6) months of funding;
(c) Provide proof by the time of funding that the Eligible Recipient is at least fifty percent (50%) owned by District residents and provides at least twenty-five percent (25%) of its W-2 and 1099 employee positions to District residents; or
(d) Demonstrate by the time of funding that the Eligible Recipient will, within six months of funding, create or retain at least one District resident job for every $100,000 in loan participation that the District provides.
2912.3 If the funding from the District of Columbia to an Eligible Recipient that is not a Certified Business Enterprise is three hundred thousand dollars ($300,000) or more, the Eligible Recipient shall execute a First Source Agreement if District law requires.
2912.4 The Commissioner may waive the provisions of §§ 2911.1 – 2912.3 and may extend the deadlines, in whole or in part if the Eligible Recipient demonstrates a reasonable need for waiver, if such waiver will not violate the U.S. Department of the Treasury’s SSBCI Guidelines, and the waiver is in the best interest of the District.
2912.5 The Eligible Recipient and any owner of the Eligible Recipient that has at least a twenty percent (20%) interest in the Eligible Recipient shall execute covenants pledging to continue to comply with Loan Participation Program requirements of maintaining its principal offices within the District and maintaining the requisite number of its W-2 and 1099 employee positions occupied by District residents.
2912.6 An Eligible Recipient shall not be:
(a) An executive officer, director, or principal shareholder of the financial institution or qualified non-profit organization enrolling the loan;
(b) A member of the immediate family of an executive officer, director, or principal shareholder of the financial institution or qualified non-profit organization enrolling the loan;
(c) A related interest of such an executive officer, director, principal shareholder, or member of the immediate family;
(d) A business engaged in speculative activities that develop profits from fluctuations in price rather than through normal course of trade, such as wildcatting for oil or dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business;
(e) A business that earns more than half of its annual net revenue from lending activities, unless the business is a non-bank or non-bank holding company or Community Development Financial Institution;
(f) A business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or
(g) A business engaged in activities that are prohibited by federal or District of Columbia law.
2912.7 For the purpose of these Eligible Recipient restrictions, as described in §§ 2912.6 (a), (b) and (c) above, the terms “executive officer,” “director,” “principal shareholder,” “immediate family,” and “related interest” refer to the same relationship to a financial institution lender or qualified non-profit organization as the relationship described in 12 C.F.R. part 215, or any successor to such part.
2912.8 Eligible Recipients under the Loan Participation Program shall certify that no principal of the Eligible Recipient has been convicted of a sex offense against a minor as such term is defined in Section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911).
2912.9 For the purposes of the certification required in § 2911.2(d) and § 2912.8, “principal” is defined as:
(a) If a sole proprietorship, the proprietor;
(b) If a partnership, each managing partner and each partner who holds twenty percent (20%) or more ownership interest in the partnership; or
(c) If a corporation, limited liability company, association, or a development company, each director, each of the five (5) most highly compensated executives, officers, or employees of the entity, and each direct or indirect holder of twenty percent (20%) or more of the ownership stock or stock equivalent of the entity.
2912.10 An Eligible Recipient’s breach of the continuing eligibility requirements in § 2912.1 and, where applicable § 2912.2, may result in a penalty being assessed to the Eligible Recipient not to exceed the amount of the District’s participation in the Eligible Recipient’s loan.
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2912.11 A breach by the Eligible Recipient of the continuing eligibility requirements in § 2912.1 and, where applicable § 2912.2, that occurred without the Eligible Lender’s assistance shall not impact the District’s participation in the loan pledged to the Lender.
2912.12 An Eligible Lender shall be required to repurchase the District’s participation in the loan if at the time of funding the Eligible Recipient failed to meet the eligibility criteria in § 2912.1, and where applicable § 2912.2, and the Eligible Lender knew that the Eligible Recipient failed to meet the eligibility criteria at the time of funding.
Section 2913, LOAN REQUIREMENTS – LOAN PARTICIPATION PROGRAM, is amended to read as follows:
2913 LOAN REQUIREMENTS – LOAN PARTICIPATION PROGRAM
2913.1 Loans facilitated by the Loan Participation Program shall be used for a business purpose, including working capital, inventory, expansion, renovations, start-up costs, and refinancing. The entire proceeds of the loan or investment shall be used within the District.
