Small Business Administration rule disqualifies many space startups from coronavirus relief loans

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The Commercial Spaceflight Federation and the SmallSat Alliance have asked the SBA to change how it defines a small business.

WASHINGTON — Industry groups representing space and other technology sectors are asking the U.S. government to change rules that make many startups ineligible to receive Small Business Administration loans to help pay workers during the coronavirus crisis.

The issue was raised in an April 29 letter sent to Treasury Secretary Steven Mnuchin, Office of Management and Budget acting director Russell Vought and the head of the Small Business Administration Jovita Carranza.

The letter was signed by two space industry groups — the Commercial Spaceflight Federation and the SmallSat Alliance — along with the App Association, Dcode and Financial Executives International.

The groups claim that hundreds of U.S. startups have been disqualified from loan programs — created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program — because of the way the SBA defines “small business.”

Many startups are funded by venture capital firms that typically invest in a portfolio of companies. To be eligible for the SBA loan program a business has to have fewer than 500 employees. When defining a small business, the SBA applies an “affiliation rule,” requiring companies to include in their worker count all the employees of companies with which they are “affiliated.”

That rule requires venture-backed startups to aggregate the employees of all the unrelated companies in which their investors have equity positions, pushing many beyond the 500-employee threshold.

According to the industry groups, 98 percent of U.S. startups have fewer than 100 employees.

The letter warns that until the SBA issues a waiver to the “affiliation rule,” thousands of workers nationwide will be laid off from startups. “Many of these companies support elements of our nation’s critical infrastructure and need to be protected.”

An industry source said the April 29 letter from the five trade groups follows several other letters sent by congressional leaders to the SBA and to Treasury over the past month on the same issue.