The Coronavirus Aid, Relief and Economic Security Act authorizes $349 billion in forgivable Section 7(a) Small Business Administration (“SBA”) loans under the “Paycheck Protection Program”, to be issued by qualified SBA lenders, as described further in our client alert. The SBA attribution rules aggregate employees or revenue of multiple business entities for purposes of determining eligibility for SBA loans. In general, affiliates are part of the same control group, and a number of different companies may be aggregated based on common control; for example, private equity or VC-backed companies are typically ineligible for SBA loans because of the attribution rules. The attribution rules have very specific standards to find affiliation, but the SBA also reserves the right to judge affiliation by the “totality of the circumstances” on a case-by-case basis; therefore, it is important to consider all the facts for each entity. A borrower may contest these findings as within 13 CFR § 121.1103.

STANDARDS FOR WHICH AFFILIATION MAY EXIST FOR A SECTION 7(A) LOAN UNDER 13 CFR § 121.103; 121.301(F):

• Majority Ownership – Control exists by ownership of more than 50% of the voting equity.
  • Convertible notes, options, warrants, etc. are generally deemed exercised.
• Minority Ownership – Control is defined in the negative, through the right to “block action” by the board of directors or shareholders due to rights in articles of incorporation or agreements among shareholders.
  • VC and PE investors are generally considered affiliates under this test.

• Management –
  • A CEO or president serves in the same capacity for multiple companies.
  • A single individual or entity controls the board of directors of multiple entities.
  • Control may exist through a management agreement.
• Substantially Identical Business or Economic Interests –
  • Close relatives, if the relatives have substantially identical business interests (e.g. same or similar industry in same geographic area)
  • Common investments, with shared resources, equipment, locations, employees, or financial support
  • Economic dependence, in which a concern derives more than 85% of receipts over prior 3 years from another concern, with exceptions
• Newly Organized Concern – Concern is in business for less than two years and is an affiliate of another entity if the newly organized concern was formed by the officers, directors, 20% owners, or other managers of a prior concern with direct monetary benefits flowing from the new concern to the original concern.

EXCEPTIONS TO AFFILIATION COVERAGE:

• Concern has received investment from an investment company licensed under the Small Business Investment Act
• Business concerns owned by Indian Tribes, Community Development Corporations
• SBA-approved pool of concerns for a joint program of R&D for defense production
• SBA-approved mentor-protégé agreement
• Member shareholders of a small agricultural cooperative

The relevant SBA affiliate regulations may be accessed here.