2913.2 The loan proceeds from the Loan Participation Program shall not be used:
(a) To repay delinquent federal or District of Columbia income taxes unless the Eligible Recipient has a payment plan in place with the relevant taxing authority;
(b) To repay taxes held in trust or escrow, for example, payroll or sales taxes;
(c) To reimburse funds owed to any owner, including any equity injection or injection of capital for the business’s continuance;
(d) To purchase any portion of the ownership interest of any owner of the business;
(e) To acquire or hold passive investments;
(f) For refinancing of existing debt, other than a refinancing permitted by § 2914.13;
(g) For legal or illegal gambling; or
(h) For evangelizing, proselytizing, or lobbying.
2913.3 Personal guarantees are required from any individual holding twenty percent (20%) or more ownership interest in the Eligible Recipient.
2913.4 An Eligible Lender shall apply to file a loan for enrollment in the Loan Participation Program by:
(a) Delivering to DISB, a copy of the District SSBCI Program Enrollment Form executed by an authorized officer of the Eligible Lender;
(b) Delivering to DISB documentation of the residency of the Eligible Recipient’s employees;
(c) Providing DISB with any other documentation or information related to the loan that DISB requires; and
(d) Complying with any other enrollment procedures that DISB may reasonably require in writing.
2913.5 DISB shall review the loan and related transaction documents that memorialize the terms and conditions of the loan, and DISB shall issue a final approval if the loan, Eligible Lender, Eligible Recipient, and other aspects of the transaction are determined to comply and satisfy all applicable requirements.
2913.6 If DISB issues a final approval of the loan, the Eligible Lender and Eligible Recipient shall execute all documentation requested by DISB to memorialize the terms and conditions of the loan to be enrolled in the Loan Participation Program.
2913.7 The Eligible Lender, Eligible Recipient, and all other parties to the transaction shall execute all of the documents required to close or settle the transaction. The terms, conditions, and material language of the executed documents shall be consistent with those upon which DISB issued a final approval.
2913.8 The loan shall be considered enrolled in the Loan Participation Program when DISB receives copies of all executed transaction documents that it previously approved and submits a funding request to the Office of the Chief Financial Officer.
Section 2914, PARTICIPATION REQUIREMENTS – LOAN PARTICIPATION PROGRAM, is amended to read as follows:
2914 PARTICIPATION REQUIREMENTS – LOAN PARTICIPATION PROGRAM
2914.1 To enroll a loan in the Loan Participation Program, the Eligible Lender shall elect on the prescribed District SSBCI Enrollment Form, or such other form required by DISB, the applicable Loan Participation Program category.
2914.2 Under the Standard Loan Participation category, DISB acquires a percentage participation of the Enrolled Loan from the Eligible Lender to an Eligible Recipient in consideration for DISB receiving interest accruing at a rate equal to the rate at which an Eligible Recipient pays an Eligible Lender pursuant to the terms of the Loan Participation Program documents.
2914.3 If the Eligible Recipient defaults in payment to the Eligible Lender, or to DISB pursuant to the terms of the Loan Participation Program documents for a Standard Loan Participation, DISB shall receive the proportional benefit of all amounts received from the Eligible Recipient or realized from the Eligible Recipient’s collateral following the default.
2914.4 To qualify for a Standard Loan Participation category, an Eligible Recipient need not meet any of the five (5) additional enrollment criteria described in § 2914.8.
2914.5 A loan may also be enrolled under the Enhanced Loan Participation category, whereby DISB acquires a percentage participation of the Enrolled Loan from an Eligible Lender to an Eligible Recipient in consideration for DISB receiving interest accruing at a rate not to exceed half of the percentage per annum charged by the Eligible Lender on the Enrolled Loan to the Eligible Recipient.
