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Stimulus Bill Creates Second Draw PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects new PPP borrowers. The changes previously discussed that will affect all PPP borrowers will also generally affect Second Draw PPP loans, and the changes previously discussed that only affect new PPP loans will also generally apply. The discussion below is based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Ability to Apply for a Second PPP Loan. While the CARES Act originally limited eligible small businesses to one PPP loan, Section 311 of the Act creates a new opportunity for certain PPP borrowers (including those that received a PPP loan in 2020 or that will receive a new PPP loan in 2021) to apply for one additional PPP loan, a so-called “second draw” loan. In order to apply for a second draw loan, the PPP borrower will need to have utilized 100% of their prior PPP loan prior to distribution of the second draw loan. This requirement should presumably not be particularly burdensome for those that obtained their PPP loan in 2020, but may limit the ability of new PPP borrowers to obtain both a PPP loan and a second draw PPP loan in 2021.

The Act provides for up to $259 billion for second draw PPP loans, with $25 billion set aside for second draw PPP loans to entities with no more than 10 employees (in individual loan amounts not to exceed $250,000 and made to an entity in a low or moderate income neighborhood). Second draw PPP loans are to be available through March 31, 2021.

Eligibility – Number of Employees. In order to be eligible for a second draw loan, the small business may have no more than 300 employees (down from 500 employees for general PPP loan eligibility). Based on the language in the Act, it appears that the other means of eligibility for a small business to have qualified for a PPP loan, namely the revenue standards or the alternative size standard, will not be available to qualify for a second draw loan.

Eligibility – Revenue Decline. Unlike a primary PPP loan, eligibility for a second draw PPP loan is also conditioned on specific evidence that the business has been harmed by the pandemic. Specifically, to be eligible for a second draw loan, a small business will need to show that gross receipts during at least one quarter in 2021 was down at least 25% from the comparable 2019 quarter. The Act provides that for loans up to $150,000, borrowers may merely attest certification to this revenue standard, but would then be required to provide supporting documentation before submitting forgiveness.

Loan Size. Like the primary PPP loan, the size of the loan is generally set to be an amount equal to 2.5 times monthly payroll costs, however the maximum size of a second draw PPP loan will be $2 million. (As over 995 of the original PPP loans were for $2 million or less, this small size cap should not affect most borrowers.) In addition, the Act provides that small businesses that are classified under NAICS 72 code (generally those in the accomodation and food services sector) are eligible for a larger PPP loan, namely up to 3.5 times their monthly payroll costs (but still capped at $2 million).

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Stimulus Bill Changes to New PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects new PPP borrowers. The changes previously discussed that will affect all PPP borrowers will also affect new borrowers. The changes below only affect new PPP borrowers, and do not affect existing outstanding PPP loans. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Applications Re-Opened through March 31, 2021. The Act authorizes a renewed opportunity for eligible small businesses to apply for a PPP loan. The Act authorizes up to $259 billion in new PPP loans, although some of that money could also be utilized for second draw PPP loans. The prior authorization for new PPP loans ended on August 8, 2020. The terms of these new (first) PPP loans remain essentially the same… up to $10 million, based on monthly payroll costs, with a cap of $20 million for any affiliated corporate group. Eligibility is also generally unchanged: less than 500 employees and ability to certify that due to economic uncertainty the PPP loan is necessary.

Public Companies Ineligible. If a company has securities listed on an exchange registered with the SEC, then it is ineligible for a covered loan on or after December 27, 2020.

Expanded Non-Profit Eligibility. Section 318 of the Act slightly expands eligibility for non-profit entities to include 501(c)(6) and “destination marketing organizations.”

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Stimulus Bill Changes to All PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects all PPP borrowers. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Tax Treatment. Most importantly, Section 276 of the Act reverses the prior Internal Revenue Service guidance and provides significant tax relief to all PPP borrowers. Not only does the Act confirm that any cancellation of debt income obtained from forgiveness of the PPP loan is tax exempt (as provided for in the CARES Act), but now any tax deductible expenses used to generate such forgiveness may still be taken to reduce taxable income.

Covered Period Flexibility. Section 306 of the Act provides PPP borrowers with the flexibility of setting the length of the “Covered Period” for purposes of PPP loan forgiveness and FTE representations at any length between 8 and 24 weeks. The Covered Period will begin on the date of the origination of the PPP loan, and end on the date selected by the borrower that occurs between 8 weeks and 24 weeks after origination.

