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SBA Releases Affiliation Rules for the Paycheck Protection Program


The Small Business Administration (SBA) has released additional guidance as it relates to the affiliation rules applicable to its Paycheck Protection Program (PPP). The affiliation rules should be applied and considered when testing for eligibility amongst owners, as well as disclosure in the application. For purposes of the PPP, four tests for affiliation based on control apply to participants in the program. The criteria are based on ownership, other equity-like interests, management and identity of interest. Please note the waiver at the end of the article as it relates to faith-based organizations. We discuss this affiliation as well as other FAQs for religious organizations in another article

For purposes of determining the number of employees of an applicant to the PPP, the applicant is considered together with its affiliates. Following is a summary of the applicable affiliation tests.

Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. Affiliation under any of the circumstances described below is sufficient to establish affiliation for applicants to the PPP.

  1. Affiliation based on ownership. For determining affiliation based on equity ownership, a concern is an affiliate of an individual, concern or entity that owns or has the power to control more than 50 percent 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 President or Chief Executive Officer (CEO) (or other officers, managing members, or partners who control the management of the concern) to be in control of the concern. The SBA will deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern’s charter, bylaws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.
  2. Affiliation arising under stock options, convertible securities, and agreements to merge.
    1. In determining size, the 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. The SBA treats such options, convertible securities and agreements as though the rights granted have been exercised.
    2. 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 thus not given present effect.
    3. 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 (or exercise of the rights) occurring is shown to be extremely remote, are not given present effect.
    4. An individual, concern or other entity that controls one or more other concerns cannot use options, convertible securities or agreements to appear to terminate such control before actually doing so. The SBA will not give present effect to individuals’, concerns’, or other entities’ ability to divest all or part of their ownership interest in order to avoid a finding of affiliation.
  3.  Affiliation based on management. Affiliation arises 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. Affiliation also arises 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. Affiliation also arises where a single individual, concern or entity controls the management of the applicant concern through a management agreement.
  4. Affiliation based on the identity of interest. Affiliation arises when there is an identity of interest between close relatives, as defined in 13 CFR 120.10, 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). Where SBA determines that interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are, in fact, separate.

Religious Exemption. The relationship of a faith-based organization to another organization is not considered an affiliation with the other organization if the relationship is based on religious teaching or belief or otherwise constitutes a part of the exercise of religion.

Waiver. The affiliation rules described above are waived for:

  1. Any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System (NAICS) code beginning with 72
  2. Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA
  3. Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 USC 681)



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