April 7, 2020 – Further Update on Paycheck Protection Program (the “PPP”) under the CARES Act
The SBA, in consultation with the Treasury Department, has issued as of April 7 additional Frequently Asked Questions (FAQ) on Paycheck Protection Program Loans (the “April 7 FAQ”). The April 7 FAQ answers several questions on the PPP that had been troubling some borrowers and lenders, but also still leaves some questions open.
Here are a few highlights of the April 7 FAQ:
1. The SBA clarified some issues around eligibility for PPP loans:
A “small business concern” (as defined by the SBA) is eligible as long as it satisfies the existing statutory and regulatory definition of a “small business concern” (the “small business concern test”) which includes meeting:
The SBA’s (i) employee-based or (ii) revenue-based size standards corresponding to the business’ NAICS Code for its primary industry; or
The “Alternative size standards” based on maximum tangible net worth of not more than $15 million and average net income after federal income taxes (excluding any carry-over losses) of the business for the two previous fiscal years of not more than $5 million.
In addition, any business that does not qualify as a “small business concern” is eligible if the business has 500 or fewer employees whose principal places of residence are in the United States (the “500 employee test”).
2. Borrowers are required to apply SBA’s affiliation rules subject to SBA’s existing affiliation exclusions that apply to the PPP.
There remains some ambiguity as to whether the affiliation rules apply only to businesses seeking eligibility under the small business concern test or if the affiliation rules also apply to businesses seeking eligibility under the 500 employee test. We expect further guidance from the SBA on some of the more nuanced aspects of when certain employees of an affiliate might impact the borrower’s ability to qualify for a PPP loan.
Venture capital or private equity types of investments where the VC/PE is a minority equity holder will only be subject to affiliation rules where the VC/PE “controls” the portfolio company, such as with rights to prevent a quorum or otherwise block action by the board or shareholders. But, if a VC/PE minority equity holder irrevocably gives up those rights the VC/PE minority equity holder will not be an affiliate of the portfolio company (assuming no other relationship triggers affiliation rules).
While these rules remain unclear, we continue to encourage clients to work with their lenders and get their applications in pending clarification of the rules.
3. The $100,000 loan limit per employee is counted only against the cash compensation (wages). Other benefits not directly paid to the employee (e.g., health insurance premiums, retirement contributions, etc.) are not capped.
4. If a business contracts with a third-party provider, such as a Professional Employer Organization (PEO), to process payroll, payroll documentation provided by the payroll provider can be used to establish the payroll of the business for the PPP.
5. Borrowers can choose to use trailing twelve months’ payroll or 2019 payroll to calculate its average monthly payroll for the PPP.
6. Independent contractors do not count towards payroll costs. Independent contractors should apply separately.
7. The employer’s portion of any payroll taxes (other than state or local payroll taxes) are not included in the calculation of payroll costs. The borrower’s calculation should be based on the gross wages paid to the employee (this includes the employee’s portion of FICA) but it should not include the employer’s portion of FICA and other federal payroll costs.
Also on April 7, recognizing the already overwhelming demand for loans under the PPP, word came out from both sides of the Hill and the Administration that additional funds would be added to the PPP. Treasury Secretary Mnuchin said that he asked for an additional $250 billion on top of the original $349 billion allocated to the program. Accordingly, although many borrowers have faced obstacles submitting loan applications to lenders and many have been concerned that PPP funds will dry up before they can get their applications in, we continue to advise our clients to move quickly, get in the queue and be persistent.