Updated PPP FAQs – Second Draw PPP Loans
On March 3, 2021, the U.S. Treasury Department in conjunction with the Small Business Administration (SBA) posted an updated set of “frequently asked questions” (FAQs) concerning the Paycheck Protection Program (PPP). These FAQs are tied to the changes and continuation of the PPP loan program enacted under the Consolidated Appropriations Act, 2021 (CAA). The updated FAQs reflect changes or clarifications made to existing FAQs mainly to assist Second Draw PPP borrowers. Below is a summary of certain FAQs. A full copy of the FAQs can be found here.
Partial Forgiveness of a First Draw PPP Loan
The updated FAQs expressly state that if a borrower received partial forgiveness of a First Draw PPP loan, the borrower may still be eligible for a Second Draw PPP loan. The borrower will still be eligible so long as the borrower used the full amount of the First Draw PPP loan only for eligible expenses, which includes those expenses added by the CAA.
Size Standards and Second Draw PPP Loans
The updated FAQs expressly state applicants may not use the SBA’s established size standards (either revenue based on employee-based) or the alternative size standards to qualify for a Second Draw PPP Loan. There are only two exceptions to the 300 employee limitation required for eligibility of a Second Draw PPP loan. Those exceptions are: 1) an applicant is assigned an NAICS code beginning with 72 (accommodation and food services) and employs no more than 300 employees per physical location; or 2) the applicant is a non-profit public broadcasting entity or a news organization that is majority owned or controlled by a business concern that are assigned NAICS code 511110 (newspapers) or an NAICS code beginning with 5151 (radio and television) and employs no more than 300 employees per physical location.
In determining initial head count for application of a Second Draw or First Draw PPP loan, borrowers may use any of the following: their average employment over the time period used to calculate their loan amount; or the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application; or the average number of employees for each pay period that the business has been operational, if it has not been operational for 12 months.
Change of Ownership (M&A Transactions) and Operation
The SBA and Secretary of the Dept. of Treasury determined that the requirement that a business be “in operation on February 15, 2020” should be based on the economic realities of the business operations. Therefore, the updated FAQs clarified where there was a change in ownership as the result of a purchase of substantially all assets of a business that was in operation on February 15, 2020, the business acquiring the assets will be eligible to apply for a PPP loan (Second or First, as applicable) even if the change in ownership resulted in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. Further, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business, if the acquiring business maintained the operations of the pre-sale business.
Second Draw PPP Loans and Necessity Certification
If you recall, a safe harbor was created in which borrowers with First Draw PPP loans were deemed to have made the necessity certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” if, together with its affiliates, the borrower received a loan of less than $2M. The updated FAQs extends this safe harbor to Second Draw PPP borrowers by noting that Second Draw PPP borrowers must demonstrate a 25% reduction in gross revenues, and thus will be deemed to have made the required necessity certification in good faith. Further, the FAQs state that loan amounts received by borrowers for First Draw PPP loans and Second Draw PPP loans will not be aggregated.
While they have extended this safe harbor generally to Second Draw PPP borrowers, it should be noted that the safe harbor may not extend to those borrowers who together with their affiliates received Second Draw PPP loan proceeds in excess of $2M. The SBA made a point of noting the First Draw and Second Draw PPP loans would not be aggregated, but did not also carve out the aggregation of affiliates that received Second Draw PPP loan proceeds in excess of $2M.
The updated FAQs provide additional guidance as to how or when the SBA and Dept. of Treasury are treating First and Second Draw PPP loans similarly and when they are treating them differently. The FAQs can be relied upon by borrowers to provide clarification as needed.
With respect to the necessity certification, which weighs heavy on PPP borrowers, the majority of Second Draw PPP borrowers can rest easy. First Draw PPP loan borrowers that received proceeds of $2M or more must still be concerned with the good-faith loan necessity certification. Those borrowers should consider requesting legal counsel or a third party to prepare a certification justification memorandum for their business. Only Second Draw PPP borrowers that, together with affiliates, received Second Draw PPP loan proceeds in excess of $2M should be concerned with the good-faith loan necessity certification and should consider obtaining legal counsel or a third party to prepare a justification memorandum for their business.