Chapter 10. Equity Participation Investment Program
Regulation .01 Purpose.LinkCopy Citation
These regulations prescribe the policies, procedures, and authorizations for providing financing to economically or socially disadvantaged persons owning franchised businesses, acquiring existing businesses, or owning technology-based businesses.
Regulation .02 Objective.LinkCopy Citation
The basic objective of the Program is to provide financial assistance in the form of “equity investments”, including loans, or guaranties to qualifying socially or economically disadvantaged persons who wish to begin or develop franchised businesses or acquire existing businesses or technology-based businesses in the State.
Regulation .03 Definitions.LinkCopy Citation
A.
In this chapter, the following terms have the meanings indicated.
B.
Terms Defined.
(1)
“Act” means Economic Development Article, Title 5, Subtitle 5, inclusive, Annotated Code of Maryland, as amended.
(2)
“Applicant” means an enterprise that applies for equity participation financing.
(3)
"Authority" means the Maryland Small Business Development Financing Authority.
(4)
“Controlling interest” means at least 51 percent of the voting interests of the existing business.
(5)
“Department” means the Department of Commerce, a principal department of the State.
(6)
“Enterprise” means a business entity, including a sole proprietorship, a partnership, a limited partnership, a corporation, a limited liability company, or a joint venture proposing to carry on a business within the State and meeting the requirements of Regulation .04 of this chapter.
(7)
“Equity participation financing” means any financial assistance provided under the Program including investment in a qualified security of an enterprise or guaranty of investment in a qualified security of an enterprise.
(8)
“Existing business” means a business whose board of directors or owners approve the sale of the business to an enterprise receiving equity participation financing.
(9)
“Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a)
A franchise or distributorship is created granting the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor or a distributor;
(b)
The operation of the franchisee's and distributee's business pursuant to a plan or system is substantially associated with the franchisor's or distributor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or distributor or their affiliate; and
(c)
The franchisee is required to pay, directly or indirectly, a franchise fee in excess of $100.
(10)
“Franchisee” means a person to whom a franchise is granted.
(11)
“Franchisor” means a person who grants a franchise.
(12)
“Guaranty” means a guaranty of an investment in a qualified security made under the Program.
(13)
“Loan” means a loan made or guaranteed under the Program.
(14)
“Major owner” means a person or persons who, in the aggregate, owns or own at least 50 percent of the ownership interests in a franchise enterprise or at least 35 percent of the ownership interests in an enterprise acquiring an existing business or a technology-based business.
(15)
“Net worth” means the dollar amount determined by subtracting the total liabilities of the enterprise or its principals from the total assets of the enterprise or its principals, excluding any valuation for goodwill.
(16)
“Person” means an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, or unincorporated organization.
(17)
“Program” means the Equity Participation Investment Program in the Maryland Small Business Development Financing Authority, as authorized by the Act.
(18)
“Qualified security” means any:
(a)
Note, bond, debenture, or other evidence of indebtedness;
(b)
Stock or other form of equity participation;
(c)
Certificate of interest or participation in a profit sharing agreement;
(d)
Investment contract;
(e)
Certificate of deposit for a security;
(f)
Certificate of interest of participation in a patent or patent application or in royalty or other payments under a patent or patent application; or
(g)
Interest or instrument commonly known as a “security” or any certificate for, receipt for, guarantee of, or option, warrant, or right to subscribe to or purchase any qualified security.
(19)
“Secretary” means the Secretary of Commerce.
(20)
“Technology-based business” means a commercial or industrial enterprise engaged in the application of scientific knowledge to practical purposes in a particular field for a profit.
Regulation .04 Eligible Applicants.LinkCopy Citation
A.
