Late Thursday night, the Small Business Administration (“SBA”) issued an interim final rule (the “Interim Final Rule”) outlining the key provisions of SBA’s implementation of the Paycheck Protection Program (the “PPP”) and related loan forgiveness under the “CARES Act”. In addition, on Saturday, the SBA issued a second interim final rule (the “Supplemental Interim Final Rule”) that supplements the Interim Final Rule with additional guidance regarding the application of certain affiliate rules to the PPP. The Interim Final Rule is available here and the Supplemental Interim Final Rule is available here. As discussed in our March 31 memorandum to clients “The Paycheck Protection Program: An Overview of the Key Provisions”, the PPP permits the SBA to guarantee loans provided by eligible lenders to help employers pay payroll and various other overhead expenses. Section 1106 of the CARES Act also provides for loan forgiveness, provided certain criteria are met. The Interim Final Rules are effective immediately, although the SBA has solicited public comments and has indicated that it will consider the need to revise its guidance based on any such comments.
The key takeaways from the Interim Final Rules are as follows:
- 1% Interest Rate and Other Loan Terms: The PPP loan interest rate will be 1.0% (notably greater than the 0.5% rate initially proposed). Borrowers will not be required to make any payments for six months following loan disbursement, although interest will accrue. The maturity date of PPP loans will be two years and no borrower collateral or personal guarantees are required. Eligible borrowers are limited to one PPP loan and the PPP is being administered on a “first-come, first-served” basis.
- Affiliate Rules: When determining eligibility for a PPP loan, in most cases a borrower’s size will be considered together with its affiliates. The Supplemental Interim Final Rule clarifies that affiliate status under the PPP is determined in accordance with the affiliation rule contained in 13 CFR §121.301 (“Section 301”), which provides that entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Notably, the SBA will deem a minority shareholder of a borrower to be in control of the borrower (and therefore an affiliate) if it has the ability to prevent a quorum or otherwise block action by the borrower’s Board of Directors or shareholders.
- Borrowers With Employees Who Live Outside of the United States: A plain reading of the Interim Final Rules suggests that in determining whether it has 500 or fewer employees, a borrower may exclude employees whose principal place of residence is outside of the United States. While somewhat unclear, this appears to represent a change from prior guidance that suggested all employees should be counted. Please refer to our March 31 memorandum for additional details regarding the PPP’s eligibility rules.
- Required Certifications: In order to apply for a PPP loan, an authorized representative of the applicant must certify in good faith to certain items, including among others that “current economic uncertainty makes [the] loan request necessary to support the ongoing operations of the applicant”. Knowingly making a false statement to obtain an SBA loan is punishable by law.
- Clarification Regarding Borrowing Calculation: The Interim Final Rule clarifies the payroll-based formula used to calculate the maximum loan amount available to a borrower under the PPP and provides a step-by-step guide to the calculation, as well as examples. Employers may not count independent contractors as employees for purposes of PPP loan calculations.
- Use of PPP Loans: Proceeds of a PPP loan are to be used for (i) payroll costs; (ii) costs related to the continuation of healthcare benefits during period of paid sick, medical, or family leave, and insurance premiums; (iii) mortgage interest payments; (iv) rent payments; (v) utility payments; (vi) interest payments on certain other debt obligations; and/or (vii) refinancing certain SBA EIDL loans. At least 75% of PPP loan proceeds must be used for payroll costs.
- Clarification Regarding Payroll Costs: The Interim Final Rule further clarifies what constitutes “payroll costs”. Compensation to employees in the form of (i) salary, wages, commissions or similar compensation; (ii) payment for vacation, parental, family, medical, or sick leave; (iii) allowance for separation or dismissal; (iv) payment for the provision of certain employee benefits; and (v) payment of state and local taxes assessed on employee compensation are all covered payroll costs, in addition to certain other items. Notably, the following are excluded from the definition of payroll costs: (i) compensation of an employee whose principal place of residence is outside of the U.S.; (ii) compensation of an employee in excess of an annual salary of $100,000; (iii) certain withheld Federal employment taxes and income taxes; and (iv) certain qualified sick and family leave wages for which a credit is allowed.
- Loan Forgiveness: An amount up to the full principal amount of the loan and any accrued interest is eligible for forgiveness, provided loan proceeds are used for forgivable purposes (as described herein) and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend in part on the total amount of eligible costs and payments over the eight-week period following the date of the loan. Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. The SBA indicated in the Interim Rule Release that it will issue additional guidance on loan forgiveness.
- Misuse of PPP Funds: If a borrower uses PPP funds for an unauthorized purpose, the borrower will be required to repay such amounts. If a borrower knowingly uses PPP funds for an unauthorized purpose, the borrower will be subject to additional liability, such as charges for fraud. If a shareholder, member or partner of a borrower uses PPP funds for an unauthorized purpose, the SBA will have recourse against such person for the unauthorized use.
The Interim Final Rule also contains additional information for lenders, including that lenders may rely on borrower certifications in determining borrower eligibility and use of proceeds, and may rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. In addition, lenders will be held harmless for borrowers’ failure to comply with PPP criteria. The Interim Final Rule also provides additional information related to a lender’s required level of underwriting in respect of the PPP loans, all of which is outside the scope of this Memorandum.
We will continue to monitor any developments related to PPP and update our clients and friends as necessary.
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.