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Lowenstein Sandler LLP

Kimberly E. Lomot

Kimberly E. Lomot

Counsel

Expertise

  • Corporate
  • Real Estate

WSG Practice Industries

Activity

Lowenstein Sandler LLP
New Jersey, U.S.A.

Profile

Kimberly regularly advises clients on the acquisition, disposition, financing, development, and leasing of commercial real estate. Her practice is national in scope, and she has extensive experience handling transactions in all real estate sectors. She has several years of experience in counseling both borrowers and lenders with respect to government guaranteed loans, including SBA (7a) and 504 loans. Kimberly’s familiarity with diverse types of real estate and the needs of developers, owners, tenants, lenders, and other investors in real property allows her to combine her knowledge of the law with a businesslike approach to getting deals done.

Kimberly brings strategic judgment and practical solutions to every real estate transaction in which she is involved. Dedicated to excellence, Kimberly personally commits herself to realizing each client’s specific goals.

Bar Admissions

    New Jersey

Education

Suffolk University Law School (J.D. 2004); Dean's List
Babson College (B.S. 2001), cum laude, business administration; Dean's List; Blue Key Honor Society
Areas of Practice

Corporate | Real Estate

Professional Career

Significant Accomplishments

Represented a 50 year-old educational institution in a 24,000 square foot lease at 1501 Broadway, in the historic Paramount Building in the heart of the Theater District and Times Square in Manhattan. This 33-story location now serves as the school’s headquarters, teaching facility, and executive offices.

Represented a global plastics manufacturer in connection with the sale of its headquarters located in New Jersey through an auction process and the leasing of its new global headquarters facility in Pennsylvania, including the negotiation of a multi-tiered tax benefit structure offered by the Commonwealth of Pennsylvania pursuant to the Redevelopment Assistance Capital Program.

Represented a leading hedge fund in connection with its new Silicon Valley, full floor headquarters lease, including exterior building signage and naming rights. 

Represented a national construction machine dealer/distributor's acquisition of the franchisee for the South Jersey, Pennsylvania, and Delaware market of a large heavy equipment sales and repair company.  This included the triple-net leaseback of three industrial facilities, including the target’s main headquarters facility totaling approximately 23.5 acres, consisting of numerous specially-purposed buildings.

Represented a technology enabled financial services company as Tenant in connection with its approximately 80,000 square foot headquarters office in Menlo Park, California. This transaction covered two leased buildings, one of which was a ground-up build-to-suit, with two different landlords – across the street from each other – but the buildings function as a single headquarters.

Represented a leading private equity firm, as lender, in connection with its $39M portfolio of mortgage loans secured by casinos in Nevada.

Represented a hedge fund, as lender, in connection with its $300M+ mortgage loan facility secured by casinos in Nevada and card rooms in the state of Washington.

Speaking Engagements

Our WebEx discussed the SBA Loan Program under PPP and, in particular, how senior execs, board members and investors should think about their obligations. We leveraged our Lowenstein team’s experience as Attorneys General/US Attorneys/Assistant DAs/Prosecutors who led and/or were involved in investigating, prosecuting and even setting policy on post-Hurricane Sandy fraud cases and post-9/11 fraud cases. Here’s a link to a twitter thread with context/questions to consider.

Many are seeking help analyzing whether VCs are “affiliates” in a way that renders a startup or growth company ineligible for SBA Loans. We’ve been using Lowenstein Sandler's #AffiliateChecklist internally and have decided to share it (with a disclaimer). You’re welcome to share it. Link to tweet & LinkedIn sharing it.  

Featuring Lowenstein Sandler's: 

  • Christopher Porrino, 60th Attorney General of the State of NJ; 
  • Elie Honig, former Asst. US Attorney in SDNY (prosecuted post-9/11 cases); former Asst. AG NJ (prosecuted post-Hurricane Sandy fraud cases); current CNN Legal Analyst
  • Kathleen A. McGee, previously, Bureau Chief for Internet & Technology, NY Attorney General’s Office;
  • Kimberly E. Lomot, previously, an SBA Lending 504 Certified as Designated Attorney;
  • Lowell A. Citron, Chair, Debt Financing, Lowenstein Sandler LLP; and
  • Ed Zimmerman, Chair, Tech Group, Lowenstein Sandler LLP & Adjunct Prof. of Venture Capital, Columbia Business School.

See some of what we published in Forbes and additional resources:

To see other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Tuesday, May 5, 2020; 2 p.m. EDT.

Topics included:

  • What do Board Members/Executives need to do/know?
  • How best to deliberate & document process?
  • What are the “No-Nos” that inform the decision to repay a loan or pull a loan application?
  • What does FAQ #31 & SBA IFR #4 require a venture fund to do? What must a Board do?
  • What does the “Mnuchin Line” ($2M loans) mean for whether your startup’s loan will be “investigated” and how?
  • Does asking for loan forgiveness or shrinking the loan size make a difference in liability/scrutiny?
  • What info about my loan will become public under FOIA (Freedom of Information Act)?
  • How will future financings, M&A, and IPOs be impacted in the coming years by these loans?
  • What will LPs ask in fundraising about loans in the portfolio?
  • The “need” standard is vague, so what will prosecution look like?
  • What is Qui Tam, and why do we care? What does PRIVATE ENFORCEMENT look like, and why are there financial incentives for private parties?
  • What did startups likely get “wrong” in their loan applications or analysis?

Speakers: 

  • Kathleen A. McGee, former Bureau Chief for Internet & Technology, NY Attorney General’s Office; Director, Mayor Bloomberg’s Office of Special Enforcement; Assistant District Attorney, in the Bronx, NY.
  • Kimberly E. Lomot, previously certified as a Designated Attorney for SBA 504 Lending, counsels both borrowers and lenders with respect to government guaranteed loans, including SBA (7a) and 504 loans.
  • Ed Zimmerman, Chairs the Tech Group at Lowenstein Sandler and, for the last 15 years, has been an Adjunct Professor of VC at Columbia’s MBA Program. Chambers USA ranked Ed among the 22 best lawyers in Startups & Emerging Companies–USA–Nationwide; of those, Ed is the only lawyer based in New York (2018). Best Lawyers in America (2017) named Ed the New York City Venture Capital Lawyer of the Year.

Notes:

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Israeli VC/PE Funds, Mature Companies & Startups: Have you filed, or are you considering filing an application? If so, you should really hear this!

Join us for a joint webinar with Lowenstein Sandler LLP experts, Kathleen McGee, Kimberly Lomot & Ed Zimmerman and Ofer Manor and Lior Aviram, from Shibolet & Co.