EIDL Advance Does Not Affect Forgiveness. Section 333 of the Act repeals a prior CARES Act provision that said that any forgiveness would be reduced by the amount of the EIDL Advance. We understand that newly processed forgiveness remittances from the Small Business Administration (SBA) already reflect this change, but we are awaiting SBA guidance for how they will handle previous EIDL Advance-based forgiveness reductions.

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PPP Loan Necessity Certifications and Fraud Investigations

A recent article in the Wall Street Journal highlights renewed talk in some circles about allegedly “growing evidence” of fraud among PPP participants.  We think the observation of the former federal prosecutor who is quoted in the story is salient.  While we wouldn’t phrase it the way the ex-prosecutor does (the “scandal is what’s legal, not what’s illegal”) and we disagree with his disdain for the program, the larger point is important: Congress has spoken—twice—and may speak a third time. In adopting the CARES Act, Congress established a program with small businesses’ self-assessment of their needs as the critical component for eligibility.  Congress’s revisions to the PPP at the end of May liberalized several program rules and broadened the amount of loan forgiveness that borrowers could expect.  While the existence of fraud, as with any federal program, was predictable, particularly in the rollout of an emergency measure, the WSJ story, and the federal prosecutor, points out that prosecutions are difficult considering that potential defendants would be judged based on the regulations and law existing at the time application were made.

We also think it’s important to put the numbers discussed in the Wall Street Journal article in context.  If every one of the suspicious activity reports related to PPP loans, then less than 0.05% of loans were suspicious.  If all 500 suspects are guilty of fraud, that represents less than 0.01% of PPP borrowers.  If we round up the dollar amount involved to ten hundred million dollars (which any reporter attempting to make a story sound important (or evil mastermind transported forward in time) would round to one billion dollars), then less than 0.2% of money lent under the Paycheck Program was fraudulent.

The WSJ story comes at a time when we have seen many accounting firms and a number of lawyers circulate the draft SBA Loan Necessity Questionnaire for For-Profit and Non-Profit Borrowers. “questionnaires.”  The questionnaires state that they will be used in cases of PPP loans greater than $2 million “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application … that economic uncertainty made the loan request necessary.”

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Four Things You May Have Missed about the PPP Change of Ownership Notice

As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice. 

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice. 

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

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PPP & Asset Sales: Is the Buyer Required to Assume the PPP Note?

No.

On October 2, the Small Business Administration published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a Buyer to assume all of the PPP Borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the Buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner makes economic sense for the parties, including leaving the PPP loan obligations with the Seller.

Section 2.b. of the procedural notice indicates that, in connection with obtaining SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate that the purchase or sale agreement “must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the Buyer assume the PPP loan. However, this obligation is limited to circumstances in which SBA pre-approval is required.

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SBA Confirms Impact of PPP Flexibility Act on Outstanding Promissory Notes

On October 7, 2020, the Small Business Administration and Treasury Department updated their Frequently Asked Questions on the Paycheck Protection Program with FAQ 52. As reflected in the question, the PPP Flexibility Act made certain changes to the terms of loans made under the Paycheck Protection Program, including an extension of the deferral period before any payments would be required. FAQ 52 confirms that these changes automatically applied to all outstanding PPP loans, and that lenders are required to give immediate effect to the statutory extension. While no formal modification of the promissory note is required (thus avoiding any need to re-execute the promissory note or an amendment), the FAQ provides that lenders “should” give notice to borrowers of the changes caused by the PPP Flexibility Act.

As the changes of the PPP Flexibility Act were 100% in the favor of the borrower, this is consistent with the approach that Bryan Cave Leighton Paisner LLP recommended to PPP lenders in advance of the publication of the new FAQ. In addition to the extension of the deferral period, the PPP Flexibility Act also provided for a permissible extension of the covered period for potential forgiveness from 8-weeks to 24-weeks, and a reduction in the percentage of forgiveness that must be used for payroll expenses.

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SBA Provides Guidance on Changes of Ownership of PPP Borrowers

On October 2, 2020, the SBA Office of Capital Access published Procedural Notice 5000-20057, which provides a framework to address whether SBA pre-approval is required for various changes of ownership under the Paycheck Protection Program, as well as the process for seeking that approval if needed. Any Paycheck Protection Program borrower looking at a potential change in control, whether via actions of the shareholders or direct action by the PPP borrower needs to be familiar with this guidance. In addition, anyone looking to acquire control of a PPP borrower should also review the guidance. While the guidance makes clear the possibility of preserving the potential for forgiveness of the PPP loan through a change of ownership, the Procedural Notice sets forth various approaches to obtain SBA pre-approval for the transaction (or to avoid the need for SBA pre-approval.)

