Washington, D.C. (May 11, 2020) - If your business has employees outside the United States, and you applied for and received Paycheck Protection Program (PPP) loan funds on the basis of the U.S. employee head count, you may want to consider checking your math. Last week, the U.S. Treasury and Small Business Administration (SBA) issued another in their evolving Frequently Asked Questions (FAQ) document. The new FAQ 44 confirmed that businesses seeking to qualify for PPP loans on the basis of the employee size standard must use the SBA affiliation rules that apply to the traditional 7(a) loan program at 13 C.F.R. § 121.301(f) and count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver or exception to the affiliation rules.
The need for the clarification likely arises from the answer to FAQ 3, which was published on April 3, 2020, just as the PPP opened for applications. The answer seemed clear, stating in part that "a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States ...." In its brevity, the answer omitted critical information about the standard SBA employee size standards test, including that employees of the applicant in the United States and elsewhere, as well as the employees of the borrower's affiliates, wherever located, count in the applicant's headcount. Under PPP ground rules, the liability for not correctly applying the size standard and affiliation rules will fall on the borrower. Unlike the normal 7(a) loan process, lenders are not required to confirm that the applicant is eligible but rather can rely on the applicant's certification that it is eligible to receive a loan.
This is just the latest evolution in the interpretation of PPP eligibility that has caused borrower angst. Last month, a public outcry ensued after it became known that almost 100 publicly traded companies and other well-capitalized entities received PPP funds. In response, the Treasury Department and SBA issued guidance in FAQ 31 and 37 that such companies were unlikely to be "able to make the required certification in good faith" that the funds were necessary to sustain business operations. The government then gave borrowers until May 7 (since extended to May 14 in FAQ 43) to return funds should they, upon reflection, determine that they do not need the funds for sustaining operations. The SBA has promised to issue guidance prior to May 14 on how it will review the certifications. That guidance is not yet available.
SBA has stated that to "ensure PPP loans are limited to eligible borrowers in need" it will review all loans in excess of $2 million, "in addition to other loans as appropriate," following the borrower's loan forgiveness application. (See our previous alert "CARES Act Borrowers Beware: Prosecutions Are Beginning," from May 6.) Given the rushed implementation of the CARES Act programs, borrowers affected by these rules should consult with legal counsel familiar with the PPP and SBA lending requirements.
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