New SBA rules on outside capital?

July 30, 2025

by a searcher from University of Richmond in Valparaiso, FL, USA

In the past SBA rules prohibited private capital participating in a material way alongside a searcher. Has the regulatory update changed that status in any meaningful way? Backstory: we have a handful of searchers we are partnering with and a few of them are interested in increasing their ownership in deals we collaborate on.

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Reply by a searcher
from University of Virginia in New York, NY, USA

Pragmatically speaking, the new changes didn't change much if you're referring to equity capital from external investors. They still need to own <20% to avoid the PG, and any payments to them can't take priority to the SBA (or it's guaranty). Most deals are structured as participating preferred + 1x liquidation pref. While that means investors get their initial invested capital back, it can't/shouldn't take seniority to any debt payments. And plus, those distributions are typically at the discretion of the Searcher to pay out... though, they’re generally incentivized to do so given there’s a preferred return attached to the outstanding balance (that typically accrues). My understanding is that the changes were trying to root out bad behavior, like side agreements, onerous put options, etc.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would be happy to discuss the equity changes. You can reach me here or directly at redacted

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