Interim Final Rules Issued for Paycheck Protection Program Loans – UPDATED

On the evening of April 2, 2020, the Treasury issued an Interim Final Rule in connection with the Paycheck Protection Program (“PPP”) loans provided under the CARES Act.   Below is a brief summary of the updates and clarifications.   We have put this together in the interest of time, but we continue to review this to confirm our initial reading is correct and to confirm no other material terms are noteworthy. 

It’s worth noting that the application process is still unclear.  The SBA released an updated application late last night, which is attached here.  However, it is unclear when banks, which may rely on their own form of application, will start accepting applications and there are multiple conflicting rumors on this point.

  • Eligibility:
    • The borrower had to be in business on February 15, 2020, and be a small business concern defined in 15 USC 632;
    • On affiliation, the SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.   Given the statement that this is characterized by the Treasury as a “first come, first served” program, such guidance may be of little use to private equity and venture-capital backed companies looking to avoid affiliation given the fact people expect the $349,000,000,000 will be allocated very quickly;
    • To be eligible, a borrower must either (1) have 500 or fewer employees whose principal place of residence is in the United States, or (2) be a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry;
    • The lenders will rely solely on a borrower’s certifications to determine eligibility and use of proceeds without independent verification.  This should speed up the process;
    • The following types of businesses are ineligible:
      • Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
      • Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);
      • Life insurance companies;
      • Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
      • Pyramid sale distribution plans;
      • Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
      • Businesses engaged in any illegal activity;
      • Private clubs and businesses which limit the number of memberships for reasons other than capacity;
      • Government-owned entities (except for businesses owned or controlled by a Native American tribe);
      • Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
      • Businesses with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
      • Businesses in which the lender or CDC, or any of its associates owns an equity interest;
      • Businesses which:
        • Present live performances of a prurient sexual nature; or
        • Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
      • Businesses which an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years;
      • The borrower or any business owned or controlled by it or any of its owners, has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government;
      • Businesses primarily engaged in political or lobbying activities; and
      • Speculative businesses (such as oil wildcatting).
  • Payroll Costs:
    • It is now clear that the CAREs act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000, this exclusion applies only to cash compensation, not to non-cash benefits including:
      1. Employer contributions to defined-benefit or defined-contribution retirement plants;
      2. Payment for the provisions of employee benefits consisting of group health care coverage, including insurance premiums; and
      3. Payment of state and local taxes assessed on compensation of employees.
    • A company may not include amounts it pays to independent contractors for purposes of its PPP loan calculation because independent contractors have the ability to apply for a PPP loan on their own. This clears up the possible double counting of those amounts.
    • There may be an argument that federal taxes are included in payroll costs for purposes of determining the loan amount, except for those federal taxes paid/withheld between February 15, 2020, and June 30, 2020. That is, why would there be the need for an exclusion if these were intended to be included in the first place? Many commentators have suggested that, at a minimum, the employer portion of FICA should not be excluded from payroll costs. However, one counter argument is that “payroll costs” is a specific and finite list of included items and because only “state and local taxes assessed on compensation” are mentioned, federal taxes are excluded.
  • Permitted Use and Forgiveness:
    • At least 75% of the PPP loan proceeds must be used for payroll costs and not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs, which is limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.
  • Certifications:
    The borrower has to make the following certifications which are different from the prior SBA application form:
    • The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
    • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
    • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud.
    • Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.
    • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs.
    • During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
    • The information provided with the application and the information provided in all supporting documents and forms is true and accurate in all material respects. That knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
  • Terms of Loan:
    • The interest rate will be 1%
    • Six-month payment deferment during which time interest accrues
    • No Prepayment Penalty
    • The maturity is two years
  • Economic Industry Disaster Loan (“EIDL”) Interplay:
    • A borrower may use the PPP loan to refinance an EIDL loan made between January 31, 2020, and April 3, 2020.  If it received an EIDL loan that was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance, up to $10,000 on the EIDL loan, will be deducted from the loan forgiveness amount on the PPP loan.

If you would like more information on loans under the CARES Act, please contact a member of our Corporate practice group at 585.232.6500 or 716.853.1616.

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