{ "id": "IN11298", "type": "CRS Insight", "typeId": "INSIGHTS", "number": "IN11298", "active": true, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 621890, "date": "2020-04-06", "retrieved": "2020-04-11T23:08:53.051243", "title": "Are Start-ups Eligible for the SBA\u2019s New Paycheck Protection Program (PPP) Loans?", "summary": "The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), among other provisions, created the Paycheck Protection Program (PPP). Under the PPP, a lender may provide \u201ccovered loans\u201d to assist small businesses (defined as either businesses that have 500 or fewer employees or that meet the general size standards under the Small Business Act), small 501(c)(3) nonprofit organizations, and small 501(c)(19) veterans organizations that have been adversely affected by COVID-19. These covered loans\u2014also known as PPP loans\u2014have\na 100% Small Business Administration (SBA) loan guarantee;\na maximum term of 10 years; \nno associated fees; and \nan interest rate not to exceed 4%.\nPPP loan proceeds can be applied to specific purposes, such as payroll (including compensation to employees and owners), leave payments, state and local taxes assessed on compensation paid by the business, mortgage or rent, utilities, and interest on any other debt obligations paid during the covered period. The covered period runs from February 15, 2020, through June 30, 2020.\nThe SBA\u2019s Affiliation Rules\nDespite directly employing 500 or fewer employees, some start-ups (and other small businesses) might be ineligible for PPP loans because of the SBA\u2019s \u201caffiliation rules.\u201d The affiliation rules are designed to prevent \u201cbig\u201d businesses from accessing SBA\u2019s programs that are statutorily required to benefit only independently owned and controlled \u201csmall business concerns.\u201d For example, a business of 1,000 employees could break up into five businesses with 200 employees each\u2014all owned by the same parent company\u2014in order to fall under the 500 employee threshold.\nUnder the SBA\u2019s affiliation regulations, an investor could be deemed to have \u201ccontrol\u201d of multiple businesses, thereby making all of the affiliated businesses under that investor\u2019s control ineligible for SBA assistance if they, in the aggregate, are too \u201cbig\u201d to be eligible. Control can be determined in a number of ways, such as a single investor owning 50% or more of the value of the business\u2019s stock or its voting rights for its board of directors (who review important business decisions made by management). Control can also be determined in some less than obvious ways, including by having multiple investors with minority ownership, family links between multiple entities, and certain contractual relationships or \u201ceconomic dependency.\u201d The affiliation rules also apply to both for-profit business and nonprofit relationships. As such, the SBA\u2019s affiliation rules could be particularly important for lenders that issue PPP loans and the businesses that seek them. \nIn particular, affiliation rules could prevent certain start-ups and other businesses that have received investments from private investment funds and investors (e.g., private equity funds, venture capital funds, and \u201cangel investors\u201d) from being eligible for PPP loans. Private equity funds tend to invest in a broad array of businesses (including smaller businesses and larger, more established businesses). Venture capital funds and angel investors often target their investments to start-ups and more early-stage companies. These private investment funds and investors often seek to control the company\u2019s business decisions by purchasing a majority of the business\u2019s stock, thereby giving them control over management decisions. Alternatively, these funds and investors may condition their investments on receiving a special class of the business\u2019s stock that gives them disproportionate voting shares, relative to their share of ownership of the total value of stock issued (\u201chigh vote shares\u201d). Both strategies are intended to protect the rate of return on investment. These arrangements, though, could lead a fund or an investor to having \u201ccontrol\u201d over multiple businesses. In the aggregate, if all affiliated businesses employ more than 500 employees, then potentially all of the businesses under the affiliation network are ineligible for PPP loans. \nPPP Exceptions to the Affiliation Rules in the CARES Act\nThe CARES Act waives the affiliation rules in three specific instances: \nbusinesses owned by franchises identified by the SBA, \nbusinesses that receive financial assistance from licensed Small Business Investment Companies (SBICs), and \nbusinesses operating in the accommodation and food services industry (North American Industry Classification System (NAICS) Code 72) that have no more than 500 employees per physical location. For example, if a single investor wholly owns a set of five hotels, organized as separate businesses, that each employ 200 people, then the affiliation rules are waived; the investor could receive PPP loans for each of the five hotel businesses.\nSBA Interim Final Rule on Affiliation\nOn Friday, April 3, SBA issued an Interim Final Rule (IFR) and an accompanying Treasury guidance document that clarify and modify the SBA\u2019s affiliation rules in the context of the PPP. \nFirst, the IFR clarifies which set of SBA affiliation regulations apply to PPP borrowers. The IFR states that PPP borrowers are subject to the affiliation regulations under 13 C.F.R. 121.301, not 13 C.F.R. 121.103. Some commentators have noted that this clarification could enhance start-ups\u2019 access to PPP loans because 121.301 lacks some provisions that are used to find affiliation under 121.103. Others, though, believe that many start-ups might still have difficulty obtaining PPP loans even with this clarification. \nSecond, the IFR would waive the application of the affiliation rules in instances that \u201cwould substantially burden those organizations\u2019 religious exercise.\u201d According to the IFR, \u201cThis exemption is required, or at a minimum authorized, by the Religious Freedom Restoration Act (RFRA) (P.L. 103-141).\u201d In further guidance for faith-based organizations, the exception applies to affiliate relationships between two organizations based on religious beliefs. The exception does not apply if two organizations are connected for nonreligious reasons (e.g., administrative convenience). According to the IFR, the SBA will not assess, and lenders will not be required to assess, the faith-based organization\u2019s good faith determination that this exception applies. The guidance includes sample language to claim the exemption and does not require an organization to describe those religious beliefs with particularity.