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Lowenstein Sandler LLP

Ed Zimmerman

Ed Zimmerman

Chair, The Tech Group


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WSG Coronavirus Task Force Group

Lowenstein Sandler LLP
New York, U.S.A.


Ed's 80+ columns published on the Accelerators & the Experts pages of The Wall Street Journal. Ed serves on The Wall Street Journal's Panel of Experts. Ed's 35+ columns in Forbes.

Ed co-founded and Chairs Lowenstein Sandler's Tech Group and VentureCrush.

Ed represents growth companies and startups as well as the venture capital, growth, and PE funds that fund them. He joined Lowenstein Sandler as a summer associate in 1991 and co-founded the firm’s Tech Group (1998), which has become one of the nation’s leading practices: Dow Jones ranked Lowenstein among the five most active U.S. law firms for venture capital and private equity (2013).

Chambers USA ranked Ed among the 22 best lawyers in Startups & Emerging Companies–USA–Nationwide; of those, Ed is the only lawyer based in New York (2018). Best Lawyers in America (2017) named Ed the New York City Venture Capital Lawyer of the Year. Chambers USA also ranked Ed among the best lawyers in Corporate/M&A–New York and in Investment Funds: Venture Capital–USA–Nationwide: “‘One of the best venture capital lawyers in the country–period’ is how clients describe Edward Zimmerman; with a practice covering the East and the West Coasts, Zimmerman enjoys a superb reputation across America and has also worked on deals abroad.” 

Ed serves as an Adjunct Professor of Venture Capital at Columbia University's Graduate School of Business (2005-present). From 1994 through 2004, Ed served as an adjunct professor at Rutgers Law School. He has also guest-lectured at Harvard Business School, Sciences Po (Paris), MIT, Wharton, Johns Hopkins, NYU, and the London School of Business, and has published case studies through Columbia's Graduate School of Business.

Ed currently serves as a Wall Street Journal Expert Panelist, publishing 80 columns on tech startups and growth companies (and sometimes wine) on The Wall Street Journal’s Accelerators page and Experts page. Ed has also authored over 35 additional articles in Forbes, the National Law JournalNew York Law Journal, and Wine & Spirits. Ed served as an editor for an M&A chapter in an American Bar Association book and chaired a committee in the National Venture Capital Association’s Model Legal Documents Project.

Ed co-founded and runs VentureCrush, which includes the accelerator VentureCrushFG (f.k.a. FirstGrowthVC, which Pando Daily called "New York's best Accelerator") and a series of gatherings for founders, senior executives, angels, venture capitalists, musicians, and winemakers (VentureCrushAVVentureCrushNYVentureCrushSF, and VentureCrushParis).

Ed was appointed to the Conseil Stratégique de l'Attractivité of France, where he served as part of a 30-member group of international business leaders advising the government and President of France (2014). He has similarly been invited to the White House and the Élysée Palace to meet with senior officials to discuss how America and, separately, France, can enhance their communities of startups and tech investors. He has also been called upon to provide similar input to Luxembourg’s Prime Minister Xavier Bettel and Minister of Finance. Ed has made numerous appearances on television and radio (in the United States and Europe) to comment on the tech and venture markets. Ed is also politically active and was listed among the "50 most powerful people in New York politics working in law,” (2019) in which New York City & State Magazine noted that "The co-founder of Lowenstein Sandler’s tech group – who is also an expert on wine – Zimmerman has been called 'one of the best venture capital lawyers in the country.’”

Ed has spoken at venture fund annual meetings in Stockholm, Berlin, Tel Aviv, and Copenhagen, and he works extensively with European and Israeli startups and venture/growth funds. Ed has angel-invested in 100+ startups (with more than 25 exits) and in numerous venture funds.

Ed advocates on issues concerning race, gender, the LGBTQ community, reproductive rights and gun control. In February 2014, Ed co-organized (with the Obama White House’s Liaison for LGBT matters) a summit of LGBTQ leaders in the tech community at the White House. He separately co-organized an event at the White House on the Future of Work & AI in 2016. In 2014 at VentureCrushNY, Ed announced a pledge against gender bias in tech, which he later published on The Wall Street Journal's Accelerators page, with subsequent coverage in Fortune magazine. In 2013, Ed published a column also on The Wall Street Journal’s Accelerators page, calling out bias in VC, noting a majority “of VCs had degrees from a small cluster of 10 schools … and a staggering 87% were Caucasian.” He published a companion Columbia University case study (2013).

Ed was profiled for his advocacy for gender equality in several books, notably Pulitzer Prize winner Joann S. Lublin's Earning It: Hard-Won Lessons from Trailblazing Women at the Top of the Business World (Harper Business 2016) and Julia Pimsleur’s Million Dollar Women: The Essential Guide for Female Entrepreneurs Who Want to Go Big (Simon & Schuster). Ed’s (non-musical) contribution to the musical (political) collaboration “Put a Woman In Charge” between multi-Grammy winning musicians Keb’ Mo’ and Rosanne Cash was reported in Billboard Magazine (2018). He and his wife Betsy have written about music (Sister Rosetta Tharpe) in Forbes (2016) and published a case study about the Blues (Columbia Business School, 2018).

Ed has written about wine and wine tech and was the host of Radio Uncorked, a wine radio show produced by Infinity Broadcasting and aired on KYOU Radio in San Francisco, Napa, Sonoma and the surrounding area. Ed was inducted as a chevalier in the Confrérie des Chevaliers du Tastevin at the Château du Clos de Vougeot in France and, in May 2018, the Echansonnerie Des Papes inducted Ed as an ambassador to the appellation of Chateauneuf-du-Pape at the Palais des Papes in Avignon. Ed has worked harvest (briefly) in France (2009) and California (2004 & 2008), where he was involved in vinifying a wine that was granted a perfect 100-point score by Robert Parker (2004 vintage). Ed's vinous adventures are the subject of the opening pages of In Search of Bacchus (by James Beard Award Foundation finalist George Taber). He has also been profiled in Wine & Spirits (March 2017) for his obsession with Burgundy. Ed enjoys understanding history through wine via dinners that have been chronicled in Wine Spectator, Vinous, and Forbes.

Ed serves on the Board of Trustees of Harvey Mudd College. He was a board member of and, since 1994, has been pro bono counsel to New York Live Arts (formerly Bill T. Jones/Arnie Zane Dance Company), which named Ed its 2018 Live Ideas Honoree. Ed and his wife, Betsy, co-founded and ran for nearly a decade the HAPI Foundation, a children's charity.

Ed graduated from the University of Pennsylvania School of Law (1992) and Haverford College (1989) (Phi Beta Kappa).

Bar Admissions

    New York
    New Jersey
    District of Columbia


University of Pennsylvania Law School (J.D. 1992), Comment Editor, Journal of International Business Law
Haverford College (B.A. 1989), Phi Beta Kappa, John P. Garrett Prize
Areas of Practice

Blockchain Technology & Digital Assets | Capital Markets & Securities | Corporate | Corporate Finance & Securities | Employee Benefits & Executive Compensation | Mergers & Acquisitions | Privacy & Cybersecurity | Seed Stage Investing & Startups | Tech Transfer | Technology & Media Transactions | Technology Transfer | The Tech Group | Venture Capital & Tech M&A | Venture Capital, Angel Investing, And M&A

Professional Career

Significant Accomplishments

Speaking Engagements

The Tech Group will host its next VentureCrushAV featuring a discussion led by Ed Zimmerman with Kamal Ahmad, Founder, Asian University for Women and President & CEO, Asian University for Women Support Foundation; Maria Klawe, President, Harvey Mudd College; and Jake Schwartz, Co-Founder & CEO, General Assembly.  The event will also feature a live musical performance by blues musician Jontavious Willis.

VentureCrushAV is a night time NYC-based gathering of founders, Senior Executives, Angels, and VCs striving to strengthen the community of tech startups and growth companies.  The event also includes live music.

