The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), signed by President Trump on March 27, 2020, is a sweeping $2 trillion stimulus bill intended to provide individuals, businesses, healthcare providers, nonprofits, and state and local governments with economic and other relief from the ravages of COVID-19. Among the most notable provisions in the CARES Act is the creation of a new Small Business Administration (SBA) loan program – the Paycheck Protection Program (PPP), to which the federal government has allocated $349 billion. Understandably, many clients are wondering whether their business is eligible under this program. Below are answers to some of the most frequently asked questions regarding eligibility. The attorneys of Morris, Manning & Martin, LLP, are available to discuss these or any other matters regarding the CARES Act or the effects of COVID-19 on your business.
1. What must the size of my business be to be eligible for loans under the PPP?
Short Answer: Generally, businesses with 500 or fewer employees.
The Details: Any business concern, nonprofit organization, or veterans organization which employs not more than the greater of (a) 500 employees total or, if applicable, the size standard in number of employees established by the SBA for the industry. The typical "total annual receipt" limits typically applied by the SBA when determining eligibility for SBA 7(a) loans are disregarded for purposes of the PPP. The SBA's most recent size standard table can be found here.
2. What if the borrower is affiliated with other entities?
Short Answer: For most businesses, employees of those entities will be counted toward the 500 employee cap.
The Details: Under the SBA's usual criteria, employees of a borrower's affiliates are included by a lender when determining whether the borrower qualifies as an eligible small business. Thus, generally speaking, a group of affiliated companies will be treated as a single borrower in determining whether that borrower's size standard eligibility. Notably, the CARES Act explicitly waives the inclusion of affiliates for accommodation and food services businesses, businesses operating as a franchise, and businesses which receive financial assistance from a Small Business Investment Company which is licensed under section 301 of the Small Business Investment Act of 1958. It remains to be determined whether the SBA, in enacting its regulations governing the PPP, will waive or modify the traditional affiliation tests for any other businesses or industries.
3. How is eligibility affected if my business is owned, in whole or in part, by a venture capital or private equity investor?
Short Answer: Unless the rules are revised, your business may not qualify under the PPP.
The Details: The SBA's criteria for determining "affiliation" is relatively complex, but in general, affiliation is determined to exist when one business controls or has the power to control another, or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership (i.e., greater than 50% equity ownership), management rights, or other specific contractual rights (such as approval or veto rights granted to a certain class or series of equity interest). While no single or combination of factors will absolutely result in a determination by the SBA that one or more parties are affiliates, and the SBA's regulations themselves note that the SBA will consider the "totality of the circumstances," the general experience of practitioners and borrowers is that the SBA will interpret affiliation liberally. Although circumstances will vary from firm to firm, many if not most venture capital and private equity investments (with the exception of, perhaps, some early-stage seed and angel investors who do not exercise control over the companies they invest in) are structured such that, under traditional SBA rules, the portfolio companies of those firms would constitute affiliates. Therefore, assuming the venture capital or private equity firm's portfolio companies (other than those explicitly excluded companies discussed above) have, in total, 500 or more employees, those portfolio companies may be ineligible for PPP loans. Note that the National Venture Capital Association (NVCA) and other groups are actively lobbying the SBA to loosen its affiliation rules as they apply to portfolio companies of private equity and venture capital firms.
4. What if my business has more than 500 employees but operates in multiple locations?
Short Answer: If it falls into certain limited industry categories, it will likely remain eligible under the PPP.
The Details: Businesses in the accommodation and food services industries that operate out of multiple physical locations remain eligible for PPP loans provided that no single physical location has more than 500 employees. To be covered by this exception, a business concern must be assigned a North American Industry Classification System code beginning with 72. Such businesses include:
- Hotels and Motels
- Casino Hotels
- Bed-and-Breakfast Inns
- All Other Traveler Accommodations
- RV Parks and Campgrounds
- Recreational and Vacation Camps (except Campgrounds)
- Rooming and Boarding Houses, Dormitories, and Workers' Camps
- Food Service Contractors
- Mobile Food Services
- Bars (Alcoholic Beverages)
- Full-Service Restaurants
- Limited-Service Restaurants
- Cafeterias, Grill Buffets, and Buffets
- Snack and Nonalcoholic Beverage Bars
5. Under what circumstances would my loan under the PPP be eligible for forgiveness?
Short Answer: A portion or all of the principal of the indebtedness, to the extent expended on certain qualified uses within eight weeks following the loan origination, is eligible for forgiveness.
The Details: Qualified uses for forgiveness include (i) payroll costs (excluding compensation in excess of $100,000 per year to any individual employee), (ii) interest (but not principal) on mortgage obligations incurred prior to February 15, 2020, (iii) rent under agreements entered into prior to February 15, 2020 and (iv) utility payments for services on accounts established prior to February 15, 2020. Any such debt forgiveness shall be excluded from gross income, such that it will not be taxable. However, the amount forgiven will be proportionately reduced by a fraction determined by dividing the average number of full-time employees of the business during the eight-week forgiveness period by the average number of full-time employees of the business during certain specified prior periods. Furthermore, the amount forgiven will be proportionately reduced by the amount of any reduction in excess of 25% of an employee's compensation in the most recent full quarter in which the employee was paid during the loan forgiveness period.
6. Will my business qualify if one or more owners are foreign persons?
Short Answer: Likely not.
The Details: The application form for PPP loans recently released by the SBA states that applicants will be denied if any owner of 20% or more of the borrower’s equity is not a U.S. citizen or lawful permanent resident. It is not currently known whether citizenship or residency will be analyzed beyond the level of the borrower’s direct owners.
7. When will further guidance on eligibility criteria become available?
Answer: The CARES Act directs the SBA to enact regulations implementing the law within 15 days of its enactment. MMM will continue to provide updates and analysis as they become available.
The information presented is for educational and informational purposes and is not intended to constitute legal advice. Readers should consult their professional advisor. Any opinions expressed within this article are solely the opinion of the featured author and not of Morris, Manning & Martin, LLP.