Growth Loan Fund

Overview

How It Works

The Growth Loan Fund program provides direct loans to eligible seed and early-stage businesses. The business must be planning to raise equity in order to qualify. The applicant will state how much equity they intend to raise, then have 12 months to do so. If they can achieve this goal, the approved loan amount will be based on 20% of the total amount of equity investment raised in the funding round. Any investments done before the defined 12-month period do not qualify. Loans range from $100,000 to $400,000.

Eligible Applicants

Businesses must meet one of the following criteria: 1) been certified to participate in the Angel Tax Credit (ATC) Program; 2) be identified by a venture or angel fund for investment; 3) be identified by an individual accredited investor for investment. Launch Minnesota grantees are strong candidates for this funding. The business must meet the ATC standard being engaged in or committed to engaging in technological innovation in Minnesota. See the Apply tab for additional details.

Equity Investment Requirements

At least one equity investment must be made by an investor that is qualified as an accredited investor per the U.S. Securities and Exchange Commission under Rule 501 of Regulation D or by a venture or angel investment fund. The accredited investor or fund must make the investment subsequent to loan approval. The total equity investment attained for the round is not exclusive to investments made by accredited investors or venture or angel investment funds. Businesses that are not ATC certified, working with a venture capital or angel fund, or working with an accredited investor are not eligible for the program. The investment round must remain under $20 million for the business to remain eligible for the loan.

Loan Amount and Terms

Loan amounts are based on 20% of equity raised in a single round, not to exceed 12 months after program enrollment. Equity raised prior to enrollment is ineligible. Loans range from $100,000 to $400,000.

Loans bear 1% interest, on a 7-year term. Principal payments are deferred until year 4. At year 4, loan payments begin based on 50% of the principal. At maturity, the outstanding balance is due in a balloon payment. If the business is sold, 10% plus the principal is due on sale.

Proof of Investment

DEED will issue the loan once the business provides proof of investments made during the defined funding round. . Enrolled businesses should see the Proof of Investment tab for detailed requirements.

The following minimum documentation will be required:

• A copy of the signed investor subscription agreement, or other underlying transaction document, evidencing the investment;
• If the investment is in the form of a convertible note or a simple agreement for future equity (SAFE), evidence of the mandatory conversion date;
• A copy of the investor's or fund's check made out to the business or wire transfer showing the accounts of the originator and beneficiary;
• A copy of the business' deposit receipt or bank statement showing the deposit of the check during the approved 12-month period.

Investments made by the following are ineligible for consideration as part of the proof of investment:

• An officer (a person elected or appointed by the board to manage the business), or
• A principal (a person having authority to act on behalf of the business), or
• A person who owns, controls, or holds the power to vote 20% or more of the outstanding securities of the business, individually or combined with family members, or
• A family member (siblings, spouse, ancestors and lineal descendants) of the above

Eligible Uses of Funds

Funds are to be used for an eligible business purpose, including startup costs, working capital, equipment, inventory, services used in the production of the business's goods or services, or tenant improvements. Funds may not be used for passive real estate or to repay any previous investment made in the business, including capital contributed by founders.

Proof of Investment

Enrolled Businesses

DEED will issue the loan once the business provides proof of investments made during the defined funding round. The business should complete the Proof of Investment and Loan Request form. To request the loan, the business should submit that completed documents, as well as required supporting documentation, to ssbci.deed@state.mn.us. The Equity Investments Tracking Form portion of the document is available as an Excel spreadsheet upon request.

Supporting Documentation

For each investment, the enrolled business should submit the following supporting documentation:

• A copy of the signed investor subscription agreement, or other underlying transaction document, evidencing the investment;
• A copy of the investor's or fund's check made out to the business or wire transfer showing the accounts of the originator and beneficiary;
• A copy of the business' deposit receipt or bank statement showing the deposit of the check during the approved 12-month period.

Convertible Notes and Simple Agreements for Future Equity (SAFEs)

If convertible loans or simple agreements for future equity (SAFEs) have a non-conditional, mandatory conversion requirement, they are considered equity. It is mandatory that the convertible note or SAFE must convert, without condition, to equity within 36 months of the date the investment was made.

Businesses are encouraged to submit a proposed convertible note to DEED for review before the investment is made to ensure the note's or SAFE's meets the program's requirements.

