Our ecosystem is dealing with a rapidly changing economic and social environment stemming from COVID-19. Once growing businesses are now being forced to make radical adjustments to their 2020 targets.
The recently passed CARES Act provides relief to individuals and businesses that have been adversely impacted by the COVID-19 (coronavirus) pandemic. Among other things, the Act establishes and allocates $349 billion in funding to the Paycheck Protection Program (PPP). We at Carta believe that some impacted companies in our industry can benefit from this relief.
Paycheck Protection Program (PPP)
The PPP seeks to support businesses with less than 500 employees through potentially forgivable loans up to $10 million for payroll, rent, and other covered costs. If the employer maintains its payroll, then portions of the loan used for payroll costs, interest on mortgage obligations, rent, and utilities may be forgiven. Payroll costs are capped at $100,000 a year for each employee, and it is anticipated that no more than 25% of the forgiven amount may be attributed to non-payroll costs. The PPP is being administered as a first-come, first-serve program and traditional lenders have been overwhelmed by interest, an opaque process, and technical difficulty in submitting applications to the Small Business Administration (SBA).
The PPP was initially hindered by confusing standards that prevented many startups, small businesses with equity investors, and growth-stage companies from accessing the program. The constraint is the affiliation standard, which typically requires the SBA to assess the employee base of the applicant as well as any of its affiliates when determining whether the applicant is eligible for loans under the PPP.
The Treasury Department and the SBA have sought to address this constraint by releasing new guidance on the issue of affiliation, namely through four tests to determine “control” and the resulting affiliation trigger. These tests still leave some ambiguity around the affiliation standard and which businesses are eligible for the PPP. If any of the tests below apply to an individual or entity, then it may not be eligible for PPP loans:
- Ownership: An individual or entity “owns or has the power to control more than 50 percent of the concern’s voting equity.”
- Securities and agreements to merge: The SBA considers stock options, convertible securities, and agreements to merge to have a present effect on the power to control a concern.
- Management: The CEO or other senior leaders also control the management of another concern, or an individual or entity controls the management of the applicant through a management agreement.
- Identity of Interest: Close relatives (as defined by 13 CFR 120.10) “with identical or substantially, identical business or economic interests.”
This blog is not legal advice and should not be relied on as such. We strongly recommend that you review the SBA guidelines and consult with your attorneys to determine whether you are eligible to apply for a PPP loan as well as which expenses are eligible for loan forgiveness. In addition, you may want to discuss with your board of directors/managers. When submitting a PPP loan application, you will be asked to certify that current economic uncertainty makes the loan request necessary to support your ongoing operations. If it is later determined that the loan was not necessary, there could be material risks, including potential criminal liability, in addition to reputational risk to you, your board members, and your investors, so consulting counsel and obtaining board approval is strongly advised.
We realize that the PPP may not be a fit for every startup, particularly those that are well capitalized or that have not been adversely affected by this crisis, but we do believe it can be helpful to many. Startups should not be penalized for operating during this tumultuous time.
Carta is in a unique position to help our customers.
Since last Sunday, we have been working diligently with Coastal Community Bank (Coastal)—a member, FDIC and SBA Preferred Lending Partner—to build, test, and optimize a simplified application for startups on the Carta platform.
Carta will facilitate your PPP loan application submission to Coastal, and Coastal will be the lender. We have submitted and Coastal has confirmed a number of PPP loans thus far, and we are now comfortable sharing our application more broadly with the entire Carta community.
If you are a Carta customer applying for a PPP loan, you can access our simplified application process here. If you need help understanding how the program works, whether you qualify, we’ve outlined the CARES Act here.
Carta will donate any profit we make on the origination fees back into the small business community through the Opportunity Fund.
For more information, please visit our recent blog and the Treasury Department’s landing page.
While we cannot guarantee access, funding, or success, we hope this helps those companies that truly need the support. Remember that this situation is constantly evolving, so some of this information may change—we advise you visit the SBA’s site for the latest information and guidance. We will continue to update these resources as more information becomes available.
UPDATE 4/16/20: PPP on pause
On Thursday, April 16, the Paycheck Protection Program exhausted its funding. The Small Business Administration announced it is unable to accept new applications at this time and lenders are unable to load additional applications. We do expect Congress to authorize additional funds for the PPP, but until they do, the PPP will remain idle.If you already applied through Carta, we are still processing your application to ensure it as the front of the line when more funding becomes available. If you have not applied, but are interested, please fill out this request form so we can begin to plan and prepare any application quickly.
DISCLOSURES: This communication is being sent on behalf of eShares, Inc. dba Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. Please consult with your attorneys and board of directors or managers before applying.
Carta is facilitating the loan application process, but Coastal will be your lender. Coastal’s obligation to provide a PPP loan to you may be subject to customary conditions, including but not limited to Coastal’s satisfactory completion of due diligence and receipt of final, executed loan documents. Coastal will be processing complete applications in the order they are received and will notify you once it receives approval from the SBA. Coastal is making every effort to ensure that each application it takes is processed and entered promptly into the SBA Portal for approval; however, neither Carta nor Coastal has any indication of when the PPP funding may run out or when the SBA will terminate the program. Accordingly, Coastal’s acceptance of your application does not guarantee that the SBA will have sufficient funds to approve your loan. Once you receive an SBA E-Tran number, your funding is secured and Coastal will fund your loan within 5 days. Coastal will notify you once the funding has expired. In the event that the initial round of funding is exhausted when your application is input, Coastal will hold it in a queue for future funding, if and when that occurs.
Equal Credit Opportunity Act Notices
NOTICE: The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract), because all or part of the applicant’s income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Protection Act. The federal agency that administers compliance with this law concerning Coastal Community Bank is: Federal Reserve Consumer Help Center, P.O. Box 1200, Minneapolis, MN 55480 Toll-Free Number (888) 851-1920 Fax Number (877) 888-2520 TDD Number (877) 766-8533.
DISCLOSURE OF YOUR RIGHT TO A STATEMENT OF DENIAL: If your gross revenues were $1,000,000 or less in your previous fiscal year and Coastal denies your application for credit, you have the right to a written statement of specific reasons for the denial. To obtain the statement please contact: Coastal Community Bank, P.O. Box 12220, Everett, WA 98206, Attn: Loan Department (425) 257-9000 within 60 days from the date you are notified of Coastal’s decision. Coastal will send you a written statement of reasons for the denial within 30 days of receiving your request for the statement.