For more information, email [email protected]


The Tech Group will host its third VentureCrushFG session of the 10th Vintage in New York City.  The event will feature a panel discussion titled, Developing Brand – Your Company's & Your Own, led by Ed Zimmerman and including panelists Karen Appleton, Angel Investor, Board Member, Startup Mentor, Employee # 7 at Box, Former Senior Director at Apple (Silicon Valley-based); Hayley Barna, Partner, First Round Capital & VentureCrushFG Alum (Co-Founder of BirchBox); Amanda Hesser, Co-Founder & CEO, Food52, Former NYTimes Food Editor, James Beard Award Winning Author & VentureCrushFG Alum; and Jodi Sherman Jahic, Managing Partner, Aligned Partners (SF-based VC).  The panel discussion will be followed by breakout sessions.

VentureCrushFG (formerly known as FirstGrowthVC) was described by Pando Daily as: "New York's best accelerator isn't much of an accelerator at all."  Instead, VentureCrushFG builds a community of founders and strives to avoid engendering competition between the founders within VentureCrushFG.  VentureCrushFG does NOT: (1) take equity, (2) charge, (3) require anyone to do business with anyone else or (4) have a demo day.

The fourth, and last, VentureCrushFG session of the 10th Vintage will take place on May 9, 2018.

For more information, email [email protected].

VentureCrushSF is an invite-only event created by the Tech Group at Lowenstein Sandler and led by the Tech Group's Chair, Ed Zimmerman, the Palo Alto Managing Partner, Kathi Rawnsley, and colleagues from Lowenstein Sandler's California and New York offices. With the help of some great venture investor co-hosts, VentureCrushSF brings together founders, tech executives and investors for a series of small discussions relevant to the tech community. We then invite even more tech industry insiders to a big party featuring a live performance, incredible wine and food, and some wonderful winemaker guests.

The Tech Group will host its next VentureCrushAV featuring a discussion between Ed Zimmerman and Arlan Hamilton, Founder and Managing Partner of Backstage Capital. The discussion will be followed by a live musical performance by Latin Grammy Award Winner, Gaby Moreno.

VentureCrushAV is a night time NYC-based gathering of founders, Senior Executives, Angels, and VCs striving to strengthen the community of Tech Startups and Growth Companies. The event also includes live music.

Please join us for a chat led by Ed Zimmerman, Lowenstein Sandler LLP with Theresia Gouw, Co-Founder of Aspect Ventures, followed by a performance by Madison Cunnigham.

Time: 6:00 p.m. - 8:30 p.m.

Location: Lowenstein Sandler, 1251 6th Ave 17th floor, New York, NY 10020

Partner and Tech Group Chair Ed Zimmerman co-hosts an invitation-only investor reception as part of the Black Women Talk Tech conference, Roadmap to Billions.

Conference description:

Join us at the only annual tech conference created exclusively by black women founders for black female founders and their supporters.

A conference built from the perspective of women, the goal is to showcase the brilliance of black women in tech, create a stage for our experiences, foster deep connections and create real funding opportunities. We believe in learning from those who are paving the way. Through their successes, (and failures), gain insight and valuable lessons to inspire and guide you on your path to success.

Join over 1000 investors, tech evangelists, founders who are just starting out and those who have been in the game for years at the largest gathering of black women tech founders in the world.

The conference runs February 27-March 1, 2019, at Union West in New York City.

The investor reception takes place 6-9 p.m. on February 28, 2019.

Ed Zimmerman co-leads a roundtable discussion at the UN Global Compact providing perspective and insights about different strategies investors can take to invest in tech through a diversity and inclusion lens, especially, but not exclusively, with respect to gender. The participants include asset managers, pension funds, foundations, and limited partners in funds. The group will discuss and debate key topics related to investing in the tech sector.

This session takes place 8-10:30 a.m. on March 22, 2019. The event is being held in the United Nations Global Compact Offices, 685 Third Avenue, New York, NY 10017.

Note: Attendance is by invitation only and is not open to the public.

Our WebEx discussed the SBA Loan Program under PPP and, in particular, how senior execs, board members and investors should think about their obligations. We leveraged our Lowenstein team’s experience as Attorneys General/US Attorneys/Assistant DAs/Prosecutors who led and/or were involved in investigating, prosecuting and even setting policy on post-Hurricane Sandy fraud cases and post-9/11 fraud cases. Here’s a link to a twitter thread with context/questions to consider.

Many are seeking help analyzing whether VCs are “affiliates” in a way that renders a startup or growth company ineligible for SBA Loans. We’ve been using Lowenstein Sandler's #AffiliateChecklist internally and have decided to share it (with a disclaimer). You’re welcome to share it. Link to tweet & LinkedIn sharing it.  

Featuring Lowenstein Sandler's: 

  • Christopher Porrino, 60th Attorney General of the State of NJ; 
  • Elie Honig, former Asst. US Attorney in SDNY (prosecuted post-9/11 cases); former Asst. AG NJ (prosecuted post-Hurricane Sandy fraud cases); current CNN Legal Analyst
  • Kathleen A. McGee, previously, Bureau Chief for Internet & Technology, NY Attorney General’s Office;
  • Kimberly E. Lomot, previously, an SBA Lending 504 Certified as Designated Attorney;
  • Lowell A. Citron, Chair, Debt Financing, Lowenstein Sandler LLP; and
  • Ed Zimmerman, Chair, Tech Group, Lowenstein Sandler LLP & Adjunct Prof. of Venture Capital, Columbia Business School.

See some of what we published in Forbes and additional resources:

To see other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Friday, April 24, 2020; 11 a.m. EDT.

Given the reaction to our "Guidance For Startups/VCs From VCs Around The Globe During COVID-19" (published one month ago), we’re hosting a two-part Webex to discuss with the VCs featured in the article how their guidance/thinking may have changed and what’s coming next.

Five of the VCs we interviewed will participate in Part 1.

Topics will include:

  • Down rounds
  • Pay-to-play
  • Liquidity
  • Shoring up portfolio company
  • How startups can shop for VC funding during the shutdown

Names of panelists to follow.

Note: We published an article in Forbes on how to consider the consequences of applying for a PPP loan from the vantage point of several of us having prosecuted post-9/11 and post-Hurricane Sandy relief fund fraud claims. This is especially timely as CNN has reported that Shake Shack gave back their loan in light of public outcry. Similarly, Lowenstein's Kathleen A. McGee (former Bureau Chief New York Attorney General’s Office) and Ed Zimmerman were quoted in the The New York Times on this topic on April 17, 2020, and in the The Wall Street Journal on April 21, 2020 ("Silicon Valley Debate: Should Venture-Backed Firms Take Stimulus Money?").

If interested, email [email protected] for more information.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Tuesday, May 5, 2020; 2 p.m. EDT.

Topics included:

  • What do Board Members/Executives need to do/know?
  • How best to deliberate & document process?
  • What are the “No-Nos” that inform the decision to repay a loan or pull a loan application?
  • What does FAQ #31 & SBA IFR #4 require a venture fund to do? What must a Board do?
  • What does the “Mnuchin Line” ($2M loans) mean for whether your startup’s loan will be “investigated” and how?
  • Does asking for loan forgiveness or shrinking the loan size make a difference in liability/scrutiny?
  • What info about my loan will become public under FOIA (Freedom of Information Act)?
  • How will future financings, M&A, and IPOs be impacted in the coming years by these loans?
  • What will LPs ask in fundraising about loans in the portfolio?
  • The “need” standard is vague, so what will prosecution look like?
  • What is Qui Tam, and why do we care? What does PRIVATE ENFORCEMENT look like, and why are there financial incentives for private parties?
  • What did startups likely get “wrong” in their loan applications or analysis?


