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April 6, 2020

COVID-19 UPDATE: Latest Developments on SBA Paycheck Protection Program

We continue our efforts to keep you informed of key legal developments relating to COVID-19. Today, we highlight the most recent developments relating to the $349 billion U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

For an overview of the PPP and other key provisions in the CARES Act, see our prior updates HERE.


Over the last ten days, the U.S. Department of the Treasury (the “Treasury”) repeatedly announced that SBA-approved lenders would begin accepting Paycheck Protection Program applications from small business owners and sole proprietorships on Friday, April 3rd. However, with the overwhelming demand for PPP loans and evolving guidelines from the federal government, many banks – including Citibank, Fifth Third Bank and Wells Fargo – have delayed accepting online applications until today (Monday, April 6th) or later. Even for customers of banks – such as Bank of America and JPMorgan Chase – that launched their online platforms last Friday, there are reports of confusion over application criteria and documentation requirements, as well as technology issues with the web-based platforms.

By and large, banks are accepting PPP applications only from their existing customers. Additionally, we have reports that certain banks have limited access further by requiring customers not just to have accounts, but also have outstanding business loans, with their institution. As of this writing, Wells Fargo had announced that it planned to disburse $10 billion in loans, but that it had already received enough applications to cover that amount; so, it is suspending the intake of new applications.

Despite the difficulties, the SBA Administrator, Jovita Carranza, tweeted on Friday evening that banks had begun processing PPP applications for 13,669 businesses in amounts totaling over $4.3 billion (see HERE). Over the weekend, Bank of America announced that it had received 185,000 loan applications for an amount of roughly $30 billion.


The SBA and the Treasury continue to update PPP forms and guidance for lenders and borrowers (see HERE). The Treasury also has begun to issue its own FAQs (see HERE). We highlight key developments below.

  • Interim Final Rule. On Thursday night, April 2nd, the SBA issued an interim final rule (see HERE).
  • Borrower Application. On Friday, April 3rd, the Treasury published on its website an updated PPP application form for borrowers (see HERE).
  • Affiliation Rules. On Friday night, April 3rd, the SBA issued rules (“Affiliation Rules”) to describe how it would assess affiliates in determining the number of employees of an applicant for the PPP (see HERE). Note that there is no revenue test for the PPP, so the Affiliation Rules are not applied for that purpose.

Interim Final Rule

The Interim Final Rule (“Interim Rule”) applies to PPP applications through June 30, 2020 (or until PPP funds are exhausted). Comments will be accepted for 30 days after the rule is published in the Federal Register, and the SBA may revise the rule based on comments received. The rule provides important details for calculating loan amounts and sets forth additional requirements, notwithstanding that – in a few instances – its consistency with the statute’s language is questionable. We highlight key provisions below.

  1. Independent Contractors Excluded. Most notably, the rule explains that businesses shall not include as part of the payroll costs in their loan amount calculation any compensation paid to independent contractors, as reported on 1099 tax forms. Similarly, independent contractor costs do not count toward loan forgiveness amounts. The SBA’s rationale is that independent contractors may apply on their own for PPP loans beginning this Friday, April 10th.
  2. 2020 SBA Disaster Loans Added. The rule provides examples to illustrate that any business with an outstanding balance under an SBA Economic Injury Disaster Loans (EIDL) made between January 31, 2020 and April 3, 2020, may increase the PPP loan amount it requests by such EIDL balance, subject to the $10 million cap. Also, if that EIDL was used for payroll costs, the PPP loan “must be used to refinance” it.
  3. Ineligible Borrowers. Certain businesses, regardless of their satisfaction of other criteria, are ineligible for PPP loans: (1) those engaging in businesses illegal under federal law (e.g. cannabis industry); (2) household employers (e.g. those employing nannies or housekeepers); (3) those with an owner of 20% or more equity in such business who has a criminal record or is “presently subject to” criminal charges; and (4) those that are delinquent or have defaulted within the last 7 years on SBA or other federal loans. Furthermore, the rule requires that borrowers can only count employees whose principal place of residence is in the United States.
  4. Interest Rate Increased; Maturity Shortened. The Interim Rule raises the interest rate for the non-forgivable portion of the PPP loan from 0.5% to 1%. While the CARES Act allowed for a maturity up to ten (10) years, the rule mandates that the maximum term is two (2) years.
  5. Loan Forgiveness Limitations. In addition to conditions set forth in the CARES Act (e.g. specific use of proceeds and amounts incurred over 8-week period following date of the loan), the rule clarifies that not more than 25% of loan forgiveness may be attributable to non-payroll costs.