2914.6 If the Eligible Recipient defaults in payment to the Eligible Lender, or to DISB pursuant to the terms of the Loan Participation Program documents for an Enhanced Loan Participation, the amounts owed by the Eligible Recipient to DISB with respect to a loan participation may be subordinated to amounts owed by the Eligible Recipient to the Eligible Lender.
2914.7 To qualify for an Enhanced Loan Participation, an Eligible Recipient shall meet at least two (2) and up to five (5) of the additional enrollment criteria described in § 2914.8. Qualification under this category may be subject to additional criteria, as determined by the Commissioner, and may include:
(a) A minimum equity contribution of ten percent (10%), which may not be borrowed;
(b) A debt service coverage ratio of one and two-tenths (1.2) (a lower minimum debt service coverage ratio may be allowed with reasonable explanation);
(c) Financial statements for the three (3) immediately preceding fiscal years, demonstrating at least one (1) year of profitability; and
(d) A credit score of six hundred and forty (640) or higher (lower credit scores may be allowed with a reasonable explanation).
2914.8 Additional enrollment criteria for qualification under the enrollment categories described in §§ 2914.1 – 2914.7 above are as follows:
(a) An Eligible Recipient shall sign an agreement to allocate at least ten percent (10%) of all new and future hires to be targeted new hires as defined by the Federal Work Opportunities Tax Credit, 26 U.S.C. § 51(d). The agreement shall endure for the duration of the Enrolled Loan.
(b) An Eligible Recipient shall be a Certified Business Enterprise or pledge to become a Certified Business Enterprise within six (6) months of funding;
(c) An Eligible Recipient shall be a business enterprise that is more than 50% woman or minority owned.
(d) An Eligible Recipient shall have its principal office located in a census tract where the poverty rate exceeds twenty percent (20%).
(e) A loan will be made to an Eligible Recipient that has its principal office located in a retail priority area as identified under D.C. Official Code § 2-1217.73.
2914.9 The Eligible Recipient and any owner of the Eligible Recipient that has at least a twenty percent (20%) interest in the Eligible Recipient shall execute covenants, pledging to continue to comply with each additional enrollment criteria as described under § 2914.8 for the enrollment option chosen by the Eligible Recipient.
2914.10 A loan or line of credit refinanced from a different lender may be enrolled in the Loan Participation Program provided that the original use of proceeds was for an eligible business purpose. Loans or lines of credit with the same lender or its affiliate may be refinanced and enrolled in the Loan Participation Program if such loans and lines of credit meet the following conditions:
(a) The new loan or line of credit includes the advancement of new monies to a small business borrower (excluding closing costs);
(b) The new credit supported with Loan Participation Program funding is based on new underwriting of the small business’s ability to repay and a new approval by the Eligible Lender;
(c) The proceeds from the new credit is only to be used to satisfy the outstanding balance of a loan or line of credit that has already matured or otherwise termed and the prior debt was used for an eligible business purpose, as defined by above; and
(d) The new credit has not been extended for the sole purpose of refinancing existing debt owed to the same financial institution lender.
2914.11 If the loan is not a line of credit and has no outstanding balance, that loan will no longer be considered an Enrolled Loan in the Loan Participation Program.
2914.12 To renew an enrolled line of credit or extend the maturity date of an enrolled line of credit the following shall occur:
(a) An Eligible Lender shall send notice to DISB of the renewal or extension;
(b) The Eligible Recipient shall consent to the extension in writing;
(c) DISB shall receive a new enrollment form; and
(d) DISB shall approve the extension
2914.13 If an enrolled line of credit is not renewed or extended it shall no longer be considered enrolled in the Loan Participation Program after its maturity date has passed.
2914.14 If an enrolled line of credit has no outstanding balance for twelve (12) consecutive months, it will no longer be enrolled in the Loan Participation Program unless, before the expiration of the twelve (12) month period, the Eligible Lender has reaffirmed in writing to the Eligible Recipient that the line of credit will remain open and the Eligible Recipient has acknowledged that reaffirmation in writing to the Eligible Lender and DISB.
2914.15 DISB shall be the legal and equitable owner of the DISB share of a loan enrolled in the Loan Participation Program and all security and documents related to the DISB share of the loan.
