Silicon Valley Bank Developments – Q&A for Startups and VCs
Q: Who runs SVB now?
A: SVB has been placed in receivership by banking regulators. This receivership applies to Silicon Valley Bank and not its affiliates. When a bank is in receivership, the regulators step in and take over bank operations. As a technical matter, the California Department of Financial Protection and Innovation (DFPI) announced it took possession of Silicon Valley Bank, citing inadequate liquidity and insolvency. The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of Silicon Valley Bank. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).
Q: We are unable to access our bank accounts at SVB. What can we do now?
A: According to the FDIC, all insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities are expected to resume no later than Monday, March 13, including on-line banking and other services, and Silicon Valley Bank’s official checks are expected to continue to clear. For more information, see this release from the FDIC: https://www.fdic.gov/news/press-releases/2023/pr23016.html
Q: Is it true that the FDIC limit is only $250,000?
A: Yes, the federally insured deposit limit is $250,000 per depositor, for each account ownership category. The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately insured bank. https://www.fdic.gov/resources/deposit-insurance/faq/
Q: Will the rest of our funds ever be available?
A: For any uninsured funds in excess of $250,000, the FDIC says it will pay an advance dividend within the next week (though it has not noted anything as to the amount of such dividend) and that you will receive a receivership certificate from the FDIC. Whether that certificate entitles you to receive any funds will depend on what assets, if any, the receiver determines to be available for distribution to depositors. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. See https://www.fdic.gov/news/press-releases/2023/pr23016.html
Q: If SVB is bailed out via acquisition by another bank, how likely is it that the account balances will be restored in full?
A: As SVB is now under FDIC receivership, it no longer operates as an independent bank. It will be up to the FDIC to decide on next steps, including future dividend payments.
Q: Our customers are remitting payments owed to us to accounts at SVB. What will happen when they attempt to remit payment going forward?
A: Once a collection account bank has failed and is taken over by the FDIC, we would expect future attempted payments by payors (e.g. accounts receivable) into the related collection accounts to be rejected by the failed bank. The payment recipient should quickly reach out to the payors to direct them to remit such payments to a different collection account at a different bank. The approach to the above will also potentially be limited by any agreement with a secured creditor (e.g. securitization or ABL lender) with respect to those payments or related new deposit accounts.
Q: Our startup has received venture debt from SVB. Do we still owe the venture debt to SVB?
A: Yes, generally speaking, in terms of obligations to SVB, outstanding venture debt would still be owed to SVB, but you may be unable to draw further funds at this time. We expect that the regulators will issue further guidance soon.
Q: In connection with the venture debt, our company issued warrants to SVB. What happens to those warrants? Are they valid? Do we need to update Carta?
A: From the perspective of the issuer of warrants, you should assume that those warrants remain valid and outstanding in accordance with their terms until further notice. There should be nothing to update on Carta at the moment. We expect that the regulators will issue further guidance soon.
Q: Our venture fund banks with SVB. We deployed our entire portfolio investment capital, but we held several millions in reserves for management fees and operations costs for the remaining life of the fund. What now? Are there special exceptions allowing us to get those funds?
A: Those funds are held in a deposit account subject to the same deposit rules that are applicable to other depositors, and in that regard only the $250,000 federal insurance limit applies. The rest is uninsured.
Q: Are fund managers personally liable to LPs for deposit losses?
A: Generally speaking, so long as the fund and the fund manager/GP operate under a conventional structure that has limited partnerships and limited liability companies, the individual managers should not typically be personally liable, but to be sure, you should consult with counsel to discuss and review the fund documents in connection with any individual assessment you might undertake.
Q: Do LPs have statutory redemption rights for the venture fund deposit losses?
A: Delaware law generally does not provide for automatic redemption rights in this case, but you should consult with counsel to discuss and review the fund documents in connection with any individual assessment you might undertake.
