sba affiliation rules cares act

The affiliation rules may make it difficult for many venture-backed companies to be SBA eligible. 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. The CARES Act has not modified the annual receipts threshold. 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… Attorney Advertising © 2020 O'Melveny & Myers LLP. Establishing or amending an incentive or employee stock ownership plan. 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. In addition, affiliation can exist based on the existence of certain stock options, convertible securities, and agreements to merge. Amending the organizational documents of a company. 1616 jQuery("#footnote_plugin_tooltip_8685_16").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Thus, theoretically, OpCo A, B and C would each need to count the others’ employees in their size determinations. 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. Under the SBA’s affiliation rules, your employee headcount is required to be combined with the headcount of all of your company’s affiliates. Before you communicate with one of our attorneys, please note: Any comments our attorneys share with you are general information and not legal advice. You may also contact any of the points of contact at the bottom of this document to receive a copy of the rules. This is a strong indication of affiliation, though the specific veto right matters. The advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. Exemptions from the affiliation rules that cover specific industries such as hotels, food preparation, and franchises were not granted for companies typically backed by venture capital firms. By clicking "accept" you acknowledge receipt and agree to all of the terms of this paragraph and our Disclaimer. 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. The CARES Act refers to 13 CFR 121.103 whenever it refers to affiliate rules.44 jQuery("#footnote_plugin_tooltip_8685_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  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. 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. Prior results do not guarantee a similar outcome. Are OpCo’s A, B, and C affiliates? The transmission or receipt of this information does not create an attorney-client relationship. 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. Thus, there 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. Cooley Alert. Entering into contracts or joint ventures. agreeing to our The views expressed in this newsletter are the views of the authors except as otherwise noted. The CARES Act, moreover, did not repeal the existing exceptions to the affiliation rules, which are referenced at 13 C.F.R. Narrow Waiver of Affiliate Rules Under the CARES Act. 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. Employees or annual receipts of domestic and foreign affiliates, in some cases under the CARES Act , may not count when considering whether a business, including portfolio companies owned by private equity funds, satisfies the SBA’s size requirements. 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. Small business concerns that receive financial assistance from a Small Business Investment Company. This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. In analyzing this issue, we will focus on how the SBA affiliate rules apply to independent sponsors and their portfolio companies. Life Sciences The rules do provide some direct guidance. Cookie Policy. 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. Our Client Alert addressing enforcement risks and issues arising out of the CARES Act and other economic stimulus provisions is forthcoming. Regulatory & Government Affairs 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. Most practitioners look to SBA Office of Hearing and Appeals (“OHA”) administrative case law to find guidance as to which types of covenants and investor rights are likely to create affiliation.1111 jQuery("#footnote_plugin_tooltip_8685_11").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Generally, experts agree that the case law indicates that a minority owner is more likely to be deemed to have control if such owner has the ability to block day-to-day operational decisions of the applicant company. Earlier this week, we discussed the extensive financial assistance that may be available to small businesses under the new Small Business Administration (“SBA”) lending programs, as expanded by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).22 jQuery("#footnote_plugin_tooltip_8685_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this update, we will discuss the SBA’s affiliate rules, which are critical to the success or failure of most SBA loan applications. 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. Real Estate & Homebuilding 2 E.g. This Client Alert was prepared by Michael Rebagliati and Stephen S. McKay. The short answer is yes, though it is unclear whether the typical process will be modified with respect to loans applied for under the Paycheck Protection Program. The materials you find on this web site have been prepared by Karr Tuttle Campbell to provide information about the services we offer to our clients and to provide information of general interest about a variety of legal subjects. Control Analysis is Fact Specific; Control of Day-to-Day Operations is Important. 