Sba Joint Venture Application Procedures: Fill & Download for Free

U.S. Small Business Administration Affiliation Rules and Their Application to the Payroll Protection ProgramTuesday, April 7, 2020On April 2, 2020, the U.S. Small Business Administration (SBA) published an interim final rule, commercial loan Program Temporary Changes; Paycheck Protection Program (the Initial Rule), providing guidance and clarification on the implementation of the “Paycheck Protection Program” (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). On April 3, 2020, the SBA published an interim final rule, commercial loan Program Temporary Changes; Paycheck Protection Program (the SBA Rule), to supplement the Initial Rule with additional guidance regarding the appliance of certain affiliate rules applicable to the PPP. On April 4, 2020, the SBA’s Office of General Counsel issued a proper memo titled “Size Eligibility and Affiliation Under the CARES Act” in response to questions the SBA has received regarding the affiliation rules applicable to the CARES Act, with attention on the PPP. the knowledge below provides an summary of the affiliation rules applicable to the SBA’s PPP.OverviewThe CARES Act, enacted on March 27, 2020, offers businesses access to liquidity through a replacement SBA loan program, the PPP. The PPP provisions of the CARES Act appropriate $349 billion for SBA-approved lenders to supply loans through the prevailing Section 7(a) Loan structure, and implements procedures to increase loan eligibility to an expanded group of companies . For more information on the PPP, see our Primer and FAQ on the Paycheck Protection Program.The PPP provisions of the CARES Act provide that, additionally to Small Business Concerns (Small Business Concerns) [1], any business (Business Concern), nonprofit organization, veterans organization, or Native American Tribal Organization are going to be eligible for a PPP loan if the topic business has 500 or fewer employees whose principal place of residence is within the us or may be a business that operates during a certain industry and meets applicable SBA employee-based size standards for that industry.Affiliation Rules GenerallyWhen calculating the entire number of employees of an applicant business for purposes of the PPP provisions of the CARES Act, an applicant business must include the amount of employees of every of its affiliates unless (i) the applicant business employs less than 500 employees and has an NAICS code beginning with 72 (Accommodation and Food Services), (ii) the business may be a franchise that has been assigned a franchise identifier code by the SBA, or (iii) the business receives financial assistance from a corporation licensed under the terms of the tiny Business Investment Act of 1958. [3]Because the CARES Act provides only limited exemptions from the SBA’s affiliation rules, a business which seeks a loan under the provisions of the PPP must determine if and the way the SBA’s existing affiliation rules apply thereto so as to work out its eligibility for such a loan. This determination of how the SBA’s existing affiliation rules apply is of serious importance to non-public equity and risk capital funds during which seemingly unrelated portfolio companies could potentially be classified as “affiliates” and end in an aggregation of the amount of employees across businesses within the risk capital or private equity portfolio.What Constitutes an Affiliate?The SBA considers an entity to be an affiliate of a business when one controls or has the facility to regulate the opposite , or a 3rd party controls or has the facility to regulate both. It doesn't matter whether control is really exercised; the mere existence of control is sufficient to make an affiliate relationship under the SBA affiliate rules.What Constitutes Control?Control, for purposes of determining affiliation under SBA regulations, could also be affirmative or negative. Affirmative control is usually found in situations during which a business is owned or managed by another person or entity. Negative control could also be found in situations during which , for instance , a minority shareholder has the proper , either under a Business Concern’s organizational documents or other contract, to stop a quorum or otherwise block action by the Business Concern’s board of directors or management.Affiliation supported OwnershipOwnership of, or the facility to regulate or direct, quite one-half (50%) of a Business Concern’s voting equity constitutes control for purposes of applying the SBA’s affiliation rules, and such an owner are going to be considered an affiliate of the business . Affiliation, for purposes of counting the workers of a business , would then reach the other business under common ownership with the topic business . If no single individual or entity owns or has the facility to regulate quite one-half (50%) of a Business Concern’s voting equity, the SBA will deem its board of directors, President or Chief military officer or other officers, managing members, or partners who direct and manage the business , to regulate the business .Where a personal equity or risk capital fund owns but a majority of the voting equity of a business , particular attention must be paid to the affirmative and negative control rights in any organizational and equity ownership documents (such as shareholders agreements) of