2914.16 The enrollment of a loan by the Eligible Lender in the Loan Participation Program constitutes a sale by the Eligible Lender to DISB of the DISB share in the Enrolled Loan and security and related documents. This sale is not, however, an extension of credit by DISB to the Eligible Lender.
2914.17 DISB shall not disburse monies related to its purchase of a portion of a loan enrolled in the Loan Participation Program at or prior to the closing of the loan by an Eligible Lender and Eligible Recipient. Monies DISB pays to the Eligible Lender shall not be disbursed by the Eligible Lender to an Eligible Recipient without the Eligible Recipient’s full execution of all of the Loan Participation Program documents.
2914.18 For each Enrolled Loan for which DISB owns a participation share the Eligible Lender shall:
(a) Negotiate, control, manage and service the Enrolled Loan;
(b) Enforce or refrain from enforcing the loan documents;
(c) Give consents, approvals or waivers in connection with the loan documents;
(d) Acquire additional security for the Enrolled Loan; and
(e) Take or refrain from taking any action and make any determination provided for in the loan documents.
2914.19 The Eligible Lender and DISB shall share all principal and interest payments and other collections under any loan enrolled by the Eligible Lender in the Loan Participation Program in proportion to their respective percentage interests in the loan, with appropriate provisions made for any differences in interest rates and payment schedules of the Eligible Lender and DISB.
2914.20 The Eligible Lender shall collect all payments made under any loan enrolled by the Eligible Lender in the Loan Participation Program and remit the principal and interest amounts due to DISB within ten (10) business days following the Eligible Lender’s receipt of such payments from the Eligible Recipient.
2914.21 The remittance shall be paid by certified check or money order payable by the Eligible Lender to DISB. The Eligible Lender shall provide all detail reasonably requested by DISB regarding the breakdown of individual payments, including itemization of the principal and interest.
Section 2920, INNOVATION FINANCE PROGRAM, is amended to read as follows:
2920 INNOVATION FINANCE PROGRAM
2920.1 The Innovation Finance Program shall provide capital to Eligible Recipients either (1) through a co-investment with an Innovation Finance Company into an Eligible Recipient; or (2) by investing as a Limited Partner in an Innovation Finance Company that shall then make an investment into an Eligible Recipient.
2920.2 A co-investment with an Innovation Finance Company shall not exceed fifty percent (50%) of the total investment in the Eligible Recipient and no more than five hundred thousand dollars ($500,000).
2920.3 The District may fully or partially subordinate its investment to the co-investment by the Innovation Finance Company.
2920.4 An investment as a Limited Partner in a Limited Partnership managed by an Innovation Finance Company shall not exceed the amount allocated to the Innovation Finance Program by the U.S. Department of the Treasury, and the resulting total investment in the Eligible Recipient shall be comprised of fifty percent (50%) or less in capital from the Innovation Finance Program and no more than five hundred thousand dollars ($500,000).
2920.5 The District may fully or partially subordinate its investment to the investment of the other Limited Partners in the Limited Partnership managed by the Innovation Finance Company.
2920.6 Where applicable, principal and interest repayments on an investment in an Innovation Finance Company and an Eligible Recipient may be deferred until the occurrence of a liquidity event, as described in §§ 2920.7 – 2920.9.
2920.7 A liquidity event shall occur in any transaction in which the Innovation Finance Company receives: cash or equity securities having a “readily determinable fair value,” as defined by the Financial Accounting Standards Board Accounting Standards Codification, as amended (“marketable securities”), in exchange for securities of the Eligible Recipient (or any securities into which the securities are converted or for which the securities are exchanged).
2920.8 Any payment to an Innovation Finance Company, including dividends and payments of principal or interest, shall be considered a liquidity event.
2920.9 Share exchanges and other similar transactions shall not be considered liquidity events to the extent that DISB’s interest in the Eligible Recipient is not tendered for cash or a marketable security. The liquidity horizon shall not exceed ten (10) years.
