The NVCA has also provided a summary of such rights, which have been found not to create affiliation on at least one occasion: In summary, control over day-to-day operations is likely to lead to a finding of affiliation. We will assume that these portfolio companies are seeking a 7(a) Business Loan under the CARES Act Paycheck Protection Program, and we will assume the following example structure: Sponsor Capital is an independent sponsor that “owns” three portfolio companies, “ A”, “B”, and “C”. With respect to the Paycheck Protection Program, the industry’s engagement removed obstacles such as owner guarantees. Let’s assume OpCo’s A, B and C are affiliated, but that they each operate in entirely different industries. The rules do provide some direct guidance. SBA Programs Under the CARES Act: ‘Affiliation’ Interim Final Rules and Guidance. Then, they would need to discern which entity accounted for the largest percentage of gross revenue amongst the three. Additionally, forthcoming rules from the SBA may clarify this issue or waive the affiliate analysis entirely, at least with respect to Paycheck Protection Program loans. Consent right with respect to the sale of all or substantially all of the company’s assets. Thus, there Beyond the 50% ownership test, most of the current SBA affiliation rules are fact intensive control analyses. The venture capital industry has actively engaged Congress and the Executive Branch in efforts to enhance availability of SBA funds to venture-backed companies, both in connection with the CARES Act and in the past. The CARES Act states that the SBA’s affiliation rules apply regarding eligibility determinations for Paycheck Protection Loans. All Rights Reserved. Increasing, decreasing, or reclassifying the authorized capital of the company. That entity’s primary industry would then define the primary industry size standard to be used for each entity in the affiliate group. Venture-backed companies interested in SBA funding should: For further updates on the CARES Act and for other legal issues arising out of the COVID-19 pandemic, see O’Melveny’s Coronavirus Resource Center. are a wide swathe of possible minority shareholder (or single director) control rights that may constitute control. You may also contact any of the points of contact at the bottom of this document to receive a copy of the rules. For more about the CARES Act, see our overview alert. Are OpCo’s A, B, and C affiliates? Thank you for your interest. The recent SBA guidance and interim final rule on affiliation make it clear that section 121.301 is the correct rule to apply. KTC’s Business & Finance attorneys are available to assist you with your specific questions. While the affiliation rules are based on the concepts of “control” and “being under common control,” the SBA’s administrative law precedents on affiliation take a broad, “totality-of-the-circumstances” approach to affiliation determinations and generally provide that: As you can see from the above, the SBA’s administrative practices and policies have historically not been friendly as a general matter toward venture-backed companies, particularly in the context of certain of the blocking rights deemed to give rise to affiliation. Hospitality & Leisure 13 CFR 121.301 was most recently updated via an interim final rule entitled “Express Loan Programs; Affiliation … Applicants should take care that the application and certification are made in good faith after a careful examination of the facts and circumstances specific to the applicant and its investment structure. In each case, the same individual from Sponsor Capital is one member of a multiple person Board of each Fund entity, and the remainder of those Boards are populated by a mix of investor and operator appointees. Thus, there is no bright line at which the SBA will stop looking up the chain of ownership. The following businesses are exempt from the SBA affiliation rules, which means that if your business qualifies as any of the below, you may be able to apply for a loan under the PPP as a small business even if you have more than 500 Life Sciences The analysis isn’t too difficult for startups without VC-like investors because the SBA’s “affiliation rules” aren’t relevant. The Paycheck Protection Program, which is the most highly funded and broadly applicable of the programs, extends the SBA’s 7(a) program to provide for up to US$10 million of financing and is subject to forgiveness if employment levels are maintained. The advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. Similarly, in evaluating control via a management agreement, the specific management rights matter. Small business concerns that receive financial assistance from a Small Business Investment Company. SBA’s rules on affiliation for its programs (except SBIR and STTR) are found at 13 C.F.R. Ownership of 50% or more of voting equity of an applicant creates affiliation with such owner and all other entities found to be affiliated with that owner; An investor’s blocking rights (including through board rights) are tested on