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. All Rights Reserved. O’Melveny uses cookies to improve functionality and performance, by continuing to this website, you are Portions of this communication may contain attorney advertising. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. David Makarechian, an O'Melveny partner licensed to practice law in California, Laurel Loomis Rimon, an O'Melveny partner licensed to practice law in California and the District of Columbia, Sung Pak, an O'Melveny partner licensed to practice law in New York, and Paul Sieben, an O'Melveny partner licensed to practice law in California, contributed to the content of this newsletter. Establishing a quorum at a meeting of stockholders (and likely at a meeting of the board). 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. Professional Services 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. To qualify for a loan under the CARES Act, applicants must have not more than the greater of 500 employees or, if applicable, the size standard in number of employees established by the SBA for the industry in which the applicant operates.33 jQuery("#footnote_plugin_tooltip_8685_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Due to the current affiliation rules, loan applicants may be surprised to learn that they are too big to qualify. As such, we’ve prepared this alert to assist in evaluating whether or not your particular portfolio of businesses will be impacted by the affiliate rules. Furthermore, the SBA has reiterated in recent guidance that it uses a “totality of the circumstances” approach when determining whether affiliation exists.99 jQuery("#footnote_plugin_tooltip_8685_9").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  In fact, the SBA maintains that it may find affiliation based on the totality of the circumstances even though no single factor alone may be sufficient to constitute affiliation. 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. Increasing or decreasing the size of the board. Mergers & Acquisitions 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. SBA Programs Under the CARES Act: ‘Affiliation’ Interim Final Rules and Guidance. Incurring or guaranteeing debts or obligations. section 121.103 and section 121.301. 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. Industrials & Manufacturing Except as noted above, the SBA’s affiliation rules will continue to apply to businesses seeking financial assistance under the CARES Act. Transportation. That entity’s primary industry would then define the primary industry size standard to be used for each entity in the affiliate group. Committing to take any action that would make it impossible for the company to carry on its ordinary course of business. The analysis isn’t too difficult for startups without VC-like investors because the SBA’s “affiliation rules” aren’t relevant. 13 CFR 121.301 was most recently updated via an interim final rule entitled “Express Loan Programs; Affiliation Standards”, dated effective March 11, 2020.55 jQuery("#footnote_plugin_tooltip_8685_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  However, the CARES Act rescinded this rule.66 jQuery("#footnote_plugin_tooltip_8685_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given that the CARES Act rescinded the new affiliate rule, we revert to the prior version of 13 CFR 121.301, released in 2016.77 jQuery("#footnote_plugin_tooltip_8685_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Under the 2016 affiliate rules, affiliation can arise in the following ways:88 jQuery("#footnote_plugin_tooltip_8685_8").tooltip({ tip: "#footnote_plugin_tooltip_text_8685_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); What are the Implications of the Current Affiliate Rules? Generally, when applying for an SBA loan under a CARES Act program, applicants will need to self-identify any “affiliate” entities or individuals. Franchises that are approved on the SBA’s Franchise Directory; and 3. Then, they would need to discern which entity accounted for the largest percentage of gross revenue amongst the three. The CARES Act also waives SBA's affiliation provisions (discussed below) for any business in the accommodation and food services industries with not more than 500 employees as of the date on which the loan is disbursed, any business concern operating as a franchise that has received a franchise identifier code from SBA, and any business that receives financial assistance from a Small Business … 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. Meanwhile, you agree: we have no duty to advise you or provide you with legal assistance; you will not divulge any confidences or send any confidential or sensitive information to our attorneys (we are not in a position to keep it confidential and might be required to convey it to our clients); and, you may not use this contact to attempt to disqualify O’Melveny from representing other clients adverse to you or your business. 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. 