  • Kathleen A. McGee, former Bureau Chief for Internet & Technology, NY Attorney General’s Office; Director, Mayor Bloomberg’s Office of Special Enforcement; Assistant District Attorney, in the Bronx, NY.
  • Kimberly E. Lomot, previously certified as a Designated Attorney for SBA 504 Lending, counsels both borrowers and lenders with respect to government guaranteed loans, including SBA (7a) and 504 loans.
  • Ed Zimmerman, Chairs the Tech Group at Lowenstein Sandler and, for the last 15 years, has been an Adjunct Professor of VC at Columbia’s MBA Program. Chambers USA ranked Ed among the 22 best lawyers in Startups & Emerging Companies–USA–Nationwide; of those, Ed is the only lawyer based in New York (2018). Best Lawyers in America (2017) named Ed the New York City Venture Capital Lawyer of the Year.


To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Israeli VC/PE Funds, Mature Companies & Startups: Have you filed, or are you considering filing an application? If so, you should really hear this!

Join us for a joint webinar with Lowenstein Sandler LLP experts, Kathleen McGee, Kimberly Lomot & Ed Zimmerman and Ofer Manor and Lior Aviram, from Shibolet & Co.

Topics include:

  • What do Board Members/Executives need to do/know?
  • What did startups likely get "wrong" in their loan applications or analysis?
  • What are the "No-Nos" that inform the decision to repay a loan or pull a loan application?
  • What does the "Mnuchin Line" ($2M loans) mean for whether your startup's loan will be "investigated" and how? What will prosecution look like?
  • How will future financings, M&A and IPOs be impacted in the coming years by these loans?


  • Kathleen A. McGee, Counsel, Lowenstein Sandler LLP
  • Kimberly E. Lomot, Counsel, Lowenstein Sandler LLP
  • Ed Zimmerman, Partner; Chair, The Tech Group; Lowenstein Sandler LLP
  • Ofer Manor, Senior Partner, Shibolet & Co.
  • Lior Aviram, Managing Partner, Shibolet & Co.

6 p.m. EDT

Access a transcript of this discussion.

Ed Zimmerman participates in a panel examining how the startup and investing world has changed drastically as a result of COVID-19.

One of the most prominent issues for founders who were either in the fundraising process or have fundraising on their road map for 2020 is how access to investors and capital–amount and type–will look in the next 12 months with a projected recession and, at short-term, shelter-in-place around the world.

This webinar will showcase opportunities for small and medium-sized startups and companies, especially for women entrepreneurs.

Topics include:

  • How specifically has the fundraising environment changed since pre-COVID-19, especially for women founders?
  • What can founders who are currently or hope to be fundraising this year expect from VCs?
  • What other opportunities are there for women founders, for instance, with alternative finance?
  • What can founders do to best prepare themselves for the next 12 months?
  • What should founders be investing their time and effort on during this period?
  • What are investors looking for and which investors are still active?


Time: 10:30 a.m. EDT

Co-organizers: This event is being co-organized by Women 2.0WE EMPOWER G7 Programme (of UN Women, EU and ILO), and GEIT (Gender Equitable Investment in Tech), a working group under EQUALS.

Access a transcript of this discussion.

Virtual fireside chat featuring:

Time: 12-2 p.m. EDT


Paycheck Protection Program Flexibility Act of 2020
Lowenstein Sandler LLP, June 2020

Certain provisions of the coronavirus/COVID-19 economic stimulus legislation are subject to the issuance of government regulations, government guidance and other government action; thus, certain details regarding the legislation may be clarified or added. View our other alerts and articles on the SBA Paycheck Protection Program on our Coronavirus/COVID-19 resource page. On June 3, 2020, the U.S...

SBA Announces: “SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion” & DOJ Announces Multiple Enforcement Actions
Lowenstein Sandler LLP, May 2020

Between May 20 and May 22, SBA announced three new Interim Final Rules and the U.S. Department of Justice (DOJ) announced three new fraud prosecutions stemming from PPP loans...

Dear Tech Company Founders & VCs: Eligible on Main Street
Lowenstein Sandler LLP, May 2020

Certain provisions of the coronavirus/COVID-19 economic stimulus legislation are subject to the issuance of government regulations and other government action, thus certain details regarding the legislation may be clarified or added...

Additional Articles

It feels like once or twice a day I speak with a startup that has tripped over a seemingly invisible rule applicable to founder equity: the founders and early employees/advisors in startups really need to get their stock or options BEFORE there’s a term sheet for a venture or angel funding. While not a secret, the law doesn’t come right out and expressly say this. Frankly, to know this you’d have to talk to folks who have an understanding of tax law, corporate law and startup life. That understanding, unfortunately, is in shorter supply than it should be and, for founders, seems to largely have been learned the Sharon Jones & the Dap Kings way:

“I learned the hard way, baby. Now I know about you. I learned the hard way … Not to be your fool.”  I wonder whether Sharon was singing about Section 409A?

This article tackles a very high class problem in the venture capital and startup world: what exercise periods are most appropriate for options following termination of employment.  Over the last several years, startups and growth companies have reevaluated the standard approach to exercise periods for stock options, which typically expire 90 days after departure.  As startups have increasingly become far more valuable pre-IPO, the cost to exercise those options can become prohibitively expensive, and employees who leave before an acquisition or IPO may be leaving millions or even tens of millions of dollars on the table.

It has been ‘market’ to have a 90-day post-termination exercise period (PTEP) on stock options, but companies like Quora and Pinterest have, in the last three years, been shifting that practice.  Many employers today, especially in tech, are considering extending beyond that standard three-month post termination exercise deadline.  Typically, startups consider extending PTEP during the growth stage rather than earlier in the startup’s life.

We – a deal lawyer and a compensation and benefits lawyer with more than 50 years of practicing law, almost evenly split between us – intend to cover in this article the current business, tax and legal issues involved as venture-backed startups and growth companies consider whether (or not) to extend PTEP.

“Hey, did we make the filing necessary to have 1202 'QSBS' stock? Now that we have an offer to sell the company, our investors are asking whether QSBS allows them to shelter their gain from taxes.”

“Hold, hold on, hold onto me...” XAmbassadors sang “Unsteady” (which is not about the 5 year holding period for stock under QSBS, but it could be...) and other songs at AngelVineVC, a VentureCrush event in NYC a few years ago. [Disclosure: Ed Zimmerman and his firm co-founded and run AngelVineVC and VentureCrush.] [In the photo, Ed is the one wearing a name tag].

That's a question we field regularly, especially these days when venture-backed M&A has really heated up. The answer, invariably, is no - no filing was made, but not for the reason the person who posed the question may think. Internal Revenue Code section 1202, under which stock of startups can be treated as “Qualified Small Business Stock” (QSBS), has become a high stakes issue for many startups because of the potentially millions of dollars per holder it can shield from taxes. That said, section 1202's complexities make it very difficult to consistently plan ahead. For starters, in the words of the Alabama Shakes, “You got to hold on” for more than Five Years...the rest is more complicated.

Startup and growth company employees in California rest easy knowing that California believes so strongly in the portability of employment that post-termination noncompetes are generally void, except for a few exceptions as referenced below (especially in the context of noncompetes connected to a sale of a business). That comfort has extended to post-employment nonsolicits, which the California courts have viewed as veiled noncompetes. However, just over a week ago, on September 7, a federal district court in California seems to have strayed from this path. This article briefly explores that recent case, Fidelity Brokerage Services LLC v. Rocine, et al.and the seemingly unanswered questions it raises regarding what employers and employees can expect from post-termination nonsolicits in the Golden State.

UPDATE December 4, 2017:

Subsequent to our original article in 2016, Congress has approved amendments increasing the trigger for Rule 701 from $5M to $10M, but the amendments have not yet been enacted. In fact, this very increase has been proposed several times – most recently in a September 2017 SEC Advisory Committee meeting. The bill, entitled “Encouraging Employee Ownership Act,” would -- if the amendments are enacted -- require the SEC, within 60 days after enactment, to raise the $5M threshold to $10M.  We do not undertake any responsibility to further update this article.

