SBA’s Affiliation Rules Still Unclear for VC-Backed Startups
TLDR: The startup community is still waiting for clarity about whether venture capital-backed startups are eligible for small business loans included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, despite suggestions by federal officials that the issue would be addressed shortly. To better understand the relationship between economic relief efforts and startups, we are asking companies to fill out a brief survey here to help determine how the government can clarify existing rules—such as the SBA’s affiliation rules—to better protect the nation’s startup ecosystem.
What’s Happening This Week: Small business owners are already applying for Paycheck Protection Program (PPP) loans from the U.S. Small Business Administration. Under the PPP program, which was created as part of the CARES Act, Congress allocated $350 billion to fund loans that allow small businesses to keep employees on payroll and cover basic expenses like rent during the economic fallout of the COVID-19 pandemic.
However, many startups and entrepreneurs remain in the dark about whether they qualify for the much-needed loans. Congressional leaders, federal officials, and others have expressed concerns that the SBA’s “affiliation rules” exclude venture capital-backed startups from receiving these loans. Only companies with less than 500 employees can receive PPP loans. However, the affiliation rules require startups and other small businesses to count all of the employees of their “affiliates” as their own employees. For VC-backed startups, the VC firm and any other startups the VC has invested in could be “affiliates,” meaning that those startups are likely ineligible for loans simply because their VC backers have invested in a handful of other startups.
House Minority Leader Kevin McCarthy (R-Calif.) told Axios last week that Treasury Secretary Steven Mnuchin was planning to issue guidance easing the affiliation rules for small startups. While the SBA did release an interim rule late on Friday regarding the affiliation rules and PPP loans, that guidance only really addressed nonprofits and faith-based groups, and not VC-backed startups. The government also issued some clarifying guidelines Friday, which appear to merely confirm that for startups, the same existing affiliation rules apply.
Why it Matters to Startups: Many startups risk losing out on the emergency loans they desperately need to keep their businesses above water. Despite suggestions that the affiliation rules would be clarified for VC-backed startups, this critical issue remains unaddressed as small businesses across the country rush to apply for funding.
Instead of clarifying that portfolio companies of venture capital firms are eligible for PPP loans, the SBA’s explanation of how the affiliation rules apply to PPP loans appears to reiterate the status quo. For example, the SBA will “deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.” This means that such a minority investor’s affiliation with other companies can keep the startup in question from qualifying for PPP loans, even if the firm in question has less than 500 employees.
The Treasury Department also released another document last night—Paycheck Protection Loans: Frequently Asked Questions—that, however, did not address the most pressing concerns for startups that are portfolio companies of larger venture firms.
There are still reports that lawmakers and federal officials are working to ease the affiliation rules for VC-backed startups. As struggling small businesses across the country rush to receive needed PPP loans, it’s imperative that federal officials listen to the startup community’s concerns and clarify the affiliation rules before VC-backed firms run out of time to secure the loans they need to survive.
Senate Majority Leader Mitch McConnell (R-Ky.) said in a statement earlier today the Congress needs to provide further funding for the SBA’s loan program to ensure that all small businesses in need of emergency liquidity have access to the loans. McConnell said he was working with Treasury Secretary Steven Mnuchin and Senate Minority Leader Chuck Schumer (D-N.Y.) to “approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday.” If Congress plans on increasing funding for this critical loan program, it’s imperative that lawmakers and federal officials quickly move to clarify the SBA’s affiliation rules to ensure that startups can meet the eligibility requirements to receive needed capital.
Engine has been reaching out to the startup community to gather more information about how the SBA’s existing policies could impact the U.S. startup ecosystem, particularly when it comes to accessing the available stimulus funds. We are asking startups to fill out a brief survey to help us determine how the government can clarify existing rules to better safeguard the country’s startup ecosystem.
On the Horizon.
The Senate Commerce Committee is holding a ‘paper hearing’ this Thursday at 10 a.m. on “Enlisting Big Data in the Fight Against Coronavirus.” Committee members will submit questions to the hearing witnesses by the close of business on Thursday about the use of anonymized and aggregated data being used to combat the COVID-19 pandemic.
