On April 7, 2020, the Small Business Association (SBA) issued additional guidance to the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress on March 27, 2020. The CARES Act offers relief for businesses experiencing economic hardship during the COVID-19 pandemic.
The April 7, 2020 guidance focused on key terms of the Paycheck Protection Program (PPP), but did not go far enough to address concerns harbored by VC- and PE-backed companies.
CHANGE TO PPP APPLICATION
No requirement of certifications by 20 percent or more owners. A previous version of the PPP application required owners of 20 percent or more ownership in a business to certify certain statements were true. The new application has removed this requirement. The current version requires statements to be certified by an authorized representative of the business applying for the PPP (the “Applicant”) loan. Additionally, Applicants are still required to certify to certain questions regarding owners of 20 percent or more ownership.
Businesses backed by venture capital and private equity funds hoped for additional guidance from the SBA which would have relaxed certain “affiliation rules” that, thus far, had precluded businesses from applying for the PPP. The April 10th guidance did not accomplish this goal, but the SBA has reserved the right to publish additional guidance as circumstances change.
Applicants will be considered together with its “affiliates” to determine eligibility for the PPP loan.
Determining Affiliation. Affiliation occurs in the following circumstances: (1) an investor holding more than 50 percent of the voting stock or less than 50 percent of the voting stock retains the power to “control” more than 50 percent of the Applicant’s voting equity; (2) affiliation based on rights which are granted but not yet exercise; (3) affiliation based on management; and (4) affiliation based on identity of interest.
- Minority investors are in control if they have the ability to prevent a quorum or otherwise block action by the board of directors or shareholders.
- Rights Treated as if Exercised:
- Stock options, convertible securities and agreements to merge are treated as though the rights granted have been exercised.
- Note: Options, convertible securities, and agreements that are subject to conditions precedent which are incapable of fulfillment, speculative, conjectural or unenforceable under state or Federal law, or where the probability of the transaction occurring is shown to be extremely remote, are not given present effect.
- Note: Agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date are not considered agreements in principle and are therefore excluded
- Management will create affiliation:
- If the CEO or President or other officers, managing members, or partners who control the management of the Applicant also controls the management of one or more other businesses.
- If a single individual or entity controls the board of directors or management of one concern also controls the board of directors or management of one or more other concerns.
- If a single individual or entity controls the management of the Applicant through a management agreement.
- Identity of Interest
- A close relative, as defined in 13 CFR 120.10, with identical or substantially identical business or economic interests (i.e., same or similar industry in the same geographic area).
Waiver of Affiliation. The affiliation rules are waived for:
- Businesses assigned a North American Industry Classification System code beginning with 72 with less than 500 employees as of the date of the loan disbursement;
- Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA;
- Any business concern that received financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.
Religious Organizations. Faith-based organizations with a relationship to another organization is not considered an affiliation if the relationship is based on a religious teaching, belief or otherwise constitutes a part of the exercise of religion. If a faith-based organization specifies a relationship that may be an affiliation in connection with the PPP application and the relationship fall within exemption, the faith-based organization may include on an addendum that it is entitled to the exemption.