Today is (well, yesterday was) Wednesday, May 13, SEVENTEEN 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 4.3 million PPP borrowers awaiting such guidance and regulations.
After sounding retreat on the certification issue and moving the goalposts yet again, SBA Wednesday evening issued FAQ #47, extending the safe harbor until Monday May 18. (At this point, I’m picturing this “safe harbor” looking a bit like Judge Smails’s yacht club after Rodney shows up.) It appears that many public companies who were waiting until the last minute to decide whether to return their PPP loans will now be keeping such loans (including the
I’d like to buy a vowel STK chain). FactSquared reports that 61 public company borrowers have returned loans totaling $411M, which is less than 1/3 the total $1.3B borrowed by the 409 public companies that FactSquared has identified as receiving a PPP loan. However, it appears that the SEC may step up its review of such borrowers.
A couple of additional notes on the new FAQ 46 guidance:
· The new guidance applies only to the “necessity certification.” Borrowers should still carefully comply, and document such compliance, with all PPP requirements, including such certification. We expect that PPP records may still be examined by potential whistleblowers, and will become a diligence point in future financings or sales of the business.
· FAQ #46 still provides that SBA will review not just loans >$2M, but also “other PPP loans as appropriate.” Thus, although borrowers under $2M will be deemed to have made the necessity certification in good faith,SBA may still review those loans for compliance with the other PPP requirements when the borrowers apply for forgiveness (and perhaps otherwise).
· The same affiliation standards and exemptions (NAICS 72, franchise, and SBIC) apply to the $2M affiliation aggregation as apply to the PPP size standards calcs on the front end.
It’s not just me (and borrowers, and the media (even in story calling FAQ 46 “great news”)) calling out the SBA for the lack of forgiveness guidance, on Friday the SBA Inspector General issued a flash report on the PPP program taking them to task for that and a few other notable points:
· SBA did not adequately instruct lenders to prioritize rural and underserved markets and borrowers.
· SBA’s guidance on the 75% rule “did not align with the allowable use requirements for PPP loans” under the CARES Act. This, combined with the 2-year term (vs the “up to 10 year” term under the CARES Act” could result in an “unintended burden to the borrowers.” Based on the OIG’s review of data “tens of thousands of borrowers” will not meet the 75% requirement because they “have more operational expenses than employee expenses.” Could this cause SBA to relax the 75% if and when it issues the forgiveness guidance?
· Speaking of which and as I mentioned, the OIG flash report also chides SBA for, yep, not having timely issued the forgiveness guidance. (This was 5 days ago and hasn’t seemed to motivate SBA yet.)
· Interestingly, the OIG also notes that SBA has failed to register borrower loans by the borrowers EIN (or Taxpayer ID Number (TIN) in the report). This seems like a minor technicality, but note that we expect one enforcement mechanism for SBA will potentially be to use data analytics to compare borrowing information against prior tax returns. If the EIN numbers have not been linked to loan numbers, it is not clear whether this will be possible, which could delay SBA’s ability to conduct the required review of all loans in excess of $2M.
· The OIG flash report also contains a helpful 30-page, 3-column table comparing the CARES Act requirements vs the IFRs and the FAQ.
SBA’s numbers today show that loan approvals are slowing down even further, with barely $1B approved on Wednesday. That money seems to be burning a hole in SBA’s pocket, as it today issued a new IFR on Loan Increases (IFR
10?X) that provides some flexibility for certain borrowers to upsize their funded PPP loans:
· Partnerships (and LLCs): On April 14, SBA issued IFR 4 that rendered persons with self-employment income because they are partners in a partnership ineligible for PPP loans, announcing that the compensation paid to such partners should instead be treated as a payroll cost of the partnership and thus eligible for PPP borrowing (and forgiveness) up to $100k annualized. Prior to that guidance, SBA had indicated that such partners were in fact eligible for PPP loans because they were self-employed.
o Thus, as with most of the PPP rules and guidance to date, IFR 4 was met with a round of face-palms, in that case by partnership borrowers who had left significant money on the table by not borrowing against such partner compensation.
o Now, a month later, IFR X is allowing those borrowers to go back and upsize their loans to include these partner compensation amounts up to $100k annualized comp for each partner and up to the $10M and $20M caps on individual and “corporate group” loans.
o Just a reminder that “partnerships” means “tax partnerships”, which includes LLCs.
· Seasonal Employers: Similarly, on April 28, Treasury* issued IFR 5 that allowed seasonal employers to use any 12-week period from May 1 to Sept 15, 2019. Because this could result in additional payroll costs against which borrowers could borrow, IFR X now allows those borrowers to upsize their loans accordingly.
*As an odd technical aside, the introduction to IFR X notes that SBA issued IFRs 1-4 and 6-9, but that*TREASURY* issued IFR 5. I have NO IDEA if that has any significance, but will check with our regulatory and tax teams. The intro also refers to IFR 5 as having been posted on April 28 although it was actually posted on April 27, as correctly reflected on Treasury’s website. (I mention this only because someone will ask me about it. It’s probably just a typo?)
· HOWEVER, because this is the Federal government and red tape reigns supreme, such a loan can NOT be upsized if the lender has already filed its Form 1502 for such loan. Those are due to be filed on the later of 20 days after the date of the loan or May 22. So, affected borrowers should quickly contact their banks to request that they hold off on filing such forms (and hope that those banks weren’t ahead of the game on making such filings.)
That is all for tonight. Apologize for not providing the HEROES Act Analysis, but we will follow up shortly with that.