Topics include:

  • What do Board Members/Executives need to do/know?
  • What did startups likely get "wrong" in their loan applications or analysis?
  • What are the "No-Nos" that inform the decision to repay a loan or pull a loan application?
  • What does the "Mnuchin Line" ($2M loans) mean for whether your startup's loan will be "investigated" and how? What will prosecution look like?
  • How will future financings, M&A and IPOs be impacted in the coming years by these loans?


Panelists:

  • Kathleen A. McGee, Counsel, Lowenstein Sandler LLP
  • Kimberly E. Lomot, Counsel, Lowenstein Sandler LLP
  • Ed Zimmerman, Partner; Chair, The Tech Group; Lowenstein Sandler LLP
  • Ofer Manor, Senior Partner, Shibolet & Co.
  • Lior Aviram, Managing Partner, Shibolet & Co.


Time:
6 p.m. EDT



Professional Associations

Member, American Bar Association, Women in the Profession GroupBoard Member, Deirdre’s House, a child advocacy center in Morristown, New Jersey


Professional Activities and Experience

Accolades
  • New Jersey Rising Stars (2010, 2013-2018) - Kimberly Lomot

Articles

Latest Update on the Paycheck Protection Program Flexibility Act of 2020
Lowenstein Sandler LLP, June 2020

View our other alerts and articles on the SBA Paycheck Protection Program on our Coronavirus/COVID-19 resource page. This alert was originally published on June 4, 2020, and is being updated as new information becomes available...

Paycheck Protection Program Flexibility Act of 2020
Lowenstein Sandler LLP, June 2020

Certain provisions of the coronavirus/COVID-19 economic stimulus legislation are subject to the issuance of government regulations, government guidance and other government action; thus, certain details regarding the legislation may be clarified or added. View our other alerts and articles on the SBA Paycheck Protection Program on our Coronavirus/COVID-19 resource page. On June 3, 2020, the U.S...

SBA Announces: “SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion” & DOJ Announces Multiple Enforcement Actions
Lowenstein Sandler LLP, May 2020

Between May 20 and May 22, SBA announced three new Interim Final Rules and the U.S. Department of Justice (DOJ) announced three new fraud prosecutions stemming from PPP loans...

Additional Articles

When entering into lease negotiations, the tenant’s representative is of course focused on the key business issues, like rent, term and security deposit. However, there are many other less apparent leasing issues that could financially impact the tenant that the tenant’s representative ignores at its peril. This article, the first of a two-part series, discusses four more hidden issues in a commercial lease that every tenant should be mindful of when lease—and even term sheet—negotiations commence.

Part one of a two-part article. Click here for access to part two of the article.

In the first part of our article, we highlighted four less apparent lease issues that tenant representatives should not miss during lease negotiations. This article continues with four additional issues, which, if not negotiated favorably in a lease, could result in avoidable tenant costs.

Part two of a two-part article. Click here for access to part one of the article.

Certain provisions of the Coronavirus/Covid-19 economic stimulus legislation are subject to the issuance of government regulations and other government action, thus certain details regarding the legislation may be clarified or added.

One of the critical components of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) is a new type of US Small Business Administration (SBA) loan program known as the Paycheck Protection Program (the “Program”). This program, which has been added as a new program under Section 7(a) of the Small Business Act, encourages employers to keep employees on the payroll and keep the doors open by providing loans (called “covered loans”) with several attractive features:

  • interest on covered loans is capped at 4% per annum (although, based on a bank call with the SBA, we understand that this cap may change);
  • the commencement of the repayment period is deferred for a minimum of six months and a maximum of one year;
  • the maturity of the loans are up to 10 years but the guidance is that the maturity on most loans will be much shorter than 10 years;
  • the maximum principal amount is generally based on a formula that is the lesser of (i) 2.5 times average monthly payroll costs (which includes salary, commission, cash tips, vacation, family, medical, sick leave, separation payments, group health care insurance premiums, retirement benefits and state and local tax assessed on employee compensation, however, excluding any compensation to an employee in excess of an annual salary of $100,000) incurred in the one-year period before the covered loan is made and (ii) $10 million (the limit on conventional Section 7(a) loans is currently $5 million);
  • no personal guaranty or collateral is required (conventional Section 7(a) loans require all available collateral including personal guaranties and blanket asset pledges);
  • covered loans will be made on a non-recourse basis, unless proceeds are used for an unauthorized purpose; and
  • so long as the proceeds of a covered loan are used by the borrower to pay payroll, rent, utilities, and other eligible expenses incurred during the eight-week period immediately following the origination of the loan, a portion of the covered loan will be permanently forgiven.

Notably for lenders, loans made under the Program are eligible to be sold in the secondary market consistent with rules under the current SBA Section 7(a) program, and the CARES Act mandates a zero percent risk-weight of these loans for purposes of banking regulators’ risk-based capital requirements. The CARES Act also has provisions regulating lender compensation upon loan origination.

Prior to the CARES Act, the SBA was authorized to provide loans in an original principal amount not exceeding $2,000,000 to small businesses with fewer than 500 employees (“disaster loans”) as part of the Disaster Loan Program. In addition to the Program described in this Alert, the CARES Act also expands the SBA’s existing Disaster Loan Program. Covered loans and disaster loans may be applied for at the same time, but a borrower is only permitted to close one of the loans. 

This alert provides guidance on the following topics relating to the Program:

  • What is a covered loan?
  • Who is an eligible recipient?
  • What expenditures count toward the amount of loan forgiveness?
  • How is the amount of loan forgiveness calculated?
  • How is a covered loan obtained and loan forgiveness granted?

What is a covered loan?

A covered loan is a loan by an authorized SBA 7(a) lender to an eligible recipient[1] made during the “covered period.” The “covered period” began on February 15, 2020 and extends until June 30, 2020. Covered loans must be originated by June 30, 2020 and, considering that 7(a) lenders may face a flood of applications, every effort should be made to apply for a covered loan as soon as possible. We anticipate that businesses will be able to apply for a covered loan approximately a week after the CARES Act becomes law.  

Who is an “eligible recipient”?

