The Small Business Administration has published the final Paycheck Protection Program (“PPP”) loan application that small businesses will be required to complete and submit to an authorized SBA lender. That loan application can be accessed here. This final form clarifies a number of issues that we spotted in the sample application form previously published.
Importantly, with the final application, the SBA also published "Interim Final Rules" for these PPP loans which are available here (the "Final Rules"). We highly recommend that anybody interested in applying for a PPP loan download these rules. Skip the first four (4) pages and begin reading from the bottom of page five (5) starting at "2. What Do Borrowers Need to Know and Do?"
Most of the information aligns with what our firm previously published on our March 31, 2020 alert, but the Final Rules clearly state information on how best to fill out the PPP application and clarify that the interest rate will actually be 1.00% instead of 0.50%, as previously indicated by the US Department of Treasury.
Here are a few highlights we anticipate will be of particular relevance to businesses considering applying for a PPP loan:
- Interest Rates – Interest on PPP loans will accrue at a fixed rate of 1.00%--not the 0.50% previously published by the US Department of Treasury.
- Independent Contractor Payments Are Not Included in Payroll Costs – Since independent contractors can apply directly for a PPP loan, an applicant does not include payments to independent contractors as part of the applicant's payroll costs.
- Only US Employees Count for Purposes of Payroll Cost Calculation – Any compensation of an employee whose principal place of residence is outside of the United States cannot be included in calculating payroll costs. This seems to apply to US citizens living abroad.
- Use of Funds Restrictions – While the CARES Act said that PPP loans could be used for certain non-payroll related expenses (e.g., rent, utilities, and certain interest payments), the Final Rules state that only 25% of a PPP loan can be used for these items. Therefore, 75% of each PPP loan must be used for payroll costs.
- Forgiveness – The general guidance on loan forgiveness discussed in our previous posts remains unchanged except no more than 25% of the overall PPP loan forgiveness may be attributable to non-payroll costs.
- Affiliation Rules Will Apply But Remain Unclear – The Final Rules state that small business concerns as defined in section 3 of Small Business Act, "and subject to SBA's affiliation rules under 13 CFR Section 121.301(f)" (unless specifically waived under the CARES Act) are eligible to apply for a PPP loan. The Final Rules then proceed to say that "any other business" may also apply and that SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR Section 121.103 and Section 121.301 ("Section 301"). Many VC-backed companies worry that affiliation may apply to them based on sub-part (6) of Section 301, which says the SBA can deem an investor to be an affiliate of an applicant if the totality of the circumstances justifies that determination. In that situation, the number of employees working for the investor's other portfolio companies that are also deemed affiliates of the investor would be added to the number of employees of the applicant. This could lead an applicant to be deemed to have more than 500 employees. Historically, the SBA has looked at whether an individual minority investor has "blocking rights" on certain business decisions (such as the right to block (i) dividends from being issued, (ii) indebtedness from being incurred, and (iii) changes to budgets). But, sub-part (6) of Section 301 requires the SBA lender to make the "totality of the circumstances" determination, and the SBA will not challenge the SBA lender's determination so long as the lender acted reasonably. Surprisingly, the PPP loan application does not have a field for listing who you think might be your affiliate(s), but it does require a certification that you believe you have 500 or less employees. We strongly recommend that all VC and/or Private Equity-backed applicants consult with their legal counsel on the affiliation rules and monitor the SBA website for further guidance and, no matter what, make it clear in writing to your SBA that you have VC or PE investors and would be happy to discuss your cap table and all protective provisions you have in your Certificate of Incorporation, Bylaws, or other agreements between your organization and your investors. (Note, if your organization receives financial assistance from a SBIC, you are exempt from the affiliation rules under the CARES Act.)
If you have particular questions about these initiatives, we encourage you to contact your legal counsel, accountants, financial institutions, and/or financial advisors.
Have additional questions? We would love to talk. Feel free to reach out to us at jake@pacificcrestlaw.com, connor@pacificcrestlaw.com, or by calling us at 415-398-5300.