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On April 11, 2022, Virginia became the second U.S. state to require providers of merchant cash advance (“MCA”) products to obtain a state regulatory license or registration, on the heels of the Utah. With Governor Glenn Youngkin’s signing of House Bill 1027, companies providing “sales-based financing” in Virginia will now be required to provide advance information on financing terms, follow certain dispute resolution procedures and register with the Virginia State Corporation Commission (“Commission”) by November 1, 2022.
Unlike small business financing disclosure laws enacted by California, New York, and Utah, which broadly apply to many forms of non-mortgage small business financing, Virginia’s new law focuses narrowly on providers of “sales-based financing”. The bill’s sponsor, Delegate Kathy Tran, noted that the bill is specifically aimed at regulating ACM providers. The law defines “sales-based financing” as a “transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the amount of the payment may increase or decrease depending on the volume of sales achieved. or income received by the beneficiary. The term “sales-based financing” also includes transactions with “an accrual mechanism in which the financing is repaid as a fixed payment, but provides a reconciliation process that adjusts the payment to an amount that is a percentage of the sales or revenue.
Virginia is now the second state to enact a specific licensing or registration regime for ACM providers. The new law requires MCA providers to register with the Virginia State Corporation Commission by November 1, 2022, and then on an annual basis thereafter. Since MCA providers often source from brokers or independent sales organizations, the law also extends the registration requirement to “sales-oriented financing brokers”, which the law defines as “a a person who, for payment or in the expectation of payment, obtains or offers to obtain financing based on sales from a supplier for a recipient. » Suppliers and brokers must also be licensed to transact in Virginia, unless they are already organized under Virginia law or are otherwise not required to obtain license. authorization to transact in Virginia as a foreign entity.
The new Virginia law also follows in the footsteps of California, New York and Utah in imposing disclosure obligations on ACM providers. MCA providers will be required to disclose funding terms at the time the provider offers an MCA to a merchant. These disclosures are similar to disclosures required for “sales-based financing” providers under other recent state laws and include:
- The total sales-based financing amount and disbursement amount, if different from the financing amount, after deducting or withholding fees at the time of disbursement
- The financial burden
- The total reimbursement amount, which is the disbursement amount plus finance charges
- The estimated number of payments, which is the number of payments expected, based on the merchant’s projected sales volume, to equal the total refund amount
- Payment amounts, based on the merchant’s projected sales volume, (i) for fixed payment amounts, payment amounts, frequency and method, or (ii) for variable payment amounts, a schedule of payment or a description of the method used to calculate the amounts and frequency of payments and method of payment
- A description of any other potential fees and charges not included in finance charges, including drawdown fees, late payment fees, returned payment fees, and prepayment fees or penalties
- If the recipient elects to prepay or refinance the sales-based financing prior to full repayment: (i) an updated disclosure of the six prior disclosures required above, as of the date of the prepayment or refinancing; and (ii) a description of prepayment policies indicating whether the recipient will be required to pay additional fees, penalties, or other amounts not already included in the finance charge, or whether the recipient will receive a fee discount financial.
- A description of collateral requirements or collateral, if any
- A statement of whether the supplier will pay compensation directly to a broker under the specific sales-based financing offer and the amount of compensation
Unlike California and New York law, Virginia law does not require the disclosure of an annual percentage rate or “APR”. Since House Bill 1027 does not define many of the terms used in the disclosure requirements, including “finance charges,” and gives MCA providers no instructions on how to calculate finance charges, the volume expected sales or payment schedule, regulators may need to issue guidelines or regulations to implement disclosure requirements. Regulators will likely need to act quickly, as disclosure obligations come into effect on July 1, 2022, and it’s hard to imagine how the law could be enforced without rules providing necessary guidance to ACM providers. The law authorizes the Commission to promulgate regulations, but the short period between the promulgation of the law and its effective date may not be sufficient for the Commission to make a proper development of notice and comment rules. . It would not be surprising if MCA suppliers were granted a grace period extending beyond July 1, similar to the many delays in the effective date of California and New York disclosure requirements. resulting from the need for regulators to finalize rules implementing disclosure requirements.
Finally, the law imposes several conditions for the settlement of disputes. First, the law prohibits providers from using the confession of judgment provisions. Second, the law also requires that any legal action related to a sales-based financing agreement be brought in Virginia; forum selection clauses requiring that legal actions be brought outside of Virginia are unenforceable. Third, the law includes two restrictions on arbitration clauses in sales-based financing agreements. Specifically, the arbitration clause cannot require face-to-face arbitration to take place outside of the jurisdiction where the merchant’s principal place of business is located, and vendors must pay all arbitration costs. Although Virginia law declares violation of the terms of a sales-based financing agreement unenforceable, vendors may be able to argue that federal arbitration law prevails over state law regulation. Statement on Arbitration Clauses.
Virginia law exempts financial institutions such as banks and credit unions. Merchant cash advances over $500,000 are also exempt. Finally, the law contains a de minimis exemption for a person who completes no more than five “sales-based financing” transactions in a 12-month period.
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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.
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