2920.10 An Innovation Finance Company’s failure to liquidate its investment in an Eligible Recipient and to pay the District its pro-rata share of the initial investment and return on investment shall be included in the loan documents or limited partnership agreement between DISB and the Innovation Finance Company as an event of default. The investment documents shall set forth the remedy or penalty for the default. The remedy or penalty for a default may include, without limitation, payment of additional interest by the Innovation Finance Company to the District. Where the failure continues for more than thirty (30) days beyond the date that the payment was to be made, forfeiture or recoupment of all or a portion of the amount allowed to the Innovation Finance Company may be required pursuant to § 2922.6 or § 2922.12.
Section 2921, INNOVATION FINANCE COMPANY - INNOVATION FINANCE PROGRAM, is amended to read as follows:
2921 INNOVATION FINANCE COMPANY - INNOVATION FINANCE PROGRAM
2921.1 An Innovation Finance Company shall demonstrate to the Commissioner that it has a track record of positive return on investment and be an entity in one of the following categories:
(a) Certified by the U.S. Department of the Treasury’s CDFI Fund as a Community Development Financial Institution;
(b) Registered as a Business Development Company, as defined under the Investment Company Act of 1940;
(c) Certified by the U.S. Small Business Administration as a Small Business Investment Company (SBIC), New Market Venture Capital Company, or Rural Business Investment Company; or
(d) Any other entity that has at least five million dollars ($5,000,000) of assets under management or an Accredited Investor within the meaning of the Federal Securities laws, both of which must demonstrate to the Commissioner that it has qualified management and staff.
2921.2 An Innovation Finance Company may also include Angel Investor Networks, which shall be defined as: (1) a group of investors where all members meet all requirements as “Accredited Investors” within the meaning of the Federal securities laws; and (2) a group of investors that has been operating as a group for a minimum of five (5) years and has made cumulative yearly investments as a network of no less than five hundred thousand dollars ($500,000) per year and average investment of no less than one hundred twenty-five thousand dollars ($125,000) per investee company. All members of the Angel Investor Networks shall meet the certification requirements of the SSBCI program, including but not limited to the Sex Offender Certifications.
2921.3 An Innovation Finance Company shall enroll in the Innovation Finance Program by providing to DISB:
(a) An application for enrollment;
(b) A signed Innovation Finance Program Participation Agreement with DISB which, after DISB’s execution, may be used by the Innovation Finance Company for subsequent investments in subsequent Eligible Recipients provided that (1) DISB has not amended or otherwise revised the form of Participation Agreement and (2) the Innovation Finance Company has been re-certified as set forth in § 2921.2;
(c) A certification that it is in compliance with the requirements of the District of Columbia and federal securities laws;
(d) A certification that, consistent with OMB Circular A-129, it has or will have at the time DISB makes any investment, at least twenty percent (20%) of its own capital at risk in any investment enrolled in the Innovation Finance Program, unless a waiver is granted;
(e) A certification that no principal of the Innovation Finance Company has been convicted of a sex offense against a minor as the term is defined in Section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911);
(f) A certification in the form to be provided to the Innovation Finance Company by DISB providing that the Innovation Finance Company has complied with the Conflicts of Interests for Venture Capital Programs set forth in the current SSBCI National Standards;
(g) A certification from the proposed Eligible Recipient in the form to be provided by DISB regarding certification of the Use of Proceeds and that the proceeds are for a permitted Business Purpose within the meaning of the SSBCI Guidelines and the Small Business Jobs Act of 2010 (the “Act”);
(h) A certification from the proposed Eligible Recipient in the form to be provided by DISB regarding the SSBCI Sex Offender Rules and the Act; and
(i) Any other document DISB determines is necessary for the administration of the District SSBCI Programs or for compliance with the U.S. Department of the Treasury’s SSBCI.
2921.4 Once enrolled and certified as an Innovation Finance Company, the Company may present subsequent Eligible Recipients to the Innovation Finance Company using the following procedure:
(a) The Innovation Finance Company shall re-certify it meets the requirements in § 2921.1; and
(b) The Innovation Finance Company and the Eligible Recipient as the case may be, shall each submit the relevant Certifications set forth in §§ 2921.3 (a) – (i).
