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sba affiliation rules cares act

KTC’s Business & Finance attorneys are available to assist you with your specific questions. The SBA always retains the authority to analyze affiliation under a totality of the circumstances approach. are a wide swathe of possible minority shareholder (or single director) control rights that may constitute control. The CARES Act, moreover, did not repeal the existing exceptions to the affiliation rules, which are referenced at 13 C.F.R. 2000bb-1 and bb-3, and SBA regulation at 13 C.F.R. Technology In addition, affiliation can exist based on the existence of certain stock options, convertible securities, and agreements to merge. A new system—including additional lenders, and new rules and guidance—is being created by the government for Paycheck Protection Program applications. Industrials & Manufacturing Small business concerns that receive financial assistance from a Small Business Investment Company. Does each company still need to count the employees of its “affiliate” in determining its size? A key provision in the CARES Act for many companies is a waiver of SBA affiliation rules. The recent SBA guidance and interim final rule on affiliation make it clear that section 121.301 is the correct rule to apply. Amending the governing documents to materially alter the rights of existing owners. For a VC-backed company, your VC investors could be considered affiliates, which would significantly impact your employee headcount for purposes of the CARES Act programs. This information must be provided for owners of all entities until the applicant identifies the ultimate owners who are natural persons.”1010 jQuery("#footnote_plugin_tooltip_8685_10").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, in our Sponsor Capital example, OpCo’s A, B and C are not saved from a finding of affiliation simply because Sponsor Capital owns less than 50% of each Fund Entity. Moreover, SBA Form 355, which the SBA has historically used to gather the relevant information for size determination for most of its programs states the following: “If the applicant is owned by one or more entities (i.e., not individuals), provide the name of all owners of the entities and their percentage of ownership. 113.3-1h, which provides: This information is not intended as legal advice or as a substitute for the particularized advice of your own counsel and should not be relied upon as such. This is a strong indication of affiliation, though the specific veto right matters. The National Venture Capital Association has published the following summary1212 jQuery("#footnote_plugin_tooltip_8685_12").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of current SBA OHA case law, which tends to show that a minority investor’s ability to do or block any of the following company actions (including via a director with a veto right), will create affiliation: By contrast, the SBA sometimes finds that minority investor rights that are tailored towards controlling extraordinary decisions do not create affiliation. Thank you for your interest. Corporate & Transactional However, the SBA’s affiliation rules, which aggregate what entities or individuals the SBA considers to be “affiliates” together for purposes of determining SBA eligibility based on size, remain applicable to the Paycheck Protection Program as well as other SBA programs. Our separate post outlines the Paycheck Protection Program (“PPP”), which is administered by the U.S. Small Business Administration (SBA), and is a distinct component of the Act. Blocking changes in the company’s strategic direction. The affiliation rules may make it difficult for many venture-backed companies to be SBA eligible. However, the SBA’s affiliation rules, which aggregate what entities or individuals the SBA considers to be “affiliates” together for purposes of determining SBA eligibility ba… Colleges & Universities Learn about the four tests for affiliation and how they apply to participants in the Paycheck Protection Program. April 4, 2020. As of publishing, there appears to be a concerted effort by industry and at least some elements of Congress to broaden the exemption of the application of the “affiliate rules” described below so that much of the analysis below would become moot. SBA Affiliation Rules for Calculating a Concern's Size SBA's affiliation rules confirm whether the annual receipts or number of employees of other entities need to be added to the applicant's numbers when determining size. Establishing or amending an incentive or employee stock ownership plan. To explain the key relief for 501(c)(3)s and small businesses in the recently enacted $2 Trillion CARES Act (complete text), we published our CARES Act Alert #1 (Help for Small Businesses & 501(c)(3)s via the PPP); CARES Act Alert #2 (Get Ready to Apply); CARES Act Alert #3 (PPP vs EIDL), CARES Act Alert #4 (initial Guidance from Treasury), and CARES Act Alert #5 (SBA Issues Interim Final Rule). Professional Services The regulations are available online at http://www.ecfr.gov. The CARES Act has not modified the annual receipts threshold. In analyzing this issue, we will focus on how the SBA affiliate rules apply to independent sponsors and their portfolio companies. 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. Then, they would need to discern which entity accounted for the largest percentage of gross revenue amongst the three. 13 CFR 121.301 was most recently updated via an interim final rule entitled “Express Loan Programs; Affiliation … Mergers & Acquisitions 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. Are OpCo’s A, B, and C affiliates? 