We have been getting tons of questions from our private fund clients about whether they (and their portfolio companies) can access funds through the CARES Act loan programs for small businesses. Below are answers to your most frequently asked questions.

Q: Do the PPP and EIDL apply to private equity and venture firms?

A: Yes. As long as you meet the other criteria regarding size and need, your management company can apply for relief.

Q: What are the affiliation rules?

A: The CARES Act loan programs are limited to small businesses, which are defined as businesses with 500 or fewer employees. In counting employees, the SBA includes all employees not only from the company applying for the loan, but also employees from every company with joint control. In other words, if you are controlled by another company, or you control another company, then you must add together all of your employees. If that number is over 500, all the affiliate companies are precluded from relief.

Q: What is the standard for determining if a company is an “affiliate”?

A: The SBA’s Affiliation Rules are complex. Treasury has provided a more readable, two-page summary. The general rule is that if one company has the ability (whether exercised or not) to control another entity, they are affiliates. Control maybe demonstrated through direct ownership, the right to future ownership, common management, or identify of interests. These are all different paths to the same question: are the same people making decisions for these entities?

Q: Are there any exclusions from the affiliation rules?

A: Yes. The CARES Act provides that the affiliation rules do not apply to hotels, food services, franchises, and SBIC portfolio companies. If your portfolio companies fall within those categories, their employees should not be counted. Also, keep in mind that these rules may not impact companies held in the portfolios of private credit firms, or private equity or venture firms that take minority positions.

Q: Has the SBA issued any guidance on the application of the affiliation rules?

A: Yes. On April 2nd, the SBA issued an Interim Final Rule regarding affiliation. Unfortunately, this dealt only with the narrow question of whether the affiliation rules apply to faith-based organizations.

Q: Will the SBA or Treasury issue additional guidance on the application of the affiliation rules to the CARES Act loans?

A: Maybe. While the CARES Act indicated in its text that the SBA administrator would issue further guidance regarding the affiliation rules, that may have referred only to the rule on faith-based organizations. However, numerous industry organizations, such as the Association of Corporate Growth, have been lobbying Congress to revisit the affiliation rules. Both House Majority Leader Nancy Pelosi (D-Calif.) and House Minority Leader Kevin McCarthy (R-Calif.) have expressed an interest in waiving the affiliation rules to some extent.

Q: What are your options if the affiliation rules exclude you from relief?

A: The CARES Act also includes a program for companies with between 500 and 10,000 employees. However, the rates are higher and the loans come with significant strings attached.