Section 2922, ELIGIBLE RECIPIENTS AND INVESTMENT REQUIREMENTS – INNOVATION FINANCE PROGRAM, is amended to read as follows:
2922 ELIGIBLE RECIPIENTS AND INVESTMENT REQUIREMENTS – INNOVATION FINANCE PROGRAM
2922.1 To qualify for an Investment, an Eligible Recipient shall:
(a) Be a non-public company that is registered in the District and is subject to tax under the laws of the District;
(b) Have at closing, or sign an agreement pledging that it will have within six (6) months after funding:
(1) Its principal offices within the District, demonstrated by a lease or a deed; and
(2) At least seventy-five percent (75%) of its employees working in the District; and
(c) Have less than seven hundred and fifty (750) existing employees, including those of its affiliates and subsidiaries
2922.2 To qualify for an Investment, an Eligible Recipient may also be subject to at least one of the following requirements:
(a) Provide proof by the time of funding that District residents are employed in at least fifty percent (50%) of its W-2 and 1099 employee positions;
(b) Sign an agreement by the time of funding pledging that at least fifty percent (50%) of its W-2 and 1099 employee positions will be occupied by District residents within six (6) months of funding;
(c) Provide proof by the time of funding that the Eligible Recipient is at least fifty percent (50%) owned by District residents and provides at least twenty-five percent (25%) of its W-2 and 1099 employee positions to District residents; or
(d) Demonstrate by the time of funding that the Eligible Recipient will, within six months of funding, create or retain at least one District resident job for every one hundred thousand dollars ($100,000) in investment support that the District provides.
2922.3 If the funding from the District of Columbia to an Eligible Recipient that is not a Certified Business Enterprise is three hundred thousand dollars ($300,000) or more, the Eligible Recipient shall execute a First Source Agreement if District law requires.
2922.4 The provisions of § 2922.1 and, where applicable § 2922.2, may be waived, and the deadlines extended, in whole or in part, by the Commissioner if the Eligible Recipient demonstrates a reasonable need for waiver, if the waiver will not violate the SSBCI Guidelines of the U.S. Department of the Treasury, and if the waiver is in the best interest of the District.
2922.5 The Eligible Recipient and any owner of the Eligible Recipient that has at least a twenty percent (20%) interest in the Eligible Recipient shall execute covenants, pledging to continue to comply with the Program requirements from § 2922.1 and, where applicable § 2922.2, for the later of (i) a Liquidation Event or (ii) ten (10) years.
2922.6 In addition to its own pro rata share in the total return on investment (ROI) on a performing investment, the Innovation Finance Company may receive a maximum of twenty-five percent (25%) carried interest of DISB’s pro rata share of the total ROI. The Parties agree that the twenty-five percent (25%) share of DISB’s pro rata share as set forth in this section is specifically in lieu of the payment of any Innovation Finance management fees or administrative fees that may be assessed to DISB pro rata with other investors, if any, in respect of an investment in an Eligible Recipient.
2922.7 If the District’s investment involves a Limited Partnership interest in a Fund where at least two thirds of the capital is from the private sector, the DISB may agree to pay a maximum annual management fee of two percent (2%) of assets under management in addition to a maximum of twenty percent (20%) carried interest on DISB’s pro rata share of the total ROI provided the carried interest and management fee are deferred and only paid from the total ROI.
2922.8 Under the Enhanced Investment category, an Eligible Recipient of an Enhanced Investment shall also sign an agreement to comply with at least one (1) of the following additional enrollment criteria for which an enhanced investment return of five percent (5%) shall be provided to the Eligible Recipient for each:
(a) The Eligible Recipient shall sign an agreement to allocate at least ten percent (10%) of all new and future hires to be targeted new hires as defined by the Federal Work Opportunities Tax Credit Act, 26 U.S.C. § 51(d) for the duration of the Enrolled Investment;
(b) The Eligible Recipient shall meet at least one (1) of the following:
(1) Be a Certified Business Enterprise or pledge to become a Certified Business Enterprise within six (6) months of funding; or
(2) Be a business enterprise more than fifty percent (50%) woman or minority owned.