The Authority shall be satisfied that the following requirements to qualify for equity participation financing have been met by applicants who are sole proprietors (and by the owners of at least 70 percent of enterprises that are not sole proprietorships):
(1)
The applicant is of good moral character;
(2)
As determined from creditors, employers, and other individuals who have personal knowledge of the applicant, the applicant has a reputation for financial responsibility;
(3)
The applicant shall be a resident of Maryland or the applicant's principal place of business shall be in Maryland;
(4)
The applicant is unable to obtain adequate business financing on reasonable terms through normal lending channels because the applicant:
(a)
Belongs to a group that historically has been deprived of access to normal economic or financial resources because of race, color, creed, sex, religion, or national origin;
(b)
Has an identifiable physical handicap that severely limits the ability of the applicant to obtain financial assistance, but does not limit the ability of the applicant to perform the activity for which the applicant would be receiving financial assistance;
(c)
Has any other social or economic impediment that is beyond the personal control of the applicant, such as lack of formal education or financial capacity or geographical or regional economic distress but that does not limit the ability of the applicant to perform the activity for which the applicant would be receiving financial assistance; or
(d)
Does not meet the established credit criteria of at least one financial institution;
(5)
The applicant or owners of the applicant who qualify as socially or economically disadvantaged under §A(4) of this regulation shall actually control as well as own at least 70 percent of the enterprise.
B.
Establishing Eligibility.
(1)
The applicant's owner may establish the economic impediment of lack of formal education under §A(4)(c) of this regulation by demonstrating that the applicant's owner has not achieved the type or level of academic or vocational training that in the Authority's determination is typical of business owners in the industry in which the applicant is operating.
(2)
The applicant or owners of the applicant may establish the economic impediment of lack of financial capacity under §A(4)(c) of this regulation by demonstrating that the applicant or owners of the applicant do not have the collateral, working capital, positive credit history, or financial experience, training, or expertise that in the Authority's determination is typical of businesses that are able to obtain financing through normal channels.
(3)
The applicant may establish the economic impediment of regional economic distress under §A(4)(c) of this regulation by demonstrating that the applicant is located or operates in areas defined as economically distressed by the State or federal government, or a local government, including:
(a)
Designated Neighborhoods, as designated by the Department of Housing and Community Development pursuant to Housing and Community Development Article, §6-305, Annotated Code of Maryland;
(b)
Enterprise Zones, as designated by the Secretary pursuant to Economic Development Article, §5-704, Annotated Code of Maryland; and
(c)
Empowerment Zones, as designated by the federal government pursuant to 26 U.S.C. §1391.
(4)
To qualify as economically disadvantaged under §A(4)(c) of this regulation, each applicant or owner shall have a net worth of $500,000 or less. Net worth is calculated deducting any interest in the business receiving financial assistance from the Authority, and any equity in real estate, including the applicant's or owner's primary personal residence, that is being used for collateral for the financial assistance from the Authority.
C.
Applicants shall also meet the following requirements to qualify for financial assistance:
(1)
Be in good standing and qualified to do business in Maryland;
(2)
Have the legal capacity and all necessary legal authorization to incur the obligations of the equity participation financing;
(3)
Demonstrate creditworthiness and repayment capability acceptable to the Authority;
(4)
Demonstrate sufficient experience and the capacity to manage the enterprise; and
(5)
If the applicant is requesting a guaranty of a loan, the applicant shall have applied for and been denied a loan in the same amount and on similar terms by a financial institution.
D.
In addition to meeting the requirements of §§A and B of this regulation at the time of application by the enterprise to the Authority to obtain financing to acquire an existing business, the following minimum qualifications shall be met:
(1)
The enterprise or its principals shall have a minimum net worth of $75,000 pledged to the Authority as security;
(2)
The enterprise or its principals shall have exhibited at least 3 years of successful experience with demonstrated achievements and management responsibilities;
(3)
The enterprise does not own a controlling interest in the existing business, but, after the acquisition, will own a controlling interest;
(4)
The existing business shall have been in existence for at least 5 years;
(5)
The existing business shall have been profitable for at least 2 of the previous 3 years;
(6)
The existing business shall have sufficient cash flow to service the debt and ensure an adequate return on the Authority's investment;
(7)
The existing business shall have the capacity for growth and job creation;
(8)
The existing business shall have its principal place of business in Maryland; and
(9)
The existing business shall have a strong customer base.
Regulation .05 Eligible Franchisors.LinkCopy Citation
To be eligible for equity participation financing involving a franchise, an applicant shall obtain or plan to obtain a franchise from a franchisor meeting the following requirements:
A.
The franchisor's trademarks, patents, and service marks shall be registered;
B.
