Food Venture Financing News - Weekly Issue No. 3
In This Issue:
- SBA Emergency Relief Loan Programs
- Links to Topical Food Venture Financing Content
- Disaster Relief Efforts in Our Industry
SBA Emergency Relief Loan Programs
Paycheck Protection Program (PPP)
We sent out our summary of the PPP plan and application process last Friday. It is attached here. There have been no significant revisions to the program since Friday, but others may follow. If you qualify, get your application in as soon as possible. The Treasury guidelines that it is intended to be a "first-come, first-served" program.
A PPP FAQ Q&A from last week's Naturally Bay Area webinar is attached here.
Economic Injury Disaster Loans (EIDL)
The key terms of this SBA program include the following:
- Up to $200k without a personal guarantee
- Maximum loan $2mm
- $10k intended to be distributed within three business days of application and is likely to be forgiven
- 3% interest rate
- 30 year repayment term
Private Sector Food Venture Financing Developments
- Some industry analysts are predicting that retail sales for U.S. packaged food companies will grow by 15% to 30% on average from March through May 2020.
- Online sales continue to surge. This may lead to a long-term shift in consumer behavior. This is the time for emerging food & brands to accelerate their online strategies.
- For companies that are not backed by PE firms, convertible promissory notes (with an investor-favorable valuation cap) and SAFEs (with no valuation cap) are likely to become the leading food venture financing instruments in the near-term, due to their relative simplicity and ability to avoid a valuation discussion in these uncertain times.
- Investor-favorable terms in convertible promissory notes like warrants, preemptive rights for lead investors, and tiered discounts may be necessary to attract investors.
- Investors, distributors, and retailers may be unlikely to support extensive new product development in the near-term. Retailers in particular will be likely to provide shelf space to products that already have established consumer demand.
Small Business Reorganization Act (SBRA)
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The CARES Act makes a significant change to the U.S. Bankruptcy Code that will permit more business to take advantage of the new Small Business Reorganization Act (SBRA), which was intended to make reorganization cheaper, faster and more efficient, and which itself only became effective in February 2020.
Some key points include:
- No Creditors' Committee. Generally, a creditors' committee will not be appointed to supervise the debtor and its operations, which eliminates a substantial cost for debtors. Instead, a standing trustee will be appointed to act as a facilitator. The standing trustee will not displace management.
- Owners Retain Equity. The SBRA relaxed the "absolute-priority" rule, which otherwise prevents owners of businesses from retaining their equity unless all creditors are paid in full.
- Up to $7.5mm in Debt. The CARES Act raised non-contingent, liquidated debt limit to $7.5mm (the original SBRA set a limit of about $2.7mm), which enables a greater number of businesses to take advantage of its terms. Note that this limit excludes contingent debts, such as most litigation claims where the debt is fairly disputed.
- Streamlined Process. A plan of reorganization may be approved without the need to prepare a disclosure statement, allowing its confirmation without the vote of any impaired consenting class or (under certain circumstances) any vote at all.
SBA Affiliation Rules
- On Monday, April 6, 2020, the Department of Treasury published another Q&A memo that addressed various questions pertaining to the SBA loans as well as affiliation rules for minority shareholders. The Department of Treasury clarified that a minority shareholder would not be deemed an affiliate of the company if it irrevocably waives these control rights. The company will not need to amend or amend/restate the charter. Instead, the company can provide documentation that the minority shareholder has waived its control rights.
- We expect that there will be further updates and clarifications on the application of affiliation rules to early-stage companies.
- Axios reported that in an interview with House Minority Leader Kevin McCarthy (R) on April 2, 2020, Rep. McCarthy stated that, based on his discussion with Treasury Secretary Mnuchin, a company should be exempt from the affiliation rules as long as the company is not controlled by a single outside shareholder (controlling 50% or more of the voting power).
- A link to the interview is found here.
Links to Topical Food Venture Financing Content
PPP and SBA Resources
- PPP Borrower Application Form
- SBA - Business Loan Program Temporary Changes; Paycheck Protection Program
- U.S. Department of Treasury - Assistance for Small Businesses
- Packaged foods sales to exceed expectations, Credit Suisse says
- CPG sales could rise as much as 30% from March to May, report finds
Disaster Relief Efforts in Our Industry
Visit the links below to learn more about organizations that are working on COVID-19 relief efforts:
At Davis Wright Tremaine LLP (DWT), we are proud to have one of the largest Food & Beverage legal practices in the country, with over 40 attorneys representing food innovators, entrepreneurs, and investors at every level of the food chain, from Farm to Label.
Please contact our Food and Beverage team if we can assist you in any way in these unprecedented times.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.