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Update: Affiliation Under the Paycheck Protection Program

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.

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Eric Z. Stevenson Business & Corporate Attorney Stark & Stark Lawrenceville, NJ
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Eric Z. Stevenson is an Associate and a member of Stark & Stark’s Business & Corporate Practice Group. Mr. Stevenson concentrates his practice in the representation of start-up companies, investment companies, and non-profit organizations on a variety of issues, including corporate formation, financing, franchising, licensing, acquisitions, executive compensation, equity compensation plans, employment agreements, real estate, governance, and intellectual property law.

Prior to joining Stark & Stark, Mr. Stevenson served as a Judicial Law Clerk to the Honorable L. Grace...

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Rachel Lilienthal Stark Banking & Financial Services Attorney Stark & Stark Lawrenceville, NJ
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Rachel Lilienthal Stark is a Shareholder and member of the Banking & Financial Services, Business & Corporate, Intellectual Property and Non-Profit Organization Groups. Ms. Stark concentrates her practice in the representation of start-up and emerging companies and non-profit organizations on a variety of issues including corporate formation, financing, franchising, licensing, acquisitions, executive compensation, equity compensation plans, employment agreements, real estate and intellectual property law. Ms. Stark also represents lenders in commercial loan transactions.

Before joining Stark & Stark, Ms. Stark worked as an associate for the New York City law firm of Cahill Gordon & Reindel. She also served as a summer intern for The Honorable Anne E. Thompson, Chief Judge of the United States District Court, District of New Jersey and as a staff assistant to Senator Frank R. Lautenberg in Washington, D.C.

Ms. Stark is a frequent guest lecturer on business law, family business and succession planning at Rider University’s Business School. She also serves on the Board of Directors of the Real Estate Section of the Mercer County Bar Association, on the Executive Advisory Council of Rider University’s College of Business Administration, and is the Co-Chair of the Lawrence Chapter of the MIDJersey Chamber of Commerce.

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Dolores Kelley, Stark and Stark Law, Real Estate Lawyer, Zoning and Land Use Attorney, FDA Litigator
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Dolores R. Kelley is a Shareholder and member of Stark & Stark’s Business & Corporate, Real Estate, Zoning & Land Use and Beer & Spirits Groups, where she concentrates her practice in the representation of start-up and emerging companies, breweries, distilleries, and non-profit organizations on a variety of issues including corporate formation, financing, licensing, acquisitions employment agreements and intellectual property law. Dolores also handles a wide range of matters for the real estate industry, including commercial transactions, leasing, condominium and homeowner...

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