The Paycheck Protection Program and Health Care Enhancement Act (PPP Enhancement Act) was signed into law on April 24, 2020 and amends certain terms of the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Prior to the enactment of the PPP Enhancement Act, the funds originally made available for the PPP had been exhausted. However, the PPP Enhancement Act has made available an additional $310 billion in funding (bringing the total to $659 billion) for potentially forgivable loans under the PPP. Furthermore, to improve the program’s accessibility to small businesses that may not have relationships with large banks, $60 billion of the additional funding for the PPP has been reserved for applications through insured depository institutions with less than $50 billion of assets, credit unions with less than $50 billion of assets, and community financial institutions.
The U.S. Small Business Administration (SBA) resumed its acceptance and processing of PPP applications submitted by participating lenders on April 27, 2020, following the appropriation of additional funds for the program.
Recent Guidance Regarding PPP:
We previously circulated a legal alert outlining the general terms and conditions of the PPP (available here), a legal alert summarizing certain answers by the SBA to frequently asked questions relating to the PPP (available here) and a legal alert highlighting guidance for individuals with self-employment income (available here).
The SBA and the U.S. Department of the Treasury (Treasury) have continued to provide guidance regarding the PPP. The recent guidance includes an interim final rule issued by the SBA on April 24, 2020 regarding requirements for promissory notes, authorizations, affiliation, and eligibility (April 24th IFR); an interim final rule issued by the Treasury on April 28, 2020 regarding a criterion for seasonal employers (Treasury IFR); an interim final rule issued by the SBA on April 28, 2020 regarding disbursements of PPP loans (April 28th IFR); additional published answers to frequently asked questions regarding the PPP (FAQ Guidance); and a document outlining how various types of businesses should calculate their maximum PPP loan amounts. We have summarized some of the recent guidance below.
Certification Regarding Need for PPP Loan. Both the FAQ Guidance and the April 24th IFR discuss the certification in the borrower application for a PPP loan that states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The FAQ Guidance states: “Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere … borrowers still must certify in good faith that their PPP loan request is necessary … taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” While the FAQ Guidance originally addressed this point in the context of public companies, later FAQ Guidance made clear that private companies are held to the same standard.
The April 24th IFR provides a limited safe harbor with respect to the certification discussed above. To the extent that a business obtained a PPP loan prior to the issuance of the April 24th IFR “based on a misunderstanding or misapplication of the required certification standard” but repays the loan prior to May 7, 2020, the SBA will deem the business to have made the certification regarding need for a PPP loan in good faith.
Eligibility of Hedge Funds and Private Equity Firms. The April 24th IFR provides that hedge funds and private equity firms are ineligible to receive PPP loans because their business is primarily investment or speculation driven. However, a portfolio company of a private equity firm may be eligible for a PPP loan, subject to the same requirements that apply to any potential borrower. Among other eligibility requirements, the portfolio company must meet the relevant size standard (after giving effect to applicable affiliation rules, summarized by the SBA here) and be able to certify on the loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Involvement in Bankruptcy Proceedings. The April 24th IFR makes clear that a business will be ineligible to receive a PPP loan if the business or the owner of the business is the debtor in a bankruptcy proceeding, either upon the submission of the business’s application for a PPP loan or at any time before the loan is given. An applicant is required to notify the lender and request cancellation of the PPP loan application if the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding before the loan is disbursed.
Loan Documentation. Consistent with earlier FAQ Guidance, the April 24th IFR provides that a lender may use either the form of promissory note provided by the SBA or its own promissory note to document PPP loans. In loan documentation for a PPP loan, a lender may require that a borrower agree to any terms and conditions that are not inconsistent with the CARES Act, published SBA or Treasury guidance, or the lender application form.
Participation in Employee Stock Ownership Plans. The April 24th IFR states that a business’s participation in an employee stock ownership plan (ESOP) does not create an affiliation between the business and the ESOP for purposes of the PPP.
Compensation Included in Payroll Costs. The FAQ Guidance clarifies that “the cost of a housing stipend or allowance provided to an employee as part of compensation” is included in payroll costs. “Payroll costs include all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.”
Determining an Employee’s Principal Place of Residence. The FAQ Guidance suggests that employers use IRS regulations (26 C.F.R. § 1.121-1(b)(2)) as a resource in determining whether a particular employee’s principal place of residence is in the U.S. for purposes of the PPP.
Counting Employees. The FAQ Guidance highlights the different measure of employees for purposes of determining PPP loan eligibility versus for purposes of loan forgiveness under the CARES Act. For eligibility purposes, each individual “employed on a full-time, part-time, or other basis” is counted as an employee. By contrast, the number of “full-time equivalent employees” is the measure that impacts potential loan forgiveness.
Calculation of Maximum Loan Amount. The SBA has provided a document (available here) that details how various types of businesses (e.g., self-employed individuals with and without employees, partnerships, and corporations) should calculate their maximum PPP loan amounts. This resource also identifies certain documentation that may be used to substantiate an applicant’s maximum loan amount and clarifies that limited liability companies “should follow the instructions that apply to their tax filing situation” to determine their maximum loan amounts.
Seasonal Employers’ Calculation of Maximum Loan Amount. The Treasury IFR permits seasonal employers to determine their average monthly payments for payroll based on any consecutive 12-week period between May 1, 2019 and September 15, 2019, in order to calculate their maximum PPP loan amounts. The interim final rule also provides that a seasonal employer in operation for any 8-week period between May 1, 2019 and September 15, 2019 will be deemed to have been in operation on February 15, 2020 for purposes of the PPP.
Disbursements of PPP Loans. The April 28th IFR provides that a lender must make a single, full disbursement of a PPP loan within a specified amount of time (typically 10 calendar days) after loan approval. A borrower may not receive multiple disbursements in order to delay the covered period relating to loan forgiveness.