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Expansion of Eligibility and Additional Guidance on the Paycheck Protection Program (Title I of the CARES Act)

On April 7, 2020, the U.S. Department of Treasury (Treasury) released a 4/7/2020 Frequently Asked Questions sheet (FAQ)[1] with respect to the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The FAQ is supplemental to the (i) First Interim Final Rule issued by the U.S. Small Business Administration (SBA) on April 2, 2020, (ii) Second Interim Final Rule issued by the SBA on April 4, 2020 and (iii) Treasury’s Applicable Affiliation Rules fact sheet that was issued on April 4, 2020.

The FAQ confirms that applicants and lenders may rely on the laws, rules, and guidance available at the time an application is submitted. A PPP applicant whose previously submitted application has not been processed yet may, but has no obligation to, revise its application based on the laws, regulations and guidance issued after the application was submitted.

Highlights of what we believe to be material new guidance or clarification of existing guidance in the FAQ are as follows:

  1. Expansion of Eligibility for PPP Applicants by using an Alternative Size Standard. The FAQ establishes a new alternative size standard that businesses may use to qualify for the PPP. Any business that satisfies the following two prong test, as of March 27, 2020, is also eligible for the PPP (the Alternative Size Standard):

(i) the maximum tangible net worth of the business is not more than $15 million; and

(ii) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the 2 full fiscal years before the date of the application is not more than $5 million.

The Alternative Size Standard is an additional eligibility test for PPP applicants. A business can otherwise qualify for the PPP if it is (i) a “small business concern” under the Small Business Act[2] or (ii) any business concern, tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, so long as such business employs not more than the greater of (i) 500 employees[3] whose principal place of residence is in the United States or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the business operates.

  1. PPP Applicant is Solely Responsible to Determine Affiliation. It is the responsibility of the PPP applicant, and not the lender, to determine which entities (if any) are its affiliates for purposes of determining eligibility for the PPP. The FAQ adds that a PPP applicant’s certification in their application form that such applicant is eligible to receive a loan signifies that the PPP applicant is eligible after application of the affiliation rules.[4] For an analysis of affiliation rules applicable to the PPP, please visit our article on the subject matter.

  2. Waiver or Relinquishment of a Minority Shareholder’s Rights to No Longer be Considered an Affiliate of a PPP Applicant. Under the applicable affiliation rules, the SBA will “deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.” The FAQ confirms that any minority equityholder of a PPP applicant can irrevocably waive or relinquish such rights to no longer be deemed an affiliate, so long as such equityholder is not deemed an affiliate after application of other rules of affiliation. As mentioned above, for further insight on affiliation, please visit our article analyzing the affiliation rules.

  3. Non-Cash Benefits are Not Excluded from $100,000 Compensation Cap. The FAQ confirms that the exclusion of employee compensation in excess of $100,000 annually applies only to cash compensation. This means that PPP loan proceeds applied to any non-cash compensation paid to employees earning in excess of $100,000 is potentially eligible for forgiveness to the extent that such non-cash compensation is included in the definition of “payroll costs” under the CARES Act.

  4. Time Periods for Calculating Payroll Costs and Determining Number of Employees for Eligibility. For purposes of computing the maximum loan amount available under the PPP, an applicant can calculate its aggregate payroll costs from either the 12-month period before the date of application or from calendar year 2019.[5] Similarly, a PPP applicant may use its average employment over the same time periods to determine its number of employees for the purpose of determining eligibility by applying an employee-based size standard.[6]

As an alternative, the PPP applicant may elect to use the SBA’s existing time period standards to determine its number of employees for purposes of determining eligibility, which is either by (i) calculating the average number of employees per pay period in the 12 completed calendar months prior to the date of the PPP application or (ii) the average number of employees for each of the pay periods that the PPP applicant has been operational (if it has not been operational for 12 months).[7]

*Things are changing quickly and the measures and interpretations described here may change. Our analysis is necessarily limited by the time sensitivities of the current crisis as well as the absence of precedent for some of what is contained here. This analysis represents our best interpretation and recommendations based on where things currently stand.*

[1] The FAQ does not carry the force and effect of law independent of the CARES Act and regulations (e.g.13 CFR 301(f)) on which it is based.

[2] The FAQ confirms that any “small business concern” meeting a SBA revenue test applicable to the industry in which it operates is eligible to receive a PPP loan.

[3] The definition of employees includes individuals employed on a full-time, part-time or other basis. This includes employees obtained from a temporary employee agency, professional employer organization or leasing concern.

[4] The FAQ states that the lender can rely on the PPP applicant’s eligibility certification.

[5] For seasonal businesses, the PPP applicant may use average monthly payroll for the period beginning on either February 15, 2019 or March 1, 2019, and ending on June 30, 2019. A PPP applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period beginning on January 1, 2020 through February 29, 2020.

[6] We note that the FAQ does not require that the same time period be used for both determining eligibility and determining “payroll costs”. We also note that the FAQ does not provide whether the time periods used for determining “payroll costs” can also be used for determining eligibility under the SBA’s revenue-based sizing test.

[7] Again, we note that the guidance is silent on application of time periods for determining eligibility under the SBA’s revenue-based sizing test.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

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Bijal Vira Corporate Finance Attorney Sheppard Mullin Law Firm
Partner

Bijal Vira is a partner in the corporate and finance practice areas in the firm's New York office.

Areas of Practice

Bijal's practice is focused on complex, private markets transactions, often involving investment funds (e.g., private equity, private credit, real estate, hedge funds, BDCs), assets managers, insurance companies and other forms of institutional capital in equity and credit investments. He is often engaged to advise clients in deals that involve regulated industries (e.g., healthcare, insurance), cross national borders, or that require novel...

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Nirav Bhatt Finance and Bankruptcy Attorney Sheppard Mullin New York, NY
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Nirav Bhatt is an associate in the Finance and Bankruptcy Practice Group in the firm's New York office.

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Nirav represents corporate borrowers, financial sponsors, portfolio companies, commercial banks and other financial institutions in a variety of financing transactions. Some of the areas in which Nirav has experience are senior secured, second-lien and mezzanine credit facilities in connection with bilateral club and broadly syndicated transactions, leveraged buyouts and add-on acquisitions. Nirav also specializes in problem loan workouts, judicial and non-judicial foreclosures.

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