Blocking changes in the company’s strategic direction. Franchises that are approved on the SBA’s Franchise Directory; and 3. Thus, most portfolio companies will still be subject to the affiliate rules. First, it is important to note that affiliate analysis is fundamentally a qualitative “control” analysis. Rights to control the management or affairs of a company by contract (beyond those typically contained in a Venture Capital Operating Company (VCOC) management rights letter may give rise to affiliation; Control of other companies by senior management or a director may give rise to affiliation; Identity of interests between two businesses with relationship connections may give rise to affiliation, Dominance of management by a small number of investors may give rise to affiliation. This is evidenced by the language of the regulation: the key is whether one entity owns or has the power to control more than 50% of the applicant concern’s voting equity. Control Analysis is Fact Specific; Control of Day-to-Day Operations is Important. 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. April 4, 2020. With respect to the Paycheck Protection Program, the industry’s engagement removed obstacles such as owner guarantees. What About a Group of Affiliates Where Each Affiliate Operates in a Different Industry? 1 Implementing rules and regulations may clarify the extent of this exemption and whether it will apply to any business that receives any financial assistance from at least one investor that is an SBIC, or applies more narrowly to a company that solely has SBIC backing or solely to the SBIC itself. 4 4 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. A key feature of the CARES Act $2 trillion relief package is the creation of the … two or three investors with a close relationship that together hold more than 50% of voting equity. 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. two businesses with board overlap that have similar businesses and shared customers. 13 CFR 121.301 was most recently updated via an interim final rule entitled “Express Loan Programs; Affiliation … Thus, there is no bright line at which the SBA will stop looking up the chain of ownership. To explain the key relief for 501(c)(3)s and small businesses in the recently enacted $2 Trillion CARES Act (complete text), we published our CARES Act Alert #1 (Help for Small Businesses & 501(c)(3)s via the PPP); CARES Act Alert #2 (Get Ready to Apply); CARES Act Alert #3 (PPP vs EIDL), CARES Act Alert #4 (initial Guidance from Treasury), and CARES Act Alert #5 (SBA Issues Interim Final Rule). Industrials & Manufacturing 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. 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. Under the affiliation rules, business concerns and other entities or individuals are deemed to be affiliates of each other if (1) one business controls or has the power to control another or (2) a third … 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. This is a strong indication of affiliation, though the specific veto right matters. 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. A new system—including additional lenders, and new rules and guidance—is being created by the government for Paycheck Protection Program applications. The CARES Act relaxed these rules for certain businesses. Prior results do not guarantee a similar outcome. The rules do provide some direct guidance. All Rights Reserved. Coronavirus Resource Center Similarly, in evaluating control via a management agreement, the specific management rights matter. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. 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. However, it is important to remember that no one factor is dispositive. The CARES Act, moreover, did not repeal the existing exceptions to the affiliation rules, which are referenced at 13 C.F.R. Notes The CARES Act refers to 13 CFR 121.103 whenever it refers to affiliate rules. Engaging in any action that could result in a change in the amount or character of a company’s capital contributions. Of certain stock options, convertible securities, and C are affiliated, but that they each operate entirely. Which are referenced at 13 C.F.R misstatements may have criminal or civil.. Will continue to apply to independent sponsors and their portfolio companies provision in amount... `` accept '' you acknowledge receipt and agree to all of the CARES,... 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