SBA Issues New Guidance
Limiting the Aggregate Amount of
PPP Loans Available to Commonly Owned Businesses; Clarifies Timing of Loan Audits

On April 30, the Small Business Administration (SBA) issued an interim final rule, effective immediately, regarding the implementation of the Paycheck Protection Program (PPP); the interim final rule limits to $20 million the aggregate amount of PPP loans available to businesses that are part of a larger corporate group.

In addition, on April 29, the SBA, in consultation with the Treasury Department, released an updated FAQ regarding the timing of the SBA’s review of PPP loans with respect to borrowers’ eligibility and their need for a PPP loan to continue their operations.

Prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance. The newly issued interim final rule can be found here: Treasury Department — PPP Interim Final Rule — Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide, found here: COVID-19 Legal Resource Guide.

Limit on Aggregate Amount of PPP Loans Received by a Corporate Group

In an attempt to preserve the limited resources available to the PPP and in light of the high demand for PPP loans and prior lapse in appropriation, the interim final rule limits to $20 million the aggregate amount of PPP loans available to businesses that are majority owned, directly or indirectly, by a common parent as part of a corporate group.

Accordingly, if multiple businesses that are part of a single corporate group as a result of being majority owned, directly or indirectly, by a common parent, wish to apply for PPP loans as separate borrowers, then such commonly owned businesses cannot receive more than $20 million of PPP loans in the aggregate. This limitation is effective immediately with respect to any PPP loans that were not fully disbursed as of April 30. With respect to such partially disbursed PPP loans, the $20 million limitation will apply to any additional disbursement to any such commonly owned business that would cause the aggregate amount of PPP loans received by its corporate group to exceed $20 million. Businesses that are part of a corporate group remain subject to this limitation even if they are eligible for the waiver of affiliation rules in the CARES Act, and thus businesses assigned a NAICS code that begins with 72 (accommodations and food services) that have fewer than 500 employees at each physical location, as well as franchises and any businesses receiving financial assistance from an SBA-licensed Small Business Investment Company, must comply with the $20 million aggregate corporate group limitation. The interim final rule states that the SBA’s affiliation rules applicable to the PPP will continue to apply independently of this new $20 million corporate group limitation.

Any PPP applicant that is part of a corporate group and has either applied for or received a PPP loan that would cause its corporate group to surpass the $20 million threshold is responsible for informing its PPP lender and withdrawing or requesting cancellation of any portion of a PPP loan in excess of the new $20 million corporate group maximum. Any failure by such applicant to withdraw or request cancellation of any such portion of a PPP loan (or PPP loan application) will be considered an unauthorized use of PPP loan funds, and such applicant’s PPP loan will not be eligible for forgiveness.

Lenders may rely on applicants’ representations concerning compliance with this $20 million limitation.

SBA Review of Need Certifications for PPP Loans

The April 29 FAQ No. 39 notes that to ensure that borrowers have truthfully made the need certification on their applications in good faith, the SBA will review all loans in excess of $2 million, in addition to other loans, as appropriate, once applications for loan forgiveness with respect to such loans are submitted. We do not believe that FAQ No. 39 implies that PPP loans in excess of $2 million for which no forgiveness is sought will not be subject to SBA scrutiny of the borrower’s need certification. Furthermore, the stated $2 million threshold should not be viewed by PPP borrowers as a firm threshold, and the SBA may ultimately determine to audit individual loans that are in principal amounts less than $2 million. The interim final rule provides that the SBA will release additional guidance with respect to the PPP loan review procedures.