Venture-Backed Startups Can Access SBA 7(a) Loans – What The Experts Aren’t Telling You!

“Dear Ed:

I’m panicking – I’ve been reading superintendence published by attention experts – they all seem to settle that venture-backed startups like my association aren’t authorised for a new SBA 7(a) loans since I’m somehow an “affiliate” of my VCs and all of their other startups. we don’t even know what that means, and we unequivocally need a $$ now to keep a startup afloat. Help!

Sasha Startup”

Before we go on – there is no tangible Sasha Startup. However, Sasha is an amalgam of vast emails, texts and calls my law organisation colleagues (see disclosure) and we have fielded over a final week. I’m happy to be a dispatcher of GOOD news in this regard. Please review on to transparent adult difficulty about venture-backed startups being somehow roughly wholly shut out of a new SBA Section 7(a) loans. Spoiler warning – they’re not! (Link to longer footnoted mainstay my colleagues and we published progressing this week).

The CARES Act (March 27, 2020) determined a new form of loan module famous as a Paycheck Protection Program (the PPP) within a U.S. Small Business Administration’s (SBA’s) Section 7(a) loan program. The startup/VC village review SBA’s keen manners about “affiliates” and resolved that flattering many any startup would be incompetent because, as one spectator pronounced (paraphrasing):

‘most lawyers we spoke to review a associate sustenance in a CARES Act to meant that any try capital-backed startup would need to associate with all a other startups in that VC’s portfolio.’

If this were scold (it isn’t) it would poise a problem: many companies that (together with their “affiliates”) have some-more than 500 employees are incompetent for SBA Section 7(a) loans. So, a doubt is, when do a “affiliate” manners force we to “aggregate” with your VC’s other portfolio companies (and a VCs themselves) for functions of final either we have 500 employees?

There are dual opposite manners that explain how to settle either SBA views companies as “affiliates.”

The early superintendence focused on a wrong rule.

The wrong rule is 13 CFR §121.103.It’s a widely germane rule, though it’s not a order that governs Section 7(a) loans.

The order that governs SBA Section 7(a) loans is indeed 13 CFR §121.301.I have dyslexia (for real), so we hatred that there’s a Section 301 and a Section 103 that both conclude “affiliate” for SBA programs.

Applying Section 301 rather than 103, however, matters a ton!

Section 103(c)(2) (the WRONG section) finds affiliation where mixed VCs any possess vast chunks of a startup’s batch and together “control” that startup, even if nothing of them owns a majority. In these cases, SBA will “presume” that any VC “controls or has a energy to control” if:

“two or some-more persons [VCs] … any owns, controls, or has a energy to control reduction than 50 percent…, and such minority land are equal or approximately equal in size, and a total of these minority land is vast as compared with any other batch holding…”

In contrast, Section 301 – (the RIGHT section), that indeed governs SBA 7(a) loans – doesn’t have an analogue to this partial of Section 103. So, for Section 7(a) loans, startups do NOT have to find “affiliation” formed on carrying dual or some-more stockholders with roughly equal land who together are “large” compared to others. Instead, Section 301 looks to a energy to “control” that is reason by an equityholder (rather than a organisation of separate minority holders) where that hilt “owns or has a energy to control some-more than 50 percent of a [company’s] voting equity.” That’s a unequivocally large difference, and very few VCs possess some-more than 50% of a startup (typically, a VC account owns a minority, not a majority, interest in a startup).

The research doesn’t finish there. Both Sections 103 and 301 also note that there are controls enabling a stockholder to retard corporate actions (in other words, a protective provisions or halt rights in try deals) that could trigger a anticipating of “control,” ensuing in SBA final that a VC is an “affiliate.”

The bottom line: Answer these 3 questions to assistance settle your VC-backed startup’s eligibility:

(1) does your VC reason 50% or some-more of your startup’s equity (calculated per Section 301(f)); or

(2) even absent that, does any singular VC control a infancy of a startup’s board; or

(3) even absent that, does any singular VC control poignant protecting provisions, enabling that VC to retard suggestive corporate movement so that a VC controls a startup?

If we answer approbation to ANY one of a above questions, find superintendence from counsel, since we might afterwards need to supplement together your worker headcount with that of your VC and all of that VC’s other “affiliates.”

If we answered no, to all 3 questions, that’s expected good news (still pronounce to counsel). Many U.S.-based startups WILL validate for SBA Section 7(a) loans, notwithstanding a disastrous early superintendence announced on this topic.

There’s some-more fact accessible in a longer, nerdier, footnoted article my colleagues (Matthew Moisan,  Kimberly E. Lomot, Lowell A. Citron, Ray Thek) and we co-authored.

Please – if your business needs cash, and so many do right now —  find an SBA lender (here is a couple to a SBA list of a 100 many active (7a) Lenders), and apply!

Good fitness and stay healthy.

PS: The SBA didn’t change a laws in a final few days. Both Sections 103 and 301, as created well before a pandemic, contend that Section 301 governs “affiliate” and “control” determinations for SBA Section 7(a) Loans.

DISCLOSURE: I’m a partner during a law firm Lowenstein Sandler LLP. While we offer as warn to many startups, expansion companies and funds, this mainstay is NOT dictated to be authorised advice, so do pronounce with your counsel. Also, this mainstay is NOT dictated to inspire field to finish a focus in any approach that is untruthful/inaccurate.


By Matthew J. MoisanEd ZimmermanLowell A. CitronKimberly E. Lomot, and Raymond P. Thek, “SBA Section 7(a) Loans for Venture Capital Backed Growth Companies/Startups Under a CARES Act,” Lowenstein Sandler LLP (March 31, 2020).

Lowell A. CitronMichael A. “Bux” BuxbaumTheodore C. Sica, and Kimberly E. Lomot, “SBA Paycheck Protection Program,” Lowenstein Sandler LLP (March 29, 2020).

Twitter Thread here.

For those who wish to see that this was already tough connected into a law: See 13 CFR §121.103(a)(8) (“For field in SBA’s Business Loan, Disaster Loan, and Surety Bond Guarantee Programs, a distance standards and bases for connection are set onward in §121.301.”); and 13 CFR §121.301(f) (“Affiliation underneath any of a resources described next is sufficient to settle connection for field for SBA’s Business Loan. … For this rule, a Business Loan Programs include of a 7(a) Loan Program …”). See also, SBA Small Business Compliance Guide: Size and Affiliation, Jun 2018 (“For a SBA’s Business Loan, Disaster Loan, and Surety Bond programs, a connection law can be found during 13 C.F.R. § 121.301(f). The Business Loan programs include of a 7(a) Loan module … Differences in a diagnosis of connection in these programs are remarkable below.”). The SBA Guide does not entirely fact a differences between Section 301 and Section 103.