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Lobbyists for the venture capital industry are pushing the Small Business Administration to correct what they called a potentially devastating flaw that could exclude many startups from the $2.2 trillion federal stimulus package President Trump is expected to sign.
When the Senate late Wednesday adopted the SBA's definition of what constitutes a small business, they left tens of thousands of venture-capital-backed startups likely ineligible for $350 billion in emergency loans included in the coronavirus relief bill. But there is still hope, said lobbyists seeking to convince the government agency tasked with overseeing the massive lending package to tweak the criteria.
The historic 880-page bill passed by the Senate, which could see a House vote as soon as Friday, makes companies with fewer than 500 employees eligible for emergency loans. Firms that use the loans to retain or rehire workers could see their debt forgiven.
The problem for smaller tech companies and startups that rely on venture funding — many of which have already cut their workforces, with some sectors hammered by city and state shelter-in-place orders — is that the SBA's rules include an "affiliate" clause that counts the employees of all companies backed by a venture firm against the 500.
"It's our view that it is within the current authority of the SBA to amend the regulation on its own," said John Dearie, president of the Center for American Entrepreneurship, who unsuccessfully lobbied senators drafting the relief bill to waive the regulations. "There are a lot of us who are talking and emailing the SBA and making it known that this is a major problem that needs to be fixed, and we are guardedly optimistic that they will fix this in the coming days."
Should that fail, Dearie said, he and other small business, tech and venture capital lobbyists will try to convince senators to make the fix in what's known as a technical corrections bill, which often follows the passage of major legislation rushed out in a crisis.
In the meantime, venture-backed tech startups who want to apply for loans will need to determine whether they trigger the SBA's affiliate rules, which seek to ensure that larger businesses do not exploit the agency's programs. The rules deem a company an affiliate of another when one controls, or has the power to control, the second.
In an industry where multiple firms may hold minority stakes, that's not always cut and dry. When in doubt, the SBA rules say the agency is to presume the two entities are affiliated, unless rebuttal evidence is presented showing otherwise.
"It's highly fact-specific," said Rebecca Wilsker, a lawyer with Choate Hall & Stewart LLP of Boston. "It involves looking at the capitalization table of a company, looking at the governing documents of a company and determining for each specific company who's in charge and how does it fit together."
Since 2015, 34,471 companies have raised VC funding, according to the National Venture Capital Association. The rule excluding venture-backed startups from eligibility was one of many provisions added into the bill when senators decided to use the SBA to administer the loans. While the SBA provision has faced criticism in the past, the agency's shift from administering $25 billion in loans to a proposed $375 billion has upped the stakes.
Lobbyists for the venture capital industry got their first glimpse of the coronavirus spending bill on March 19. They panicked, but for an entirely different reason. Another provision in the draft, also adopted from the SBA's guidelines, would have required the founder or CEO of a company to personally guarantee any government-backed loans.
"That would have left just about every small business we represent out of the program," said Justin Field, head of government affairs for the National Venture Capital Association. "You're not going to put your house and family at risk to make payroll for two months."
Field, along with a handful of other lobbyists representing tech companies and small-business interests, scrambled to make their case to the bill's drafters. It wasn't easy. With $2 trillion on the table, and just a few days to draw up the mammoth bill, the requests for senators and their staffers were coming fast and furious.
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"Everyone and their mother is yelling at them about something. There's no time to sit down for half an hour and quietly explain the issue. Your entire bandwidth to make the case is three lines in an email that you hope someone reads," Field said.
Late Sunday night, Field said his group finally got a response from a Senate contact working on the bill. Language waiving the personal guarantee provision had been included. It was only after that fire had been extinguished, Field said, that he and others realized that the SBA's affiliate clause would also exclude many venture-capital backed startups and tech companies from one of the bill's most powerful relief programs.
Field and his fellow lobbyists rallied again on Monday, but felt like they had already cashed in their chips. "Time had run out to make more changes," Field said.