Affiliation Rules

As a general rule, small businesses are classified as those with not more than 500 employees; however, for certain industries, the SBA uses a different employee count metric (see Table of Size Standards HERE). Moreover, under the CARES Act, a business with a NAICS code of 72 (e.g. food and hospitality industry) that has more than one location may also qualify for a PPP loan if each of its individual locations employ not more than 500 employees.

When determining an applicant’s number of employees, the SBA will consider that applicant together with its affiliates. The Affiliation Rules issued by the SBA on Friday night describe four (4) affiliation tests based on control that apply to business concerns and corporate entities applying for PPP loans. When one entity can control another, they are affiliates. When a third-party controls two entities, they are affiliated. The rule emphasizes that it “does not matter whether control is exercised, so long as the power to control exists.” Key points from the 4 tests include:

  1. Affiliation Based Ownership. Ownership of more than 50% in equity constitutes control, but the SBA will deem a minority shareholder to have control if that individual or entity has the ability under corporate organization or shareholder agreements to prevent a quorum or block a vote by the shareholders or board of directors.
  2. Affiliation Arising under Stock Options, Convertible Securities and Merger Agreements. If the option, convertible security or agreement to merge (including agreements in principle) has “a present effect” on the power to control, the SBA will treat it as though the rights have been exercised. Excluded are those options, securities or agreements subject to conditions precedent that are incapable of fulfillment, speculative, conjectural, unenforceable or for which the “probability” of the transaction is “extremely remote.”
  3. Affiliation Based on Management. Affiliation arises when the President, CEO or other officers who control a firm’s management also controls the board of directors or management of one or more other business concerns, including through management agreements.
  4. Affiliation Based on Identity of Interest. Affiliation arises when there is an identity of interest between close relatives (as defined in 13 CFR 120.10), such as where the close relatives operate businesses in the same or similar industry in the same geographic area. The individuals or firms have the opportunity, however, to rebut the SBA’s determination of affiliation with evidence that the interests are separate in fact.

Faith-Based Exemption

The Affiliation Rules do not apply to faith-based organizations when the relationship between the organization is based on a religious teaching, belief or “otherwise constitutes a part of the exercise of religion.”


Under the CARES Act, these affiliation rules are waived for (1) businesses that have a NAICS code of 72 at the time the loan is disbursed; (2) businesses operating a franchise that have been assigned a franchise identifier code by the SBA; and (3) businesses that receive financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.

Addendum A to PPP Application

The current form of the PPP application requires applicants to identify in an Addendum A any business in which the applicant or any of its owners has an ownership interest or which have common management, but without requiring disclosure of the number of employees of any such disclosed business. It is not clear how banks or the SBA will utilize this information for purposes of applying the Affiliate Rules and processing PPP applications. Moreover, as of this writing, certain bank online application procedures do not provide for uploading of any Addendum A disclosure.

The rollout of the PPP evolves daily; in the coming days, we plan to report on further guidance available for independent contractors and self-employed individuals who may apply for PPP loans as early as Friday, April 10th.


We understand that federal, state and local officials are keenly aware of the need for further economic relief, as well as stimulus packages that fund improvements in America's infrastructure, including its health and digital infrastructure. We are monitoring these proposals and will report on further available information as the week unfolds.

We will continue to send periodic updates on topics that may be helpful to your businesses. If you have a particular issue that you’d like us to address or if you’d like to be removed from the distribution list, please let us know.

Feel free to contact us with any questions.

Gery Chico and Jon Leach

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