Who is Deemed an Affiliate?
Rule 405 of the Securities Act of 1933 says that an affiliate is “a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.” Rule 144 under the same Act says the same thing about the term.
In connection with securities registration, the Securities and Exchange Commission (SEC) broadly expands the definition of an affiliated person. Form S-11 defines an affiliated person as:
- Any director or officer of the registrant;
- Any person directly or indirectly controlling or under direct or indirect common control with the registrant;
- Any person owning of record or known by the registrant to own beneficially 10 percent or more of any class of equity securities or the registrant;
- Any promoter of the registrant directly or indirectly connected with the registrant in any capacity;
- Any principal underwriter of the securities being registered;
- Any person performing general management or advisory services for the registrant; and
- Any associate of any of the foregoing persons.
It is also important to note that when we say “affiliate,” it doesn’t necessarily mean people; they can also be business entities. The most common affiliates of a company are:
- Chief executive officers (CEOs)
- Directors
- Stockholders (those who hold a large amount of stock)
- Subsidiaries
- Sister companies
- Parent companies
- Members of a corporation’s advisory board
Depending on the situation, an affiliated person might be called simply an “affiliate.” They may also be called “insiders” or “control persons.”
Other Types of Affiliates
Retail Affiliates
In retail, particularly in e-commerce, an affiliate company is a business that sells the goods of other merchants in exchange for a commission. Products are ordered from the main company, but the sale takes place on the site of the affiliate. Examples of large companies that use this type of affiliate marketing include Amazon.com, Walmart, and Target.
International Affiliates
A multinational company can set up affiliates to break into international markets while protecting the parent company’s name in case the affiliate fails or the parent company is seen negatively because it is from another country. Aside from this, the parent company might also benefit from lower taxes in the affiliate’s country.
Affiliates vs. Subsidiaries
When it comes to affiliates, the key thing to remember is that they’re not owned or controlled by the other company. This means that each company is completely independent and can make or break relationships with other businesses as it sees fit.
On the other hand, a subsidiary is a company that is at least partially owned by another company. This ownership stake can be anywhere from 51% to 100%. When a company owns less than 50% of another company, it is considered a minority stakeholder.
Subsidiaries are much more closely aligned with their parent companies than affiliates are. This alignment is due in large part to the fact that the parent company has some control over the subsidiary. For example, the parent company may have board seats or veto power over major decisions made by the subsidiary. This control is not always absolute, however. Depending on the structure of the subsidiary, minority shareholders may also have some say in how the company is run.
Are Family Members Considered Affiliates?
The SEC has not provided a definitive answer, but it is generally accepted that family members are not considered affiliates. This is because the SEC says an affiliate relationship exists when one company is controlled by another. Family members usually don’t have this type of control over each other.
However, there are some situations where family members might be considered affiliates. For example, if a company is closely held by a family and members of that family have significant influence over the company’s decisions, they might be considered affiliates.
Another situation where family members might be considered affiliates is when they are part of a group that meets the definition of an “affiliated person.” For instance, if a group of family members owns more than 10% of a company’s stock, they would likely be considered affiliates.
Changes in Affiliate Relationships
A change in an affiliate relationship can have a big impact on a company. For instance, if a subsidiary is sold to another company, it is no longer an affiliate. This could affect the parent company’s taxes since it would no longer be able to file a consolidated return.
Affiliates often have agreements with each other that outline what will happen if their relationship changes. For example, an agreement might state that if one company is sold, the other company has the right to buy it back.
These agreements protect both companies and make sure that their business relationship goes as planned.
Takeaway
The term ”affiliate” has a few different meanings. Understanding the difference between these meanings is critical to ensuring that you are in compliance with the law and that your business dealings are carried out correctly. Also, this will help you avoid any misunderstandings with business partners and other companies.
