COVID-19: SBA Clarifies Affiliation Rules for Paycheck Protection Program
On Thursday, April 2, 2020, the U.S. Small Business Administration (SBA) issued its Interim Final Rule to the Paycheck Protection Program (PPP). The final rules provide, in part, that entities eligible to apply for PPP loans will be subject to the SBA’s existing rules on entity affiliation. This left many entities with affiliate relationships (most notably private equity firms and venture capital firms) concerned and unclear on whether they would be excluded from qualifying for PPP loans. On Friday, April 3, 2020, the SBA issued a supplemental Interim Final Rule and a supporting guidance document to provide clarity on how the affiliation rules will apply to businesses generally, and how the affiliation rules will apply to faith-based organizations.
The new guidance maintains that, in most cases, borrowers will be considered together with their affiliates for purposes of determining eligibility for PPP loans. This will include small businesses not defined in the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, nonprofit organizations, and veterans organizations. However, there are a number of exemptions and waivers (see below).
According to 13 CFR 121.301(f), an affiliation occurs when one entity controls or has the power to control another entity, or when a third party controls both entities. It is important to note that control does not have to be exercised; merely the power to control will suffice for purposes of determining affiliation.
The new guidance makes clear that control, and therefore affiliation, will exist under any of the following four circumstances:
- Ownership: When an entity owns or has the power to control more than 50% of the other entity’s voting equity. A minority shareholder may also be in control if it has the power to prevent a quorum or block action by the board of directors or shareholders.
- Stock options, convertible securities, and agreements to merge: When stock options, convertible securities, and agreements to merge (including agreements in principle) affect one entity’s control over another entity.
- Management: When a CEO or president of one entity also controls the management of another entity; when a single individual that controls the board of directors or management of one entity also controls the board of directors or management of another entity; or when an entity controls the management of another entity through a management agreement.
- Identity of interest: When close relatives have identical or almost identical business or economic interests.
EXEMPTIONS & WAIVERS
The new guidance confirms that the affiliation rules are waived for the following entities:
- Businesses with fewer than 500 employees that have a North American Industry Classification System (NAICS) code 72 designation (hospitality and food service businesses)
- Franchises assigned a franchise identifier code by the SBA
- Businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act
In addition, faith-based organizations are exempted from the affiliation rules, if the relationship is based on a religious teaching or belief, or otherwise constitutes a part of the exercise of religion.
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