Eligible recipients include any business concern, non-profit organization, veterans organization, sole proprietor, independent contractor, and self-employed individual, among others (each a “subject business”). Each subject business is eligible to receive a covered loan provided that it employs not more than the greater of 500 employees (includes full-time, part-time, and those employed on other bases) or if applicable, the size standard in number of employees established by the SBA for the industry in which the business operates. While the CARES Act does not specifically address the SBA’s maximum revenue requirements, we expect that the SBA may limit some businesses eligibility based on revenue in accordance with the SBA’s existing revenue requirements for the industry in which the business operates (please see the SBA sizing tool based on number of employees and revenue). Additionally, the CARES Act is silent on whether or not the existing list of ineligible types of businesses for SBA 7(a) loans (as outlined in 13 C.F.R. §120.110) remain applicable to the PPP. We expect to hear further guidance on this issue from the SBA in the coming week. For businesses in the hospitality and dining industries (NAICS Class 72) with more than one physical location, if the business employs 500 or fewer employees per location, the business will be an eligible business.

The SBA Section 7(a) program of which the Program is now a part contains affiliation and common control rules (found in 13 CFR §121.103) that will in many circumstances cause the employees of any particular business to be aggregated with the employees of all other businesses that are deemed to be under common control with that business. This will be particularly important for portfolio companies of investment funds and will disqualify some otherwise needy businesses from eligibility under the Program. However, the SBA affiliation rules are waived for businesses in the food service sector (NAICS Class 72), certain franchises, and businesses receiving financial assistance from a company licensed under Section 301 of the Small Business Investment Act.

What expenditures count toward the amount of loan forgiveness?

Consistent with the purposes of the CARES Act to help keep businesses open and employees on the payroll beginning as soon as possible, the expenses outlined below that count toward loan forgiveness are those that are incurred during the eight-week period immediately following the date the covered loan is originated. The amount of any loan forgiveness will not be considered gross income under the Internal Revenue Code, although state and local taxing authorities may or may not follow this rule. Note that the eight-week period may run past June 30, 2020 as long as the covered loan is originated before that date.

The following expenditures (“Qualifying Expenditures”) incurred during the eight-week period count toward loan forgiveness:

  • payroll costs (which includes, among other things, W-2 and 1099 income);
  • payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
  • rent (including rent under a lease agreement); and
  • utilities. 

Notably, “payroll costs” exclude compensation, prorated for the eight-week period, of employees and independent contractors to the extent that compensation exceeds $100,000.

Use of Covered Loan Proceeds.

Covered loans are a variant of conventional Section 7(a) loans, so proceeds of covered loans under the Program may also be used for working capital, refinancing existing debt, purchases of equipment, and other uses permitted for Section 7(a) loans generally. However, to the extent proceeds of covered loans are not utilized for Qualifying Expenditures during the eight-week period following the origination of the covered loan, loan forgiveness is unavailable. Borrowers applying for covered loans under the Program must certify that “funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments,” but the statute does not specify what portion of the funds must be so utilized. Regulations may provide guidance on this question.

How is the amount of loan forgiveness calculated?

The maximum principal amount of a covered loan is the lesser of (i) $10,000,000 and (ii) 2.5 times the average monthly payroll during the 12-month period ending on the date the covered loan is made (different formulas apply for (A) seasonal employers and (B) employers not in business between February 15, 2019 and June 30, 2019). This spreadsheet indicates the maximum principal amount of a covered loan available to a borrower (other than those described in (A) or (B) above) for various employee headcounts and average annual payrolls.  Up to 100% of this maximum amount can be forgiven by utilizing the covered loan proceeds solely for Qualifying Expenditures during the aforementioned eight-week period following the origination of the covered loan.  However, loan forgiveness is subject to two additional limitations, one based on reduction in number of employees (the “Headcount Adjustment”), the other based on compensation reduction (the “Compensation Adjustment”), each computed with reference to certain specified measuring periods.

The Headcount Adjustment reduces the amount of forgiveness to an amount equal (a) to the amount otherwise available for forgiveness multiplied by (b) a fraction, the numerator of which is the average number of full time equivalent employees (FTEs) during the eight-week period immediately following the origination of the covered loan, and the denominator of which is the average number of FTEs per month during, at the borrower’s election, either (i) the period February 15, 2019 through June 30, 2019, or (ii) the period January 1, 2020 through February 29, 2020.

The Compensation Adjustment reduces the amount of forgiveness otherwise available by the aggregate amount of salary reductions (determined on an employee-by-employee basis) effectuated during the eight-week period to the extent a reduction exceeds 25% of an employee’s salary or wages during the most recent full quarter prior to the commencement of the eight-week period.  Employees who are compensated at a rate in excess of $100,000 per year are not considered, that is, no amount of salary reduction for employees earning over $100,000 per year has the effect of reducing loan forgiveness.

The reductions in loan forgiveness attributable to the Headcount Adjustment and the Compensation Adjustment can be mitigated, or even eliminated, to the extent that (i) in the case of a headcount reduction occurring during the period that began on February 15, 2020 and ends April 26. 2020, the borrower reverses that reduction by June 30, 2020 (for example, by re-hiring furloughed employees or hiring new employees), and/or (ii) in the case of a salary reduction occurring in that window period that began on February 15, 2020 and ends 30 days after the enactment of the CARES Act, the reduction is similarly reversed by June 30, 2020.  In other words, to the extent that loan forgiveness would otherwise be reduced by a Headcount Adjustment and/or a Compensation Adjustment, the borrower can mitigate the effect of each by re-hiring employees and restoring salary cuts, respectively, before June 30, 2020.

For purposes of computing the Headcount Adjustment and the Compensation Adjustment, independent contractors are not considered employees.

How is a covered loan obtained and loan forgiveness granted?

To obtain a covered loan, a borrower applies to a participating lender, who generally will be the same lenders who currently offer SBA Section 7(a) loans.  We recommend that businesses contact their existing banks as soon as possible to see if they offer SBA Section 7(a) loans as many lenders have indicated that their existing customers will receive priority on their applications.  Following disbursement of a covered loan and expiration of the eight-week measuring period, the borrower submits to the lender certain required documentation along with a certification outlining the amount requested to be forgiven together with proof of payment of qualified expenditures and a certification that the application documentation is true and correct whereupon, within 60 days thereafter, the lender should issue a formal decision forgiving the portion of the covered loan set forth in the application.

[1] See "Who is an eligible recipient."

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

At an already anxious time for many entrepreneurs and investors, the venture capital (VC) and startup community has recently added a major new worry: a debate over whether many startups will need to change their Charters in order to qualify for SBA Section 7(a) loans under the Paycheck Protection Program.

