US seeks to ease small business lending process, but startups fear exclusion

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The Treasury Department has issued new guidelines to expand access to the emergency small business loan program, but some in Silicon Valley say it doesn’t guarantee startups will be able to get help.

Federal regulations may make it more difficult for companies with private equity or venture capital funds to qualify as small businesses, as they may consider all businesses controlled by a single investor as a single entity under the so-called rules. affiliation.

In guidelines released Friday night, the Treasury Department said minority investors who own less than 50% of a company’s voting stock could still be considered controlling shareholders in certain circumstances. These include the ability to block certain basic business operations, such as the approval of a stock option plan.

In theory, the guidelines are supposed to create an opening for some startups to access loans, as many don’t have a single investor who owns more than 50% of their shares. But in practice, their complex incorporation documents can make it more difficult to determine whether they are affiliated with an investor and potentially ineligible for the loan, industry experts have said.

The interim final rule released on Friday evening “hasn’t changed any of the substantive findings about how we approach affiliate rules,” said Peter Werner, a startup lawyer at Cooley LLP. “The rules that startups hoped to be simplified have not been.

This could be bad news, especially for venture capital-backed start-ups that are in greater need of bailout funding than more mature, advanced companies.

Start-ups are more likely to have a single investor who could be seen as having some element of operational control, triggering the affiliate rule. Late-stage startups have raised capital from more VC firms, so investors’ relative ownership positions are diluted and their control is shared.

Already, some companies that feel they need the money the most are changing their corporate charters, or are preparing to do so, to remove provisions that could trigger membership rules, Werner said.

An industry official estimated that about 15,000 venture-funded firms and about 12,000 privately-funded firms have fewer than 500 employees.

“There is definitely a concern about how it works or not. “

Whether or not startups are affiliated with an investor could create confusion for banks handling loans, said Justin Field, head of government affairs for the National Venture Capital Association, a lobbying firm for capital investors. risk.

It could also create liability for businesses and their banks if loans are approved and the Small Business Administration later determines that they should have been refused. In this case, the banks could lose the federal loan guarantee, Field said.

Congress has granted nearly $ 350 billion in small business loans to cover wage costs over the next few months as large swathes of the economy shut down in an attempt to stem the spread of the coronavirus. The program, which is administered by the SBA, is only available to companies with fewer than 500 employees.

The corporate-backed businesses had the backing of powerful lawmakers such as House Speaker Nancy Pelosi (D., Calif.) And Minority Parliamentary Leader Kevin McCarthy (R., Calif.), Who urged the administration Trump to allow startups to access emergency loans. .

Senator Marco Rubio (R., Fla.), One of the main authors of the small business lending provisions, said on Twitter on Saturday that he was awaiting further advice on several outstanding issues, including the membership rules .

“For lenders to participate with confidence, they need more clarity” on the rules of affiliation, especially for nonprofits, and on the general conditions of eligibility, said Mr Rubio . “I expect this very early next week as well.”

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He also said that the strong demand for loans on the first day made it clear that Congress will need to provide more money for the program by the end of May.

Separately, the SBA issued an interim rule exempting faith-based organizations from the membership rules for the purposes of the emergency loan program.

The loan program got off to a bumpy start on Friday, just hours after the government released final guidelines and application forms. Many lenders said they were unable to process applications yet given the rapid turnaround time, leaving many business owners disheartened as they sought financing to stay afloat in the weeks to come. future.

Write to Kate Davidson at [email protected], Rolfe Winkler at [email protected] and Dave Michaels at [email protected]

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