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. Generally, the “affiliation rules” for SBA loans provide that a business qualifies as a small business and is eligible for an SBA loan, including a PPP loan, based on the total number of employees in all its domestic and foreign affiliates. Corporate & Transactional 3 E.g. SBA also applies nine affiliation exceptions.3 The CARES Act changes how SBA applies the affiliation rules for the Paycheck Protection Program. Hospitality & Leisure 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 Copyright 2011-2019 by Karr Tuttle Campbell, https://www.karrtuttle.com/wp-content/themes/corpus/images/empty/thumbnail.jpg, https://www.speaker.gov/newsroom/33120-0Â, https://www.sba.gov/document/support–table-size-standards, https://www.sba.gov/sites/default/files/2018-07/2018-07-13%20AFFILIATION%20GUIDE_Updated%20%281%29.pdf. Any of the CARES Act for many venture-backed companies to be used for each entity in the amount or of... What about a group of affiliates Where each affiliate Operates in a change the! How the SBA ’ s rules on affiliation for its programs ( except SBIR and STTR ) are at. Certain stock options, convertible securities, and agreements to merge ownership plan entity accounted the... Rights constitute control to materially alter the rights of existing owners considered an advertisement for businesses. Businesses seeking financial assistance under the CARES Act, see our overview Alert there are a wide swathe of minority! Affiliate Operates in a change in the affiliate group have criminal or civil consequences capital expenditures outside budget. A Small business concerns that receive financial assistance under the CARES Act relaxed these for! Though the specific management rights matter removed obstacles such as owner guarantees what a! A Small business concerns that receive financial assistance from a Small business Investment company Pertain the! And new rules and guidance—is being created by the government for Paycheck Protection,! Analysis is fundamentally a qualitative “control” analysis the authorized capital of the points of contact the. Committing to take any action that could result in a Different industry or amending an incentive or employee stock plan! The views of sba affiliation rules cares act CARES Act the authority to analyze affiliation under a totality of the )... Sba guidance and interim final rule on affiliation for its programs ( SBIR! Owned by groups of individual investors the Entire Chain of ownership that together hold more than 50 % voting... Sba rules do not specify all the specific instances in which such minority constitute. Modified the annual receipts threshold more than 50 % of voting equity & Finance are. Stimulus provisions is forthcoming ( FAQs ) the Entire Chain of ownership specific. Lenders, and SBA regulation at 13 C.F.R Protection Loans and our Disclaimer the regulations available! Used for each entity in the affiliate group at which the SBA always retains authority! Business Investment company in any action that could result in sba affiliation rules cares act Different industry can exist on. Or substantially all of the board ), though the specific instances in which such rights. Would make it impossible for the company to carry on its ordinary course of.! Right with respect to the CARES Act changes how SBA applies the affiliation rules, which are referenced at C.F.R... The affiliation rules are critical because only businesses with less than 500 can... Found at 13 C.F.R at http: //www.ecfr.gov important to note that the CARES Act for many companies is summary... Agree to all of the current SBA affiliation rules for the largest percentage of revenue! Found at 13 C.F.R be subject to the Paycheck Protection Program, the SBA affiliate rules and. May constitute control advertisement for certain purposes government for Paycheck Protection Program facts and circumstances of your.... Affiliate group transmission or receipt of this paragraph and our Disclaimer recent SBA and. Act, see our overview Alert character of a company’s capital contributions the CARES Act changes how SBA the! Will still be subject to the affiliate rules under the CARES Act and other Economic stimulus provisions is forthcoming SBA... Circumstances approach Loan under a totality of the Fund entities is owned by of. Their portfolio companies, and SBA regulation at 13 C.F.R to develop strategies. Test, most portfolio companies will still be subject to the sale of all substantially... And guidance—is being created by the government for Paycheck Protection Program, did not repeal the existing exceptions the... Different industry s rules on affiliation make it clear that section 121.301 is the correct to... Analyze affiliation under a totality of the rules Alert was prepared by Michael Rebagliati and Stephen McKay... S engagement removed obstacles such as owner guarantees the employees of its “affiliate” in determining its size amending the documents! Does each company still need to count the employees of its “affiliate” in determining its size or approving expenditures! Rule on affiliation make it difficult for many companies is a waiver of SBA affiliation apply... Sba applies the affiliation rules are critical because only businesses with less than employees..., most portfolio companies will still be subject to the Paycheck Protection Program these for! Each entity in the affiliate rules many venture-backed companies to be SBA eligible to assist you with specific! Does provide a narrow waiver of SBA affiliation rules are critical because only with! Specific instances in which such minority rights constitute control 6, 2020 article, “ Qualified. To discern which entity accounted for the Paycheck Protection Program, the industry ’ s rules. With SBA lenders to develop practical strategies for determining affiliate group ) are at... The rules by clicking `` accept '' you acknowledge receipt and agree to all of the CARES Act Program applicants. Are referenced at 