The Recent Release of Affiliate Rules related to the Paycheck Protection Loan Program

The clarification we’ve all been waiting for was provided by the SBA on April 2, 2020 and yes, this includes the much-anticipated affiliate rules. The SBA Section 7(a) loans under the Paycheck Protection Loan Program (PPP) are intended to assist small businesses by offering borrowed funds to pay wages and benefits, mortgage interest, interest on other debt before February 15, 2020, as well as rent and utility payments for the eight weeks following funding.

As a PE firm, you may be wondering if you qualify for the PPP, given your number of employees across your investment footprint. Businesses that qualify for the PPP loan include any business concern, not-for-profit organization, veteran organization, or Tribal business concern, with no more than 500 employees whose principal place of residence is in the U.S. – or those in a specified industry that meet the SBA employee-based size standards. For many businesses this stipulation is clear, for PE firms, not so much. PE firms with employees across portfolio companies and funds may run into trouble calculating their eligibility. Here are few answers to your burning questions on eligibility.

Does My PE Firm Qualify?

The SBA’s affiliation rules apply in determining the number of employees at the impacted business. 13 CFR 121.301 outlines the following tests to determine affiliation. A major point of confusion has been that the PPP affiliation rules are outlined in 13 CFR 121.301 and not 13 CFR 121.103 (which are general guidelines for SBA 7(a) loans).

  1. Affiliation based on ownership – generally met by owning >50% of a company’s voting equity. It can also be met by occupying executive or board positions or allowing certain shareholders preferential rights.
  2. Affiliation under stock options, convertible securities, and agreements to merge – stock options and instruments with convertible ownership provisions are treated as though exercised and can result in the security holder having perceived control of a company.
  3. Affiliation based on management – Executive overlap between companies can cause affiliation, as can overlap by individuals/entities that control the board across companies.
  4. Affiliation based on identity of interest – companies controlled by spouses, children, siblings, or parents that operate similar businesses in similar geography can cause affiliation.

Long story short, the application of these rules will generally require employees at the fund and other portfolio companies to be included in the total employee count.

This may result in portfolio companies of mature, established funds to be ineligible under the Program, while the portfolio companies of newer funds, smaller funds, funds focusing on minority investments, and/or placing certain debt instruments may qualify.

It wouldn’t be a government regulation without a few exceptions. Affiliation rules are waived for businesses in the restaurant and hospitality industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program.

Businesses in certain industries can have more than 500 employees (including affiliated entities) and still be eligible for the PPP loans. Note, any increased employee count provisions are still evaluated against the affiliated group.

Next Steps for Private Equity Firms

Regulators are currently working on liquidity resources for companies that exceed the SBA small business concern levels. We expect more clarity on eligibility and application within the next one to two weeks. As with most regulations, patience is required. Our experts are monitoring the available loan programs so you don’t have to (at least, not to the level of detail our experts will). We’re eager to assist with any questions you have and encourage you to reach out. Head over to our COVID-19 Resource Center to view available resources and guidance as we navigate the current situation together.


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