Good morning.   Last night SBA and Treasury issued yet another FAQ guidance on the PPP Loan program.  It has become this April’s “tradition unlike any other”.  The latest version helpfully incorporates a number of points made in the Klein memo that we circulated yesterday, and clarifies that the $100k limit only applies to cash comp; but also provides an interpretation on FICA (employer-side is always out).  Here are some quick thoughts, and please note the paragraph at the end about the seemingly increased risk of potential False Claims Act claims. 

  • Affiliation; Ownership; Risk Shifting.  Sorry, no, they did not repeal any of the control tests that are impacting VC and PE portfolio companies. However:
    • Interestingly, FAQ#4 expressly says that lenders are not “required” to make any independent determination of a borrower’s affiliation and that lenders are “permitted to rely” on borrower’s certifications.  Reading this in conjunction with FAQ #18 which says that lenders are not “required to collect, certify or verify beneficial ownership information” for existing borrowers for whom they have previously collected ownership information. 
      • Read together, it seems that the clear intent of SBA and Treasury is to (A) expedite the completion of PPP application paperwork by the banks and (b) put the onus and risk of accuracy of application information (including need, payroll and affiliation) and squarely and exclusively on the borrowers (see more on this below).
      • FAQ #18 goes on to say that banks do not even need to this collect this information for existing customers for whom they have NOT previously collected ownership info “unless otherwise indicated by the lender’s risk-based approach to BSA compliance” (which unfortunately may cause many banks to simply stay the course and require it).
      • We have encountered several banks requiring detailed ownership information from existing borrowers even where no affiliation is claimed.  We suggest such borrowers recontact their banks ASAP and point to this new FAQ #18.
    • If a minority shareholder “irrevocably waives or relinquishes” its problematic covenant veto rights, then it will no longer be deemed an affiliate.  We have been working with several clients who were wondering if it would be possible to waive such covenants for the duration of the loan.  These FAQ do not say that such a waiver would NOT work, but such an approach must now be seen as more vs a permanent waiver.  (FAQ #6). (As a reminder, these are generally veto rights relating to operation of the business or the ability to prevent a board or SH quorum).
  • Size Standards.  SBA and Treasury have now formally adopted the analysis suggested in the Klein memo from yesterday’s email, which is included below. Several of you applied yesterday under this interpretation and can now point your lender to FAQ #2.  Thus, the applicable standards are:
    • Not more than 500 employees (see more on this below);
    • Meet the applicable NAICS employee-based standard;
    • Meet the applicable NAICS annual receipts-based standard; or
    • Meet the “alternative size standard” of net income of not more than $5M and tangible net worth  of not more than $15M  (Note that these standards remain at $5 & $15, because they were not increased when the SBIC size standards were increased).
  • $100k Comp Limit.  Trying to clarify what has been one of the most confusing questions, FAQ #7 clearly says that the exclusion of comp in excess of $100k “only to cash compensation, not to non-cash benefits, including:
    • employer contributions to defined-benefit or defined-contribution retirement plans;
    • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
    • payment of state and local taxes assessed on compensation of employees.”

We know that at least one bank was taking a different approach and counting some or all of the above amounts against the $100k limit.  Again, borrowers who encountered that should contact their banks to present this FAQ.  Presumably, that same standard will apply to determining which $100k employees “count” for the forgiveness math, but stay tuned for more guidance on that.

  • FICA is OUT.  Contradicting the IFR, FAQ 16 makes it clear that the employee side of FICA is in, but the employer side is out and thus NOT included in either the borrowing base or the forgiveness amount.  FAQ #17 helpfully says that if you applied under the interpretation in the IFR, you can continue to rely on the IFR, you do NOT need to reapply or fix your application.  Note that this may result in some of your loan not being forgiven, because I think that reliance will only apply to the application and perhaps the amount; not forgiveness.
  • How to Count Employees; Measurement Period for Borrowing Base and Employee Count.
    • FAQ #3 reiterates that the 500 employee standard applies only to employees whose “principal place of residence is in the US”.  This perhaps means that employers can exclude employees on temporary work visas, but please consult an employment lawyer before making that determination.   In theory, this also means that large multinational companies with small US operations could qualify for a PPP, because even though the affiliation rules would apply, employees outside the US would not count against the size standard.  That seems to be a permissible, but aggressive, approach.
    • FAQ #14 clarifies that borrowers may use either 2019 or the TTM period before loan application to measure (A) payroll costs for the borrowing base and (B) calculating the average number of employees for the size standard, but also allows:
    • Seasonal employers to use the average number of employees over “the same time [seasonal?] period”, presumably the same time period against which the employer is borrowing (I don’t think they mean to allow peak-season borrowing and off-season employee size count); and
    • Also, new businesses formed after June 30, 2019, may use average employee counts for Jan-Feb, 2020.
  • Details:  1099s Still Out; PEOs OK
    • Employers still can’t count 1099 payments in the loan amount or forgiveness.
    • Employers using PEOs can still apply, and helpfully notes that if you can’t get a 941 from the PEO, a “statement” of applicable payroll costs from the PEO will suffice.

Yesterday, I mentioned FOIA.  Today’s f-word is FCA:  the federal False Claims Act.  Our team is working on a more formal alert on this topic (also called “qui tam”), but the basic gist from my limited corporate-lawyer understanding is:

  • The FCA allows both the government and individual whistleblowers to bring claims against persons who knowingly, or with reckless disregard for the truth, submitted false claims to the federal government. 
  • PPP Loan applications and forgiveness calculations will be submitted by lenders to SBA and thus are subject to the FCA.  The FCA plaintiff’s bar is likely to be watching the PPP and licking it’s chops.
  • The risk of a false statement (or a statement judged later to have been false) is not simply having to repay the loan rather than having  it forgiven.  Potential FCA losses include treble damages, penalties and payment of attorneys’ fees.   
  • Whistleblowers and the plaintiffs’ bar are incentivized to bring such claims because they can recover 15-30% of the damage award plus attorneys’ fees. 

Virtually every borrower and investor that we know is taking a careful and thoughtful approach to this.  That said, we know that some borrowers, in the face of unclear, shifting and uncertain guidance, have debated submitting applications under the most favorable reading of the various guidances and assuming that the lender and/or SBA will sort it out and process the loan correctly.  These FAQ seem to be an acknowledgement that the volume of loan applications (already more than 10-20x all of 2019) makes that simply impossible and that the government may take an approach similar to the 2008 crisis where it “paid and then chased” and ultimately recovered more than $13B in FCA damages under TARP, much of that based on whistleblower complaints.

Borrowers cannot rely on their bank or the SBA to protect the borrower from an inaccurate application. Thus, applicants should be extremely careful in submitting PPP loan applications and should keep meticulous records in using PPP proceeds.  Although the present circumstances may be exigent and dire, borrower statements may be subject to second guessing in the harsh light of morning after the fact when things have settled down.    If that’s not enough, I will leave you with this cheery tweet from over the weekend:

Be careful out there.  Let us know if we can help.