OCC Bulletin Offers Guidance on Venture Lending

In the wake of the Silicon Valley Bank crisis and other incidents of banking distress last year, new participants continue to enter the venture debt market — resulting in the formation of new banking relationships. Accordingly, the Office of the Comptroller of the Currency (“OCC”) issued Bulletin 2023-34 (the “Bulletin”) to address what it sees as “heightened uncertainty” created by these developments. 

Issued to all OCC regulated banks, the Bulletin aims to clarify some of the best practices for venture lending. 

The Bulletin begins by offering guidelines for identifying venture lending relationships, including the following:

• “Venture borrowers” are defined as having characteristics of less-mature companies, such as a shorter business history and higher risk of business failure. 
• “Venture lending” broadly extends to “commercial lending activities targeting high-risk borrowers” in any of the three stages of development: (a) early- (i.e., planning stage), (b) expansion- (i.e. product/service development stage), and (c) late-stage (i.e. significant product/service rollout stage). Notably, asset-based loans are expressly excluded from the Bulletin.
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Next, the Bulletin focuses heavily on how venture lenders can be more sure of a potential borrower's ability to repay, including consideration of the following indicators:

• Credit enhancements: Requiring borrowers to procure credit enhancements (e.g. controlled cash collateral), particularly early- and mid-stage borrowers who rely on investors and other secondary sources of cash — and even for late-stage borrowers with weak cash flow.
• Proof of capital commitments: Requiring borrowers who rely on new funding commitments to provide the lender with evidence of their legal right to enforce such commitments. 
• Sustainable source of cash: If a borrower's cash is reserved and pledged to the lender, the OCC considers it "a sustainable source of cash" — whereas if it is unrestricted and vulnerable to negative operating cash flow, it "does not qualify as a sustainable source of cash."
• Cautious treatment of recurring revenue: The OCC does not consider recurring revenue to be the equivalent of demonstrating a sufficient ability to repay, such as in the case of a SaaS company borrower with subscription revenues but limited or negative cash flow.
• Review of borrower's business model: Identifying structural protections and credit enhancements based on a borrower’s business model, including evidence of a borrower’s ability to attain profit at realistic scale.

Due to the heightened risks of venture lending, the OCC’s Bulletin specifically recommended certain practices for lenders, including heightened loan monitoring, frequent and robust borrower financial reporting, and loan structures with controls such as collateral requirements and covenants. Reviewing this Bulletin with an eye toward implementing the OCC’s recommendations can also help to protect lenders engaged in venture lending. Likewise, borrowers who are considering a venture loan should refer to the Bulletin to better understand their suitability as a candidate.

The above summary is intended to serve as a general overview of the legal issues discussed. We encourage you to reach out to an attorney at Scale LLP for a more detailed evaluation and review of your situation. Scale LLP is a full-service law firm with deep experience in financial services, including lending. 

DISCLAIMER: The above materials reflect information available to Scale LLP as of the date of publishing such materials. The contents are intended to provide a general guide to the subject matter therein, and should not be treated as legal advice regarding individual situations. No attorney-client relationship between you and Scale LLP will be formed based on your use of these materials unless Scale LLP expressly agrees (or has agreed) to enter into such a relationship with you.

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¹OCC Bulletin 2023-34, Commercial Lending: Venture Loans to Companies in an Early, Expansion, or Late Stage of Corporate Development (Nov. 1, 2023), https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-34.html.