We believe that amending a Charter is one of several ways to achieve the desired goal, but it’s the most cumbersome and expensive way, and there are better solutions. Please read on for a brief explanation and a request for others in the startup community to accept this position. Please stay tuned for a subsequent longer, more detailed article expanding our analysis.

It’s not news that the Federal small-business program got off to a rocky start. There’s confusion around which “protective provisions” trigger “control” under the applicable rules – an important distinction, because a finding of “control” would mean that a startup would have to add together its employee headcount with that of its venture capital investor(s), as well as the many other startups funded by that same VC. If aggregated in this way, most VC-backed startups would likely be ineligible for these loans.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

Many have asked for help in connection with analyzing whether investors are “affiliates” in a way that would render a startup or growth company ineligible. We’ve written about the analysis (in Forbes and our site) and we developed (for our own Lowenstein Sandler attorneys as our team counsels clients) this checklist to help analyze whether venture-backed startups and growth companies might be eligible. We decided to share it with all of you. You are welcome to share it with others and we hope it is helpful. Please see the  disclaimer on the form (the form isn't legal advice nor is it a substitute for counsel, please don't rely on it, using it doesn't create an attorney client relationship with Lowenstein Sandler or our lawyers - see disclaimer on form for more).

If you have any questions, please email us at [email protected].

 

DISCLAIMER: We’re providing this checklist as of April 7, 2020 at noon Eastern. This is not legal advice and its use does not create an attorney-client relationship between our law firm (Lowenstein Sandler LLP) and anyone using this checklist. Please do not rely on it -- we expressly disclaim any liability if you do rely on it. We understand that there are various approaches to conducting “affiliation” analysis for purposes of Section 301(f) in the context of applying for SBA Section 7(a) PPP loans. We at Lowenstein Sandler LLP developed this checklist to help our law firm’s own attorneys move through the steps of the affiliate analysis. There’s no substitute for having counsel review the Company’s relevant documents because the affiliate analysis calls for legal conclusions. Accordingly, we advise against reaching the legal conclusions without the advice of counsel having reviewed full and accurate information.

This checklist: (1) doesn’t purport to be complete, (2) is geared toward the venture capital/startup community, and (3) as a result, will be as far less relevant outside of that context. While we may provide updates, we do not undertake an obligation to do so or to notify users of changes in the law – the law regarding these matters has been changing daily.


Lowenstein Sandler’s Team has published these resources (among others) we hope may be helpful.

For info: [email protected]

3.15.20 – Forbes, When the Music Stops: SAFEs & Convertible Notes Give VCs Massive Price Protection: HERE
3.20.20 – Lowenstein Sandler Client Alert: The Families First Coronavirus Response Act–New Paid Leave Mandates for Employers With Fewer Than 500 Employees; Tax Credits To Help Offset Employer Costs: HERE
3.23.20 – Forbes, Guidance from Top VCs around the Globe During the Pandemic: HERE
3.27.20 – Lowenstein Sandler Client Alert: Key Tax and Employee Benefits Provisions of the CARES Act: HERE
3.30.20 – Lowenstein Sandler Client Alert: SBA Paycheck Protection Program: HERE
3.31.20 – Lowenstein Sandler Client Alert: SBA Section 7(a) Loans for VC Backed Growth Companies/Startups Under the CARES Act: HERE
4.1.20 – Forbes, detailing analysis of SBA Loans under 301 vs. 103: HERE
4.2.20 — VIDEO OF OUR SBA 7(a) For Startups/VC W/ LS Team & Congressman Don Beyer (who worked on the legislation)
4.3.20 — Lowenstein Sandler Client Alert: SBA Paycheck Protection Program Update: SBA Interim Rule: HERE
4.4.20 – Forbes, using new Treasury guidance CONFIRMING 301 vs 103: HERE
4.5.20 (update 4/7) – Forbes, “Please don’t make startups Amend Charters” (TREASURY said SAME): HERE
4.7.20 — Lowenstein Sandler Client Alert: SBA Paycheck Protection Program Update: Frequently Asked Questions: HERE

Click here to subscribe to our COVID-19 updates.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. Use of this article does not create an attorney-client relationship between you and Lowenstein Sandler. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney. In addition, the information in this article may change based on guidance by the SBA or Treasury as well as a change in law.

We have been sharing client alerts about the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) created by the CARES Act.  Below are some frequently asked questions and answers with respect to the PPP that we hope will help you understand this program.

What is the Paycheck Protection Program?

The PPP is a loan program that allows eligible borrowers to obtain loans on favorable terms to cover payroll and other eligible expenses (rent, utilities, certain health care benefits and health insurance premiums, and certain interest expense). This loan program is for the specific purpose of helping eligible borrowers affected by the coronavirus pandemic to keep paying employees and to keep their doors open for business. To the extent the PPP loan is promptly used to pay payroll, rent, mortgage interest and utilities, the loan never has to be repaid (“terms and conditions apply,” naturally).

The first wave of PPP funding was exhausted on April 16, 2020. The government approved $310 billion of new funding for the PPP on April 24, 2020. On April 27, 2020, the SBA resumed accepting PPP applications from participating lenders. About one fifth of the new PPP funding is earmarked for smaller banks, smaller credit unions, and community financial institutions that provide financing to underserved and economically disadvantaged communities. According to the SBA, as of June 17, 2020, about $146 billion remains of the second round of PPP funding. This funding may go quickly. As the law is currently written, no new loans may be issued after June 30, 2020. It is possible Congress will extend this period.

UPDATE: The CARES Act was substantially amended on June 5, 2020, with the enactment of the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). The Flexibility Act updates many aspects of the PPP. As suggested by its name, the new law is intended to give PPP borrowers more flexibility in when and how they spend their PPP funds. New guidance from the SBA and Treasury Department will likely follow. Flexibility Act updates are included below.

Who is eligible for a PPP loan?

You are eligible for a PPP loan if you employ fewer than 500 employees (full-time and part-time) who live in the United States, AND you were in operation on February 15, 2020, AND you either (1) paid salaries and payroll taxes for employees or (2) paid independent contractors.

Some businesses may qualify under other applicable tests. Please check with your lender or advisor about eligibility on other grounds.

Be aware that two or more businesses under common control could be “affiliated” under SBA rules. “Affiliated” employers are lumped together in determining the 500-employee limit. This determination often requires detailed analysis. Check with your attorney even though you may think your organization stands 100% alone.

Do independent contractors count as employees for purposes of PPP calculations?

No. Independent contractors can apply for a PPP loan on their own; the entities that engage them cannot count them for purposes of a PPP loan application.

I don’t have employees. Can I still qualify?

