Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), the loan program intended to allow employers to continue to pay their employees and assist with certain other expenses resulting from the COVID-19 pandemic.
As the PPP went into immediate effect without the standard comment period, the SBA continues to issue additional guidance in the form of Frequently Asked Questions (FAQs) and responses. The most recently updated FAQs, current as of May 3, 2020, are available here. Importantly, the government will not challenge actions that borrowers and lenders take consistent with the guidance in effect at the time.
In the most recently updated FAQs, the SBA provided the following guidance:
1. Assessment of Other Sources of Liquidity – Applicability to Businesses Owned by Private Companies
The SBA issued updated guidance stating that businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations must assess whether they can certify, in good faith, that the PPP loan is actually necessary, given the availability of the applicant to access other sources of liquidity to support their ongoing operations in a manner that is not significantly detrimental to the business.
2. Eligibility of Successor Entities for PPP Loans
The PPP loan application – available here – requires the applicant to certify that it was “in operation” on February 15, 2020. The SBA clarified that as long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership of the applicant.
If there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, 2020, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new Tax ID number and even if the acquiring business was not in operation until after February 15, 2020.
As long as the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan.
3. Review of PPP Loan Files
The SBA has decided, in consultation with the U.S. Department of the Treasury (Treasury), that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. This decision is consistent with the SBA’s previous guidance that a borrower should be prepared to demonstrate to the SBA, upon request, the basis for its certification that the PPP loan is necessary for the borrower’s ongoing operations.
NOTE: The SBA advised that additional guidance implementing this procedure will be forthcoming.
4. Effect on Loan Forgiveness When Employee Rejects Offer for Rehire
The SBA advised that it and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire and the employee’s rejection of that offer must be documented by the borrower.
It is important to be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
NOTE: It is unclear how this guidance squares with the requirement that at least 75% of the loan proceeds must be used for payroll costs.
5. Effects of Updated Guidance on Previously Filed Applications – Seasonal Employers
The PPP loan application requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.”
On April 27, 2020, Treasury issued an interim final rule – available here – allowing seasonal borrowers to use a base period (March 1, 2019 through June 30, 2019) for purposes of calculating the loan amount for which they are eligible under the PPP, which was later changed (any 12-week period between May 1, 2019 and September 15, 2019). An applicant that is otherwise in compliance with applicable SBA requirements and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page three of the loan application for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.
Attorney Advertising. The information contained in this Legal Alert provides a general summary of the topics covered and is not intended to be and should not be relied upon as legal advice. You should consult with your legal counsel for advice and before making legal, business or other decisions.
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