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 To make a good faith self-certification, companies should undertake a careful analysis of the specifics of their investment structure, protective provisions, and venture financing documents, taking available information and precedent into account. This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. Disposing of the goodwill of the company. Sponsor Capital also has an equity stake in each fund entity, but in each case it individually owns less than 50% of each Fund entity. Effect of the Waiver of Affiliation Rules The CARES Act would allow certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable thresholds to qualify for a covered loan. Energy, Natural Resources & Utilities Coronavirus resource hub. § 121.301(9) and located a… Committing to take any action that would make it impossible for the company to carry on its ordinary course of business. agreeing to our The only affiliation exemption that may be available to some venture-backed companies provides that businesses that receive “financial assistance” from a Small Business Investment Company (SBIC) are exempt.1 While further engagement to obtain rules or guidance on affiliation as applied to venture-backed companies is ongoing, absent such rules or guidance, an understanding of the historical administrative policies and practices of the SBA remains crucial to the eligibility analysis. Of course, this analysis is clunky and not suited to the economic realities of companies like OpCo’s A, B and C. Nevertheless, this calculation difficulty illustrates the general point that SBA lending has not historically been well suited to independent sponsors with diversified (but controlled) portfolios. To provide further clarification, the SBA recently released a supplemental Interim Final Rule (“Rule”) addressing the application of SBA affiliation rules in the context of the PPP. All loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty, including the First Amendment to the Constitution, the Religious Freedom Restoration Act, 42 U.S.C. 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. Cooley Alert. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. As discussed in our April 3, 2020 article, “ Can Qualified Small Businesses Get a PPP Loan under the CARES Act? 4 4 This SBA regulation provides some general principles of affiliation but notes that for applicants in SBA’s Business Loan, Disaster Loan, and Surety Bond Guarantee Programs, the size standards and bases for affiliation are set forth in 13 CFR 121.301. Hiring and firing officers and executives. Entertainment & Media The CARES Act modifies the employee threshold, to indicate that the applicant (together with its affiliates, as determined under the SBA rules) must have no … It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. See O’Melveny’s March 26, 2020 Client Alert for a summary of the Paycheck Protection Program and other lending programs for US businesses. Sponsor Capital formed three special purpose funds to assemble the equity for each of the portfolio companies (“Fund A”, “Fund B”, and “Fund C”). Before you communicate with one of our attorneys, please note: Any comments our attorneys share with you are general information and not legal advice. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000. Each of the Fund entities is structured so that the investors have certain veto rights over the actions of the Fund entity and its respective operating company. Life Sciences The CARES Act modifies the employee threshold, to indicate that the applicant (together with its affiliates, as determined under the SBA rules) must have no more than the greater of: 500 employees, and the number of employees designated in the applicable NAICS code size standard. This was again reaffirmed on April 6, 2020, when the SBA issued a new set of frequently asked questions (FAQs). The CARES Act states that the SBA’s affiliation rules apply regarding eligibility determinations for Paycheck Protection Loans. Engaging in any action that could result in a change in the amount or character of a company’s capital contributions. No attorney-client relationship will exist between you or your business and O’Melveny or any of its attorneys unless conflicts have been cleared, our management has given its approval, and an engagement letter has been signed. Increasing, decreasing, or reclassifying the authorized capital of the company. Amending the organizational documents of a company. Historically, an applicant company has had to include all employees of domestic and foreign affiliates when calculating its size.1313 jQuery("#footnote_plugin_tooltip_8685_13").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Then, the company would look up the relevant SBA size standard for its primary industry to find out how many employees (or in some cases, what amount of gross receipts) it could have to be considered a small business.1414 jQuery("#footnote_plugin_tooltip_8685_14").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  A company’s primary industry was determined by reviewing the distribution of receipts, employees and costs of doing business among the different industries in which the company had operations for the most recently completed fiscal year.1515 jQuery("#footnote_plugin_tooltip_8685_15").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  With respect to affiliate groups that have businesses that operate in different industries, the term ‘primary industry’ has meant the work that accounts for the greatest percentage of the aggregated receipts of those affiliates. All Rights Reserved. Hospitality & Leisure While the application process is expected to be more streamlined than for traditional SBA 7(a) loans, applicants will, at a minimum, have to self-identify any ‘affiliates’ and make a certification as to eligibility. Under the SBA’s affiliation rules, your employee headcount is required to be combined with the headcount of all of your company’s affiliates. Similarly, in evaluating control via a management agreement, the specific management rights matter. Presumably, the analysis would be similar under the Paycheck Protection Program, except that if the affiliate group’s industry-specific size cap was less than 500 employees, the affiliate group could use the greater (slightly more favorable) 500-employee size cap instead. This is evidenced by the language of the regulation: the key is whether one entity owns or has the power to control more than 50% of the applicant concern’s voting equity. Portions of this communication may contain attorney advertising. 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. Increasing or decreasing the size of the board. 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. Monitor any new guidance or rulemaking from the SBA or Treasury; Monitor application and pre-application portals established by banks in coordination with the SBA; Carefully analyze their investment structures for eligibility under the affiliation rules; and. , the SBA ’ s Franchise Directory ; and 3 on its ordinary course of business intentional or misstatements. Points of contact at the bottom of this paragraph and our Disclaimer an advertisement certain! 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