Congressional Research Service IN11298 (Are Start-ups Eligible for the SBA’s New Paycheck Protection Program (PPP) Loans?)

Summary

A Congressional Research Service Insight, IN11298, by Sean Lowry, updated April 6, 2020, on whether start-ups are eligible for loans under the Small Business Administration's Paycheck Protection Program (PPP), created by the CARES Act (P.L. 116-136). It states that lenders may provide covered loans to small businesses, defined as having 500 or fewer employees or meeting SBA size standards, as well as small 501(c)(3) nonprofit organizations and 501(c)(19) veterans organizations adversely affected by COVID-19. It lists the loans' terms: a 100% SBA guarantee, a maximum term of 10 years, no fees and an interest rate not to exceed 4%. It notes that proceeds can pay for payroll, rent, utilities and other purposes during a covered period from February 15, 2020, through June 30, 2020.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Full text

INSIGHTi

Are Start-ups Eligible for the SBA’s New
Paycheck Protection Program (PPP) Loans?

Sean Lowry
Analyst in Public Finance

Updated April 6, 2020
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
“covered loans” 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—also known as PPP loans—have
 a 100% Small Business Administration (SBA) loan guarantee;
 a maximum term of 10 years;
 no associated fees; and
 an interest rate not to exceed 4%.
PPP 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.

The SBA’s Affiliation Rules
Despite directly employing 500 or fewer employees, some start-ups (and other small businesses) might be
ineligible for PPP loans because of the SBA’s “affiliation rules.” The affiliation rules are designed to
prevent “big” businesses from accessing SBA’s programs that are statutorily required to benefit only
independently owned and controlled “small business concerns.” For example, a business of 1,000
employees could break up into five businesses with 200 employees each—all owned by the same parent
company—in order to fall under the 500 employee threshold.
Congressional Research Service
7-....
www.crs.gov
IN11298

CRS INSIGHT
Prepared for Members and
Committees of Congress
Congressional Research Service 2

Under the SBA’s affiliation regulations, an investor could be deemed to have “control” of multiple
businesses, thereby making all of the affiliated businesses under that investor’s control ineligible for SBA
assistance if they, in the aggregate, are too “big” 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’s 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
“economic dependency.” The affiliation rules also apply to both for-profit business and nonprofit
relationships. As such, the SBA’s affiliation rules could be particularly important for lenders that issue
PPP loans and the businesses that seek them.
In 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 “angel investors”) 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’s business decisions by
purchasing a majority of the business’s 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’s stock that gives them disproportionate voting shares, relative to their share of ownership of
the total value of stock issued (“high vote shares”). Both strategies are intended to protect the rate of
return on investment. These arrangements, though, could lead a fund or an investor to having “control”
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.

PPP Exceptions to the Affiliation Rules in the CARES Act
The CARES Act waives the affiliation rules in three specific instances:
1. businesses owned by franchises identified by the SBA,
2. businesses that receive financial assistance from licensed Small Business Investment
Companies (SBICs), and
3. businesses 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.

SBA Interim Final Rule on Affiliation
On Friday, April 3, SBA issued an Interim Final Rule (IFR) and an accompanying Treasury guidance
document that clarify and modify the SBA’s affiliation rules in the context of the PPP.
First, 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’ 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.
Second, the IFR would waive the application of the affiliation rules in instances that “would substantially
burden those organizations’ religious exercise.” According to the IFR, “This exemption is required, or at a
Congressional Research Service 3

minimum authorized, by the Religious Freedom Restoration Act (RFRA) (P.L. 103-141).” 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’s 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.
For 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.

IN11298 · VERSION 3 · UPDATED
EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the
Library of Congress, charged with providing the United States Congress non-partisan advice on
issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The
reports are not classified, and Members of Congress routinely make individual reports available to
the public.

Prior to our republication, we redacted phone numbers and email addresses of analysts who
produced the reports. We also added this page to the report. We have not intentionally made any
other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in
the United States. Any CRS report may be reproduced and distributed in its entirety without
permission from CRS. However, as a CRS report may include copyrighted images or material from a
third party, you may need to obtain permission of the copyright holder if you wish to copy or
otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public
understanding of information that has been provided by CRS to members of Congress in
connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim
copyright on any CRS report we have republished.

File and source

File: IN11298.621890.pdf
Size: 609,632 bytes
SHA-256: 147f1379a2a6ed2b40f6b54a3335e70a8850646d291f78cf861337025cfff72b
Our copy: IN11298.621890.pdf
Original: www.everycrsreport.com