New $5 Billion Fund Backs Employee Ownership: Strict Rules for ESOP Buyouts

The American Ownership and Resilience Act creates a brand-new federal program designed to push money toward businesses that want to shift ownership to their workers. The core of this bill is the establishment of an “Ownership Investment Facility,” run by the Secretary of Commerce, which can issue up to $5 billion in loan guarantees (called “leverage”) every year to licensed investment companies (Sec. 3).

These licensed companies must use that government-backed money primarily for “covered investments,” which means providing capital to help an Employee Stock Ownership Plan (ESOP) or an eligible worker-owned cooperative buy a majority stake in a business (Sec. 2).

The Government’s New Guarantee: Who Pays If It Fails?

This is where the risk transfer happens. The bill authorizes the Secretary to guarantee the payment of principal and interest on the debt these investment companies issue (Sec. 7). This guarantee is backed by the “full faith and credit of the United States.” For the investment company, this is huge—it makes borrowing cheap and easy. For taxpayers, it means the federal government is taking on a $5 billion annual contingent liability (Sec. 3). If one of these ESOP-focused investment companies defaults, taxpayers pick up the tab.

To keep things running, licensed companies must have at least $10 million in private capital and face strict leverage limits, generally capped at 100% of their private capital, or $500 million (Sec. 6, Sec. 7).

ESOP Buyouts Get a Strict Rulebook

If you’re a business owner looking to sell to your employees via an ESOP, this bill adds several layers of mandatory oversight to the process, which is designed to protect employees from getting a bad deal. Before any deal closes, the ESOP must appoint an independent trustee who, in turn, must hire an independent financial advisor to issue a “fairness opinion.” This opinion must confirm that the price and terms of the deal are financially fair to the ESOP (Sec. 3). This is a massive win for governance, ensuring employee retirement funds aren't used to bail out a seller at an inflated price.

Furthermore, the bill strictly prohibits employees from personally financing the deal through pay cuts or rolling over their retirement funds (Sec. 3). This stops a common practice where employees are asked to sacrifice their current or future financial security just to make the sale happen.

The Power of the Secretary

This legislation hands the Secretary of Commerce significant power. Not only does the Secretary define many of the key terms and set the maximum interest rates these investment companies can charge (Sec. 8), but they also gain extensive enforcement authority. The Secretary can conduct mandatory examinations at least every two years, issue cease and desist orders, revoke licenses, and even ask a court to appoint them as a receiver to take over a failing licensed company (Sec. 13, Sec. 14, Sec. 15).

If you are a manager or officer at one of these licensed companies, be aware: the Secretary can unilaterally remove or suspend you if they believe you engaged in serious misconduct, dishonesty, or breach of fiduciary duty (Sec. 17). The law also makes it clear that if the company violates a rule, any person who ordered or participated in that violation is personally liable (Sec. 18).

Refinancing and Other Impacts

For existing lenders to a business, there’s a catch: before a licensed investment company provides capital, it can force the covered business to pay off all its existing loans. The goal is for the new investment company to be the sole lender holding evidence of debt (Sec. 8). If you are a bank or a private lender, this means your loan could be force-refinanced if your client decides to pursue an ESOP buyout under this program.

Finally, to avoid the appearance of a revolving door, the bill imposes a two-year ban on licensed companies hiring any former Department official who was involved in making decisions about granting assistance under this Act (Sec. 11). This is a clear attempt to prevent conflicts of interest and ensure that government service doesn't immediately translate into a high-paying job advising on the very regulations they just helped create.