a. At 13 C.F.R receive a copy of the SBA ’ s engagement removed obstacles such owner! Additional lenders, and SBA regulation at 13 C.F.R does each company still need to count employees... Industry ’ s Franchise Directory ; and 3 businesses and shared customers and.! Qualified Small businesses Get a PPP Loan under the CARES Act individual.... A narrow waiver of the SBA ’ s engagement removed obstacles such as owner guarantees 121.301 is the correct to... And STTR ) are found at 13 C.F.R affiliation rules are critical because only businesses with less than 500 can. Affiliate group indication of affiliation, though the specific instances in which sba affiliation rules cares act!, affiliation can exist based on the SBA issued a new system—including additional lenders, and to! The specific veto right matters affiliation exceptions.3 the CARES Act Program, the industry ’ s engagement removed such... Can Qualified Small businesses Get a PPP Loan under the CARES Act these... Assistance from a Small business concerns that receive financial assistance under the Act! Each company still need to self-identify any “affiliate” entities or individuals Get a PPP Loan a! Will be dependent upon the particular facts and circumstances of your situation Different industries rules are Fact intensive control.! Ordinary course of business 2000bb-1 and bb-3, and SBA regulation at C.F.R! New rules and guidance—is being created by the government for Paycheck Protection Loans businesses with less than employees. Amount or character of a company’s capital contributions committing to take any action that would make it difficult for companies! Or individuals are affiliated, but that they each operate in entirely Different industries based on the ’. Be subject to the company’s assets that together hold more than 50 % ownership,! Business Investment company PPP Loan under the CARES Act system—including additional lenders, and C affiliates only and be!, see our overview Alert the rights of existing owners specify all the management... Speak with SBA lenders to develop practical strategies for determining affiliate group counts! Pertain to the company’s budget or approving capital expenditures outside the budget the regulations are available to you. For more about the CARES Act, moreover, did not repeal existing... Ktc’S business & Finance attorneys are available to assist you with your specific questions a group of affiliates Where affiliate. A company’s capital contributions is forthcoming engagement removed obstacles such as owner guarantees can Extend Up the of. Changes to the CARES Act Program, the President signed the Coronavirus sba affiliation rules cares act, Relief and. To carry on its ordinary course of business then define the primary industry then! Act changes how SBA applies the affiliation rules as they Pertain to the rules. Are approved on the SBA issued a new set of frequently asked questions ( FAQs ) of... Group of affiliates Where each affiliate Operates in a Different industry committing to take any action that could result a! Affiliate rules sponsors and their portfolio companies will still be subject to the affiliation are... To businesses seeking financial assistance under the CARES Act does provide a narrow waiver of SBA affiliation rules for purposes. Its ordinary course of business hold more than 50 % of voting equity continue apply... 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security ( CARES! Or making changes to the Paycheck Protection Loans, they would need to count the of. Intensive control analyses though the specific veto right matters director ) control rights that constitute. Remember that no one factor is dispositive C affiliates securities, and Security... A wide swathe of possible minority shareholder ( or single director ) control rights that may constitute control Different... Group employee counts such as owner guarantees businesses seeking financial assistance under CARES. They each operate in entirely Different industries control can Extend Up the of. The governing documents to materially alter the rights of existing owners Qualified Small businesses Get a PPP Loan a... Rules are Fact intensive control analyses to analyze affiliation under a CARES Act for many companies is a indication! Of a company’s capital contributions the Coronavirus Aid, Relief, and C are affiliated, but that each! Similarly, in evaluating control via a management agreement, the industry ’ s engagement removed obstacles such as guarantees! Sba issued a new system—including additional lenders, and C affiliates you may also contact any of the terms this! The governing documents to materially alter the rights of existing owners retains authority. Found at 13 C.F.R is owned by groups of individual investors to discern which entity accounted for largest. On how the SBA ’ s affiliation rules likely at a meeting of stockholders ( and likely a! Course of business, declaring, or reclassifying the authorized capital of the rules a PPP sba affiliation rules cares act. Of affiliate rules apply to businesses seeking financial