According to SEC filings, Silicon Valley Bank has exclusivity agreements with certain of its customers that prevented them from using other financial institutions’ services.
The contracts ranged in wording and scope, making it hard for those clients to safely diversify where they kept their money. Six contracts for finance or credit solutions that businesses signed with SVB were examined by CNBC. All of them demanded that the businesses open or maintain bank accounts with SVB and rely entirely or primarily on the company for all of their banking needs.
These arrangements are especially troublesome now that SVB has been taken over by federal authorities following the bank run last week. Due to the fact that the Federal Deposit Insurance Corporation only covers up to $250,000 in deposits per client, SVB’s clientele, which is predominately comprised of tech startups, is concerned that millions of dollars in operational money could be held hostage for an indefinite amount of time.
Banking regulators came up with a plan on Sunday to backstop depositors with money at SVB in an effort to prevent a feared panic across the industry following the second-largest bank failure in American history.
SVB stipulated that Upstart Holdings maintain all of its “operational and other deposit accounts, the Cash Collateral Account, and securities/investment accounts” with SVB as part of a multi-million dollar financing deal.
The contract had certain provisions for accounts at other banks, but it had tight size restrictions.
“We haven’t had the exclusivity commitment for years, and more than 90% of our cash is stored among the top five US banks,” Upstart stated in a statement to CNBC.
DocuSign, a provider of cloud software, also had an exclusive agreement with SVB, according to papers, which called for the e-signature provider to maintain its “principal” depository, operating, and securities accounts with the bank. This stipulation was included in a senior secured credit facility between DocuSign and SVB that was signed in May 2015. Existing deposit accounts held at Wells Fargo were allowed to be kept by DocuSign.
Two years after DocuSign’s launch, Upstart held its IPO in 2020.
Sprout Social, which went public in 2019, received a multi-million dollar financing from SVB. The social media management software provider was required by the bank to keep all of its “principal operating and other deposit accounts, the Cash Collateral Account, and securities/investment accounts” with SVB.
Similar to Upstart, SVB imposed stringent restrictions on the value and type of accounts that Sprout might hold elsewhere.
SVB stipulated that Limelight Networks, which later changed its name to Edgio, hold all “operational accounts, depository accounts, and surplus funds with Bank and Bank’s Affiliates” in a separate loan and security agreement.
However, the contract said that Limelight may only make use of SVB’s business credit cards and made an exception for foreign bank accounts.
Since its founding 40 years ago, SVB has developed into the 16th largest bank by assets in the United States and a significant provider of venture debt, backing businesses in their early stages and offering the kind of liquidity that entrepreneurs couldn’t acquire from most regular banks.
A request for comment from SVB was not immediately answered.
Dexcom and SVB entered into a loan and security agreement, which required the maker of diabetes management devices to keep its bank accounts open and transfer whatever funds it had elsewhere within 90 days of the arrangement.
In accordance with the terms of the agreement with SVB, Dexcom was also required to open a lockbox and keep the “majority” of its securities accounts with the bank.
“Dexcom does not have material exposure to SVB, nor any exclusive connection, because the contract cited expired in 2016,” the business said in a statement to CNBC.
Furthermore in the health-tech sector, SVB had an exclusive agreement with Hyperion Therapeutics, a pharmaceutical company that Horizon Pharma purchased in 2015 for $1.1 billion.
Hyperion was only needed to bank with SVB, but it was not compelled to provide the company access to any accounts it used for “payroll, payroll taxes, and other employee wage and benefit payments.”
DocuSign, Sprout Social, Edgio, and Horizon representatives did not immediately reply to requests for comment.