On Monday, the United States Supreme Court (“USSC”) will hear arguments in a matter fundamental to how employers and their employees and contractors argue about rights and entitlements. The USSC can, in these matters, equip employers with powerful tools to shut down cases that look like the currently raging Uber class action and the important Microsoft class action (2000), the latter of which resulted in thousands of contractors becoming employees and receiving benefits and equity.

The USSC arguments on Monday in Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA, Inc. will focus on whether arbitration clauses in the employment or independent contractor context result in enforceable waivers of a worker’s right to bring or participate in a class action. These arguments underscore the rift in federal circuit courts of appeals regarding the interpretation of arbitration agreements as class action waivers in employment and other independent contractor agreements.

Last week, in what has become an annual occurrence, I was invited by my friend Jeff Bussgang to speak at Harvard Business School. Jeff, who has written two books about entrepreneurship, lectures on the subject at HBS; in his spare time, he works at Flybridge Capital, a NY and Boston-based venture fund he has co-led for the last 15 years. Jeff asked me to speak about my legal practice (I represent startups, growth companies and their investors from my perch as a partner at the law firm of Lowenstein Sandler) and my angel investing (I’ve invested in more than 100 startups and in several dozen venture capital funds, including - for purposes of disclosure - funds managed by Flybridge Capital).

In advance of trips to wine regions, I generally ask very knowledgeable wine professionals to direct me to winemakers who might not be on my radar. In late 2011, I was particularly interested in the Les Rugiens vineyard in the Burgundy village of Pommard, which was then the subject of a newly-emerging controversy. Pommard is a village in the Cote de Beaune and while it has spectacular Premier Cru vineyards, it does not have any Grand Cru vineyards. There is a push, however, to elevate to Grand Cru status Pommard’s finest Premier Cru vineyards -- Les Rugiens, Les Epenots and Les Grands-Epenots (or parts of them). Wines from Les Rugiens, in particular, are legendary for their power and longevity.

“Transparent management” is a term used to describe an approach to business leadership that entails being honest and open with team members. In my experience, it is discussed more than it is practiced. But I recently had a conversation on this topic with a founding CEO whom I respect.

(subscription required to access article)

It will come as no surprise that startup founders spend substantial time raising money, jumping through complex hoops every step of the way. As a result, they crave simplicity and low friction in the mechanisms and legal structures they use to bring in that needed capital, especially at the earliest stages of the startup’s life–when the transaction costs are a more material portion of the funding.

It’s little wonder, then that founders have fallen in love with short, easy documents like the SAFE (simple agreement for future equity) and KISS (Keep it Simple Security) or the slightly longer and more timeworn convertible note. Each of those documents is designed to enable investors to fund a startup without agreeing on price today and without taking the time to resolve so many of the open issues.

(subscription required to access article)

Retailers have taken note of the dramatic shift in state sales tax law emerging from one of Justice Anthony Kennedy’s last Supreme Court decisions. As different states announce legislative and regulatory changes throughout the summer, retailers are scrambling and we’re now seeing the impact in venture capital, private equity, and merger and acquisition transactions involving commerce companies.

On June 21, 2018 the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. , in which it upheld a South Dakota law that requires certain sellers to collect sales tax even if those sellers lack “physical presence” in the State. The South Dakota law challenged prior Supreme Court precedent because it required a minimum annual amount of sales to South Dakota customers rather than requiring a seller’s physical presence in South Dakota. As a result, the Supreme Court’s decision reverses longstanding precedent and has sweeping repercussions for online sales and old style mail order sales. In the two months following the Wayfair decision, numerous States have been reacting, including enacting legislation very similar to South Dakota's, and they’re doing so with an eye toward enhancing their collections of sales tax revenues. Consumers will pay and retailers, especially but not solely, online retailers, are concerned that the Wayfair case will adversely impact sales and/or price.

I had the privilege of interviewing both Laura Marling and Space Shuttle Commander Mark Kelly together at our VentureCrushAV event in New York in October 2017. As explained next, the discussion has renewed relevance right now.

In early 2019, Commander Mark Kelly announced he was running for the United States Senate. Two weeks ago, Politico reported that Commander Kelly’s Senate race “will likely be one of the most expensive and closely watched campaigns of the cycle in an emerging presidential battleground.” That same article also reported that Commander Kelly's Republican opponent was “shaking up her campaign team ahead of her 2020 race, turning the page on her disappointing loss last year as she tries to protect a critical battleground Senate seat…” (June 24, 2019)

This column shares the fireside chat I had with Latin Grammy winner/Emmy-nominee, Gaby Moreno at our VentureCrushSF event in June 2019. During our chat, Moreno graciously performed a moving solo acoustic version of “Salvese Quien Pueda” off her Grammy-nominated album, Illusion. You can see that on the video (below) right after she explains why she will never release the official video she filmed for that song.

Since moving to Los Angeles from her native Guatemala, singer-songwriter Gaby Moreno earned a Grammy nomination for her album, Illusion (Best Latin Album of the year, 2017), and an Emmy nomination (the "Parks & Recreation" theme song), and won a Latin Grammy (Best New Artist, 2011). The official video for "Fuiste Tú" (the song she did with Ricardo Arjona) has been viewed on Youtube 775 Million times, charting at number 1 in multiple countries. Gaby is justifiably proud of her role doing the theme song and voicing a character on multi Emmy Award-winning Disney children’s television series, “Elena of Avalor,” which features Disney's first Latina princess. This week, Netflix announced that "Gaby Moreno’s moving version of “Cucurrucucú Paloma” was chosen to play at the end of the emotional” penultimate episode of "Orange Is The New Black,” the multi-Emmy winning show that has become Netflix’s most watched original series. Noting that this season (the show’s final) will contain “timely and disturbing ICE detention scenes,” presumably further cementing the political implications of Moreno’s artistry. 

Founders of startups usually hold their stock subject to “vesting” (stock subject to vesting is also known as “restricted stock”), which generally raises a tax question under Section 83(b).1 How the founder answers this tax question – and they must answer it early in their vesting period – could tremendously impact that founder’s taxes, both now and in the future, on that stock.

This article (1) discusses the general tax treatment of receiving ‘restricted stock’ (stock subject to vesting) whether for a founder, executive, board member, advisor or anyone else providing a service to the company, (2) considers the commonly discussed election under Section 83(b) (an “83(b) Election”) as well as the interplay between Section 83 and Qualified Small Business Stock (or QSBS), and (3) lays out detailed examples of how (not) making a Section 83(b) Election could play out over the several years following receipt of restricted stock. For more on QSBS, see Edward Zimmerman and Brian Silikovitz, “Gimme Shelter: VC-Backed M&A Tax Strategies For QSBS/1202,” Forbes (July 18, 2016, we refer to this article as the “Zimmerman/Silikovitz QSBS Article”).

It’s simple: It’s easier, faster and cheaper to close funding using Convertible Notes & SAFEs (as compared to a “priced round” in which your startup or growth company issues preferred stock) but SAFEs and Notes also entitle VCs to very heavy duty “Price Protection.” In a prolonged market decline, prices will float down and the Notes and SAFEs of yesterday will convert at painful prices tomorrow; more so than had the startups and growth companies done priced rounds. We’ve known about this for a long time, but the market has been so buoyant, that few have voiced concerns. That’s about to change.

The March 2020 turbulent markets have motivated founders to close on funding swiftly and without friction. That means Convertible Note and SAFE financings will gain market share overpriced rounds. Please remember that BOTH Convertible Notes and SAFEs provide greater “price protection” built into them in favor of the investor than priced rounds do. Please also note, that as my Lowenstein Sandler partner (and Tech Group co-founder), Anthony Pergola, reminds growth companies regularly, if you’re layering Convertible Notes into companies with bank debt, you’ll need to hammer out an intercreditor agreement with the banks or other lenders to get their consent as the Notes will almost certainly need to be subordinate to bank debt. Conversely, banks love to see a bigger cushion of priced equity behind them.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

As news of COVID-19 and its impact rapidly unfolds, tech companies, their employees and investors are reviewing guidance regarding the financial future of their startups/growth companies and how investors and seeking insight into how the venture markets will behave.

