Updates on Paycheck Protection Program

Authored by
Joshua H. Rissmiller

As part of our continuing series of alerts regarding the Paycheck Protection Program (“PPP”), please be advised of the following recent developments:

This Memorandum is subject to further review and update as circumstances develop and should not be relied on for any legal advice without consultation with an attorney.

Loan Necessity Questionnaire

On October 26, the SBA published a nine-page questionnaire that is required to be completed, signed and returned by any recipient of a PPP loan in the original principal amount of $2 million or greater.  This is consistent with prior guidance that loans of $2 million or greater would face heightened scrutiny from the SBA.  The stated purpose of the questionnaire is to assist the SBA in reviewing the certifications made in each recipient’s PPP loan application.  However, most of the questions on this new questionnaire relate to items that were not part of the certifications made in original the PPP application form.  Many of the questions also relate to the period of time after PPP loans were granted, while the original PPP application form could only speak to matters as of the time applications were submitted.  For these reasons, the questionnaire may give us new insight into the nature and scope of regulatory and enforcement risks on PPP loans generally.

Here is a summary of the types of questions on the questionnaire, and the clues they may give us regarding potential enforcement risk on PPP loans:

  • Revenue: The questionnaire asks for a statement of the borrower’s gross revenue in the second quarter of 2019 and the second quarter of 2020.  These questions suggest that the SBA and other regulatory agencies may examine the actual impact of COVID-19 on PPP borrowers during the second quarter of 2020, even if the borrower’s PPP loan application was submitted well before the end of the second quarter.
  • Business Impacts of COVID-19:  The questionnaire asks if the PPP borrower was required to shut down or significantly alter its operations due toCOVID-19, or if the borrower voluntarily ceased, reduced or altered operations due to COVID-19, and for supporting details on these changes to the business.  The questionnaire also asks about any new capital improvement projects since March 13, 2020.  This set of questions indicates that regulators will look into the actual impact of COVID-19 on borrowers, regardless of the projected impact of COVID-19 at the time its loan application was submitted.
  • Liquidity:  The questionnaire asks for information regarding PPP borrowers’ cash position as of the date of the PPP loan application, as well as any dividends, distributions or prepayment of debt since March 13, 2020. These questions indicate that regulatory focus on a PPP borrower’s liquidity, which was indicated by previous guidance, remains a high priority.
  • Employee Compensation:  The questionnaire asks if any employees were compensated in excess of $250,000 on an annualized basis during the PPP loan’s forgiveness period and related information, and particularly whether this group includes any owners of the business. This indicates that companies with highly compensated employees may face greater enforcement risk, particularly when those employees are owners.
  • Ownership: The questionnaire asks if 20% or more of the borrower was owned by any publicly traded company, private equity firm, venture capital fund, or hedge fund on the date of the PPP loan application, or if the borrower was affiliated with a non-US state-owned company or state agency.  In addition, the questionnaire asks if the borrower was a subsidiary of another company, and if so, whether the parent is a non-US company or publicly traded.  Finally, the questionnaire asks for the shareholders’ equity value of any privately-owned PPP borrower as of the end of the calendar quarter prior to the PPP loan application.  This set of questions seem to validate the concerns expressed by many that a borrower will face higher scrutiny if it has publicly traded companies, private equity or venture capital investors, or non-US companies in its investor base.

If your business was the recipient of a PPP loan in excess of $2 million, we advise you to begin gathering this information now, as the questionnaire is required to be completed within ten business days after receipt from the PPP lender.  If your PPP loan is under $2 million, you will most likely not be required to fill out a questionnaire, but the questions nevertheless give us a useful insight into the SBA’s current philosophy and areas of focus when reviewing loan and forgiveness applications, and we would recommend at a minimum that you consider these questions and how you would answer them if required.  Although all PPP loans over $2 million will be reviewed, the SBA may also review any other loans at its discretion.  We would also advise our clients to consult with us when completing this questionnaire and also when submitting forgiveness applications.

Change of Ownership Guidelines

On October 2, the Small Business Administration published guidance regarding the treatment of PPP loans in “change of ownership” transactions.  There are a number of important takeaways:

  • Transaction Threshold:  The threshold for a “change of ownership” transaction is low.  In the case of a transaction structured as a stock sale, the sale of 20% of a company’s common stock or other ownership interests will be deemed to be a “change of ownership”.  In the case of a transaction structured as an asset sale, the sale of 50% of a company’s assets will be deemed to be a “change of ownership”.  In addition, any merger transaction will be deemed to be a “change of ownership”.
  • Lender Approval: Lender approval is always required in any change of ownership transaction.
  • SBA Approval and Escrow Requirement:  SBA approval is required for any “change of ownership” transaction structured as a sale of greater than 50% of the common stock or other ownership interests of the PPP borrower, or as an asset sale.  However, the PPP borrower may avoid this requirement by submitting a complete forgiveness application to the lender and putting funds equal to the loan balance into escrow in an account held by the lender.  If for whatever reason forgiveness is not obtained, these escrowed funds will be used to satisfy the loan amount.  In cases where SBA approval is sought for an asset sale transaction, the SBA will not give approval unless the purchaser assumes all obligations under the PPP loan.

If you are involved in any transaction that is a potential “change of ownership” under these regulations, and one of the parties has an outstanding PPP loan, please consult us for more detailed advice.

Tax Update

On November 18, the IRS issued a ruling stating that business expenses that are paid with PPP loan proceeds (such as payroll and rent) will not be deductible in the 2020 calendar year, if there is a reasonable expectation of forgiveness for the PPP loan.  If you have an outstanding PPP loan, you should consult your accountants and tax advisors to ensure that your business is not expecting a deduction that will not be available.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form