the portfolio company to work out whether the minority position constitutes control and, consequently, creates further affiliation among other portfolio companies.SBA case law (as decided by the SBA Office of Hearings and Appeals (OHA)) has held that minority owners may have veto rights to guard their investment without creating affiliation as long because the veto rights don't create control over day-to-day business operations. SBA’s OHA has previously issued guidance with samples of rights that make control over day-to-day business operations (and create affiliation relationships) et al. that are only considered extraordinary (and which don't create affiliation relationships). the subsequent non-exhaustive list contains samples of minority control which do and don't create affiliation relationships:Control of Day-to-Day Business Operations (Affiliation):Making, declaring, or paying distributions or dividends aside from tax distributions.Establishing a quorum at a gathering of stockholders (and likely, by extension, at a gathering of the board).Approving or making changes to the company’s budget or approving capital expenditures outside the budget.Determining employee compensation.Hiring and firing officers and executives.Blocking changes within the company’s strategic direction.Establishing or amending an incentive or employee stock ownership plan.Incurring or guaranteeing debts or obligations.Initiating or defending a lawsuit.Entering into contracts or joint ventures.Amending or terminating leases.Extraordinary Minority Control Rights (No Affiliation):Selling all or substantially all of the company’s assets.Placing an encumbrance on all or substantially all of the company’s assets.Engaging in any action that would end in a change within the amount or character of a company’s capital contributions.Changing the company’s line of business.Engaging during a merger transaction.Issuing additional stock/equity.Amending the organizational documents of a corporation .Filing for bankruptcy.Amending the governing documents.Dissolving the corporate .Increasing, decreasing, or re-classifying the authorized capital of the corporate .Increasing or decreasing the dimensions of the board.Entering into a confession of judgment.Disposing of the goodwill of the corporate .Committing to require any action that might make it impossible for the corporate to hold on its ordinary course of business.Private equity and risk capital funds with minority investments in businesses that wish to use for a PPP loan would wish to review all relevant investment and governance documents concerning their investments so as to guage whether control rights vested within the private equity or risk capital fund will constitute control of the day-to-day operations of the topic business. If a minority owner has control over day-to-day business operations, the topic company and any minority owners might want to think about amending any documents or agreements which create such control, in order that no single minority owner are going to be deemed to possess a minority right constituting control over the topic company. it's important to notice , however, that any modifications would wish to be in effect at the time the topic company applies for a PPP loan and, in any event, will still got to pass muster under the totality of the circumstances.Affiliation Arising Under Stock Options, Convertible Securities and Agreements to MergeStock options, convertible securities (including convertible promissory notes) and agreements to merge (including letters of intent) are generally included as “present interests” for purposes of determining stock ownership. this suggests that the SBA will deem interests that haven't yet been exercised, or which haven't vested pursuant to convertible securities, including warrants and options, to be fully vested as of the date that affiliation is being determined, which the SBA will assess control supported stock ownership on an as-converted, as-diluted basis.Affiliation supported ManagementAffiliation are going to be found where the CEO or President of an applicant business (or other officers, managing members, or partners who control the management of the concern) also control the board of directors or management of another concern. [4]Affiliation supported Identity of InterestThe SBA may deem a business and another entity or person to be affiliates in situations during which the 2 have substantially identical business or economic interests. relations , persons or entities with common investments, and economically dependent entities could also be considered affiliates under this idea . Where identical or substantially identical identities of interest exist, the SBA may aggregate the individual interests together , absent evidence showing that the interests are actually separate.ConclusionAny borrower seeking a PPP loan, including portfolio companies of personal equity or risk capital funds, will got to review their investment and governance documents to determine whether the SBA might find an affiliate relationship and thus require an aggregation of employees across all portfolio companies. If an affiliate relationship exists, there could also be a chance to renegotiate investment and governance documents with a view toward eliminating the affiliate relationship. this could be done before submitting an application for the PPP.