In an effort to gather useful guidance, over the last week, I spoke with dozens of senior venture capital investors (VCs), with a heavy emphasis on those who’ve been in market since at least the 2008 downturn. Below is an amalgam of the on- and off-record responses they provided from New York, California, Chicago, Boston, London, Berlin, Paris, Stockholm, and Nigeria. I’ve parenthetically provided dates of the conversations, as the rate of information change has been rapid.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

“Dear Ed:

I’m panicking – I’ve been reading guidance published by industry experts – they all seem to agree that venture-backed startups like my company aren’t eligible for the new SBA 7(a) loans because I’m somehow an “affiliate” of my VCs and all of their other startups. I don’t even know what that means, and I really need the $$ now to keep our startup afloat. Help!

Sasha Startup”

Before I go on – there is no actual Sasha Startup. However, Sasha is an amalgam of countless emails, texts and calls my law firm colleagues (see disclosure) and I have fielded over the last week. I’m happy to be the bearer of GOOD news in this regard. Please read on to clear up confusion about venture-backed startups being somehow almost entirely shut out of the new SBA Section 7(a) loans. Spoiler alert – they’re not! (Link to longer footnoted column my colleagues and I published earlier this week).

The CARES Act (March 27, 2020) established a new type of loan program known as the Paycheck Protection Program (the PPP) within the U.S. Small Business Administration’s (SBA’s) Section 7(a) loan program. The startup/VC community read SBA’s arcane rules about “affiliates” and concluded that pretty much every startup would be ineligible because, as one observer said (paraphrasing):

‘most lawyers I spoke to read the affiliate provision in the CARES Act to mean that any venture capital-backed startup would need to affiliate with all the other startups in that VC’s portfolio.’

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Why is there so much confusion regarding whether venture capital-backed startups are eligible for SBA Section 7(a) loans under the Paycheck Protection Program (the PPP)? The confusion has largely stemmed from three things:

(1) the “Affiliation Rules

(2) a widely shared misreading of which Affiliation Rule applied (see last week’s Forbes article on Section 301(f) vs. Section 103, which we’ll call the “Forbes Section 301(f) Article”), and

(3) the lack of clarity around protective provisions, which are veto rights found in a startup’s charter or other documents.

Let’s tackle these one at a time, starting with an introduction to the affiliation rules, then moving to the Treasury Department’s confirmatory guidance (issued within the last 24 hours), followed by diving into how to address “Protective Provisions.”

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

At an already anxious time for many entrepreneurs and investors, the venture capital (VC) and startup community has recently added a major new worry: a debate over whether many startups will need to change their Charters in order to qualify for SBA Section 7(a) loans under the Paycheck Protection Program.

We believe that amending a Charter is one of several ways to achieve the desired goal, but it’s the most cumbersome and expensive way, and there are better solutions. Please read on for a brief explanation and a request for others in the startup community to accept this position. Please stay tuned for a subsequent longer, more detailed article expanding our analysis.

It’s not news that the Federal small-business program got off to a rocky start. There’s confusion around which “protective provisions” trigger “control” under the applicable rules – an important distinction, because a finding of “control” would mean that a startup would have to add together its employee headcount with that of its venture capital investor(s), as well as the many other startups funded by that same VC. If aggregated in this way, most VC-backed startups would likely be ineligible for these loans.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Many have asked for help in connection with analyzing whether investors are “affiliates” in a way that would render a startup or growth company ineligible. We’ve written about the analysis (in Forbes and our site) and we developed (for our own Lowenstein Sandler attorneys as our team counsels clients) this checklist to help analyze whether venture-backed startups and growth companies might be eligible. We decided to share it with all of you. You are welcome to share it with others and we hope it is helpful. Please see the  disclaimer on the form (the form isn't legal advice nor is it a substitute for counsel, please don't rely on it, using it doesn't create an attorney client relationship with Lowenstein Sandler or our lawyers - see disclaimer on form for more).

If you have any questions, please email us at [email protected].


DISCLAIMER: We’re providing this checklist as of April 7, 2020 at noon Eastern. This is not legal advice and its use does not create an attorney-client relationship between our law firm (Lowenstein Sandler LLP) and anyone using this checklist. Please do not rely on it -- we expressly disclaim any liability if you do rely on it. We understand that there are various approaches to conducting “affiliation” analysis for purposes of Section 301(f) in the context of applying for SBA Section 7(a) PPP loans. We at Lowenstein Sandler LLP developed this checklist to help our law firm’s own attorneys move through the steps of the affiliate analysis. There’s no substitute for having counsel review the Company’s relevant documents because the affiliate analysis calls for legal conclusions. Accordingly, we advise against reaching the legal conclusions without the advice of counsel having reviewed full and accurate information.

This checklist: (1) doesn’t purport to be complete, (2) is geared toward the venture capital/startup community, and (3) as a result, will be as far less relevant outside of that context. While we may provide updates, we do not undertake an obligation to do so or to notify users of changes in the law – the law regarding these matters has been changing daily.

Lowenstein Sandler’s Team has published these resources (among others) we hope may be helpful.

For info: [email protected]

3.15.20 – Forbes, When the Music Stops: SAFEs & Convertible Notes Give VCs Massive Price Protection: HERE
3.20.20 – Lowenstein Sandler Client Alert: The Families First Coronavirus Response Act–New Paid Leave Mandates for Employers With Fewer Than 500 Employees; Tax Credits To Help Offset Employer Costs: HERE
3.23.20 – Forbes, Guidance from Top VCs around the Globe During the Pandemic: HERE
3.27.20 – Lowenstein Sandler Client Alert: Key Tax and Employee Benefits Provisions of the CARES Act: HERE
3.30.20 – Lowenstein Sandler Client Alert: SBA Paycheck Protection Program: HERE
3.31.20 – Lowenstein Sandler Client Alert: SBA Section 7(a) Loans for VC Backed Growth Companies/Startups Under the CARES Act: HERE
4.1.20 – Forbes, detailing analysis of SBA Loans under 301 vs. 103: HERE
4.2.20 — VIDEO OF OUR SBA 7(a) For Startups/VC W/ LS Team & Congressman Don Beyer (who worked on the legislation)
4.3.20 — Lowenstein Sandler Client Alert: SBA Paycheck Protection Program Update: SBA Interim Rule: HERE
4.4.20 – Forbes, using new Treasury guidance CONFIRMING 301 vs 103: HERE
4.5.20 (update 4/7) – Forbes, “Please don’t make startups Amend Charters” (TREASURY said SAME): HERE
4.7.20 — Lowenstein Sandler Client Alert: SBA Paycheck Protection Program Update: Frequently Asked Questions: HERE

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To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

“If the money doesn’t come out fast enough, the politicians will be criticized.”

- Chris Porrino, formerly 60th Attorney General of New Jersey

The U.S. government has been rapidly pushing $349 billion of funding out the door in SBA Section 7(a) Payroll Protection Program (PPP) Loans, while “encouraging” the public “to apply as quickly as you can because there is a funding cap.” The ‘get it while it lasts’ nature of the program combined with the vague requirements regarding business qualifications for a PPP loan, will create very fertile grounds for future fraud claims.

Understanding how this scenario will play out informs how loan applicants should approach PPP loans. Several of us are former senior law enforcement officials who led investigations and prosecutions of the fraud cases that arose from relief funding in the wake of Hurricane Sandy (2012) and 9/11, and we see commonalities and differences between those past relief efforts and today’s PPP loans.

