CARES Act – SBA Interim Final Rule and Updated Application

All, Thursday evening (April 2, 2020) SBA released an Interim Final Rule (IFR) implementing the PPP Loan program, and later released a new form of PPP Application.  These effect significant changes to the prior Treasury guidance and prior form of application, both released on March 31.  Note that some changes fundamentally alter availability, so a careful review is required. 

Here is a summary of the more material changes:

  • Application; Timing
    • The new application helpfully removes the requirement that 20% owners sign the application. 
    • Based on our discussions with leading SBA lenders, we understand that:
      • Many of the larger lenders will not be ready to accept applications on Friday  and are hoping to go live early next week;  and
      • At least initially, many lenders of all sizes intend only to provide PPP loans to existing customers of such bank, and in some cases only to existing “borrower” clients.  Prospective borrowers should contact their preferred lenders early on Friday morning to inquire as to that lender’s application process and timing.
  • Ineligible Businesses.  The IFR expressly states that certain businesses are ineligible to receive a PPP, by referencing CFR § 120.110  (What businesses are ineligible for SBA business loans?), which includes the following ineligible businesses:
    • Lenders, factors, life insurance companies;
    • Certain “sin” businesses (but alcohol-related companies are generally eligible);
    • Passive businesses (including developers, etc.);
    • Businesses teaching or indoctrinating religious beliefs;
    • Political or lobbying business; and
    • Speculative businesses (such as “oil wildcatting”).
  • Eligibility Size Test:
    • The IFR revises the 500 employee test to count only employees whose principal place of residence is the US and appears to measure such employee count as of the time of application for or funding of a PPP loan.
  • The IFR appears to clarify that a borrower may not qualify for a PPP under an industry size standard tied to its “annual receipts”.  Instead, the applies only the “employee-based size standards for [the applicable] industry.”  It appears that this industry-based size standard (and not the 500=employee test) is to be calculated in accordance with 13 CFR 121.106, which counts all employees foreign and domestic and uses the average number of employees on each payroll period for the most recent TTM.   
  • Interest Rate:  has been raised to 1.00% and is now forgivable.
  • Payroll Costs
    • The IFR clarifies that borrowers should not include payments to 1099 independent contractors in the calculating either the loan amount or forgiveness amount (because such contractors can apply for their own PPPs).
    • In an ongoing inconsistency, the IFR refers to the loan amount being calculated based on TTM payroll costs, while the revised application still says that “most Applicants will use the average … for 2019.”  It is not clear if this inconsistency is intentional, but applicants may be able to choose either period in their application.  (And are advised to check with their preferred PPP lender, if possible).
    • The IFR excludes both the employee and employer FICA contributions only for the period from Feb 15, 2020 to June 30, 2020.  Thus, such amounts incurred prior to Feb 15, 2020 could be included in calculating the loan mount, but later FICA payments cannot be counted toward forgiveness.
    • The IFR clarifies that for employees making more than $100k per year, the loan (and forgiveness calculation) only exclude “compensation paid to” such employee in excess of $100k.  Thus for an employee making $105k, a borrower could include $100k of compensation, plus benefit and other permissible costs.
  • Affiliation.   Unfortunately, the IFR punts on this for now and simply says “SBA intends to promptly issue additional guidance” re affiliation (and that it will also issue (no mention of promptly) additional guidance on loan forgiveness).  Some are optimistically inferring that the reference to further guidance on affiliation indicates a likely loosening of the affiliation  standards applicable to portfolio companies of PE and venture-backed companies, but we will need to such additional guidance before commenting.   We are continuing to monitor for such guidance and will provide updates when possible. 

Thank you and please let any member of our CARES Act loan team know if you have any questions.

SBA PPP Initial Fact Sheets

SBA just provided more information and fact sheets on the SBA Paycheck Protection Program forgivable loans.  These are NOT full implementing regulations, but are helpful and clarify many terms (thankfully, including providing the “right answer” to the $100k question).  We are still studying these in detail and still need the final regs, but in the meantime, we have attached:

  • A high-level PPL loan summary term sheet, updated to reflect information in the SBA fact sheets (new information is noted in bold in the term sheet); and
  • The just-released loan application, which requires:
    • Signatures by all holders of 20% or more of the borrower’s equity (plus GPs, etc.) (we are reviewing the impact of this requirement);
    • A listing  of affiliates and description of the nature of the relationship, which will likely require legal analysis and assistance;
    • Copies of 2019 “payroll documentation” (we expect that lenders will also require corporate/entity org docs and tax returns); and
    • The expected certifications as to the necessity of the loan due to economic uncertainty and use of proceeds, etc.

Note that applications may be submitted beginning this Friday April 3, so we (and they) have some time, but borrowers can begin completing these and gathering the required info.

NOTE: that the application clarifies the $100K comp question in the hoped-for manner by saying that the measure is “average monthly payroll for 2019 , excluding costs over $100,000 on an annualized basis for each employee.”  This is doubly good news because it:

  • Means borrowers only exclude $5k for an employee making $100k (and can thus borrow against the first $100k); and
  • Uses calendar year 2019 payroll amounts, which should be easier for most borrowers to calculate.

Here are direct links to the SBA resources:

  • For a top-line overview of the program CLICK HERE
  • If you’re a lender, more information can be found HERE
  • If you’re a borrower, more information can be found HERE
  • The application for borrowers can be found HERE

We will be in touch with more information, as and when we receive it.  Thank you.