Virginia Enacts Merchant Cash Advance Registration and Disclosure Law
On April 11, 2022, Virginia became the second US state to require providers of merchant cash advance (“MCA”) products to obtain a state regulatory license or registration—hot on the heels of Utah. With Governor Glenn Youngkin’s signing House Bill 1027 into law, companies providing “sales-based financing” in Virginia will now be required to provide up-front disclosures about financing terms, follow certain dispute-resolution procedures, and register with the Virginia State Corporation Commission (“Commission”) by November 1, 2022.
Unlike the small business finance disclosure laws enacted by California, New York, and Utah, which apply broadly to many forms of non-mortgage small business financing, Virginia’s new law is narrowly focused on providers of “sales-based financing.” The bill’s sponsor, Delegate Kathy Tran, noted that the bill specifically aims to regulate MCA 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 payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient.” The term “sales-based financing” also includes transactions with “a true-up mechanism where the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”
Virginia is now the second state to adopt a specific licensing or registration regime for MCA providers. The new law requires MCA providers to register with the Virginia State Corporation Commission by November 1, 2022, and on an annual basis thereafter. As MCA providers often source their products through brokers or independent sales organizations, the law also extends the registration requirement to “sales-based financing brokers,” which the law defines as “a person that, for compensation or the expectation of compensation, obtains or offers to obtain sales-based financing from a provider for a recipient.” Providers and brokers must also obtain authority to transact business in Virginia, unless they are already organized under Virginia law, or are otherwise not required to obtain authority to transact business in Virginia as a foreign entity.
The new Virginia law also follows in the footsteps of California, New York, and Utah by imposing disclosure obligations on MCA providers. MCA providers will be required to make disclosures of the financing terms at the time the provider offers an MCA to a merchant. These disclosures are similar to the disclosures required for “sales-based financing” providers under the other recent state laws and include:
- The total amount of the sales-based financing and the disbursement amount, if different from the financing amount, after any fees are deducted or withheld at disbursement
- The finance charge
- The total repayment amount, which is the disbursement amount plus the finance charge
- The estimated number of payments, which is the number of payments expected, based on the merchant’s projected sales volume, to equal the total repayment amount
- The payment amounts, based on the merchant’s projected sales volume, (i) for payment amounts that are fixed, the payment amounts, frequency, and method, or (ii) for payment amounts that are variable, a payment schedule or a description of the method used to calculate the amounts and frequency of payments and payment method
- A description of all other potential fees and charges not included in the finance charge, including draw fees, late payment fees, returned payment fees, and prepayment fees or penalties
- If the recipient elects to pay off or refinance the sales-based financing prior to full repayment: (i) an updated disclosure of the six up-front disclosures required above, as of the day of prepayment or refinancing; and (ii) a description of prepayment policies including whether the recipient will be required to pay any additional fees, penalties, or other amounts not already included in the finance charge, or if the recipient will receive any discount to the finance charge.
- A description of collateral requirements or security interests, if any
- A statement of whether the provider will pay compensation directly to a broker in connection with the specific offer of sales-based financing and the amount of compensation
Unlike the California and New York laws, the Virginia legislation does not require the disclosure of an annual percentage rate or “APR.” Because House Bill 1027 does not define many of the terms used in the disclosure requirements, including the “finance charge,” and does not give MCA providers any instruction on how to calculate the finance charge, projected sales volume, or payment schedule, regulators may need to issue guidance or regulations to implement the disclosure obligations. Regulators will likely need to act fast, as the disclosure obligations go into effect on July 1, 2022, and it is difficult to imagine how the law could be enforced without rules that provide necessary guidance to MCA providers. The law authorizes the Commission to promulgate regulations, but the short period between the law’s enactment and effective date may not be adequate for the Commission to conduct proper notice-and-comment rulemaking. It would not be surprising if MCA providers were granted a grace period extending beyond July 1, similar to the numerous delays in the effective date of the California and New York disclosure requirements resulting from the regulators’ need to finalize rules implementing the disclosure requirements.
Finally, the law imposes several dispute-resolution requirements. First, the law prohibits providers from using confession-of-judgment provisions. Second, the law also requires that any court action related to a sales-based financing agreement be brought in Virginia; forum-selection clauses requiring that court actions be brought outside 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 occur outside of the jurisdiction where the merchant’s principal place of business is located, and providers must pay all arbitration costs. Although the Virginia law declares violating provisions of a sales-based financing agreement unenforceable, providers may be able to argue that the Federal Arbitration Act preempts the state law’s regulation on arbitration clauses.
The Virginia law exempts financial institutions such as banks and credit unions. Merchant cash advances in an amount over $500,000 are also exempt. Finally, the law contains a de minimis exemption for a person that enters into no more than five “sales-based financing” transactions in any 12-month period.
