April 4, 04:53 pm: This story has been corrected to clarify the new guidance rules on SBA loans. We apologize for the error.
On Friday night, the Treasury Department updated its rules regarding the “affiliation” of private entities to include religious organizations and nonprofits but keep in place the same rules that would deny some startups from receiving loans.
The rule update comes after language in the economic stimulus package signed into law last week left unclear whether some VC-backed startups would be eligible for relief. The $2 trillion CARES Act has earmarked $350 billion for loans to small businesses, to be managed through the Small Business Administration (SBA). To qualify for relief, companies must have fewer than 500 employees.
The program came with guidelines called “affiliation rules.” These rules dictated that companies majority-owned by private equity or venture capital firms must count the employees of other startups in their investors’ portfolios toward their own employee totals.
If a venture firm and its portfolio companies were to be considered affiliates, many would easily surpass the 500-person limit, making them ineligible for SBA loans.
On Tuesday, Speaker of the House Nancy Pelosi and Rep. Ro Khanna sent a letter to Treasury Secretary Steve Mnuchin and Jovita Carranza, head of the SBA, to address the portion of the stimulus package that excludes venture capital-backed startups from being considered a small business.
“Many small businesses in our districts that employ fewer than 500 employees, particularly startup companies with equity investors, have expressed concerns that an overly strict application of the Small Business Administration’s (SBA) affiliation rule may exclude them from eligibility for PPP loans,” wrote the two lawmakers. “For these small businesses, as for many others across America, access to forgivable PPP loans will be critical to preserving jobs during the coronavirus pandemic and to securing America’s leadership in science, technology and innovation.”
Additionally, the Iowa Capital Venture Association, along with more than 100 other organizations across the U.S., sent a similar letter urging the SBA and U.S. Department of the Treasury to include VC-backed startups in the CARES Act.
“Without clear guidance enabling startups and small businesses supported by equity investment to access the loan facility, many of these startups may be rendered ineligible,” reads the letter. “The confusion alone could lead to waves of preventable layoffs. These layoffs will also have broad short term downstream economic consequences, including for service-oriented businesses like restaurants, coffee shops, and bars, who rely on these workers as customers.”
Senate Stimulus: What it would mean for the tech sector -March 27, 2020
State announces assistance for targeted small businesses -March 26, 2020
Iowa launches Small Business Relief Program in response to COVID-19 -March 24, 2020
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