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Could the SBA’s PPP Affiliation Rules Prevent Your Participation?

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SBA’s Affiliation Rules

The SBA has released affiliation rules for the Paycheck Protection Program (click for a copy)

These rules must be applied when determining whether the number of employees for a company allows it to qualify for the PPP loan. In other words, the applicant may be considered in light of the additional employees of its affiliates. Affiliation may be considered based on (1) ownership, (2) securities and merger (and acquisition) activites, (3) management and (4) identities of interest. 

If another entity is deemed an affiliate, the additional employees of that company will be added to the applicant of the PPP loan. Whether a company is an affiliate of another company, in the eyes of the SBA, is considerably broader than in the corporate law context. Affiliation refers to controlling or having the power to control an entity. It also refers to the scenario where a third party controls or has the power to control multiple entities. For instance, unlike the traditional corporate context, even minority shareholders may have such power, and accordingly the multiple companies allegedly controlled by this minority shareholder would have their employees added for the sake of loan approval.

To be specific, an owner member of a firm or an owner of the majority of shares or interest units is considered to have control. But so is a minority member (or owner of shares/interests) considered to have control if they can either: (1) prevent the minimum number of shares voted or members required to conduct corporate business (i.e., authority to prevent a quorum), or (2) or otherwise block the actions of either the company’s board or shareholders in its daily actions.

Examples of such day-to-day actions that could be blocked would likely include (1) hiring, firing, compensation, distribution, dividend payment, and stock options decisions concerning officers, executives and employees; (2) enforcing or defending legal actions, or entering into agreements such as leases and purchase orders; (3) purchasing equipment, selling assets or encumbering assets with debt; (4) rendering strategic decisions regarding the direction of the business.

Private equity and venture capital must be particularly careful. In PE and VC firms, some measure of “control,” at least the way the SBA defines it, is quite prevalent. One example is some measure of control afforded to owners of preferred shares. The employees of portfolio deemed controlled would become employees of the applicant for the sake of the PPP loan.

The SBA also considers affiliation to arise between close relatives having substantially identical business or economic interests. An example is where close relatives operate concerns in the same or similar industry in the same geographic area. This is a rebuttable presumption, as the individuals may prove that their interests are actually separate.

Religious Exemption

 SBA specifies that the relationship of a faith-based organization to another organization is not to be deemed an affiliation where the relationship is based on the exercise of religion or involves religious teachings.

Waiver from Affiliation

Congress wanted in particular to help small businesses working in the foodservice and hospitality industries. For that reason, for companies having North American Industry Classification System (NAICS) codes beginning with ‘72,’ and having multiple locations, they would still qualify so long as there are no more than 500 employees in any location(s).
The waiver is also extended to businesses operating as a franchise, and identified as such to the SBA.

Lastly, the waiver is also extended to businesses receiving financial assistance from entities licensed under the Small Business Investment Act of 1958.

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