Yes. The rules issued under the CARES Act state: “You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual . . . .” In that case, you must submit documents such as payroll processor records, payroll tax filings, Forms 1099-MISC, income and expenses from a sole proprietorship, or other documents sufficient to demonstrate the qualifying loan amount.

Can I apply for a PPP loan if I am receiving unemployment assistance?

Yes, but proceed with caution. There is no restriction on receiving both benefits, but you cannot use the PPP loan to cover your own compensation while at the same time receiving unemployment benefits. If you are receiving unemployment benefits, you can use your PPP for other business expenses, such as other employees’ compensation, rent, or utilities. 

At least 60% of the forgiven amount must be used for payroll costs; if you use all or most of your loan for non-payroll expenses, therefore, the forgivable amount may be low.

How do I apply for a PPP loan?

You should contact your existing lender or lending institution where you maintain your bank accounts. Many participating lenders are accepting applications only from existing customers. Most lenders are accepting applications through their own online portals. If your existing bank is not participating in the PPP program or is no longer accepting applications, you may wish to apply with a community bank such as Northeast Bank, Kabbage, or Old Dominion Bank, or FinTech company such as PayPal. If you need additional help finding a qualified lender, this SBA search tool will identify lenders near you.

When can I apply?

Applications will be accepted through June 30, 2020, or until the funds for this program are exhausted, whichever is sooner. This program is supposed to operate on a “first come, first served” basis. APPLY AS SOON AS YOU CAN.

What is the maximum amount I can borrow?

It’s a formula amount: 2.5 times your average monthly payroll expenses for either (1) the 12 months before you apply for the loan or (2) calendar year 2019 (the bank to which you apply may require you to use (2), which many applicants who use payroll services will find more convenient anyway).

The Treasury Department has released guidance to help general partnerships, sole proprietors, and independent contractors calculate payroll. See Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type, for complete instructions. 

If you are a seasonal business, you can borrow 2.5 times average monthly payroll costs from: (1) February 15 to June 30, 2019, (2) March 1 to June 30, 2019, or (3) during any consecutive 12-week period between May 1, 2019 and September 15, 2019, whichever generates the best result.

If you are a startup business that did not exist between February 15 and June 30, 2019, you can calculate your average monthly payroll costs based on payroll from January 1 to February 29, 2020.

Salary and wages above $100,000 per employee are excluded from the calculation of average monthly payroll, but all benefits the business pays on behalf of such employees (e.g., health insurance, retirement benefits) are counted in the payroll calculation. If you already have an Economic Injury Disaster Loan, please inform your lender or lawyer.

Finally, there’s an absolute cap of $10 million on every PPP loan, and each borrower can get only one such loan. 

What information should I gather in order to apply for a PPP loan?

You should have evidence of paying payroll or self-employment taxes. Any or all of the following information may be required by your lender for the relevant period; check before applying:

  • 2019 IRS quarterly 940, 941, or 944 payroll tax reports;
  • Documentation for the following:
    • Gross wages for each employee
    • Paid time off for each employee
    • Vacation pay for each employee
    • Family medical leave pay for each employee
    • State and local taxes assessed on the employee’s compensation for each employee
    • Documentation showing the total health insurance premiums the company paid under a group health plan for all employees and owners
    • Documentation of the sum of all retirement plan funds the company paid (note: do not include money that came from employees’ paycheck contributions); this includes 401K plans, simple IRAs, and SEP IRAs;
  • Organizational documents for your business;
  • Sole proprietors, independent contractors, and the self-employed must submit documents such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship;
  • Borrowers who do not have any of this documentation should provide supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

What can I use the loan proceeds for?

The loan proceeds can be used for:

  • payroll costs;
  • costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • payments of interest on any mortgage obligation (but not to pay principal or prepay a mortgage);
  • rent (including rent under a lease agreement);
  • utilities;
  • interest on any other debt obligations that were incurred before the covered period; and
  • refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020.

When will I have to repay the loan?

Flexibility Act Update: You now will not have to start making payments on the loan until after you submit your forgiveness application and the SBA pays the forgiveness amount to the lender. Interest will not accrue during this time. 

For PPP loans made before the enactment of the Flexibility Act, the full amount will be due within 2 years of when you received the money. If you receive your PPP loan after the enactment of the Flexibility Act, you will have 5 years to repay the loan. Existing PPP loans can be extended up to 5 years if the lender and borrower mutually agree. If you want to pay earlier, there are no penalties for pre-payment.

Are there any other PPP loan terms I should know about?

  • Interest rate will be 1%.
  • No collateral will be required.
  • No personal guarantees will be required.

Will all or a portion of my PPP loan be forgiven?

Flexibility Act Update: The loan amounts will be forgiven so long as:

  • the loan is used to cover payroll costs, interest on mortgage, rent, and utility costs over the 24-week period after the loan is made or by December 31, 2020, whichever is earlier; and
  • employee and compensation levels are maintained.

(Before the enactment of the Flexibility Act, to qualify for full forgiveness borrowers had to spend the funds over the 8-week period after the loan was made. The Flexibility Act gives borrowers the option to spend the funds over a longer period. Borrowers whose PPP loan was approved prior to the enactment of the Flexibility Act may keep the original 8-week period if they choose. Most businesses will find the 24-week period preferable, but some may wish to retain the original 8-week period so as to submit the forgiveness application as soon possible.)

Originally, the SBA indicated that at least 75% of the forgiven amount had to be used for payroll costs. The Flexibility Act reduces this percentage: PPP borrowers are now eligible for loan forgiveness so long as they use at least 60% of loan proceeds for payroll expenses, with no more than 40% of loan proceeds going to eligible non-payroll expenses.

 

Reductions to Forgiveness:  Forgiveness is reduced based on headcount reductions and salary reductions.  Both are hard to work through and may require the assistance of legal counsel. 

Note that some reductions in workforce will not count against you for the purpose of loan forgiveness. Loan forgiveness will not be impacted if:

  • you laid off workers between February 15, 2020 and April 26, 2020 and then rehire them by December 31. (Before the enactment of the Flexibility Act, employers only had until June 30, 2020 to rehire employees laid off between February 15 and April 26.) 
  • you fire an employee for cause; an employee voluntarily resigns; or an employee voluntarily requests and receives a reduction in hours.
  • you have laid off employees, and then:
    • made a good faith, written offer to rehire,
    • documented the employee’s rejection of that offer,
    • informed the state unemployment insurance office within 30 days of the employee’s rejection of the offer (employees who reject offers of reemployment may forfeit eligibility for continued unemployment compensation), and
    • documented your inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. 
  • Rehiring – Flexibility Act Update: In addition to the above, forgiveness will not be reduced if you can document in good faith that your business is unable to return to the same level of activity it was operating at before February 15, 2020, due to compliance with operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. 

