October 12, 2020
Alert: Multiple Updates to the Paycheck Protection Program
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law providing, among other relief, up to $349 billion to fund loans to small businesses affected by the outbreak of COVID-19 (the “PPP”). On April 24, 2020, funding for the Paycheck Protection Program was reauthorized in the amount of $310 billion when the President signed H.R. 266 – the Paycheck Protection Program and Health Care Enhancement Act into law. On June 5, 2020, H.R. 7010 – the Paycheck Protection Program Flexibility Act of 2020 (the “PFA”) was signed into law by the President, which resulted in significant changes to the initial program greatly benefitting borrowers. Finally (at least as of the date of this writing), on July 4, 2020, the deadline to apply for a PPP loan was extended through August 8, 2020 when the President signed S. 4116 into law.
New Frequently Asked Question
On October 7, 2020, question 52 and the answer thereto (“FAQ 52”) were added to the “Paycheck Protection Program Loans Frequently Asked Questions (FAQs),” (the “PPP FAQs”) marking the first new PPP FAQ added since August 11, 2020. FAQ 52 addresses the PFA’s extension of the payment deferral period[1] and whether same must be documented via a formal note modification agreement. The guidance provides that the statutory deferral period provided pursuant to the PFA is automatic and that no additional documentation is required. A copy of the PPP FAQs can be found here.
New Procedural Notice Issued
On October 1, 2020, the SBA issued SBA Procedural Notice Control No.: 5000-20057 effective October 2, 2020 (“Procedural Notice”) to address questions that the SBA has received regarding changes to the ownership structure of an entity that received a PPP loan (a “PPP Borrower”). A copy of the Procedural Notice can be found here.
The Procedural Notice provides, among other things, that “[f]or purposes of the PPP, a ‘change of ownership’ will be considered to have occurred when (1) at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.” Furthermore, “[f]or purposes of determining a change of ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.” The Procedural Notice goes on to detail the steps that a PPP Borrower must take in the event that a change of ownership has occurred. A summary of these steps is set forth below.
| PPP Note Paid In Full? | Change of Ownership Structure | Restrictions on Change of Ownership | Conditions Precedent to Change of Ownership |
SBA Prior Approval Required? |
| Yes[2] | Any | No restrictions. | None | No |
| No | Sale or other transfer of common stock or other ownership interest or mergers in or of the PPP Borrower (“Interest Transfer”) | No restrictions provided that the conditions precedent are satisfied | 1. The Interest Transfer is less than 50% in the aggregate measured from the date of approval of the PPP loan; or
2. The PPP Borrower has properly completed and filed its forgiveness application reflecting all of its use of the PPP loan proceeds with its lender and an interest-bearing escrow account controlled by the lender is established with funds in an amount equal to the outstanding balance of the PPP loan. |
No |
| No | A change of ownership that is structured as an asset sale of 50% or more of the PPP Borrower’s assets (an “Asset Sale”) | No restrictions provided the conditions precedent are satisfied | The PPP Borrower has properly completed and filed its forgiveness application reflecting all its use of the PPP loan proceeds with its lender and an interest-bearing escrow account controlled by the lender is established with funds in an amount equal to the outstanding balance of the PPP loan | No |
| No | All other transactions that do not satisfy the requirements of an Interest Transfer or an Asset sale as set forth herein | To be determined by the SBA4 | The PPP must request approval from the SBA, which request must include:
|
Subject to the unilateral prior approval of the SBA |
For all Interest Transfers, whether or not the prior approval of the SBA is required, the PPP Borrower, and in the case of a merger, the successor to the PPP Borrower, will remain subject to all obligations of the PPP Borrower under the PPP loan, and liability will be extended to all new owners of the PPP Borrower in the event that they utilize any PPP loan proceeds for unauthorized purposes. See Procedural Notice, Section 2c. In addition, all new owners and successors-in-interest to the PPP Borrower must adhere to additional requirements regarding the segregation of PPP funds and compliance with PPP loan documentation requirements. See Procedural Notice, Section 2c.
All prospective successors-in-interest or purchasers of a PPP Borrower should be mindful of the possible consequences that the transaction could have on them. This includes, without limitation, whether or not the combined amount of any PPP Borrower’s loan plus the prospective successor-in-interest or purchaser’s PPP loan could push them into a higher review category, such as PPP loans of $2 million or more being subjected to an automatic audit. In addition, prospective successors-in-interest and purchasers should be aware of the potential impact that the PPP Borrower’s loan could have on said successor or purchaser who did not receive a PPP loan but received other benefits under the CARES Act, such and the Employee Retention Credit[5]. It is important to note that definitive guidance from the SBA is not yet available regarding the foregoing concerns, even though these are hot topic issues in current transactions.
