Treasury Issues Additional Guidance on Affiliation Rules for Applicants of PPP Loans Under the CARES Act

The Treasury issued an additional Interim Final Rule on the evening of April 3, 2020 in connection with the Paycheck Protection Program (“PPP”) loans provided under the CARES Act.  This Interim Final Rule supplements the prior rule and CARES Act with additional guidance regarding the application of certain affiliate rules applicable to eligibility for the PPP loans. 

Below is a brief summary of the updates and clarifications.   We have put this together in the interest of time, but we continue to review this to confirm our initial reading is correct and to confirm no other material terms are noteworthy.

  • Affiliation Rules Generally.  In addition to the Interim Rule, the SBA issues guidance on how the affiliation rules are applicable to the PPP, which can be found here.
    • PPP Loan applicants are subject to the affiliation rule contained in 13 CFR 121.301, which provides that an applicant business concern must satisfy two criteria:
      • The size of the applicant alone (without affiliates) must not exceed the size standard designated for the industry in which the applicant is primarily engaged; and
      • The size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.
    • Businesses are 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 does not matter whether control is exercised, so long as the power to control exists.  Affiliation under any of the circumstances below is sufficient to establish affiliation for applicants for the PPP:
      • Affiliation based on ownership.  A business is an affiliate of an individual or other entity that owns or has the power to control more than 50% of that concern’s voting equity.  The SBA will deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.
      • Affiliation arising under stock options, convertible securities and agreements to merge.  The SBA considers stock options, convertible securities and agreement to merge to have a present effect on the power to control a concern and as though the rights granted have been exercised.
      • Affiliation based on management.  Affiliation arises where the CEO or President of the applicant concern also controls the management of one or more other concerns. Or where a single individual, concern or entity controls the management of the applicant concern through a management agreement.
      • Affiliation based on identity of interest.  Affiliation arises when there is an identity of interest between close relatives, with identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area).
    • In determining a business’s size, the SBA counts employees of the business whose size is at issue and all of its domestic and foreign affiliations, regardless of whether the affiliates are organized for profit.
  • Faith-Based Organizations Exemptions.  Otherwise qualified faith-based organizations are exempted from the SBA’s affiliation rules.   The Interim Rule finds that “as applied to these faith-based organizations, the affiliation rules would impose a substantial burden.  The affiliation rules would deny an important benefit (participation in a program for which they would otherwise be eligible under the CARES Act) because of the exercise of sincere religious belief (affiliation with other religious entities).”  The affiliation rules do not apply to the relationship of any church, convention or association of churches, or other faith-based organization or entity to any person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitute a part of the exercise of religion.

If you would like more information on loans under the CARES Act, please contact a member of our Corporate practice group at 585.232.6500 or 716.853.1616.

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