Is loan forgiveness automatic?

No. You will need to submit an application for forgiveness directly to the lender that provided your PPP loan. On June 16, the SBA released a revised 7-page loan forgiveness application that incorporates changes to PPP loan forgiveness requirements made by the Flexibility Act. On the same date, the SBA also released a simplified 3-page “EZ” loan forgiveness application for borrowers who can satisfy any of the following requirements:

  • the borrower applied for a PPP loan as a self-employed individual, independent contractor or sole proprietor who had no employees at the time of the PPP loan application.
  • the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the period between January 1, 2020 and March 31, 2020, and did not reduce the number or hours of employees between January 1, 2020 and the end of the covered loan period (ignoring reductions related to employees who refused offers of rehire and whose positions could not be filled with similarly qualified workers).
  • the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the period between January 1, 2020 and March 31, 2020, and was unable to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with official requirements related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Is the amount forgiven taxable?

No. The amount of any loan forgiveness will not be considered gross income under the Internal Revenue Code, although state and local tax authorities may or may not tax the forgiven amount.   

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Can I apply for more than one PPP loan?

No.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

“If the money doesn’t come out fast enough, the politicians will be criticized.”

- Chris Porrino, formerly 60th Attorney General of New Jersey

The U.S. government has been rapidly pushing $349 billion of funding out the door in SBA Section 7(a) Payroll Protection Program (PPP) Loans, while “encouraging” the public “to apply as quickly as you can because there is a funding cap.” The ‘get it while it lasts’ nature of the program combined with the vague requirements regarding business qualifications for a PPP loan, will create very fertile grounds for future fraud claims.

Understanding how this scenario will play out informs how loan applicants should approach PPP loans. Several of us are former senior law enforcement officials who led investigations and prosecutions of the fraud cases that arose from relief funding in the wake of Hurricane Sandy (2012) and 9/11, and we see commonalities and differences between those past relief efforts and today’s PPP loans.

Last Thursday, we assembled approximately 600 people for a WebEx (viewable here) to apply our enforcement perspectives to these loans in the startup/growth company context.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.

There’s been confusion about the rules governing eligibility for SBA Section 7(a) loans, which we’ve elsewhere written about.1 That confusion focused on whether to conduct “affiliation” analysis under Section in Title 13 CFR §121.301 (“Section 301(f)”) or §121.103 – the right answer is Section 301(f)).2 But there’s added confusion because the Section 301(f), as it now appears online and in print, is outdated and, therefore inaccurate. What follows is a “bootleg redline”3 (showing Section 301(f)’s revised text marked against the currently available version) and a brief explanation of both why the redline remains relevant and how we got here.

TLDR: Section 301(f) was enacted in 2016, amended February 10, 2020 (with an effective date of March 11, 2020), but the CARES Act repealed those amendments, reverting Section 301(f) back to the old rule on March 27, 2020.

Why it Matters: Applicants in SBA's Business Loan Program, including applicants for 7(a) loans under the Paycheck Protection Program (“PPP”), must apply the size standards and bases for affiliation appear in Section 301(f). While the $349 billion program “ran out of money”4 on the date we’re publishing this, the review and continued importance of the affiliation rules will endure because (1) enforcement officials, regulators, and private party plaintiffs will review the accuracy of affiliation determinations, which borrowers have certified (see “PPP Loans For Startups/Growth Companies—Former Attorney General’s Perspective—Lessons From Hurricane Sandy & 9/11”)5 and (2) borrowers and their investors will be required to provide representations, warranties and indemnification in subsequent transactions (venture, private equity, mergers and acquisitions, public offerings) as to their compliance with these rules as they were in effect at the time the relevant company (and its affiliates and/or 20% or greater equityholders) submitted the loan application. We say ‘as in effect at the time’ because the U.S. Department of Treasury recognized that the rate of change as new law, final rules and clarifications were released was breathtaking. Accordingly, Treasury has clarified that borrowers and lenders generally “may rely on the laws, rules, and guidance available at the time of the relevant application.”6

Brief History of Section 301(f)
SBA announced a proposed rule on October 2, 20157 (with a request for comment), ultimately issuing Section 301(f) on June 27, 2016 as a Final Rule (the “June 2016 Final Rule”), which took effect on July 27, 20168 to amend:

“regulations pertaining to the determination of size eligibility based on affiliation by creating distinctive requirements for small business applicants for assistance from the Business Loan, Disaster Loan and Surety Bond Guarantee Program (“SBG”). For purposes of this rule, the Business Loan Programs consist of the 7(a) Loan Program…”9

February 2020 Interim Rule: SBA published an Interim Final Rule on February 10, 2020, which took effect March 11, 2020 (the “February 2020 Interim Rule”)10, to amend Section 301(f). However, Section 1102(e) of the CARES Act11 repealed the February 2020 Interim Rule in its entirety, without providing further clarification or referencing specific sections. In the rush to implement the legislation, SBA did not publish the rule as revised by that repeal. As a result, lawyers were left to either find an old version of the once-superseded June 2016 Final Rule or to read the amendment to determine which aspects of the published version of Section 301(f) the short-lived February 2020 Interim Rule had altered. Without a published version of the post-CARES Act version of Section 301(f), there was also confusion as to whether or not §121.301(f) had reverted to its formulation under the June 2016 Final Rule. On April 4, 2020, the Office of General Counsel Office of Procurement Law on behalf of SBA issued a Letter regarding Size Eligibility and Affiliation under the CARES Act (the “April Letter”),12 which provided clarity (in a footnote,13 nonetheless):

“the CARES Act rescinds the changes that SBA made to § 121.301(f) through an interim final rule published on Feb. 10, 2020. See Pub. L. 116-136, § 1102(e). Thus, references are to the pre-2020 version of the regulation.” (Emphasis added).

The April Letter’s affiliation analysis specifically relies on the June 2016 Final Rule rather than the February 2020 Interim Rule.

The below REDLINE shows Section 301(f) as NOW IN EFFECT (the June 2016 Final Rule or “Current Rule”) marked against the now rescinded February 2020 Interim Rule. Many had (quite understandably) initially reviewed the now rescinded February 2020 Interim Rule upon release of the CARES Act (and PPP).