(c) The Eligible Recipient shall have its principal office located in a census tract where the poverty rate exceeds twenty percent (20%); and
(d) The Eligible Recipient shall have its principal office located on retail priority areas as identified under D.C. Official Code § 2-1217.73.
2922.9 The Eligible Recipient of an Enhanced Investment, and any owner of the Eligible Recipient that has at least a twenty percent (20%) interest in the Eligible Recipient shall execute covenants pledging to continue to comply with the additional enrollment criteria as described under § 2922.8 for the enrollment category chosen by the Eligible Recipient.
2922.10 The Eligible Recipient of an Enhanced Investment may receive five percent (5%) of DISB’s pro rata share of the total ROI for meeting each of the economic development goals stated in § 2922.8, up to a total of fifteen percent (15%).
2922.11 In both categories of enrollment, DISB shall receive the proportional benefit of all amounts received from the Eligible Recipient or realized from the Eligible Recipient’s collateral following default or loss.
2922.12 An Enrolled Investment may be used to refinance a loan or line of credit from a different lender under the Innovation Finance Program.
2922.13 An Eligible Recipient shall not be:
(a) An executive officer, director, or principal shareholder of the Innovation Finance Company enrolling the investment;
(b) A member of the immediate family of an executive officer, director, or principal shareholder of the Innovation Finance Company enrolling the investment;
(c) A related interest of an executive officer, director, principal shareholder, or member of the immediate family;
(d) A business engaged in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil or dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business;
(e) A business that earns more than half of its annual net revenue from lending activities, unless the business is a non-bank or non-bank holding company or community development financial institution;
(f) A business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or
(g) A business engaged in activities that are prohibited by federal or District of Columbia law.
2922.14 For the purpose of these Eligible Recipient restrictions, as described in § 2922.13(a), (b), and (c) above, the terms “executive officer,” “director,” “principal shareholder,” “immediate family,” and “related interest” refer to the same relationship to an Innovation Finance Company as the relationship described in 12 C.F. R. part 215 or any successor to such part.
2922.15 An Eligible Recipient under the Innovation Finance Program shall certify that no principal of the Eligible Recipient has been convicted of a sex offense against a minor as such term is defined in Section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911).
2922.16 For the purposes of the certification required under § 2921.3(e) and § 2922.15, “principal” is defined as:
(a) If a sole proprietorship, the proprietor;
(b) If a partnership, each managing partner and each partner who holds twenty percent (20%) or more ownership interest in the partnership; or
(c) If a corporation, limited liability company, association or a development company, each director, each of the five (5) most highly compensated executives, officers, or employees of the entity, and each direct or indirect holder of twenty percent (20%) or more of the ownership stock or stock equivalent of the entity.
2922.17 An Eligible Recipient shall use the investments facilitated by the Innovation Finance Program for a business purpose, including working capital, inventory, expansion, renovations, start-up costs, and refinancing. The entire proceeds of the investment shall be used within the District.
2922.18 The investment from the Innovation Finance Program shall not be used:
(a) To repay delinquent federal or District of Columbia income taxes unless the Eligible Recipient has a payment plan in place with the relevant taxing authority;
(b) To repay taxes held in trust or escrow, for example, payroll or sales taxes;
(c) To reimburse funds owed to any owner, including any equity injection or injection of capital for the business’s continuance;
(d) To purchase any portion of the ownership interest of any owner of the business;
(e) To acquire or hold passive investments;
(f) For legal or illegal gambling; or
(g) For evangelizing, proselytizing, or lobbying.
2922.19 An Innovation Finance Company shall file an investment for enrollment in the Innovation Finance Program by:
(a) Delivering to DISB a copy of the District SSBCI Program Enrollment Form executed by an authorized officer of the Innovation Finance Company;
(b) Providing DISB with any other documentation and information related to the investment that DISB requires; and
(c) Complying with any other enrollment procedures that DISB may reasonably require in writing.
2922.20 The filing of an investment for enrollment shall be considered to occur on the date on which the Innovation Finance Company submits to DISB the documentation requested by DISB in § 2922.21 and, where applicable, § 2922.22.
