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Small business aid could go to venture capital-backed companies

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Via Financial Times

US start-ups backed by some of the biggest names in finance are set to gain access to $350bn of rescue loans for small businesses after lawmakers from both political parties lobbied the Treasury to change aid rules to help the venture capital industry, according to people briefed about the matter.

Under the $2tn coronavirus relief package signed into law by Donald Trump last week, the Small Business Administration has been authorised to offer the loans to cash-strapped businesses employing under 500 people. 

At issue has been the so-called affiliation rule, under which small businesses can be barred from receiving rescue funds if they are backed by a financial firm whose portfolio companies collectively have a workforce that exceeds the 500-person limit.

Democrats including Nancy Pelosi, the Speaker of the House of Representatives, and Republicans had asked Treasury secretary Steven Mnuchin to intervene on behalf of venture capital-backed firms.

Kevin McCarthy, the Californian congressman who is the top Republican in the House, said he spoke with Mr Mnuchin about the issue on Thursday and believed the requests would be granted.

“This is going to be solved,” Mr McCarthy said in an interview with Axios. “The way you solve this is you want to make sure a portfolio company isn’t controlled by 50 per cent or more.”

Venture capital firms typically own minority stakes in the businesses they back. However, venture capitalists had been concerned that the affiliation rule could be invoked in cases where they had board control.

One congressional aide familiar with the matter said there had been no intention to leave out start-ups from the small business relief, but the main focus of the legislation was to provide help to businesses such as hair salons, restaurants and dry cleaners across the country. 

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The US Treasury department did not respond to a request for comment. 

While venture capital-backed companies would qualify for small business loans issued under the package, it is unclear whether companies controlled by private equity funds, who have also been pushing for access to the loans, would also be allowed to participate.

Jerry Moran, a Republican senator from Kansas, told Mr Mnuchin that it would be a mistake to shut out private equity-backed companies from the loan plan because of an “unintended” and “unfair” reading of the rules. 

Much of the support for the venture capital firms came from legislators from California, home to Silicon Valley and many of its leading financiers.

Start-ups including the electric scooter company Bird and real estate brokerage Compass have axed thousands of workers in recent weeks, as venture capitalists push the companies to preserve cash. Investors and entrepreneurs have been consulting lawyers to determine if their companies would qualify for aid under the current rules.

Ms Pelosi, who represents a San Francisco in the House, pleaded for venture capital-backed companies to have access to the SBA loans, calling start-ups “the engine of America’s innovation economy”. 

Another advocate for the venture capital industry was Kamala Harris of California, who joined with fellow Senate Democrats Mark Warner of Virginia and Chris Coons of Delaware, as well as Republican senator Susan Collins of Maine, in calling for rule changes favouring venture capital.

“We urge you to clarify, such as by issuing an unambiguous bright-line test, that start-ups with minority equity investors may also access some portion [of] these important resources,” they wrote to Mr Mnuchin.

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Ms Harris, who many see as a possible vice-presidential candidate if frontrunner Joe Biden wins the Democratic presidential nomination, has received more financial contributions in this election cycle from individuals in the venture capital sector than any other Democratic senator.

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