The Paycheck Protection Program (“PPP”) officially launched April 3, 2020. In the application for a PPP loan, applicants are required to disclose if the applicant or any owner of the applicant is an owner of any other business, or has common management with, any other business and if so, for the applicant to list such businesses and the relationships. This question relates to eligibility to receive a PPP loan as only businesses with 500 or fewer employees qualify (unless the applicant falls in one of the exceptions as provided in our previous posts).

In most cases, an applicant will be considered together with its affiliates for purposes of determining eligibility for a PPP loan. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management and identity of interest.

As promised in the Interim Final Rule, the SBA has issued guidance to applicants of the affiliation rule applicable to the PPP. Below is a summary of the SBA’s affiliation guidance:

• Affiliation based on ownership. A concern is an affiliate of an individual or entity that owns or has the power to control more than 50% of the concern’s voting equity. If no individual, concern, or entity is found to control, the SBA will deem the Board of Directors or other officers, managing members, or partners who control the management of the concern to be in control of the concern.
• Affiliation arising under stock options, convertible securities, and agreements to merge. In determining size, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised. If these rights have been granted and they confer the power to control, affiliation exists.
• Affiliation based on management. Affiliation arises (1) where the CEO or President of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns; (2) where a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one or more other concerns; or (3) 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 (a spouse; a parent; or a child or sibling, or the spouse of any such person) 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).

Exceptions to the affiliation rules: (1) A business concern with fewer than 500 employees that is assigned a NAICS code beginning with 72; (2) a franchise; and (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.