PPP Loans: Do Private Equity And Venture Capital Backed Companies Qualify?

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon
Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
Jason@FreemanLaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

As previously posted on Forbes.com.

The Coronavirus Aid, Relief and Economic Security Act—better known as the “CARES Act”—is the largest economic relief bill in U.S. history.  It represents a $2 trillion relief package designed to stabilize the U.S. economy.  Its flagship offering?  The “Paycheck Protection Program” (“PPP”), a loan initiative designed to provide funds to small businesses as they ride out the COVID-19 storm.  And a critical sector of the economy is asking one very important question: Do venture capital (“VC”)- and private equity (“PE”)-backed companies qualify for PPP loans?

The answer?  It depends.

The PPP loan initiative is available to small businesses.  For these purposes, small businesses are generally defined as those business concerns that have no more than 500 employees.  But the SBA’s “affiliation” rules require that a business also add an affiliate’s employees to its total.  As a result, the affiliation rules can turn a business that, standing alone, has fewer than 500 employees, into a business that fails the 500-or-fewer-employees test.  To take a simple example:  Company A has 200 employees.  Its affiliate, Company B, has 350 employees. Under the SBA’s affiliation rules, Company A is treated as having 550 employees.  The upshot?  It generally would not qualify for a PPP loan because it has more than 500 employees.

Venture Capital And Private Equity 

Venture capital and private equity play an important role in financing small businesses.  And over the past two decades, there has been a marked uptick in private capital. Today, private markets deploy trillions of dollars in capital—much of it to fund small businesses that would, standing alone, fall below the SBA’s 500-or-fewer-employees rule.

VC and PE firms conventionally finance their investments in portfolio companies through preferred stock instruments.  These instruments often provide “negative” control rights, such as veto rights.  Likewise, VC and PE funds often bargain for protective covenants to safeguard their investments.  These protective covenants and “negative” control rights are at the core of the affiliation issue.

How Do The Affiliation Rules Apply To PE- And VC-Backed Companies? 

There is nothing in the SBA’s affiliation rules that outright prohibits PE-backed companies from receiving PPP loans.  But if a VC or PE fund is deemed to be affiliated with a company, then all of the portfolio companies that are “controlled” by the fund may come into the affiliation equation.  That calculus can quickly become unwieldy, as it may add all of the employees of all of the other portfolio companies that the fund controls to the company’s employee count.  You can see where this goes.

 

For a link to the above post, click here.

 

Business Tax Planning Lawyer 

Need assistance in managing the business planning processes? Freeman Law advises clients with corporate and other entity formations and reorganizations. Restructuring entities—through conversions, mergers, and liquidations—can involve particularly complex tax and regulatory considerations. Freeman Law provides experienced tax and business counsel, helping our clients achieve their organizational goals in a tax-efficient manner. Schedule a consultation or call (214) 984-3000 to discuss your corporate structuring or business and tax planning concerns.