Some Explanation of Changes You’ll See in the REDLINE:
The first substantive change appearing in the REDLINE in §301(f)(4) contains additional changes not necessarily shown in the REDLINE due in part to their subtlety. For example, the REDLINE indicates that the excerpt: “Where SBA determines that interests should be aggregated…” was added back in the Current Rule. Yet that phrase was never deleted in the first place. That phrase appears in red in the last sentence of what was previously sub-section (4)(i), and in blue in the last sentence of the current sub-section (f)(4). The key change here is that the Current Rule’s concept of “affiliation by identity of interest” only considers close relatives (with substantially identical interests), whereas the Now Rescinded February 2020 Interim Rule had expanded the rule to also include “two or more individuals or firms” with substantially identical interests.

We mentioned above that the Current Rule rescinded the “Totality of Circumstances” provision, which was §301(f)(6). Our REDLINE does not renumber.

The REDLINE Does NOT Show Additional Exceptions: Note also that this REDLINE does not include the handful of additional affiliation exceptions which the CARES Act added under Section 1102(a)(36)(D)(iv) to waive the affiliation rules for: (i) any business with not more than 500 employees that is assigned a North American Industry Classification System [NAICS] code beginning with 72, (ii) any business operating as a franchise that is assigned a franchise identifier code by SBA, and (iii) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).14 Our reasoning here is two-fold: (1) our current understanding is that those types of provisions primarily apply only during the “covered period,” (defined as February 15, 2020 – June 30, 2020 under the CARES Act) whereas the February 2020 Interim Rule was rescinded permanently; and (2) exceptions to affiliation for purposes of 7(a) loans do not fall under Section 301 – they fall under Section 103(b). Again, we understand this is confusing because at the top of this article we wrote that affiliation for 7(a) loans is determined under Section 301 – that is true, but the last sentence of Section 301(f) (no matter which version of Section 301(f) you review) clearly states that “For exceptions to affiliation, see 13 CFR 121.103(b).”15

To summarize, at a high-level, the “changes” made in repealing the February 2020 Interim Rule:

  • The changes to “affiliation based on identity of interest,” as outlined above;
  • Completely striking the concept of affiliation based on Common Investments;
  • Completely striking the concept of affiliation based on the “newly organized concern rule;” and
  • Completely striking the concept of affiliation based on a “totality of the circumstances.”


Meet the New Rule, Same As the Old Rule:
The following REDLINE shows Section 301(f) as currently in effect, marked against the pre-CARES Act version. We expect that the new law, as revised, will come online soon. Also, because we’re not in the business of publishing law (we advise on and analyze law), please note that this is an unofficial version as of April 8, 2020 and we’re providing it for convenience (rely at your own risk).

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 


1 See Matthew J. MoisanEd ZimmermanLowell A. CitronKimberly E. Lomot, and Raymond P. Thek, SBA Section 7(a) Loans for Venture Capital Backed Growth Companies/Startups Under the CARES Act, (Mar. 31, 2020).

2 See Ed ZimmermanWait What?! Treasury Clarifies ‘Affiliation’ Rules For SBA Section 7(a) Loans (& Startups Are...), FORBES (Apr. 4, 2020, 9:52 PM).  Both of the foregoing cite 13 C.F.R. Section 121.103(a)(8) and U.S. Department of Treasury then issued guidance confirming that analysis in numerous places, for instance Treasury’s April 8th FAQ, U.S. DEP’T OF TREASURY, PAYCHECK PROTECTION PROGRAM LOANS, FAQ, Question 5 (Apr. 8, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf, and Treasury’s Interim Final Rule on Affiliation, U.S. SMALL BUS. ADMIN., SBA-2020-[  ], 13 CFR PART 121.301, BUSINESS LOAN PROGRAM TEMPORARY CHANGES; PAYCHECK PROTECTION PROGRAM 6 (Apr. 4, 2020), https://home.treasury.gov/system/files/136/SBA%20IFR%202.pdf.  Note however that exceptions to affiliation, even for applicants in SBA’s Business Loan Program, is still governed by Section 121.103(b), as further referenced below.

3 Redline available HERE

Andrew Duehren, “Funding Exhausted for $350 Billion Small-Business Paycheck Protection Program,” Wall Street Journal (April 16, 2020).

5 Ed Zimmerman, Chris PorrinoElie HonigKathleen McGeeKim Lomot, and Lowell Citron, “PPP Loans For Startups/Growth Companies—Former Attorney General’s Perspective—Lessons From Hurricane Sandy & 9/11,” Forbes (April 14, 2020, 9:43 p.m.)

6 See Treasury Department’s “FAQ” (p. 6, April 15, 2020). Answer to Question 17.

7 SeeAffiliation for Business Loan Programs and Surety Bond Guarantee Program,” 80 Fed. Reg. 59667 (October 2, 2015).

8 See Affiliation for Business Loan Programs and Surety Bond Guaranty Program, 81 Fed. Reg. 41423 (June 27, 2016) (to be codified at 13 C.F.R. §§ 109, 115, 120-21).

9 For clarity, the June 2016 Final Rule only amended the affiliation rules with regards to the Business Loan, Disaster Loan and Surety Bond Guarantee Program.

10 See Express Loan Programs; Affiliation Standards, 85 Fed. Reg. 7622 (Feb. 10, 2020) (to be codified at 13 C.F.R. §§ 103, 120-21).

11 Section 1102(e) states, in its entirety: “(e) INTERIM RULE. On and after the date of enactment of this Act the interim final rule published by the Administrator entitled ‘‘Express Loan Programs: Affiliation Standards’’ (85 Fed. Reg. 7622 (February 10, 2020)) is permanently rescinded and shall have no force or effect.”

12 See Letter from John W. Klein, Assoc. Gen. Counsel for Procurement Law, U.S. Small Bus. Admin., to William M. Manger, Assoc. Admin. for Capital Access (Apr. 4, 2020).

13 Id. at 2 n.2, where the Office of General Counsel confirmed that “[T]he CARES Act rescinds the changes that SBA made to §121.301(f) through an interim final rule published on Feb. 10, 2020. Thus, references are to the pre-2020 version of the regulation.”

14 See also BUSINESS LOAN PROGRAM TEMPORARY CHANGES; PAYCHECK PROTECTION PROGRAM, supra n. 2, at 10, which temporarily exempted faith-based organizations that might otherwise be considered affiliates under 13 C.F.R Section 121.103(b) for purposes of participation in the PPP.