Last Thursday, we assembled approximately 600 people for a WebEx (viewable here) to apply our enforcement perspectives to these loans in the startup/growth company context.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

There’s been confusion about the rules governing eligibility for SBA Section 7(a) loans, which we’ve elsewhere written about.1 That confusion focused on whether to conduct “affiliation” analysis under Section in Title 13 CFR §121.301 (“Section 301(f)”) or §121.103 – the right answer is Section 301(f)).2 But there’s added confusion because the Section 301(f), as it now appears online and in print, is outdated and, therefore inaccurate. What follows is a “bootleg redline”3 (showing Section 301(f)’s revised text marked against the currently available version) and a brief explanation of both why the redline remains relevant and how we got here.

TLDR: Section 301(f) was enacted in 2016, amended February 10, 2020 (with an effective date of March 11, 2020), but the CARES Act repealed those amendments, reverting Section 301(f) back to the old rule on March 27, 2020.

Why it Matters: Applicants in SBA's Business Loan Program, including applicants for 7(a) loans under the Paycheck Protection Program (“PPP”), must apply the size standards and bases for affiliation appear in Section 301(f). While the $349 billion program “ran out of money”4 on the date we’re publishing this, the review and continued importance of the affiliation rules will endure because (1) enforcement officials, regulators, and private party plaintiffs will review the accuracy of affiliation determinations, which borrowers have certified (see “PPP Loans For Startups/Growth Companies—Former Attorney General’s Perspective—Lessons From Hurricane Sandy & 9/11”)5 and (2) borrowers and their investors will be required to provide representations, warranties and indemnification in subsequent transactions (venture, private equity, mergers and acquisitions, public offerings) as to their compliance with these rules as they were in effect at the time the relevant company (and its affiliates and/or 20% or greater equityholders) submitted the loan application. We say ‘as in effect at the time’ because the U.S. Department of Treasury recognized that the rate of change as new law, final rules and clarifications were released was breathtaking. Accordingly, Treasury has clarified that borrowers and lenders generally “may rely on the laws, rules, and guidance available at the time of the relevant application.”6

Brief History of Section 301(f)
SBA announced a proposed rule on October 2, 20157 (with a request for comment), ultimately issuing Section 301(f) on June 27, 2016 as a Final Rule (the “June 2016 Final Rule”), which took effect on July 27, 20168 to amend:

“regulations pertaining to the determination of size eligibility based on affiliation by creating distinctive requirements for small business applicants for assistance from the Business Loan, Disaster Loan and Surety Bond Guarantee Program (“SBG”). For purposes of this rule, the Business Loan Programs consist of the 7(a) Loan Program…”9

February 2020 Interim Rule: SBA published an Interim Final Rule on February 10, 2020, which took effect March 11, 2020 (the “February 2020 Interim Rule”)10, to amend Section 301(f). However, Section 1102(e) of the CARES Act11 repealed the February 2020 Interim Rule in its entirety, without providing further clarification or referencing specific sections. In the rush to implement the legislation, SBA did not publish the rule as revised by that repeal. As a result, lawyers were left to either find an old version of the once-superseded June 2016 Final Rule or to read the amendment to determine which aspects of the published version of Section 301(f) the short-lived February 2020 Interim Rule had altered. Without a published version of the post-CARES Act version of Section 301(f), there was also confusion as to whether or not §121.301(f) had reverted to its formulation under the June 2016 Final Rule. On April 4, 2020, the Office of General Counsel Office of Procurement Law on behalf of SBA issued a Letter regarding Size Eligibility and Affiliation under the CARES Act (the “April Letter”),12 which provided clarity (in a footnote,13 nonetheless):

“the CARES Act rescinds the changes that SBA made to § 121.301(f) through an interim final rule published on Feb. 10, 2020. See Pub. L. 116-136, § 1102(e). Thus, references are to the pre-2020 version of the regulation.” (Emphasis added).

The April Letter’s affiliation analysis specifically relies on the June 2016 Final Rule rather than the February 2020 Interim Rule.

The below REDLINE shows Section 301(f) as NOW IN EFFECT (the June 2016 Final Rule or “Current Rule”) marked against the now rescinded February 2020 Interim Rule. Many had (quite understandably) initially reviewed the now rescinded February 2020 Interim Rule upon release of the CARES Act (and PPP).

Some Explanation of Changes You’ll See in the REDLINE:
The first substantive change appearing in the REDLINE in §301(f)(4) contains additional changes not necessarily shown in the REDLINE due in part to their subtlety. For example, the REDLINE indicates that the excerpt: “Where SBA determines that interests should be aggregated…” was added back in the Current Rule. Yet that phrase was never deleted in the first place. That phrase appears in red in the last sentence of what was previously sub-section (4)(i), and in blue in the last sentence of the current sub-section (f)(4). The key change here is that the Current Rule’s concept of “affiliation by identity of interest” only considers close relatives (with substantially identical interests), whereas the Now Rescinded February 2020 Interim Rule had expanded the rule to also include “two or more individuals or firms” with substantially identical interests.

We mentioned above that the Current Rule rescinded the “Totality of Circumstances” provision, which was §301(f)(6). Our REDLINE does not renumber.

The REDLINE Does NOT Show Additional Exceptions: Note also that this REDLINE does not include the handful of additional affiliation exceptions which the CARES Act added under Section 1102(a)(36)(D)(iv) to waive the affiliation rules for: (i) any business with not more than 500 employees that is assigned a North American Industry Classification System [NAICS] code beginning with 72, (ii) any business operating as a franchise that is assigned a franchise identifier code by SBA, and (iii) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).14 Our reasoning here is two-fold: (1) our current understanding is that those types of provisions primarily apply only during the “covered period,” (defined as February 15, 2020 – June 30, 2020 under the CARES Act) whereas the February 2020 Interim Rule was rescinded permanently; and (2) exceptions to affiliation for purposes of 7(a) loans do not fall under Section 301 – they fall under Section 103(b). Again, we understand this is confusing because at the top of this article we wrote that affiliation for 7(a) loans is determined under Section 301 – that is true, but the last sentence of Section 301(f) (no matter which version of Section 301(f) you review) clearly states that “For exceptions to affiliation, see 13 CFR 121.103(b).”15

To summarize, at a high-level, the “changes” made in repealing the February 2020 Interim Rule:

  • The changes to “affiliation based on identity of interest,” as outlined above;
  • Completely striking the concept of affiliation based on Common Investments;
  • Completely striking the concept of affiliation based on the “newly organized concern rule;” and
  • Completely striking the concept of affiliation based on a “totality of the circumstances.”

Meet the New Rule, Same As the Old Rule:
The following REDLINE shows Section 301(f) as currently in effect, marked against the pre-CARES Act version. We expect that the new law, as revised, will come online soon. Also, because we’re not in the business of publishing law (we advise on and analyze law), please note that this is an unofficial version as of April 8, 2020 and we’re providing it for convenience (rely at your own risk).

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

1 See 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 the CARES Act, (Mar. 31, 2020).

2 See Ed ZimmermanWait What?! Treasury Clarifies ‘Affiliation’ Rules For SBA Section 7(a) Loans (& Startups Are...), FORBES (Apr. 4, 2020, 9:52 PM).  Both of the foregoing cite 13 C.F.R. Section 121.103(a)(8) and U.S. Department of Treasury then issued guidance confirming that analysis in numerous places, for instance Treasury’s April 8th FAQ, U.S. DEP’T OF TREASURY, PAYCHECK PROTECTION PROGRAM LOANS, FAQ, Question 5 (Apr. 8, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf, and Treasury’s Interim Final Rule on Affiliation, U.S. SMALL BUS. ADMIN., SBA-2020-[  ], 13 CFR PART 121.301, BUSINESS LOAN PROGRAM TEMPORARY CHANGES; PAYCHECK PROTECTION PROGRAM 6 (Apr. 4, 2020), https://home.treasury.gov/system/files/136/SBA%20IFR%202.pdf.  Note however that exceptions to affiliation, even for applicants in SBA’s Business Loan Program, is still governed by Section 121.103(b), as further referenced below.

3 Redline available HERE

Andrew Duehren, “Funding Exhausted for $350 Billion Small-Business Paycheck Protection Program,” Wall Street Journal (April 16, 2020).