DEED recognizes there may be additional instruments in the market that have similar equity conversion clauses. If you would like to inquire whether such an alternative instrument qualifies, please contact the program administrator.

Ineligible Investments

Investments made by the following are ineligible for consideration as part of the proof of investment:

• An officer (a person elected or appointed by the board to manage the business), or
• A principal (a person having authority to act on behalf of the business), or
• A person who owns, controls, or holds the power to vote 20% or more of the outstanding securities of the business, individually or combined with family members, or
• A family member (siblings, spouse, ancestors and lineal descendants) of the above.

Apply

Applications may be submitted to SSBCI.DEED@state.mn.us. After initial review, additional certification forms will need to be completed by the applicant.

Businesses need to meet the following criteria to apply for a loan:

• Be headquartered in Minnesota;
• Have fewer than 50 employees. No minimum number of employees is required;
• Not have been in operation for more than 10 years (20 years if related to medical devices or pharmaceuticals requiring FDA approval);
• Not have been disqualified from investment under Minn. Stat. 80 A.50 (b)(3), the Small Corporation Offering Registration disqualifications;
• Not have issued securities that are traded on a public exchange;
• Not previously have received private equity investments of more than $4 million.

Applications must demonstrate the following:

• Sound business plan and detailed management background information for each principal of the business and any Board of Directors positions;
• Dedicated management team with significant experience to execute in given technology or industry;
• Private sector investment/participation, including from at least one accredited investor;
• Investment plan for securing follow-on capital to sustain firm;
• Patent, license or other intellectual property protection;
• Strategy demonstrating a strong sustainable competitive advantage in growing market;
• Exit strategy for repayment of the loan;
• Successful collaborations or experience needed to commercialize technology and accelerate the growth of high-tech startup business.

Applications need to also include:

• A current capitalization table showing the name, dollar amount invested, and ownership percentage of each owner/investor - DEED may request term sheets or subscription agreements for investors listed on the cap table;
• A copy of Angel Tax Certification acceptance email

OR

• Written documentation that the applicant is currently working with either an accredited investor as defined by Rule 501 of Regulation D or a venture capital fund as defined in 17 CFR 275.203(l)-1.

Businesses must agree to comply with U.S. Treasury SSBCI guidelines, including signed certifications regarding use of proceeds, conflict of interest, and that no principal of the business is a sex offender. Once enrolled, businesses will be required to submit annual reporting to meet SSBCI requirements.

Please see the list of Frequently Asked Questions available under the FAQ tab for answers to common questions about the program.

If you have questions about whether your business is eligible to apply, please consult the SSBCI Unit team at SSBCI.DEED@state.mn.us or call John Endris at 651-259-7452.

FAQ

What size loan is available from the program?

The loan size minimum is $100,000 and the maximum is $400,000.

How do I get the maximum loan available?

The loan amount will be 20% of the stated raise. To be approved for a $400,000 loan, the applicant must raise at least $2,000,000.

What if I raise more equity than I anticipated? Can I get a bigger loan?

The business may request an amended loan amount after completing the raise. Any change must be approved by DEED and is subject to available funds. The loan amount may not exceed $400,000.

What if I cannot raise the anticipated amount of equity funds?

The applicant will state the amount of equity they intend to raise. If the applicant cannot raise at least 70% of the estimated raise during the 12-month period subsequent to approval, the business will not be eligible for the loan.

If the business raises at least 70%, but less than the full amount, the loan amount will be lowered to 20% of the amount actually raised.

If the amount raised is less than $500,000, the business will no longer be eligible for the loan.

Are convertible loans considered equity investments?

If convertible loans have a non-conditional, mandatory conversion requirement, they are considered equity. It is mandatory that such debt must convert, without condition, to equity within 36 months of the date the note.

Are simple agreements for future equity (SAFEs) considered equity investments?

If simple agreements for future equity (SAFE) have a non-conditional, mandatory conversion requirement, they are considered equity. It is mandatory that the SAFE must convert, without condition, to equity within 36 months of the date of the agreement.

What are the terms of DEED's GLF loan?

The loan bears 1% interest. The amortization is 7 years with interest-only payments until year 4. In year 4 payments will begins such that the business will have repaid 50% of loan principal by the end of the 7-year term. A balloon payment for the loan balance is due at maturity.

