Considerations for VC Funds Regarding Receivership of SVB

VC Fund has an Account with SVB

• See the FDIC's FAQ and Orrick's SVB Resource Center generally for issues relating to the SVB receivership and related matters.
• As long as a VC Fund does not have loans outstanding under a subscription credit facility with SVB, such VC Fund should consider opening one or more non-SVB accounts and encourage third parties to make all payments to those non-SVB accounts.
• If LPs have been making contributions to a VC Fund's SVB account, updated wire instructions of the alternative non-SVB account should be delivered to LPs.

VC Fund has a Subscription Credit Facility with SVB

• See the FDIC's Borrower's Guide generally for information relating to an FDIC insured bank failure.
• VC Funds should ensure that they have a copy of the subscription credit facility documentation with SVB.
• It is uncertain whether SVB will honor drawdown requests from VC Funds having a subscription credit facility.
• VC Funds will remain liable for all principal, interest and fees on outstanding loan obligations with SVB. VC Funds should consider continuing to make scheduled payments in order to avoid a default.
• VC Funds should consider continuing to comply with the “accounts” covenant in order to avoid a default.
• It is unlikely that another lender will provide a subscription credit facility to a VC Fund having an outstanding subscription credit facility with SVB (i.e., because SVB has a senior lien on LP capital commitments of such VC Fund). In addition, entering into a new subscription credit facility using the same LP capital commitments as collateral would likely violate the SVB subscription credit facility.
• VC Funds should review the subscription credit facility documentation to determine whether SVB's receivership constitutes a violation of the agreement / collateral requirement under that arrangement.
• VC Funds merely at the term sheet stage with SVB regarding a subscription credit facility should note that such term sheet is not contractually binding.

VC Fund LPs with Funding Risk

• Given the SVB receivership and general uncertainty in the current market environment, VC Funds may wish to consider reaching out to their LPs to determine the extent to which the LP base has short-term risk in meeting anticipated capital calls. The extent of risk will dictate the timing and level of future capital calls to LPs.
• If any LP replaces it's SVB account with a non-SVB account for purposes of (i) funding future capital calls issued by a VC Fund and/or (ii) receiving distributions from a VC Fund, such VC Fund should ensure that it properly KYCs the alternative account of such LP.

VC Fund LPs have Accounts with SVB (cont.) 

• VC Funds are typically permitted to waive the enforcement of LP default remedies available under the governing agreements. VC Funds may wish to consider potentially (i) extending a capital call funding deadline date and/or (ii) waiving on a short-term basis certain default remedies with respect to LPs whose funding capabilities are temporarily disrupted from replacing an SVB account with a non-SVB account or due to other reasons stemming from the SVB receivership or potential other liquidity issues that could arise for other banks.
• VC Funds are typically permitted to use cash on hand in order to satisfy ongoing expenses (as an alternative to drawing down fresh capital from LPs). In addition, during the investment period, VC Funds are typically permitted to use proceeds from realized investments to make new investments (i.e., recycling capital), rather than distributing such proceeds to LPs and then re-drawing it.

VC Fund Portfolio Companies with SVB Lending Arrangements

• Portfolio companies with SVB lending arrangements may need alternative sources of capital in the near future. A VC Fund should consider the items below in connection with providing bridge loans to such portfolio companies:
  • The VC Fund should ensure that the VC Fund agreement does not prohibit any such loan.
  • The VC Fund should ensure that extending such loan would not jeopardize the VC Fund manager's reliance on the “Venture Capital Fund Adviser Exemption” from SEC registration, if applicable.
    • Such exemption provides that an investment adviser solely advising “venture capital funds” is exempt from registration with the SEC. In turn, one condition of qualifying as a “venture capital fund” is that no more than 20% of the fund's total assets may be invested in assets that are not “qualifying investments” (i.e., equity securities issued by portfolio companies) or “short term holdings.”
  • If a portfolio company has an outstanding loan agreement with SVB, then any such bridge loan from a VC Fund should be subordinated.
    • Subordinating such loan would allow the loan to be considered “permitted indebtedness” under the SVB loan agreement, subject to express authorization by SVB.
  • If a portfolio company does not have an outstanding loan agreement with SVB or any other lender, then any such bridge loan from a VC Fund will not need to be subordinated (and can be secured or unsecured).
  • If a VC Fund is a secured lender to a portfolio company having one or more accounts with SVB, consideration should be given to moving those accounts to another bank.