The SBA Imposes a $20M Limit on PPP Loans for Corporate Groups

On April 30, 2020, the U.S.  Small Business Administration (SBA) issued a sixth interim final rule on the SBA’s Paycheck Protection Program (PPP), one of the relief programs available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. [1] The PPP, which we have written about previously, provides aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including provisions for loan forgiveness if the proceeds are spent on payroll and other qualifying expenses. The program, which has received overwhelming interest, depleted its initial $349 billion in funding within days, and it received an additional $310 billion in late April. To preserve the limited resources available to the PPP in light of the previous lapse in appropriations and the high demand for PPP loans, the SBA has issued a rule placing a $20 million limitation on the amount of PPP loans that businesses in a single corporate group can receive. 

The new rule, which does not appear in the underlying statute, is the latest in a series of rules and other guidance from the SBA that, among other things, clarify eligibility for PPP loans and restrict the ability of certain businesses, including large, publicly-traded businesses, hedge funds, and private equity firms to obtain PPP loans. This weekend, the SBA also clarified the terms of PPP loan forgiveness, making it clear that a borrower’s eligibility for loan forgiveness will not be reduced if a borrower offers to rehire an employee, but that employee declines the offer. Under the new interim final rule, if multiple businesses that are part of a single corporate group wish to apply for PPP loans as separate borrowers, they cannot receive more than $20 million in the aggregate. For the purposes of this rule, businesses are in a single corporate group when they are majority owned, directly or indirectly, by a common parent. This borrowing limit is effective immediately and applies both to loans that were not fully disbursed as of April 30, 2020, and any future loans disbursed under the PPP.   

For partially disbursed loans, this means that any undisbursed amounts that would bring the total loan amount to over $20 million will be withheld. If businesses within a single corporate group have applied for PPP loans exceeding $20 million and their loan application(s) are still pending, these businesses must (1) notify the lender(s) that their requested loan amount exceeds the limit and (2) withdrawn their loan request(s). Failure to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan(s) will not be eligible for forgiveness.  A lender may rely on an applicant’s representation concerning the applicant’s compliance with this limitation.

In general, businesses that are majority owned by a common parent would have already been affiliated under SBA’s standard affiliation rules. However, prior guidance implemented specific affiliation exceptions discussed below and in prior client advisories. The interim final rule makes clear that, notwithstanding any such exceptions, businesses are subject to this limitation, even if they are eligible for the waiver-of-affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA’s affiliation rules. The SBA’s affiliation rules applicable to the PPP will continue to apply independently of this new $20 million corporate‑group limitation. The new rule will likely have the greatest impact on businesses that were not subject to the SBA’s affiliation rules for this program, a category that includes, among others, businesses operating as franchises assigned franchise-identified codes by the SBA, businesses receiving financial assistance from companies licensed under §301 of the Small Business Investment Act of 1958 (15 U.S.C. 681), and businesses assigned a North American Industry Classification System (NAICS) code beginning with 72 (the accommodation and food services sector) that employ not more than 500 employees per physical location. Up until this point, restaurants and franchises have benefited from the fact that while individual franchise locations were limited to $10 million in PPP loans, there was not a limit on the amount of PPP loans a corporate group could receive. For example, a restaurant chain with seven franchise locations could have each location apply for and receive up to $10 million, for a total of $70 million for the group as a whole. Some such chains have been in the news as of late, which likely inspired this particular action.

Morrison & Foerster has formed a task force of attorneys to help our clients handle the impact of the COVID-19 pandemic and understand the implications of the CARES Act and other actions taken by state governments and the federal government. Please refer to MoFo’s COVID-19 Resource Center for more information and for access to our library of related insights.

[1] Some have questioned whether the interim rules issued by Treasury and SBA are consistent with the statute itself.  Given the speed of issuance and the bypassing of traditional notice and comment procedures, it is certainly possible that inconsistencies will arise. To the extent a rule is inconsistent with the underlying statute, the statute would control.