PPP loans are available to businesses that qualify as small business concerns under the SBA’s rules, as well as other businesses with up to the greater of (i) 500 employees or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the business operates. Several categories of individuals are also eligible, including individuals who operate under sole proprietorships or as independent contractors, as well as certain self-employed individuals. The existing SBA affiliation rules govern how many employees a business is deemed to have, except with respect to businesses in the hotel and food services industries, franchises, and businesses that receive financial assistance from SBA’s Small Business Investment Company (“SBIC”) program, for which the CARES Act waives the SBA affiliation rules. For more information on the PPP program, please see V&E’s summary here.

As of April 2, 2020, the SBA has not yet promulgated regulations specifically addressing many of the questions associated with the application of the SBA affiliation rules to PPP applicants. For example, questions have been raised as to how the SBA affiliation rules apply to businesses that are owned by venture capital or private equity funds or otherwise under common control or management, such that an applicant would need to count employees of these “affiliates.” This could require counting employees of entities owned by a company’s majority or controlling shareholders, companies that share common management, and companies that share identical or substantially identical business or economic interests, among others. Even the borrower’s minority shareholders could be deemed to have the power to control the company if they have the right to control or veto certain corporate actions. Confusingly, these affiliation regulations are waived entirely for employers in certain industries (assigned a North American Industry Classification System code beginning with 72), certain franchises, or companies receiving financial assistance under the SBIC program.

These nuances, among others, are not apparent from the face of the sample application distributed by the SBA or the guidance distributed thus far. As such, companies with complex ownership structures or that have concerns about the potential inclusion of affiliates’ employees should consult with experienced counsel prior to submitting any forms to lenders.

History teaches that massive stimulus and recovery efforts such as the CARES Act are often followed by years of audits, criminal and civil fraud investigations, and litigation. This was the case with the Troubled Asset Relief Program (“TARP”) following the 2008 global financial crisis¹, and has been the case following major natural disaster recovery efforts. Indeed, the CARES Act creates the Office of the Special Inspector General for Pandemic Recovery within the Department of the Treasury “[to] conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury” under the CARES Act. Misunderstanding the eligibility requirements of the PPP, or worse — intentionally lying about or obfuscating details while applying, could subject entities and individuals participating in the application process to criminal charges under 18 U.S.C. § 1001 for making false statements. Additionally, litigation under the False Claims Act, 31 U.S.C. §§ 3729-3733, is common in connection with programs of this type.

¹ As but one example, in November 2013, the former CEO of a bank that applied for TARP funds was sentenced to 23 years in prison followed by five years of supervised relief. Press Release, Office of the Special Inspector General for the Troubled Asset Relief Program, Former CEO of TARP Applicant Bank Sentenced to 23 Years in Federal Prison for Massive Bank Fraud (Nov. 6, 2013), available at https://www.sigtarp.gov/Press%20Releases/Woodard_Edward_Sentencing_Press_Release.pdf.