Can I get more than one loan from the GLF?

The applicant may receive up to two loans from the program, but the total loan amount may not exceed $400,000.

If I received a loan from the Angel Loan Fund (ALF), can I get a loan from the GLF?

Yes. However, the total loan amount may not exceed $400,000 between programs.

What can I use the loan funds for?

Loan funds must be used for an eligible business purpose as defined by SSBCI guidelines, including:

• Working capital (defined as capital necessary to maintain the businesses operating cycle)
• Acquisition of equipment
• Inventory
• Services used in the production, manufacturing or delivery of a business's goods or services
• Purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes as defined by Passive Real Estate Investment Guidance – 12 USC 5704(e)(7)(A)(i)(I)

Are there restrictions for what I can spend the GLF loan on?

Yes. The loan is subject to SSBCI restrictions, which prohibit:

• Repaying delinquent federal or state income taxes unless the eligible business (as defined by SSBCI Policy Guidelines) has a payment plan in place with the relevant taxing authority; or
• Repaying taxes held in trust or escrow, e.g. payroll or sales taxes;
• Reimbursing funds owed to any owner for startup costs, including any additional equity injection for business continuance; or to purchase any portion of the ownership interest of any owner; or to buy out ownership shares of any limited or general partners;
• Purchasing any portion of the ownership interest of any owner of the business, except for the purchase of an interest in an employee stock ownership plan qualifying under Section 401 of Internal Revenue Code, worker cooperative, or related vehicle, provided that the transaction results in the employee stock ownership plan or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business.

Can anyone be an investor in my business?

At least one investment must be made by an investor that is qualified as an Accredited Investor per the U.S. Securities and Exchange Commission under Rule 501 of Regulation D or an angel or venture capital fund as defined in 17 CFR 275.203(l)-1. Not all investments made during the funding round are required to meet the accredited investor or venture capital fund criteria.

Are investments from owners, directors or family members qualified as part of the equity raise?

SSBCI must be a cause and result for private financing and is meant to facilitate new funding that would not occur without the assistance of SSBCI. No investment from an officer, principal, owner of 20% or more of the outstanding securities of the business (individually or combined with family members), or family member of the aforementioned individuals will count toward the equity raise.

What is considered a passive investment or passive real estate?

A passive investment is trade or business activities in which you don't materially participate or materially participate in the operation of the activity on a regular, continuous, and substantial basis. Passive real estate is defined by Passive Real Estate Investment Guidance – 12 USC 5704(e)(7)(A)(i)(I)

What if my business is based in Minnesota, but incorporated in Delaware or elsewhere?

The business must be headquartered in Minnesota to be eligible for a loan. It may be incorporated in another state. Evidence of the business filing with the Minnesota Secretary of State is required to apply.

What kind of businesses are not eligible for the GLF?

The program is limited to businesses engaged in, or committed to engaging in, technological innovation in Minnesota. In addition, the program is subject to SSBCI restrictions on type of business, which prohibit:

• Speculation businesses (profiting from price fluctuations, wildcatting, oil futures, commodity futures)
• A business that earns more than half of its annual net revenue from lending activities.
• A business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or MLM
• Businesses engaged in the production, manufacturing, processing, or distribution of controlled substances or products/services connected to be used in connection with an illegal activity. this category of businesses also includes direct and indirect marijuana businesses, as defined in SBA Standard Operating Procedure 50 10 6
• A business deriving more than one-third of gross annual revenue from legal gambling activities, unless the business is a Tribal SSBCI participant as defined as Class II and Class III gaming under the Indian Gaming Regulatory Act (IGRA), 25 USC 2703.

Can I use the loan to reimburse myself for startup costs, pay off any debt or credit cards I've used to build the business, or buy out a partner?

No. The loan may not to be used for any purpose that falls under SSBCI's definition of refinancing, including retiring a debt, investment or other capital injection previously made by a founder or partner to start the business.

Can I use the loan to repay an investor to replace their ownership with another or reimburse an early investor?

No. The loan may not be used to repay any previous investor or debt.

Can I use the loan to pay a dividends on preferred stock to investors?

No. SSBCI rules do not allow such payments.