5 Ed Zimmerman, Chris PorrinoElie HonigKathleen McGeeKim Lomot, and Lowell Citron, “PPP Loans For Startups/Growth Companies—Former Attorney General’s Perspective—Lessons From Hurricane Sandy & 9/11,” Forbes (April 14, 2020, 9:43 p.m.)

6 See Treasury Department’s “FAQ” (p. 6, April 15, 2020). Answer to Question 17.

7 SeeAffiliation for Business Loan Programs and Surety Bond Guarantee Program,” 80 Fed. Reg. 59667 (October 2, 2015).

8 See Affiliation for Business Loan Programs and Surety Bond Guaranty Program, 81 Fed. Reg. 41423 (June 27, 2016) (to be codified at 13 C.F.R. §§ 109, 115, 120-21).

9 For clarity, the June 2016 Final Rule only amended the affiliation rules with regards to the Business Loan, Disaster Loan and Surety Bond Guarantee Program.

10 See Express Loan Programs; Affiliation Standards, 85 Fed. Reg. 7622 (Feb. 10, 2020) (to be codified at 13 C.F.R. §§ 103, 120-21).

11 Section 1102(e) states, in its entirety: “(e) INTERIM RULE. On and after the date of enactment of this Act the interim final rule published by the Administrator entitled ‘‘Express Loan Programs: Affiliation Standards’’ (85 Fed. Reg. 7622 (February 10, 2020)) is permanently rescinded and shall have no force or effect.”

12 See Letter from John W. Klein, Assoc. Gen. Counsel for Procurement Law, U.S. Small Bus. Admin., to William M. Manger, Assoc. Admin. for Capital Access (Apr. 4, 2020).

13 Id. at 2 n.2, where the Office of General Counsel confirmed that “[T]he CARES Act rescinds the changes that SBA made to §121.301(f) through an interim final rule published on Feb. 10, 2020. Thus, references are to the pre-2020 version of the regulation.”

14 See also BUSINESS LOAN PROGRAM TEMPORARY CHANGES; PAYCHECK PROTECTION PROGRAM, supra n. 2, at 10, which temporarily exempted faith-based organizations that might otherwise be considered affiliates under 13 C.F.R Section 121.103(b) for purposes of participation in the PPP.

15 See 13 C.F.R. § 121.301(f)(7) (This link will take you to the text of 13 C.F.R. §121.301 as formulated under the June 2016 Final Rule).

Scant and inconsistent instruction from the Treasury Department has wrought havoc among small business owners seeking emergency funding under the Paycheck Protection Program. It's time for Congress to step in with answers.

The U.S. Treasury Department last week quietly added new guidance to its Paycheck Protection Program. In doing so, the Treasury second-guessed itself, and small business borrowers, by saying PPP loans went to companies that may not have faced imminent “significantly detrimental” financial harm. On Tuesday, Treasury Secretary Steven Mnuchin announced a “full review” of any loan that exceeds $2 million.

We propose a new amnesty program to address the significant missteps made in the PPP program to date.

The PPP’s goal—to help America’s small businesses survive the health and financial crisis caused by the novel coronavirus—stands beyond reproach. However, when launched, the program provided scant guidance to potential borrowers on what qualified as “need.”

Businesses applying for PPP loans had to certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.” The government failed to clarify this further. Did the business have to be out of money, or in danger of running out soon (and if “soon,” by when)? Must that danger have arisen solely (or mainly) from COVID-19?

Many anxious business owners did not pause to unbundle the loan application’s vague “need certification” language as they hurriedly applied for relief loans. Indeed, the Treasury urged small businesses “to apply as quickly as you can because there is a funding cap.”

The Treasury Department issued revised guidance April 23 to clarify the standard of need and to convince companies that do not meet the revised standard to return PPP loans. That has wrought havoc. In failing to provide clear guidelines for the PPP in the first instance and rewriting requirements in the second instance, the Treasury has whipsawed small business, forcing many to hurriedly consider repaying loans already received or risk potential fraud prosecutions, public scorn and civil litigation.

The Treasury’s latest guidance, in FAQ 31, calls into question the legality of a substantial number of already-issued PPP loans. The Treasury now, retroactively, instructs all PPP borrowers to take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Borrowers did not undertake such an analysis prior to certifying their PPP applications (because that standard did not exist).

While many lawyers are unaccustomed to a “significantly detrimental” standard, the Treasury’s intent is clear: applying a stricter filter than “uncertainty of current economic conditions,” which borrowers had certified at least a week earlier as the SBA approved 1,661,367 loans totaling $3,422,779,991 by April 16. Many business owners who had legitimately obtained PPP loans following the Treasury’s then-articulated vague guidance have spent or earmarked the money and must now return it.

Our experience tells us that there will likely be a proliferation of criminal investigations, criminal and civil fraud claims, and private-party litigation against companies that received PPP loans. Clearly, some of the money went to the wrong companies, but a far larger share of the potential misallocation of money stemmed from the Treasury’s own failure to provide clear guidance amidst anxiety that was (and remains) high.

Even the Treasury’s April 23 guidance was unclear, as the department released a clarification Tuesday, in FAQ 37. The upshot: all small business owners who received PPP loans are forced to quickly reassess whether they “needed” those loans under the Treasury’s new standard, as those with boards of directors frantically reconvene meetings during the 14 days between publishing FAQ 31 and the May 7 deadline for repayment under the “Limited Safe Harbor.” The Treasury will deem a borrower’s initial certification of need to have been in good faith, where the PPP loan is fully repaid on or before May 7. While this may address a borrower’s concerns about potential federal prosecution, it fails to address other concerns, such as whether returning the loans may be viewed as an admission of misconduct for purposes of civil litigation, public scrutiny, and reputational harm.

The whiplash among small businesses is palpable.

There is a better way to do this so that those committed to fair play don’t get punished and limited federal funds go to those in greater need.

We strongly encourage Congress to immediately enact an amnesty program. Smoothing the path for companies to repay the PPP loans they now believe do not meet the Treasury’s after-the-fact standards could help augment much-needed funds for a next round of PPP funding. Just as importantly, an amnesty program would reaffirm fairness in our system.

The amnesty program we propose would provide that:

  1. Borrowers who applied for PPP loans before enactment of the amnesty program, and who return the funds in full (no interest) within 30 days of the amnesty program’s enactment, would receive immunity from government prosecution and from private causes of action with respect to those loans.
  2. Borrowers repaying the loans under the amnesty program would be treated under the law as though they had not applied for or received PPP loans, and thus no Freedom of Information Act disclosures would be made.
  3. The Treasury should use the replenished funds to provide other small businesses with loans.

There are good faith PPP borrowers out there who would more readily undo their applications and repay the funds if they could do so without penalty or scrutiny. Establishing a federal government amnesty program, as we suggest, would free up funds for immediate use by the over 700,000 pending PPP applicants, which is unequivocally a good thing. It would also stem the coming flood of public and private lawsuits and quell some of the backlash against borrowers who are now being second-guessed. Finally, it is fair—which is what this critically important financial program should be.

Ed Zimmerman, an adjunct professor at Columbia Graduate School of Business, chairs the tech group at Lowenstein Sandler. Anne Milgram, a law professor at New York University and former New Jersey attorney general, is special counsel at the firm. Kathleen McGee, former bureau chief for internet and technology for the New York State Attorney General’s Office, serves in the firm’s tech and white collar criminal defense groups.

Reprinted with permission from the April 29, 2020, edition of The National Law Journal. © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - [email protected].

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

With one day to spare before the May 14 “Limited Safe Harbor” expires, the SBA released FAQ #46 (May 13) to explain the process of how the SBA will review Paycheck Protection Program (PPP) loans. The new FAQ, unfortunately, prompts more questions than answers regarding risks around certifications required under the PPP. Later in the day, the SBA also released FAQ 47 extending the May 14 deadline to May 18, with “a revision to the SBA’s interim final rule” to follow–or, put another way, more to come.