The franchisor shall:
(1)
Have complied with State and federal disclosure and registration laws pertaining to franchising,
(2)
Be able to explain, to the Authority's satisfaction, all suits and other legal actions pending against it,
(3)
Have the financial resources to support a franchise system,
(4)
Be creditworthy by commercial banking standards,
(5)
Have been in business for a period of time which demonstrates its capacity to survive successfully in the marketplace,
(6)
Have at least one company-owned outlet to function as a prototype store and training facility,
(7)
Have existing franchised outlets that have operated successfully in the marketplace;
C.
Royalties required by the franchisor should not exceed 10 percent of the franchisee's gross sales.
Regulation .06 Eligible Uses.LinkCopy Citation
The proceeds of the equity participation financing may be used for the purposes approved by the Authority, which may include, but are not limited to, working capital, acquisition of inventory, equipment, or real property, construction, renovation, or leasehold improvements.
Regulation .07 Equity Participation Financing Terms and Requirements.LinkCopy Citation
A.
Equity participation financings shall meet the requirements in §§B—U of this regulation.
B.
The Authority may not own securities representing more than:
(1)
45 percent of the voting stock of the franchisee or own an interest greater than 45 percent in any enterprise engaged in franchising; or
(2)
25 percent of the voting stock of any enterprise acquiring an existing business or own an interest greater than 25 percent in any enterprise acquiring an existing business.
C.
The amount of the Authority's equity participation financing for any franchise enterprise may not exceed:
(1)
$100,000; and
(2)
45 percent of the total initial investment in the enterprise.
D.
The amount of the Authority's equity participation financing for any enterprise acquiring an existing business may not exceed:
(1)
$500,000; and
(2)
25 percent of the total investment in the enterprise acquiring an existing business.
D-1.
The amount of the Authority's equity participation financing may not exceed $500,000 for a technology-based business.
E.
Authority's Investment.
(1)
The Authority shall find that there is a reasonable probability that the Authority will recover its initial investment and an adequate return on investment.
(2)
The Authority's investment shall be recoverable within:
(a)
7 years of the equity participation financing involving a franchise;
(b)
7 years of the equity participation financing involving an acquisition of an existing business; or
(c)
10 years of the equity participation financing involving a technology-based business.
F.
The Authority's recovery shall be the greater of the current value of the percentage of the equity investment in the enterprise or the amount of the initial investment in the enterprise.
G.
The value of the enterprise at the time of the recovery shall be determined after obtaining at least one independent appraisal of the value from an appraiser selected from a list of at least three appraisers supplied by the Authority.
H.
The applicant shall either provide the enterprise with an equity injection in cash, assets, or collateral or demonstrate substantial technical or managerial expertise within the business or trade for which the financing is sought.
I.
An enterprise involved in franchising shall have its principal location within Maryland and carry on its franchise business primarily in Maryland.
J.
The existing business to be acquired shall have its principal place of business in Maryland.
J-1.
A technology-based business applying for equity participation financing shall have its principal place of business in Maryland.
K.
The applicant's business plan shall:
(1)
Show a thorough understanding of franchising, of the existing business, or of the technology-based business;
(2)
Demonstrate an understanding of the unique features of the products or services to be provided; and
(3)
Have a fully developed marketing strategy.
L.
The applicant's business plan shall show that the Authority can liquidate its initial investment within 7 years for a franchise or an acquisition of an existing business, or 10 years for a technology-based business.
L-1.
The applicant's business plan shall show that the Authority can meet its minimum required return within 5 to 10 years.
M.
An individual applicant or a major owner of the applicant shall be involved in the enterprise on a full-time basis.
N.
The equity participation financing agreement shall be secured by the security required by the Authority, which may include but is not limited to the personal guaranties of the owners of the enterprise, liens on personal and real property of the enterprise, its owners, or the personal guarantors, and assignment of the franchise agreement.
O.
To obtain equity participation financing for the acquisition of an existing business, an enterprise or its owners shall have the capacity to contribute cash from their own capital in an amount equal to at least 5 percent of the equity participation financing amount toward the acquisition of the existing business.
P.
Late Charges. Late charges, as permitted by law, may be imposed.
Q.
Change of Applicant Eligibility. If at any time the applicant ceases to satisfy the requirements of Regulation .04 of this chapter, the Authority, in accordance with the terms of the financing documents between the Authority and the applicant, may accelerate the payment of the entire amount due under the equity participation financing.
R.
