CARES Act Considerations for Emerging Tech Companies
On March 28, 2020, President Trump signed into law a historic $2.2 trillion stimulus package, namely, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in response to the novel Coronavirus Disease 2019 (COVID-19) pandemic. This is the largest emergency aid package in U.S. history, offering economic relief to companies and their employees.
The new law expands the Economic Injury Disaster Loan Program (EIDL) and establishes the Paycheck Protection Program (PPP). Both programs operate under the oversight of the Small Business Administration (SBA). For a detailed overview of the CARES Act, please read GT’s Alert, “Congress Passes CARES Act: Overview of the Relief Available to Small and Other Business Concerns.”
Many of the CARES Act provisions impact the emerging technology sector. Below, we outline some programs and other considerations that apply to emerging technology companies.
SBA Paycheck Protection Program (PPP) Loans
Generally, the CARES Act allocates $349 billion for low interest, no-fee loans equal to the lesser of $10 million and 2.5 times the borrower’s monthly U.S. payroll costs as measured over the prior 12 months loans may be partially forgiven in certain circumstances. PPP is generally limited to “small business concerns” with fewer than 500 employees.
SBA Economic Injury Disaster Loans (EIDL)
The CARES Act expands the existing SBA EIDL program under Section 7(b)(2) and allocates $10 billion for related SBA grants.
Recipients may receive up to $2 million in loans for working capital and ordinary expenditures based on economic injury from COVID-19 and should apply directly with the SBA. EIDL applicants may be eligible for Emergency IDL Grants up to $10,000.
Compliance with SBA Affiliation Rules
Small business concerns must satisfy the affiliation rules under the SBA, which may make eligibility difficult for early-stage companies due to the aggregation requirements.
The general rules governing the SBA’s interpretation of “affiliation” can be found in 13 C.F.R. Section 121.103 and in the SBA Small Business Compliance Guide: Size and Affiliation – A Guide to the SBA’s Size Program and Affiliation Rules.
However, application of the affiliation rules to the PPP and EIDL loans are subject, instead, to 13 C.F.R. Section 121.301 and recent guidance from the U.S. Department of the Treasury (Treasury), which narrows the general affiliation concepts by eliminating, in relevant part, the “totality of circumstances” test and limiting the identity of interest test.
There are certain waivers from the affiliation rules for (i) any business concern that is assigned a North American Industry Classification System (NAICS) code beginning with 72 (generally, hospitality and restaurant businesses), (ii) any business concern operating as a franchise that is assigned a franchise identification code by the SBA, and (iii) any business concern that receives financial assistance from an company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681), that is a Small Business Investment Company.
Despite this limited relief, significant uncertainty remains as to the application of particular provisions of Section 121.301, subpart (f), for venture-backed companies. Numerous technology trade associations, including the National Venture Capital Association (NVCA), have written a letter to the Treasury and SBA requesting further relief from the affiliation rules in connection with the stimulus programs.
Unless the concerns around the affiliation rules are addressed, many tech startups, including those in the life sciences, may not be able to benefit from relief provided by the CARES Act.
Considering the ongoing COVID-19 pandemic and the heightened demand on SBA lenders, potential borrowers may wish to contact their SBA lender as soon as possible to help determine eligibility.