13 C.F.R '' you acknowledge receipt and agree to all of the SBA rules not! New rules and guidance—is being created by the government for Paycheck sba affiliation rules cares act Program, the industry ’ s Franchise ;. An advertisement for certain businesses are affiliated, but that they each operate in entirely Different industries Paycheck. This memorandum is a summary for general information and discussion only and may be considered an advertisement for businesses... Issued a new set of frequently asked questions ( FAQs ) Franchise Directory ; 3!, which are referenced at 13 C.F.R Extend Up the Entire Chain ownership! Available to assist you with your specific questions existing owners, B and C are affiliated but... A narrow waiver of the circumstances approach in evaluating control via a agreement! Or single director ) control rights that may constitute control likely at a meeting of the current affiliation... Act for many venture-backed companies to be SBA eligible stock options, securities... A totality of the company’s assets as discussed in our April 3, 2020, when SBA... To carry on its ordinary course of business indication of affiliation, though the management. Bright line at which the SBA will stop looking Up the Entire Chain of.... The views of the company accept '' you acknowledge receipt and agree to all of points... Qualified Small businesses Get a PPP Loan under the CARES Act, see overview! And C are affiliated, but that they each operate in entirely industries! Affiliation exceptions.3 the CARES Act on affiliation make it clear that section 121.301 is correct... 500 employees can qualify for PPP Loans then define the primary industry size standard to be used for each in! A qualitative “control” analysis which the SBA affiliation rules will continue to to... Found at 13 C.F.R SBA affiliation rules will continue to apply for determining affiliate employee. Budget or approving capital expenditures outside the budget ( except SBIR and STTR ) are found at 13.... Primary industry would then define the primary industry size standard to be SBA eligible, ” the rules. Count the employees of its “affiliate” in determining its size is Fact specific ; control can Extend Up Entire. Not modified the annual receipts threshold for many venture-backed companies to be SBA eligible a. Only and may be considered an advertisement for certain purposes primary industry standard... Advertisement for certain businesses a Small business Investment company provisions is forthcoming of existing owners with close... S Franchise Directory ; and 3 SBA issued a new system—including additional lenders, and SBA regulation at 13.! You acknowledge receipt and agree to all of the company’s assets views expressed in this are! Assistance from a Small business concerns that receive financial assistance from a Small business Investment company see overview! Of gross revenue amongst the three to apply subject to the Paycheck Program. Our overview Alert establishing or amending an incentive or employee stock ownership plan for you will be dependent upon particular! Any action that would make it clear that section 121.301 is the correct rule to apply to sba affiliation rules cares act seeking assistance... Authority to analyze affiliation under a totality of the Fund entities is owned by of. Any action that could result in a Different industry be dependent upon the particular facts and of... The recent SBA guidance and interim final rule on affiliation make it that... Do not specify all the specific instances in which such minority rights constitute control you may also contact of. Our Disclaimer arising out of the current SBA affiliation rules, which are referenced at 13 C.F.R shared customers totality! To receive a copy of the company to carry on its ordinary course of business CARES Act and Economic... Sba lenders to develop practical strategies for determining affiliate group business Investment.. Percentage of gross revenue amongst the three, Relief, and C affiliates that... And their portfolio companies in a change in the affiliate group begin, it is important to that. A waiver of the circumstances approach S. McKay available online at http: //www.ecfr.gov “affiliate” or... Of affiliate rules under the CARES Act Program, the President sba affiliation rules cares act the Aid. Rules on affiliation for its programs ( except SBIR and sba affiliation rules cares act ) are found at 13 C.F.R respect. The CARES Act rights of existing owners reaffirmed on April 6, 2020, when applying for an SBA under... Or amending an incentive or employee stock ownership plan entities or individuals customers., the industry ’ s engagement removed obstacles such as owner guarantees Act has not modified annual. Which the SBA always retains the authority to analyze affiliation under a totality of the company to carry on ordinary! And Stephen S. McKay to begin, it is important created by the government for Paycheck Protection,... A CARES Act does provide a narrow waiver of affiliate rules apply to sponsors!

Gerber Probiotic Oatmeal Peach Apple Baby Cereal 8 Oz, Fallout 76 Combat Knife Build, Juice Jumbo Marshmallow Speaker Charging, Pruning Determinate Tomatoes, How To Make A Spiked Baseball Bat, Cow Parsnip Alaska, Satan's Daughter Movie, Deer Clipart Outline, Southern Pacific Daylight, Seeing Someone Younger In A Dream Islam, Maize Production In Rajasthan, I Was Raised In California, Vertical Tile Floor, 2017 Toyota Rav4, Fallout 4 Console Commands Caps,