Reed Smith Client Alerts

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the interim Paycheck Protection Program (PPP) loan regulations and guidance that have been promulgated since the CARES Act’s passage contain several important provisions designed to assist companies with weathering the financial impact of COVID-19. Many of the CARES Act’s provisions relate to loan programs administered by the Small Business Administration (SBA); the CARES Act makes one of these loan programs more accessible by making changes to certain applicable affiliation rules that impact eligibility and by waiving fees associated with applications. Other CARES Act provisions impact contractor employee benefits, expand contractor opportunities to support the federal government during this crisis, and provide funds for pandemic education. This alert will discuss the CARES Act provisions that expand existing SBA loan programs, impact paid leave to federal contractors, affect agency-specific other transaction agreement (OTA) authority, and provide for grants to educate and inform small businesses about COVID-19.

Auteurs: Holly A. Roth Lawrence P. Block Elizabeth Leavy Liza V. Craig William T. Kirkwood Alejo R. Cabranes

I. SBA Loans

One of the most hotly discussed aspects of the CARES Act relates to the expansion of SBA loan programs. Generally, the SBA makes loans available to eligible small businesses under the 7(a) program; the SBA also provides low interest disaster loans in certain circumstances under its Economic Injury and Disaster Loan (EIDL) program. The CARES Act creates the new PPP to provide (1) loans to eligible small businesses for payroll and other fixed obligations; (2) a mechanism for loan forgiveness where the small business can demonstrate that the loan proceeds were used for payroll and certain other costs; and when forgiven, (3) the ability to not recognize the forgiven loan as revenue for tax purposes. In addition, the CARES Act increased eligibility for the EIDL loans, and the CARES Act makes available grants of up to $10,000 to cover immediate operating costs of eligible businesses applying for EIDL assistance. The CARES Act provides nearly $350 billion of additional funding for these loan programs during the covered period – February 15, 2020 to June 30, 2020. In addition, on April 7, 2020, the Treasury Department indicated it will seek additional funds to address the high level of public interest in, and applications for, these loan programs.

Who is eligible for a PPP loan?

Small businesses that meet the SBA’s definition of a small business are eligible. Also, the CARES Act includes business concerns, non-profit organizations, veterans organizations, and tribal businesses provided that such entities employ not more than the greater of (i) 500 employees (which includes full-time and part-time employees) or, if applicable, (ii) the employee-based or revenue-based size standard for the industry in which such entity operates; or (iii) if maximum tangible net worth of the business is not more than $15 million and (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. To determine whether a company is small, the SBA affiliation rules set forth at 13 CFR 121.301 are applicable. The SBA published an Interim Final Rule on Affiliation on Friday April 3, 2020, which set forth four tests for affiliation pursuant to 13 CFR 121.301: (1) affiliation based on ownership, (2) affiliation arising under stock options, convertible securities, and agreements to merger, (3) affiliation based on management, and (4) affiliation based on identify of interest. Guidance released by the SBA confirms these tests for affiliation. As a result, the employees of the borrower and its affiliates are aggregated for purposes of the calculation.

The CARES Act provides limited waivers of affiliation rules for entities in the accommodations and food services industries (see North American Industry Classification System (NAICS) Sector 72) that have more than one physical location, provided that such entities employ fewer than 500 employees per physical location. Franchise operators approved by the SBA are likewise afforded some relief from the affiliation rules, as are business that have received funding from a Small Business Investment Company (SBIC). However, the application of the affiliation rules is complex and fact-specific, particularly if a borrower shares a management company and/or is sponsored by private equity, venture capital, and similar financial sponsors. Borrowers that share a management company and/or are sponsored by these entities are encouraged to consult with their attorney to walk through the detailed analysis related to whether financial sponsors and the sponsors’ other portfolio companies are likely to be deemed “affiliated” with the borrower for eligibility purposes for the PPP loan.