Treasury unlikely to change rule that disqualifies space startups from relief loans

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Treasury is said to be concerned that changing the rule for venture-owned startups would subvert the intent of the relief loan program.

WASHINGTON — Industry groups representing space companies and other sectors have been lobbying the Treasury to waive the so-called “affiliation” rule that disqualifies many startups from coronavirus relief loan programs.

To be eligible for small business loan programs, a company has to have fewer than 500 employees. Startups, no matter how small, do not meet that requirement if they’re owned by a large holding company or a venture capital firm that owns a portfolio of companies whose total is greater than 500 employees.

Several industry associations and lawmakers in recent weeks have called on Treasury to waive the affiliation rule so struggling startups can get emergency aid. But Treasury has pushed back out of concern that changing the rule for venture-owned startups would subvert the intent of the Small Business Administration’s loan program that was created to help independently owned small businesses.

One of the most sought loans is the Small Business Administration’s Paycheck Protection Program — a loan that helps businesses keep their workforce employed for eight weeks. The money has to be paid back in two years or not at all if the workforce was not downsized.

The loan programs have created a dilemma for startups and venture capital firms over whether to break their affiliation in order to qualify, says space industry consultant Jose Ocasio-Christian, CEO of Caelus Partners.

“VC’s need to understand that in order to get help from the government, they’re going to have to give a little as well, look beyond a waiver or a loophole” Ocasio-Christian tells SpaceNews.

If a startup owned by a large company gets government help, there is a risk that it’s “double dipping” because the government might already be supporting the holding company through other CARES provisions, he says. If a startup needs help badly, it can disaffiliate itself from the owner to qualify for the loan, but many are reluctant to do so, says Ocasio-Christian.

Under the CARES Act, billions of dollars are being allocated to help aerospace companies like Boeing that are being hit hard by the downturn. A space startup funded by Boeing’s venture capital arm, for example, based on the ownership structure can be in some circumstances counted as part of Boeing’s assets for the purposes of the CARES assistance.

The Treasury is saying that holding companies or investors — if they are not willing to let go of a company so it can be independent — should be able to help a troubled startup and if the startup is a defense supplier they have access to other forms of help from the Defense Department or from state and local governments, Ocasio-Christian says.

The larger lesson from this crisis, he says, is that “we have to re-imagine how we invest in these companies. How do we help space companies in the future?” he says. What is needed is a different model of investments for space that looks not just for commercially viable ideas but also their national security implications so startups aren’t so vulnerable to venture capital disruptions.