SBA PPP: Important CHANGE to Employee Size Standard?

It is Wednesday, May sixth, ten days after the deadline imposed under Section 1106(k) of the CARES Act for SBA to “issue guidance and regulations implementing” PPP forgiveness.  There are now more than 4 million PPP borrowers awaiting such guidance and regulations.

After extending the Safe Harbor to May 14, SBA and Treasury last night also released a new FAQ #44 , which says that employees of foreign affiliates now must be counted for purposes of all size standards.  This is a stunning change.  IFR 1 and FAQ#3 both refer to 500 employees whose principal place of residence is in the US.  

·         Recall that the CARES Act refers only to “500 employees” with no reference to that standard being limited to US employees.    We were surprised when IFR 1 and FAQ #3 came out with the rule that excluded foreign employees from this test because that contradicted the plain language of the CARES Act and the traditional SBA size standards under 13 CFR 121.106(b)(1) (employees “include[e] the employees of its domestic andforeign affiliates”).

·         IFR 1 issued April 2and FAQ 3, issued April 6,  clearly contradicted this. IFR 1:  “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States”; FAQ 3:  “In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States”).

·         Now, more than a month and FOUR MILLION PPP LOANS later, SBA and Treasury have reversed course, reverting to the statutory standard under the CARES Act and the traditional SBA rule.  Even for a process that has been this poorly managed, this is a stunning change.

·         Existing borrowers with foreign affiliates should be able (at least in legal theory) to rely on FAQ  #17 which says that  “Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application.” 

·         However, it appears that we are in FULL OTTER MODE (language warning) at this point and seemingly unable to trust or rely on existing guidance.  We are continuing to review the administrative law aspects of this changing guidance.  (As an aside, Admin Law was widely regarded as the most boring of all boring classes in law school, so I didn’t take it.  This process is a lot of things, but boring isn’t one of them.)

We will address this and other questions on our Virtual Town Hall on Eligibility at 1:00 ET today.  Yes, despite the safe harbor extension, we are going forward with it (and I just don’t have the heart to change the title from “last look”).

SBA also announced that on Monday and Tuesday it had approved fewer than new 200k PPP loans totaling about $5.5B, bringing the total under PPP 2.0 to $181.2 Billion.

Finally, SBA and Treasury also last night released a new IFR titled: Business Loan Program Temporary Changes; Paycheck Protection Program – Nondiscrimination and Additional Eligibility Criteria (IFR 8), addressing two points:

·         SBA is incorporating applicable exemptions from Federal statutory and regulatory non-discrimination provisions for certain sex-specific and religious practices for organizations who would otherwise be entitled to such exemptions but for getting an SBA loan.

·          Student workers count as employees except for students in “work-study” programs employed by higher education PPP borrowers.  Such borrowers must exclude work-study students both for purposes of the size standard for PPP eligibility and for purposes of calculating payroll costs (and presumably for the FTE forgiveness test?  I mean, would it kill them to address forgiveness?).

And yes, with IFR 8 addressing only these two points and not addressing forgiveness, that means that eight is NOT enough IFRs to implement this program. (Sigh. I may be the only person old enough to get that reference). That’s all for now. Hope to see you at 1:00.