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Last Friday, the SBA issued an Interim Final Rule and additional guidance on the SBA’s affiliation rules. The additional guidance clarifies that a majority of the affiliation rules typically applicable to business borrowers are also applicable in the context of the SBA’s Paycheck Protection Program (“PPP”). For a copy of the guidance, please click here.
The SBA’s guidance makes clear that its affiliation rules will serve to aggregate business borrower companies and their “affiliates” for purposes of determining eligibility under the size tests applicable under the PPP. Notably, the key measure in the affiliation tests, including those reiterated in the SBA’s most recent rule and guidance, is control. The affiliation tests make clear that “affiliates” will be interpreted broadly, and that affiliation may be deemed based on:
- Ownership (particularly where an individual, concern or entity owns or has the power to control more than 50% of the concern’s voting equity), and including, in some cases, minority ownership,
- Ownership or control through potentially unexercised (but exercisable) options, convertible securities and, in some cases, merger agreements,
- Shared management among entities (such as if a CEO, President, officer, managing member, partner or entity in control of an applicant’s management also controls the management of another), including through board control of multiple entities and/or control through a management agreement, and
- Identity of interests when “close relatives” (defined in 13 CFR 120.10) share an identity of interest based on identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area).
The SBA’s April 3rd guidance and Interim Final Rule also created an additional affiliation waiver for faith-based organizations and reiterated that the existing affiliation waivers set forth under the CARES Act still apply (i.e., the affiliation rules are waived for (i) any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a NAICS code beginning in 72, (ii) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA, and (iii) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681) (i.e., a Small Business Investment Company)).
Although the SBA and Treasury are continuing to provide further guidance on the CARES Act and PPP program, the guidance on the affiliation rules makes clear that a number of private equity, family offices and the like may be precluded from utilizing the PPP program for their portfolio companies and interests. This question had remained outstanding pending the SBA’s most recent guidance, but the SBA has since clarified that it will take a more typically stringent look at affiliation when determining size guides for eligibility.
Jeffer Mangels Butler & Mitchell LLP is a full-service law firm committed to providing clients with outstanding results. Our corporate lawyers serve numerous middle-market companies, large publicly traded corporations and emerging entrepreneurial businesses with a full range of financing, transactional and operational counsel, as well as in all aspects of mergers and acquisitions.