FAQ 46’s guidance neither clarifies nor alters the meaning or factual premises adequate to certify “necessity” for PPP loans. Instead it explains the SBA’s planned approach for the SBA’s audit and review of PPP loan applications. Borrowers of loans below $2 million are breathing a sigh of relief, especially if they experienced anxiety regarding whether they fully satisfied the necessity requirement. That said, FAQ 46 is more accurately analogized to the IRS saying, “We’re unlikely to audit your tax returns, and if we do, we’ll simply ask for the money you owe us without penalties and interest,” but ONLY if (1) you have the money to repay when required and (2) if you erred solely on the certification of need.

While the FAQ seems to provide a “safe harbor” and to “deem good faith,” it lacks clarity and finality, as it would appear to bind only the SBA, rather than the Department of Justice (DOJ) or potential private litigants. Moreover, regardless of the size of the loan, fraud and problems resulting from missteps in the hyper-technical affiliation and eligibility rules remain fair game for prosecution and were never part of the “limited safe harbor” the SBA had earlier announced.

FAQ 46 provides in relevant portion that in the SBA’s review of a borrower’s good faith certification of a PPP loan application:

“[The] SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to [the] SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

This appears as a “safe harbor” solely for certification of need for borrowers (not affiliation rules properly, for instance) with loans aggregating under $2 million (including all loans taken by borrower’s affiliates). FAQ 46 continues:

“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance …”

This statement is somewhat confusing because the “safe harbor” applies only to “PPP loans with an original principal amount of less than $2 million,” so that ALL borrowers with loans greater than $2 million will not satisfy the safe harbor.

FAQ 46 then provides:

“[The] SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by [the] SBA for compliance. … If [the] SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, [the] SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” (emphasis added).

While some have posited that FAQ 46’s safe harbor seems to apply to all loans below $2 million, the above passage clearly speaks of BOTH loans above $2 million “and other PPP loans as appropriate …” In other words, it is unclear precisely how “safe” the harbor is. It is also unclear whether an investigator or prosecutor must carry a steep or modest burden to overcome the borrower’s “deemed …good faith” and shift the borrower into the category of having “lacked an adequate basis for the required certification” of necessity. In other words, while the SBA will clearly scrutinize loans above $2 million, the SBA has been vague regarding the scrutiny the SBA will apply to smaller loans.

Additionally, it is unclear whether FAQ 46’s specific language means that the SBA is restricting itself so that the SBA is ONLY able to seek repayment while the loan remains outstanding: “SBA will seek repayment of the outstanding PPP loan balance” (emphasis added). This detail is important because loan forgiveness is supposed to happen with real speed, which would give the SBA very little time to review these loans. The SBA could have phrased this as “the SBA’s entitlement to ‘seek recovery’ of the original loan amount (regardless of whether forgiven or partially repaid).” The current phrasing supports arguments that FAQ 46 could preclude the SBA from asserting loan recovery rights after the loan has been either repaid or forgiven.

FAQ 46 next outlines the process the SBA will follow:

“If the borrower repays the loan after receiving notification from [the] SBA, [the] SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

We are uncertain of how binding the SBA’s articulation of its loan review process will be on the DOJ, though we do note that the SBA has clearly stated its flagging enthusiasm for generating leads for the DOJ as to many of these loans. We also believe that FAQ 46 will, as a practical matter, make it more challenging for the DOJ to enforce claims arising from the certification of need on loans below $2 million. It will be interesting to watch how enforcement priorities change in the coming months and after the elections, as well as how public perception will unfold regarding these loans.

While stating that all applicants for amounts under $2 million will be deemed to have been filed in good faith, FAQ 46 does not change the legal requirement that applicants must in good faith certify need. If that certification is inaccurate, it is still a violation of law and could still be subject to federal enforcement action even though not uncovered in the SBA’s review or audit process. The SBA will require return of funds from borrowers–and we read that to mean borrowers of loans of any size–rather than penalties, unless the borrower cannot repay. Yet, FAQ 46 does nothing to prevent negative publicity or private plaintiffs’ actions. Of course situations of alleged egregious misuse of funds will still bring enforcement, like the action announced on May 13 (where the Atlanta-based borrower used the funds to, among other things, lease a Rolls Royce, buy a Rolex, and pay child support (NBC Reporting)) and the first prosecutions DOJ announced (May 5, Rhode Island (DOJ announced that the borrowers had “discussed via email the creation of fraudulent loan applications and supporting documentations”)).

As to negative publicity, on May 12, five major news organizations (The New York Times, The Washington Post, the parent company of The Wall Street Journal, Bloomberg, and Pro Publica) sued the SBA under the Freedom of Information Act (FOIA) “seeking access to records showing who received subsidized loans under both programs, the size of each loan and which bank processed the loan, as well as other loan-specific information.” (See Washington Post coverage). This is consistent with our firm’s earlier publications regarding the application of FOIA to these loans (See April 8 and April 15 posts), as well as The Wall Street Journal’s reporting (April 21).

We will continue to watch the rapidly shifting landscape around PPP loans, especially as the SBA has advised us to expect an Interim Final Rule.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 


Raymond P. Thek, Vice Chair, Tech Group, Lowenstein Sandler LLP.

Kathleen A. McGee, former Bureau Chief for Internet & Technology, NY Attorney General’s Office; served in Mayor Bloomberg’s Administration (Director, Mayor’s Office of Special Enforcement); prosecuted homicide and sex crimes as an Assistant District Attorney in the Bronx; now serves in Lowenstein Sandler LLP’s Tech Group and White Collar Criminal Defense Group.

Ed Zimmerman, Chair, Tech Group, Lowenstein Sandler LLP & Adjunct Prof. of Venture Capital, Columbia Business School, Co-Founder, VentureCrush.

Kimberly E. Lomot, previously certified as a Designated Attorney for SBA 504 Lending; serves as a debt financing and real estate lawyer at Lowenstein Sandler LLP.

Coauthored with Sadiki Wiltshire, an SEO Law Fellow at Lowenstein Sandler LLP, a rising 1L at Stanford Law, and a graduate of Princeton University (China Studies / Physics).

On June 10thAcrew Capital Founding Partner, Theresia Gouw, and Northzone General Partner, Pär-Jörgen Pärson, discussed with Lowenstein Sandler LLP Partner and Tech Group Chair, Ed Zimmerman strategies for building a venture firm, raising a new fund, and investing during the time of COVID. Northzone hosted the event for dozens of early stage venture capital investors around the globe. Gouw, Parson, and Zimmerman each entered this sector in the 1990s and have participated through numerous economic cycles. Gouw and Parson are regulars on the Forbes Midas List of the World’s most successful Venture Investors. Gouw is based in the Bay Area, Parson in Stockholm, Sweden, and Zimmerman (who has served as a Professor of Venture Capital in Columbia University’s MBA Program for 15 years and co-founded and chairs VentureCrush), is based in New York.

Here are three takeaways.

  1. The next 6 months. The next 6 months are likely to have a dim economic outlook on a macro level, as we see the ripple effect of U.S. unemployment exceeding 30M (see Fortune, June 9, 2020). There will be bright spots in the market, but it will be a more varied market. ...
  2. Investing in a COVID world. Early stage investing amidst COVID has become the accepted state of play. Despite having initially thought that shutdowns would be temporary, we’re now resigned to understanding that for a protracted period, we’ll operate in a COVID environment. This is, in some ways, liberating, as people can now make decisions and move forward with business strategies, rather than waiting for a temporary setback to fade. ...
  3. Building resilience via Diversity, Equity and Inclusion. All conversations happen in the context of the defining issues of the day. Just as COVID was a major factor contextualizing the discussion, so, too, were the murders of George Floyd and Breonna Taylor, as well as the ensuing, ongoing nationwide reevaluation of systemic racism in the U.S.

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