Virginia Legislature Passes Nation’s First Registration Requirement for Sales-Based Financing

On March 22, 2022, the Virginia legislature passed HB 1027, which, if approved by the Virginia governor, would impose the nation’s first registration requirement for sales-based financing providers.  Virginia would join New York and California in creating state-based commercial financing disclosure requirements applicable to these types of providers.

What is “sales-based financing”?

Sales-based financing is a transaction repaid by the recipient to the provider as either:

• a percentage of sales or revenue that depends on the volume of the sales made or revenue received by the recipient, or

• by a fixed payment that provides for a “reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”

Who is a “provider”?

A “provider” refers to a person that specifically extends offers of sales-based financing to a recipient, ora person who solicits and presents others with offers of sales-based financing by use of an exclusive contract or arrangement with the provider.

However, the bill also provides exemptions for financial institutions, providers, and brokers, that conduct no more than five sales-based financing transactions during a 12-month period and for single transactions totaling more than $500,000.

Providers will be required to register with the State Corporation Commission by November 1, 2022. The registration process includes submission of an application requiring certain controlling persons of the provider to disclose “any judgment, memorandum of understanding, cease and desist order, or conviction” related to specified bad acts.

At registration, there will be a $1,000 fee assessed to providers.  There will be a $500 fee in each subsequent year assessed to providers.

What information must be disclosed?

The bill requires disclosure of the following items:

• The total amount and disbursement amount of the sales-based financing, after the exclusion of any fees that may have been deducted or withheld from the total;

• Charges assessed for financing;

• The total repayment amount—which amounts to the disbursement plus the financing charge;

• The estimated number of payments expected, based on the projected sales volume;

• The payment amounts, based on the projected sales volume;

• A description of any potential fees or charges not included in the “finance charge”;

• Specified prepayment information;

• A description of the collateral requirements and security interests; and

• A statement as to whether the provider will pay compensation directly to the related broker and the amount of compensation expected.

If approved by the governor, the bill will apply to contracts entered into on or after July 1, 2022. Covered entities should review these requirements and be prepared for the regulatory changes.