Before outlining the key elements of the SBA guidance, we must note that this guidance is being published almost six months after the first PPP loans were issued, and two months after the SBA advised that guidance on changes of ownership would be issued “soon.” While one might hope that such delay at least allowed for clear and complete guidance to be published, I’m afraid the guidance may result in more questions than answers.

General Rule

Without expressing a basis for such obligation, SBA Procedural Notice provides that prior to the closing of any “Change of Ownership” transaction, the “PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”

While only specifically requiring notification (as opposed to application or consent), this requirement would seem inconsistent with the SBA’s Frequently Asked Questions and Interim Final Rule permitting lenders to use their own promissory note and to include any terms not inconsistent with Sections 1102 and 1106 of the Cares Act, the PPP Interim Final Rules and Guidance, and SBA Form 2484. While the SBA general form of promissory note does require lender’s prior consent if a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure,” these terms were not defined and lender’s were expressly permitted to use other forms of note.

Changes of Ownership Defined

For purposes of the SBA Procedural Notice, “Changes of Ownership” are defined to consist of the following transactions:

  • an aggregate change in 20% or more of the ownership interests in the Borrower since date of SBA approval of the SBA loan (but for public companies, only need to include sales or transfers resulting in one person owning at least 20%) (stock transfers);
  • sale or transfers of 50% or more of the fair market value of the assets of the Borrower (asset sales); and
  • mergers with or into another entity (mergers).
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GAO Report Highlights Need for Additional PPP Forgiveness Guidance

On September 21st (do you remember?), the U.S. Government Accountability Office released a report on the Federal Government’s COVID-19 response, including with respect to the Paycheck Protection Program. The GAO report provides additional statistical breakdown of the PPP loans, addresses some of the SBA’s oversight plans, and then addresses the need for further guidance on the PPP forgiveness process.

Updated Statistics

The GAO Report notes that most of the largest PPP loans (those over $2 million), were made during the first phase of the program, between April 3rd and April 26th. 75% of the loans for more than $2 million were approved in the first phase, with the report noting that this may have been due to increased scrutiny from the public, Treasury and SBA.

The vast majority of PPP loans were made to borrowers with 10 or fewer employees (73.6% of the loans) while the majority of PPP loan dollars went to businesses with 100 or fewer employees (67.6%). While borrowers with more than 500 employees were granted limited access to participate in the program, less than 0.1% of borrowers had more than 500 employees.

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PPP: Does a Borrower need its Lender’s Consent to a Change in Control Transaction?

Nothing in the CARES Act, Interim Final Rules, or Frequently Asked Questions currently requires Lender’s Consent in connection with a change in control transaction. However, the specific terms of the PPP Note signed by the borrower may require the Lender’s consent in a variety of situation.

(Note: This is one post in a series of posts regarding questions about the Paycheck Protection Program and Loan Forgiveness. A list of questions addressed so far is also available on our PPP Resources page. These questions and our answers are based on discussions with colleagues and clients, both lenders and borrowers. Our intention is to cover issues that, while potentially frequently asked, are not explicitly addressed in official FAQs or directly in Interim Final Rules. Our answers may ultimately be subject to change as additional guidance is provided, but reflect our view of the regulations at the time of posting.)

Update October 4, 2020: The SBA has published a Procedural Notice outlining when and how SBA pre-approval of a Change of Ownership is required. The Procedural Notice provides, among other things, that a PPP borrower must notify its Lender in writing of any contemplated change of ownership transaction and provide the Lender with copies of the transaction documents. The Procedural Notice provides certain situations where the PPP Lender may approve the Change of Ownership without SBA pre-approval, and other situations where the PPP Lender may not unilaterally approve the Change of Ownership. Read our summary of the SBA Procedural Notice on Changes of Ownership under the Paycheck Protection Program.

Consistent with SBA PPP FAQ #19, no specific form of PPP note was required to be used by lenders. Each lender was authorized to use their own promissory note or an SBA form of promissory note. Many, but by no means all, PPP lenders ultimately used the SBA Standard Loan Note on Form 147 as the base of their PPP promissory notes.

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