\nFor more information on SBA loan programs and the SBA-related provisions of the CARES Act, see CRS Report R46284, COVID-19 Stimulus Assistance to Small Businesses: Issues and Policy Options, by Robert Jay Dilger, Bruce R. Lindsay, and Sean Lowry.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11298", "sha1": "730ec6c4e5536554128cc4eb1976ae77b8567622", "filename": "files/20200406_IN11298_730ec6c4e5536554128cc4eb1976ae77b8567622.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11298", "sha1": "161b6e931459f16dbdebea91b4bde57cb46e368d", "filename": "files/20200406_IN11298_161b6e931459f16dbdebea91b4bde57cb46e368d.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4832, "name": "Small Business" } ] }, { "source": "EveryCRSReport.com", "id": 621440, "date": "2020-03-31", "retrieved": "2020-04-01T22:10:53.554471", "title": "Are Startups Eligible for the SBA\u2019s New Paycheck Protection Program (PPP) Loans?", "summary": "The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), among other provisions, created the Paycheck Protection Program (PPP). Under the PPP, a lender may provide \u201ccovered loans\u201d to assist small businesses (defined as either businesses that have 500 or fewer employees or that meet the general size standards under the Small Business Act), small 501(c)(3) nonprofit organizations, and small 501(c)(19) veterans organizations that have been adversely affected by COVID-19. These covered loans\u2014also known as PPP loans\u2014have\na 100% SBA loan guarantee;\na maximum term of 10 years; \nno associated fees; and \nan interest rate not to exceed 4%.\nPPP loan proceeds can be applied to specific purposes, such as payroll (including compensation to employees and owners), leave payments, state and local taxes assessed on compensation paid by the business, mortgage or rent, utilities, and interest on any other debt obligations paid during the covered period. The covered period runs from February 15, 2020, through June 30, 2020.\nThe SBA\u2019s Affiliation Rules\nDespite directly employing 500 or fewer employees, some startups (and other small businesses) might be ineligible for PPP loans because of the SBA\u2019s \u201caffiliation rules.\u201d The affiliation rules are designed to prevent \u201cbig\u201d businesses from accessing SBA\u2019s programs that are statutorily required to benefit only independently owned and controlled \u201csmall business concerns.\u201d For example, a business of 1,000 employees could break up into five businesses with 200 employees each\u2014all owned by the same parent company\u2014in order to fall under the 500 employee threshold.\nUnder the SBA\u2019s affiliation regulations, an investor could be deemed to have \u201ccontrol\u201d of multiple businesses, thereby making all of the affiliated businesses under that investor\u2019s control ineligible for SBA assistance if they, in the aggregate, are too \u201cbig\u201d to be eligible. Control can be determined in a number of ways, such as a single investor owning 50% or more of the value of the business\u2019s stock or its voting rights for its board of directors (who review important business decisions made by management). Control can also be determined in some less than obvious ways, including by having multiple investors with minority ownership, family links between multiple entities, and certain contractual relationships or \u201ceconomic dependency.\u201d The affiliation rules also apply to both for-profit business and nonprofit relationships. As such, the SBA\u2019s affiliation rules could be particularly important for lenders that issue PPP loans and the businesses that seek them. \nIn particular, affiliation rules could prevent certain startups and other businesses that have received investments from private investment funds and investors (e.g., private equity funds, venture capital funds, and \u201cangel investors\u201d) from being eligible for PPP loans. Private equity funds tend to invest in a broad array of businesses (including smaller businesses and larger, more established businesses). Venture capital funds and angel investors often target their investments to startups and more early stage companies. These private investment funds and investors often seek to control the company\u2019s business decisions by purchasing a majority of the business\u2019s stock, thereby giving them control over management decisions. Alternatively, these funds and investors may condition their investments on receiving a special class of the business\u2019s stock that gives them disproportionate voting shares, relative to their share of ownership of the total value of stock issued (\u201chigh vote shares\u201d). Both strategies are intended to protect the rate of return on investment. These arrangements, though, could lead a fund or an investor to having \u201ccontrol\u201d over multiple businesses. In the aggregate, if all affiliated businesses employ more than 500 employees, then potentially all of the businesses under the affiliation network are ineligible for PPP loans. \nPPP Exceptions to the Affiliation Rules \nThe CARES Act waives the affiliation rules in three specific instances: \nbusinesses owned by franchises identified by the SBA, \nbusinesses that receive financial assistance from licensed Small Business Investment Companies (SBICs), and \nbusinesses operating in the accommodation and food services industry (North American Industry Classification System (NAICS) Code 72) that have no more than 500 employees per physical location. For example, if a single investor wholly owns a set of five hotels, organized as separate businesses, that each employ 200 people, then the affiliation rules are waived; the investor could receive PPP loans for each of the five hotel businesses.\nFor more information on SBA loan programs and the SBA-related provisions of the CARES Act, see CRS Report R46284, COVID-19 Stimulus Assistance to Small Businesses: Issues and Policy Options, by Robert Jay Dilger, Bruce R. Lindsay, and Sean Lowry.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11298", "sha1": "913e1648fca49ff5e1021004af73095e21b7e457", "filename": "files/20200331_IN11298_913e1648fca49ff5e1021004af73095e21b7e457.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11298", "sha1": "0780bcef4792d8960854b7f20227cd0a8a826dff", "filename": "files/20200331_IN11298_0780bcef4792d8960854b7f20227cd0a8a826dff.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4832, "name": "Small Business" } ] } ], "topics": [ "CRS Insights" ] }