15 See 13 C.F.R. § 121.301(f)(7) (This link will take you to the text of 13 C.F.R. §121.301 as formulated under the June 2016 Final Rule).

With one day to spare before the May 14 “Limited Safe Harbor” expires, the SBA released FAQ #46 (May 13) to explain the process of how the SBA will review Paycheck Protection Program (PPP) loans. The new FAQ, unfortunately, prompts more questions than answers regarding risks around certifications required under the PPP. Later in the day, the SBA also released FAQ 47 extending the May 14 deadline to May 18, with “a revision to the SBA’s interim final rule” to follow–or, put another way, more to come.

FAQ 46’s guidance neither clarifies nor alters the meaning or factual premises adequate to certify “necessity” for PPP loans. Instead it explains the SBA’s planned approach for the SBA’s audit and review of PPP loan applications. Borrowers of loans below $2 million are breathing a sigh of relief, especially if they experienced anxiety regarding whether they fully satisfied the necessity requirement. That said, FAQ 46 is more accurately analogized to the IRS saying, “We’re unlikely to audit your tax returns, and if we do, we’ll simply ask for the money you owe us without penalties and interest,” but ONLY if (1) you have the money to repay when required and (2) if you erred solely on the certification of need.

While the FAQ seems to provide a “safe harbor” and to “deem good faith,” it lacks clarity and finality, as it would appear to bind only the SBA, rather than the Department of Justice (DOJ) or potential private litigants. Moreover, regardless of the size of the loan, fraud and problems resulting from missteps in the hyper-technical affiliation and eligibility rules remain fair game for prosecution and were never part of the “limited safe harbor” the SBA had earlier announced.

FAQ 46 provides in relevant portion that in the SBA’s review of a borrower’s good faith certification of a PPP loan application:

“[The] SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to [the] SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

This appears as a “safe harbor” solely for certification of need for borrowers (not affiliation rules properly, for instance) with loans aggregating under $2 million (including all loans taken by borrower’s affiliates). FAQ 46 continues:

“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance …”

This statement is somewhat confusing because the “safe harbor” applies only to “PPP loans with an original principal amount of less than $2 million,” so that ALL borrowers with loans greater than $2 million will not satisfy the safe harbor.

FAQ 46 then provides:

“[The] SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by [the] SBA for compliance. … If [the] SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, [the] SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” (emphasis added).

While some have posited that FAQ 46’s safe harbor seems to apply to all loans below $2 million, the above passage clearly speaks of BOTH loans above $2 million “and other PPP loans as appropriate …” In other words, it is unclear precisely how “safe” the harbor is. It is also unclear whether an investigator or prosecutor must carry a steep or modest burden to overcome the borrower’s “deemed …good faith” and shift the borrower into the category of having “lacked an adequate basis for the required certification” of necessity. In other words, while the SBA will clearly scrutinize loans above $2 million, the SBA has been vague regarding the scrutiny the SBA will apply to smaller loans.

Additionally, it is unclear whether FAQ 46’s specific language means that the SBA is restricting itself so that the SBA is ONLY able to seek repayment while the loan remains outstanding: “SBA will seek repayment of the outstanding PPP loan balance” (emphasis added). This detail is important because loan forgiveness is supposed to happen with real speed, which would give the SBA very little time to review these loans. The SBA could have phrased this as “the SBA’s entitlement to ‘seek recovery’ of the original loan amount (regardless of whether forgiven or partially repaid).” The current phrasing supports arguments that FAQ 46 could preclude the SBA from asserting loan recovery rights after the loan has been either repaid or forgiven.

FAQ 46 next outlines the process the SBA will follow:

“If the borrower repays the loan after receiving notification from [the] SBA, [the] SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

We are uncertain of how binding the SBA’s articulation of its loan review process will be on the DOJ, though we do note that the SBA has clearly stated its flagging enthusiasm for generating leads for the DOJ as to many of these loans. We also believe that FAQ 46 will, as a practical matter, make it more challenging for the DOJ to enforce claims arising from the certification of need on loans below $2 million. It will be interesting to watch how enforcement priorities change in the coming months and after the elections, as well as how public perception will unfold regarding these loans.

While stating that all applicants for amounts under $2 million will be deemed to have been filed in good faith, FAQ 46 does not change the legal requirement that applicants must in good faith certify need. If that certification is inaccurate, it is still a violation of law and could still be subject to federal enforcement action even though not uncovered in the SBA’s review or audit process. The SBA will require return of funds from borrowers–and we read that to mean borrowers of loans of any size–rather than penalties, unless the borrower cannot repay. Yet, FAQ 46 does nothing to prevent negative publicity or private plaintiffs’ actions. Of course situations of alleged egregious misuse of funds will still bring enforcement, like the action announced on May 13 (where the Atlanta-based borrower used the funds to, among other things, lease a Rolls Royce, buy a Rolex, and pay child support (NBC Reporting)) and the first prosecutions DOJ announced (May 5, Rhode Island (DOJ announced that the borrowers had “discussed via email the creation of fraudulent loan applications and supporting documentations”)).

As to negative publicity, on May 12, five major news organizations (The New York Times, The Washington Post, the parent company of The Wall Street Journal, Bloomberg, and Pro Publica) sued the SBA under the Freedom of Information Act (FOIA) “seeking access to records showing who received subsidized loans under both programs, the size of each loan and which bank processed the loan, as well as other loan-specific information.” (See Washington Post coverage). This is consistent with our firm’s earlier publications regarding the application of FOIA to these loans (See April 8 and April 15 posts), as well as The Wall Street Journal’s reporting (April 21).

We will continue to watch the rapidly shifting landscape around PPP loans, especially as the SBA has advised us to expect an Interim Final Rule.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

 


Raymond P. Thek, Vice Chair, Tech Group, Lowenstein Sandler LLP.

Kathleen A. McGee, former Bureau Chief for Internet & Technology, NY Attorney General’s Office; served in Mayor Bloomberg’s Administration (Director, Mayor’s Office of Special Enforcement); prosecuted homicide and sex crimes as an Assistant District Attorney in the Bronx; now serves in Lowenstein Sandler LLP’s Tech Group and White Collar Criminal Defense Group.

Ed Zimmerman, Chair, Tech Group, Lowenstein Sandler LLP & Adjunct Prof. of Venture Capital, Columbia Business School, Co-Founder, VentureCrush.

Kimberly E. Lomot, previously certified as a Designated Attorney for SBA 504 Lending; serves as a debt financing and real estate lawyer at Lowenstein Sandler LLP.


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