2922.21 DISB shall review the investment and related transaction documents that memorialize the terms and conditions of the investment, and DISB shall issue a final approval if the investment, Innovation Finance Company, Eligible Recipient, and other aspects of the transaction, are determined to comply and satisfy all applicable requirements.
2922.22 The Innovation Finance Company and Eligible Recipient shall execute all documentation requested by DISB to memorialize the terms and conditions of the investment to be enrolled in the Innovation Finance Program.
2922.23 The Innovation Finance Company, Eligible Recipient, and all other parties to the transaction, shall execute all of the documents required to close or settle the transaction. The terms, conditions, and material language of the executed documents shall be consistent with those upon which DISB issued a final approval.
2922.24 The investment shall be considered enrolled in the Finance Innovation Program when DISB receives copies of all executed transaction documents that it previously approved and submits a funding request to the Office of the Chief Financial Officer.
2922.25 DISB shall not commit capital from SSBCI Program Funds to an Innovation Finance Company until the Innovation Finance Company has met all requirements set forth in § 2922.1 and, where applicable, § 2922.22.
Section 2923, REPORTING REQUIREMENTS – INNOVATION FINANCE PROGRAM, is amended to read as follows:
2923 REPORTING REQUIREMENTS – INNOVATION FINANCE PROGRAM
2923.1 Each Eligible Recipient under the Innovation Finance Program shall annually submit the following information to DISB within sixty (60) days after the year-end and at any other time DISB reasonably requests:
(a) The Eligible Recipient’s annual revenues, if any, in the prior fiscal year;
(b) The number of the Eligible Recipient’s full-time and part-time equivalent employees, including those who are District residents by ward, and the number of jobs created and retained as a result of the investment for the Eligible Recipient; and
(c) Any additional documentation and information DISB reasonably requires.
2923.2 Failure to file a complete annual report may result in a fine of twenty-five dollars ($25.00) per day for each violation. This fine shall not exceed one percent (1%) of the Enrolled Investment for each violation. It shall be payable by the Eligible Recipient and any owner of the Eligible Recipient, that has at least a twenty percent (20%) interest in the Eligible Recipient.
2923.3 Failure to comply with any required covenants under §§ 2920.1 – 2923 of this chapter may result in a fine not to exceed the amount invested by DISB in the Eligible Recipient. This fine shall be payable by the Eligible Recipient and any owner of the Eligible Recipient, who has at least twenty percent (20%) interest in the Eligible Recipient.
Section 2924, TERMINATION OF INVESTMENT – INNOVATION FINANCE PROGRAM, is added as follows:
2924 TERMINATION OF INVESTMENT – INNOVATION FINANCE PROGRAM
2924.1 DISB may terminate its obligation to enroll investments under the Innovation Finance Program by issuing a notice of termination to an Innovation Finance Company. The termination shall apply on the effective date specified in the notice of termination.
2924.2 The termination shall not apply to any Enrolled Loan or Enrolled Investment that is made on or before the date on which the notice of termination is received by the Innovation Finance Company.
Sections 2925-2998 are amended to read as follows:
2925-2998 [RESERVED]
Section 2999, DEFINITIONS, § 2999.1, is amended by adding the following definitions:
Certified Business Enterprise: A local business enterprise as defined in D.C. Official Code § 2-218.02 (1D).
First Source Agreement: An agreement with the District governing certain obligations of the Eligible Recipient, pursuant to Section 4 of the First Source Employment Agreement Act of 1984, effective June 29, 1984 (D.C. Law 5-93; D.C. Official Code § 2-219.03), and Mayor's Order 83-265, dated November 9, 1983, regarding job creation and employment generated as a result of the District’s investment.
Subsection 2999.1 is amended by amending the following definition:
Innovation Finance Company: Any Community Development Financial Institution, Business Development Company, Small Business Investment Company, New Market Venture Capital Company, Rural Business Investment Company, private sector venture capital fund, angel investor network, seed capital fund, or entity that has five million dollars ($5,000,000) of assets under management and can demonstrate qualified management and staff.