Change of Ownership. If at any time during the term of the equity participation financing the enterprise sells, ceases to own, assigns, transfers, or otherwise disposes of, all or any part of the franchised, existing, or technology-based business, the Authority, in accordance with the terms of the financing documents between the Authority and the enterprise, may accelerate the payment of the entire amount due under the equity participation financing.
S.
Title Insurance. The applicant may be required to provide an American Land Title Association Loan Policy, as amended, issued by a title insurance company acceptable to the Authority for an amount equal to the amount of the equity participation financing, insuring the Authority, evidencing that title to the property on which the enterprise is located on the date of closing is vested in the enterprise, or that title to the property, if any, offered as collateral for the equity participation financing is vested in the enterprise, the owner or owners of the enterprise, or the offerers of the property. The title insurance policy:
(1)
Shall contain only standard exceptions and encumbrances approved by the Authority;
(2)
Shall be accompanied by a survey, certified in the manner required by the Authority and the title company issuing the title insurance, showing that there are no easements or encroachments upon or other matters pertaining to the property, except those acceptable to the Authority;
(3)
May not contain any survey exceptions.
T.
Insurance. Before providing equity participation financing, the Authority may require the applicant or the applicant's owners and key managers to obtain and assign to the Authority life insurance in the amount of the equity participation financing. The Authority may also require casualty, hazard, liability, vehicle, workers' compensation, and business interruption insurance as well as any other insurance it deems necessary.
U.
Appraisals. The Authority may require appraisals by qualified appraisers showing the value of property that is offered as collateral.
Regulation .08 Application and Processing Procedures.LinkCopy Citation
A.
Equity Participation Financing Application. Equity participation financing applications shall be made upon standard forms prescribed by the Authority. Each application shall contain a business plan including the following documentation:
(1)
A description of the enterprise and the franchisor, existing business, or technology-based business and their management, product, and market;
(2)
A statement of the amount, immediacy of need, and projected use of the capital required;
(3)
A statement of the potential economic impact of the purchase of qualified securities;
(4)
A copy of the most recent Maryland offering circular of the franchisor;
(5)
Information that relates to the satisfaction of the applicant's requirements of Regulation .04 of this chapter;
(6)
A copy of the articles of incorporation filed with the state of incorporation, bylaws, partnership agreement, or other organizational documents, and most recent financial statements of the applicant;
(7)
A copy of the lease or deed to the property, or the contract or option to purchase the property;
(8)
Photographs of the site and any existing buildings; and
(9)
Other information the Authority requires.
B.
Processing of Application. To make an initial determination of the eligibility of the applicant and the franchisor in accordance with these regulations, the Authority's staff shall perform an initial review of each application and may also perform a preliminary audit investigation of the enterprise's books and records.
C.
Final Processing. Before approval of the equity participation financing, the applicant shall provide the following documentation for review and approval by the Authority:
(1)
Evidence of zoning compliance; and
(2)
If a loan guaranty is requested, a copy of a lender's commitment letter to provide financing which, at a minimum, shall state the amount, rate, and terms of the financing.
D.
Equity Participation Financing Approval. Approval of equity participation financing shall be evidenced by a resolution and commitment letter from the Authority to the applicant. The Authority is not obligated to take further action on equity participation financing after issuance of a commitment letter until an applicant executes and returns the commitment letter to the Authority.
E.
Equity Participation Financing Documents. The Authority, or, in the case of a guaranty, the lender, shall provide the enterprise with copies of relevant standard form equity participation financing documents which may include:
(1)
An investment agreement, loan agreement, limited partnership agreement, preferred stock purchase agreement, or other investment document;
(2)
A deed of trust or indemnity deed of trust;
(3)
A security agreement;
(4)
Financing statements;
(5)
A guaranty agreement;
(6)
A personal guaranty agreement;
(7)
A franchisor's cooperation agreement;
(8)
A landlord's waiver;
(9)
Subordination agreements; and
(10)
Other documents the Authority may require.
F.
Taxes. Taxes and assessments against the enterprise or any collateral which are due and payable shall be paid at or before closing.
G.
Fees.
(1)
A franchise applicant shall pay a $50 preapplication fee and a $100 application fee.
(2)
An applicant acquiring an existing business and an applicant acquiring a technology-based business shall pay a $250 preapplication fee and a $250 application fee.
