On May 8, 2020, the U.S. House Select Subcommittee on the Coronavirus
letters to five companies calling on them to return Paycheck Protection
Program loans or produce supporting documentation by May 15. The press
release announcing the action included the names of the companies and
characterized them as “large” and not the intended beneficiaries of the
Coronavirus Aid, Relief, and Economic Security (CARES) Act Paycheck
Protection Program (PPP) loans.
According to the press release, these companies were selected based on the
following stated criteria: The companies “(1) are public; (2) have market
capitalization of more than $25 million; (3) have more than 600 employees;
and (4) sought and received ‘small business’ loans of $10 million or more.”
However, the CARES Act does not specify these criteria as conditions for a
PPP loan, nor has subsequent guidance from the Treasury Department and
Small Business Administration (SBA) expressly excluded businesses from
obtaining PPP loans based on the foregoing criteria (subject to compliance
with the employee threshold or alternate size test). Under the PPP, business concerns are eligible if they comply with one of the
- Applicant with not more than the greater of — 500 employees; or
, if applicable, SBA employee-based size standard by NAICS code.
- A business concern that meets the SBA revenue-based size
standard corresponding to its primary industry.
- A small business concern that already met existing SBA employee-based
- Under the “alternative size standard” as of March 27, 2020, the business
concern is a small business concern that satisfies the following: (1)
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.
There are also exemptions from the SBA’s affiliation rules for companies
that receive financial assistance from small business investment companies,
business concerns classified under NAICS Code 72 (the accommodation and
food services sector), and certain franchise entities.
The CARES Act does not require applicants to be privately held business
concerns. In addition, many eligible NAICS codes allow size standards well
in excess of 600 employees, as could application of the additional
exception for NAICS Code 72 businesses, which are permitted to apply the
500-employee threshold on a per-location basis.
This congressional demand comes on the heels of significant changes in the
PPP loan borrower certification requirements, as described in public
statements and written guidance published by the Treasury Department and
SBA since April 22, 2020. Notwithstanding apparently contradictory
provisions of the CARES Act, all borrowers under the PPP loan program have
been directed to review their original certification that “[c]urrent
economic uncertainty makes this loan request necessary to support the
ongoing operations of the Applicant” in light of guidance set forth in
questions 31, 37, 39 and 43 of the
SBA’s Frequently Asked Questions
and related rules, by “taking into account their current business activity
and their ability to access other sources of liquidity sufficient to
support their ongoing operations in a manner that is not significantly
detrimental to the business.” A safe harbor was created and extended to May
14, 2020, for borrowers to repay in full PPP loans in order to be deemed to
have made the original necessity certification, in light of the retroactive
guidance, in good faith.
The PPP eligibility criteria are complex, continue to be updated and can be
confusing. Given ongoing enforcement efforts of the Treasury Department,
SBA and now Congress, PPP loan borrowers should carefully and
contemporaneously document the analysis used in determining eligibility for
PPP loans to consider the safe harbor and otherwise mitigate risk and
potential future liability.
If your company requires assistance in navigating these complex standards,
please contact one of the authors of this alert, your regular McGuireWoods
attorney or a member of McGuireWoods’
COVID-19 Response Team, which helps clients navigate legal and business issues and meet federal,
state and local government relations challenges arising from the pandemic.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.