Raising Capital - FAQ
What is an SBA Economic Injury Disaster Loan?
Through its network of approved lenders, the SBA provides businesses with long-term, low-interest Economic Injury Disaster Loans of up to $2 million. These loans offer vital economic support to businesses who are experiencing a temporary loss of revenue due to a disaster. Economic Injury Disaster Loans may be used to pay fixed debts, payroll, accounts payable, and other bills that can’t be paid because of the economic impact of the disaster.
This loan program is only activated after the declaration of a state of emergency in a county or state. Most often, the program is only available to select areas of the country in response to specific disasters, e.g. excessive flooding, an earthquake, or drought. However, due to the unprecedented COVID-19 pandemic, this loan program is available to all 50 states, including Washington DC and U.S. territories.
More information on these SBA programs are available on the SBA website, or you can contact us to discuss how to apply for an Economic Injury Disaster Loan.
What is the SBA Paycheck Protection Program?
Updated: April 3, 2020 3:50 PM
The Paycheck Protection Program is a new $349 billion SBA-backed loan program that was initiated through the CARES Act. It will provide forgivable loans of up to $10 million to small businesses to pay their employees as they try to deal with the economic effects of the COVID-19 crisis. These loans require no collateral and no personal guarantee. The interest rate is 1% fixed with a 2-year payment schedule and a 6-month deferral on payments. Interest will accrue during the deferral period.
In general, small businesses with 500 or fewer employees—including nonprofits, veterans organizations, self-employed individuals, sole proprietorships, and independent contractors— are eligible to apply for these loans. The application process officially opens on April 3, 2020 for small businesses and sole proprietorships and April 10, 2020 for everyone else. However, due to a lack of guidance as of April 3, many lenders have decided not to begin processing applications until the SBA has issued its final rules.
Loans will be made through approved SBA 7(a) lenders or through any participating federally insured depository institution, federally insured credit union, or Farm Credit System institution. If you don’t currently have a relationship with a banker, you can locate one using this list of SBA-approved lenders that we put together.
The loan can be fully forgiven if the funds are used for a set list of approved items, such as payroll costs, interest on mortgages, rent, and utilities, over the eight-week period after the loan is made. Businesses must also maintain their levels of employment and employee compensation to be eligible for loan forgiveness.
For a fuller explanation of the Paycheck Protection Program and other critical SBA loan programs, click the link below.
Read More: Your Guide to The New SBA Loan Programs
What is a "Blue Sky" law?
Whenever you sell securities, you have to worry about two things: Federal law, regulated by the Securities and Exchange Commission, and the law of the state where the investor resides (the primary residence or primary place of business for the investor). These state-regulated securities laws are called “blue sky” laws.
The term originated in the early 1900s as states around the country enacted various laws to protect investors from “Blue Sky merchants.” These fraudsters would go around selling stakes in companies, gold mines, etc. that had no more assets backing them up than “so many feet of ‘blue skies’.” Newspapers carried the stories and perpetuated the colloquial term, which stuck.
Because public filings are financially prohibitive for most closely held businesses, companies generally find exemptions. Until 10–15 years ago, companies had to find an exemption both to federal securities laws—e.g. Regulation D, Rule 506—and to state-specific, Blue Sky laws in any state where they were selling securities. The law changed, though, and federal securities law now mostly preempts state law.
That doesn’t mean state laws don’t matter. Instead, you only have to worry about three things, the three F’s: Fees, Filings, and Fraud. So, even if you comply with a federal law exemption, you still have to consider the state where the investor resides because the state typically wants you to file the exemption form and pay a fee—plus, you still can’t defraud the investors. Typically, the filings are required after the sale of securities in that state, except in New York, where there’s a pre-filing requirement.
There are a couple states, like Florida, that don’t have any filing requirements at all. In theory, as long as you comply with the federal exemption, there are no state fees and no state filings. But, again, you still cannot commit fraud.
What is a security?
In business circles “securities” are talked about a lot, but in reality few people can give a concise definition of what a “security” is.
Unfortunately, the definition is broad and has evolved over the years. One of the earliest definitions came in a landmark 1940’s Supreme Court case that originated from nearby in Howey-in-the-Hills, Florida. In the case, the Court decided that under certain circumstances a security could even be an orange grove!
In the famous Howey case, buyers purchased a group of trees, and the company promoting the arrangement tended the trees, picked the fruit, and sold the produce. The tree owner would receive the net revenue from the sale of the produce after the company deducted the expenses for its work.
The Supreme Court decided that the ownership interest in the trees was a security. In articulating one of the earliest tests to determine if an arrangement is a security (now known as the Howey Test), the Court concluded that an investment in a common venture with the expectation of profits derived from the efforts of others (e.g. an investor gives your company (or you) money and expects that money and more in return) is a security under Federal law.
Whether you call it a profit interest, partnership interest, membership interest in an LLC, promissory note, preferred stock, investment in real estate, or “a very special doodad,” if you have an arrangement where someone gives you money for investment purposes, it’s a security and you must comply with both federal and state securities laws.