(3)
The applicant may also be required to reimburse the Authority for expense incurred in making the equity participation financing and for filing fees, credit reports, appraisals, and other expenses.
Regulation .09 Nondiscrimination.LinkCopy Citation
Applicants may not discriminate against any person on the basis of race, color, religion, national origin, sex, marital status, physical or mental handicap, or age in any aspect of the Program. Each applicant shall comply with all applicable federal, State, and local laws and Departmental policies and programs regarding discrimination and equal opportunity in employment, housing, and credit practices including Title VII of the Civil Rights Act of 1964, the provisions of the Governor's Code of Fair Employment Practices, as amended, and the Department's Minority Business Enterprise Program, as amended.
Regulation .10 Program Administration.LinkCopy Citation
A.
Any action or decision required or permitted to be taken or made by the Authority pursuant to the Act or these regulations may be taken by the Authority, the Secretary or the Secretary's designee, or, to the extent set forth in the Act or properly delegated by the Authority or the Secretary, the Executive Director of the Authority.
B.
The Secretary may delegate to the Executive Director of the Authority or to any other official or employee of the Department the authority to review and execute any equity participation financing documents.
Regulation .11 False Statements.LinkCopy Citation
A.
A person may not knowingly make or cause any false statement or report to be made:
(1)
In any application or in any document furnished to the Authority;
(2)
For the purpose of influencing the action of the Authority on an application for financial assistance or for the purpose of influencing any action of the Authority affecting financial assistance whether or not the assistance may have been already extended.
B.
A person and that person's aiders and abettors who violate or attempt to violate any provision of §A of this regulation are guilty of a misdemeanor and on conviction are subject to:
(1)
A fine not exceeding $50,000, or imprisonment not exceeding 5 years, or both; and
(2)
Immediate acceleration of the equity participation financing.
Regulation .12 Waiver.LinkCopy Citation
The Authority may waive or vary particular provisions of these regulations to the extent that the waiver is not inconsistent with the Act if:
A.
Conformance to the requirements of any federal, State, or local programs in connection with an equity participation financing necessitates waiver or variance of a regulation; or
B.
In the determination of the Authority, the application of a regulation in a specific case or in an emergency situation would be inequitable or contrary to the purposes of the Act.
Regulation .13 Severability.LinkCopy Citation
The provisions of these regulations are severable. A judgment by any court of competent jurisdiction finding or declaring that any provisions of these regulations or the application of any provision to any person or circumstance is invalid does not affect the validity of the remaining provisions of the regulations or any other application of these regulations, and the remaining regulations shall have full force and effect as if no judgment had been entered.
Regulation .14 Drug-Free and Alcohol-Free Workplace.LinkCopy Citation
The applicant shall comply, and remain in compliance, with the State's policy concerning drug-free and alcohol-free workplaces, as set forth in COMAR 01.01.1989.18, and shall make a good-faith effort to eliminate illegal drug use and alcohol and drug abuse from places at which work is performed in accordance with equity participation financing.
Chapter annotations
Authority: Economic Development Article, §2-108 and Title 5, Subtitle 5, Annotated Code of Maryland
History: Effective date: April 3, 1989 (16:6 Md. R. 730)
History: Regulation .01 amended effective April 16, 1990 (17:7 Md. R. 853); December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .02 amended effective April 16, 1990 (17:7 Md. R. 853); August 3, 1992 (19:15 Md. R. 1394); December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .03B amended effective April 16, 1990 (17:7 Md. R. 853); December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .04 amended effective February 18, 2002 (29:3 Md. R. 223)
History: Regulation .04A amended effective December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .04C adopted effective April 16, 1990 (17:7 Md. R. 853)
History: Regulation .05 amended effective April 16, 1990 (17:7 Md. R. 853)
History: Regulation .07 amended effective April 16, 1990 (17:7 Md. R. 853); August 3, 1992 (19:15 Md. R. 1394); December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .08A and G amended effective April 16, 1990 (17:7 Md. R. 853); December 7, 1992 (19:24 Md. R. 2128)
History: Regulation .09 amended effective April 15, 1991 (18:7 Md. R. 775)
History: Regulation .14 adopted effective April 15, 1991 (18:7 Md. R. 775)