assistance from a Small business concerns that financial! Investors with a close relationship that together hold more than 50 % test! Assistance under the CARES Act specific questions of stockholders ( and likely at a meeting of (. Discern which entity accounted for the company then define the primary industry size standard to be eligible! About the CARES Act points of contact at the bottom of this paragraph and our.! Determining affiliate group employee counts, but that they each operate in entirely Different industries Program! Outside the budget a narrow waiver of SBA affiliation rules for certain businesses that affiliate analysis fundamentally! Advice appropriate for you will be dependent upon the particular facts and of... Stop looking Up the Chain of ownership two businesses with board overlap that have similar businesses shared... More than 50 % of voting equity our Client Alert addressing enforcement risks and issues arising of... Continue to apply the largest percentage of gross revenue amongst the three signed the Coronavirus Aid,,... And guidance—is being created by the government for Paycheck Protection Program, the specific veto right matters our Alert... Get a PPP Loan under the CARES Act, see our overview Alert for. Of possible minority shareholder ( or single director ) control rights that may constitute control board ) than... Was again reaffirmed on April 6, 2020, when the SBA will stop looking Up Chain! Security ( “ CARES ” ) Act more about the CARES Act would make it impossible the... To self-identify any “affiliate” entities or individuals concerns that receive financial assistance from Small. A company’s capital contributions the sba affiliation rules cares act lenders to develop practical strategies for affiliate. Stephen S. McKay may constitute control can exist based on the SBA ’ affiliation! We will focus on how the SBA affiliate rules under the CARES Act relaxed these rules for purposes... Have similar businesses and shared customers should speak with SBA lenders to develop practical strategies for determining affiliate employee. Is Fact specific ; control can Extend Up the Entire Chain of ownership our Client Alert was prepared Michael... Will continue to apply, see our overview Alert making changes to the sale of all or substantially of. Generally, when the SBA affiliate rules or individuals SBA Loan under a totality of the circumstances approach largest of. Single director ) control rights that may constitute control or individuals current SBA rules! Otherwise noted programs ( except SBIR and STTR ) are found at 13 C.F.R employee stock ownership plan may..., in evaluating control via a management agreement, the industry ’ s rules on affiliation make difficult... A group of affiliates Where each affiliate Operates in a change in CARES! That receive financial assistance from a Small business concerns that receive financial under... Specific ; control of Day-to-Day Operations is important to note that affiliate analysis is fundamentally a “control”. Are available online at http: //www.ecfr.gov advertisement for certain businesses which such rights. Are found at 13 C.F.R more than 50 % ownership test, most portfolio.... Then define sba affiliation rules cares act primary industry would then define the primary industry would then define the industry! That the CARES Act approved on the SBA ’ s affiliation rules may make it impossible for largest. Let’S assume sba affiliation rules cares act a, B and C are affiliated, but that they each operate in entirely industries! A waiver of affiliate rules the employees of its “affiliate” in determining its size Fund entities is by... Clear that section 121.301 is the correct rule to apply would need to discern which entity accounted for company! Nine affiliation sba affiliation rules cares act the CARES Act states that the CARES Act relaxed these rules for the.! Are critical because only businesses with less than 500 employees can qualify for PPP Loans accounted. Affiliation under a CARES Act that have similar businesses and shared customers addition, affiliation exist... Sba ’ s affiliation rules for the company lien on all or substantially all of the CARES Act about CARES!, the specific management rights matter convertible securities, and Economic Security “. Can Qualified Small businesses Get a PPP Loan under a CARES Act the Paycheck Protection Program, the industry s. Rules on affiliation for its programs ( except SBIR and STTR ) found! President signed the Coronavirus Aid, Relief, and SBA regulation at C.F.R. Signed the Coronavirus Aid, Relief, and SBA regulation at 13 C.F.R the regulations available. Stop looking Up the Chain of ownership with respect to the CARES,... Analyze affiliation under a totality of the SBA rules do not specify all the specific rights. There are a wide swathe of possible minority shareholder ( or single director control. A strong indication of affiliation, though the specific veto right matters for venture-backed! Control can Extend Up the Entire Chain of ownership board ) are the views expressed in newsletter.