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SVOG Update For Theatrical Productions – March 17, 2021

Based on the latest update to the FAQ’s (March 12, 2021) and items that have come up in the larger conversation, we thought it helpful to highlight two points:

Supplemental Grants

In FAQ 5 under the Application section, the SBA has indicated that if all SVOG funding is expended during the program’s initial phase (or funds run out before the SBA can make fully funded supplemental awards to all eligible entities) they intend to issue zero dollar “placeholder” supplemental awards to eligible entities, that could subsequently be modified to add funds in the event Congress appropriates additional monies for the program.   The important aspect of this is that under this approach, an eligible entity that receives a zero-dollar placeholder grant would still be entitled to the six-month extension afforded to recipients of supplemental phase awards; meaning, that grant funds could be used for expenses incurred through June 30, 2022, and actually expended within 18 months from the date of the grant.

Both initial and supplemental grants are limited to a total grant per eligible entity of $10M.  As supplemental grants can only be given to eligible entities, it would appear that applicants who are eligible for the full $10M grant, should consider not applying for the full initial grant, so that they may be eligible to apply for the supplemental grant and thereby extend the time in which eligible expenses can be incurred.

You are eligible to apply for a supplemental grant if, as of April 1, 2021 the revenues of the eligible person or entity for the most recent calendar quarter are not more than 30% of the revenues of the eligible person or entity for the corresponding calendar quarter during 2019.

For determining applicant eligibility for priority periods, the SBA has indicated that they are using their definition of “gross revenues” as the relevant definition of “revenue”.  We believe it is likely that the same definition will apply for the supplemental grant.  The definition of “gross revenue” is the functional equivalent of receipts, which the SBA has defined as “all revenue in whatever form received or accrued from whatever source”.  Before deciding if you should reduce your initial grant request, you should be sure you are eligible for the supplemental award.

Affiliation Rules

In FAQ 7 under the Subsidiaries & Affiliates section, SBA has stated that in administering the SVOG program, they will  take into account the principles of affiliation in the following contexts: (1) In applying those provisions of the Economic Aid Act that specifically reference affiliation; and (2) In determining whether an applicant qualifies for the small employer set-aside.

The Economic Aid Act mentions affiliation in two ways.  First, it says affiliated firms (including subsidiaries) may apply for SVOGs on their own if they meet all the eligibility requirements.  Second, it says that no more than five affiliated firms may receive SVOGs.

When calculating how many full-time employees an SVOG applicant has for purposes of determining whether it qualifies for the small employer set-aside, the SBA will look to the total number of full-time employees retained by the applicant and all of its affiliated entities.  If this combined number is not more than 50, the applicant will qualify for the small employer set-aside.

Based on the above, it would appear that the SBA will likely request applicants to provide a listing of their affiliates.  Further, it is important to make the determination if you believe you may be eligible for the small employer set-aside.

The affiliation rules are complex and may require consultation with counsel familiar with the SBA affiliation rules, a review of management relationships, and organization and ownership charts to determine who is an affiliate.

Again, SBA will only apply the affiliation rules for the purposes mentioned above regarding the no more than 5 affiliated applications, and the small employer set-aside.

A summary of the affiliation rules (excluding size standards as they are not relevant) from 13 C.F.R. §121.301(f) are as follows;

The SBA definition of affiliate includes where one firm has the power to control another firm, or a single person or entity has the power to control both.  Affiliation typically arises due to common ownership, common management, or through contractual or other legal arrangements.

Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.  It does not matter whether control is exercised, so long as the power to control exists.

Affiliation Based on Ownership

For determining affiliation based on equity ownership, a concern is an affiliate of an individual, concern, or entity that own 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, SBA will deem the managing members, or partners who control the management of the concern to be in control of the concern.

Affiliation Based on Management

Affiliation arises where the managing members or partners who control the management of the concern, also control the management of one or more other concerns.  Affiliation also arises where a single individual, concern or entity that controls the management of one concern also controls the management of one or other concerns.  Affiliation also arises 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 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).

We continue to await further guidance on issues previously raised regarding the priority period determination for entities not in business in 2019, but in operation in 2020, eligible uses of funds for the $100,000/employee/independent contractor rule, the eligibility of royalty payments and other items.  We will continue to keep you updated.

If you have any questions please reach out to a member of Withum’s Theatre Entertainment Team.

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