New Forgiveness Application for PPP Loans of $50,000 or Less and Interim Final Rule
On October 8, 2020, the SBA in consultation with the U.S. Department of the Treasury released a third form of the PPP loan forgiveness application which joins previously released SBA Forms 3508 and 3508EZ. This new form titled, “Paycheck Protection Program PPP Loan Forgiveness Application Form 3508S,” OMB Control No. 3245-0407 is only for those PPP Borrowers that received a loan in the principal amount of $50,000 or less, except for those PPP Borrowers that, together with their affiliates, received PPP loans totaling in the aggregate $2 million or greater. A copy of SBA Form 3508S can found here. It is worth noting that this change makes it easier for approximately 68% of PPP Borrowers to file for and obtain loan forgiveness.[6]
Also on October 8, 2020, the SBA and the U.S. Department of the Treasury issued new Interim Final Rule RIN 3254-AH59 (the “IFR”)[7] which provides additional guidance in conjunction with Form 3508S. The IFR provides, among other things, that PPP Borrowers that are able to utilize Form 3508S[8] are “exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees (section 1106(d)(2) of the CARES Act) or reductions in employee salary or wages (section 1106(d)(3) of the CARES Act) that would otherwise apply.”[9] The IFR also confirms that those PPP Borrowers submitting Form 3508S do not have to provide their calculations for the requested forgiveness amount and that lenders may rely upon the representations of the PPP Borrowers contained in Form 3508S provided that the PPP Borrower submits the applicable supporting documentation with the application.[10]
This new streamlined and simplified two page forgiveness application is designed to make obtaining loan forgiveness even simpler and less costly for the smallest of small businesses, a purpose that is recognized in the IFR. This is surely welcome news for many PPP Borrowers. It is important to note that this new form contains an expiration date of October 31, 2020, and that any PPP Borrower intending to use this form, should do so quickly in case the expiration date is not extended. Furthermore, we have not yet received guidance on how similarly situated PPP Borrowers that already submitted their forgiveness applications will be impacted by this new forgiveness application and guidance
SBA Commences Remitting of Forgiveness Payments to PPP Lenders
In its October 8, 2020 press release regarding the above new forgiveness application, the U.S. Department of the Treasury also announced that on October 2, 2020, the SBA finally began remitting payments to PPP lenders for amounts forgiven pursuant to filed forgiveness applications and the resulting decisions of PPP lenders. This is great news given that there could be up to a 150-day turnaround time on SBA decisions and applicable payments pursuant to filed applications for forgiveness. See SBA Procedural Notice No. 5000-20038 effective July 23, 2020. For those PPP Borrowers that have already submitted their completed forgiveness application, it now looks possible that they will receive decisions and wrap up their PPP loan before the end of the calendar year.
There are still many unanswered questions concerning PPP loan forgiveness, and if possible, it is advisable that PPP borrowers refrain from submitting their application for loan forgiveness until all open questions that the PPP borrower and its trusted professionals concerning the forgiveness applications have been adequately addressed through the issuance of rules and guidance from the applicable authorities.
We are closely monitoring this continually developing area and will keep our clients updated as the Paycheck Protection Program and associated forgiveness application progresses. We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available.
If you have any questions, please feel free to reach out to our Commercial Finance and Secured Lending attorneys, Christine H. Price at (516) 265-1176 or cprice@moritthock.com, Brett P. Garver at (516) 880-7266 or bgarver@moritthock.com and Brian P. Boland at (516) 880-7239 or bboland@moritthock.com.
Footnotes:
[1]The PFA provides that the deferral period for a PPP Borrower’s payments of principal, interest and fees runs through: (i) the date that the PPP Borrower’s lender receives the forgiveness amount from the SBA, or (ii) if the PPP Borrower does not apply for loan forgiveness, then a date that is ten months after the end the PPP Borrower’s loan forgiveness covered period.
[2] Repayment in full includes the following: (1) the PPP borrower repaid the note in full; or (2) the PPP borrower completed the PPP loan forgiveness application and thereafter (a) the SBA fully forgave the PPP loan and repaid the sums due thereunder to the lender, or (b) the SBA did not forgive the PPP loan or it only partially forgave the PPP loan and remitted the applicable to sums to the lender and then borrower paid any remaining balance to the lender.
[3]“After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction.” See, Procedural Notice Section 2(ii).
[4] See Procedural Notice Section 2b for some possible restrictions and covenants.
[5] Pursuant to the CARES Act, an entity cannot receive both a PPP loan and the Employee Retention Credit.
[6] “Paycheck Protection Program (PPP) Report, Approvals through 08/08/2020”, U.S. Small Business Administration. A copy the report can be found here. This figure is based upon the number of PPP loan applications and not the aggregate amount advanced pursuant to the program.
[7] RIN 3245-AH59, Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, Small Business Administration, October 8, 2020. A copy of the IFR can be found here.
[8] This also applies to lender’s equivalent form.
[9] RIN 3245-AH59 at page 6.
[10] RIN 3245-AH59 at page 9.
