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April 9, 2020

SBA Affiliation Rules

For purposes of determining the number of employees of an applicant for a Paycheck Protection Program (PPP) loan, in most cases, the applicant must count the number of employees of not only the applicant but also of any affiliate of the applicant. Under 13 CFR § 121.301, concerns and entities are considered affiliates of each other when “one controls or has the power to control the other or a third party or parties controls or has the power to control both.” It doesn’t matter whether control is exercised as long as the power to control exists. The affiliation rules will apply to both business entities and to not-for-profits.

Under SBA rules, entities will generally be considered affiliates if there is:

  1. Affiliation based on ownership
  2. Affiliation arising under stock options, convertible securities, and agreements to merge
  3. Affiliation based on management
  4. Affiliation based on identity of interest

Affiliation based on ownership will exist if an individual, concern, or other entity owns or has the power to control 50 percent or more of a concern’s voting stock or a block of voting stock that is disproportionately large compared to other outstanding blocks. If no individual, concern, or entity is found to control, then the board of directors, president, or CEO will be deemed to be in control of the concern or entity.

In determining size, the SBA will consider stock options, convertible securities, and agreements to merge to have a present effect on the power to control a concern. However, if the agreements are still being negotiated, are merely agreements in principle, or are subject to conditions precedent, they’re not considered in determining the size of the applicant.

In regards to common management, affiliation arises where one or more officers, directors, managing members, or partners who control the board of directors or management of one concern also control the board of directors or management of one or more other concerns.

Affiliation based on identity of interest will be found to exist if individuals or firms have identical or substantially identical business or economic interests, such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships. An individual or firm may rebut that determination with evidence showing that the interests are in fact separate.

An entity generally meets the SBA size standards required to be eligible for a PPP loan if it, combined with its affiliates, meets one of the following:

  • Is a small business as defined in section 3 of the Small Business Act
  • Has 500 or fewer employees whose principal place of residence is in the United States or is a business that operates in a certain industry
  • Otherwise meets applicable SBA employee-based size standards for that industry
  • Is a tax-exempt not-for-profit described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, a tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business concern

Affiliation rules are waived in the following cases:

  1. Any business concern with no more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American industry classification system code beginning with 72
  2. Any business concern operating as a franchise that’s assigned a franchise identifier code by the SBA
  3. Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Samantha Podlas, associate, at spodlas@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.

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