On April 30, 2020, the U.S. Small Business Administration (SBA) issued its Seventh Interim Final Rule[1] with respect to the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).[2]

COVID-19, Mnuchin

The Seventh Interim Final Rule limits the amount of PPP loans that any “single corporate group” may receive to $20 million in the aggregate.  The SBA reasoned that the $20 million cap is necessary in light of the high demand for PPP loans by eligible businesses and to preserve the finite funds available under the PPP.  This limitation for single corporate groups is effective immediately with respect to any PPP loan that has not yet been fully disbursed as of April 30, 2020.  For PPP loans that have been partially disbursed, the limitation applies to any additional disbursement that would cause the total PPP loans to a single corporate group to exceed $20 million.

For purposes of this $20 million limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a “common parent”.  The SBA, however, did not define or otherwise elaborate on the term “common parent”.  For tangential guidance, businesses can look to the U.S. Internal Revenue Code of 1986 (as amended, the IRS Code) under 26 CFR § 1.1471-5(i) to determine who the “common parent” is within a corporate group of entities unless and until the SBA issues subsequent interpretative rules.  26 CFR § 1.1471-5(i)(2) states that, for federal tax income purposes, an “expanded affiliated group” is generally defined in accordance with the principles of the IRS Code to mean one or more chains of entities connected through ownership by a common parent entity.  In construing and applying the rules under the Seventh Interim Final Rule and the existing federal regulations to the PPP, a single corporate group consists of one or more chains of entities connected through ownership by a “common parent” entity to the extent the “common parent” entity directly or indirectly owns a majority of the equity interests in the associated entities.

The Seventh Interim Final Rule adds that businesses are subject to the $20 million limitation even if the businesses are eligible for the waiver-of-affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA’s affiliation rules.  For an analysis of the affiliation rules applicable to the PPP, please visit our article on the subject matter.

It is the responsibility of the PPP applicant to notify their lender if the applicant has applied for or received PPP loans in excess of $20 million.  Further, PPP applicants must withdraw or request cancellation of any pending PPP loan application or approved PPP loan that would cause the aggregate PPP loan amount for the PPP applicant’s corporate group to exceed $20 million.  Failure by the PPP applicant to do so will be regarded as an unauthorized use of PPP funds, and the PPP loan will not be eligible for forgiveness.  A PPP lender may rely on a PPP applicant’s representations with respect to the total amount of PPP loans that the associated corporate group has received.

*Things are changing quickly and the measures and interpretations described here may change. Our analysis is necessarily limited by the time sensitivities of the current crisis as well as the absence of precedent for some of what is contained here. This analysis represents our best interpretation and recommendations based on where things currently stand.*

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[1] The Seventh Interim Final Rule is effective without advance notice and public comment because Section 1114 of the CARES Act authorizes SBA to issue regulations to implement the PPP without regard to notice requirements.

[2] The Seventh Interim Final Rule is supplemental to the (i) First Interim Final Rule issued by the SBA on April 2, 2020, (ii) Second Interim Final Rule issued by the SBA on April 3, 2020, (iii) Third Interim Final Rule issued by the SBA on April 14, 2020, (iv) Fourth Interim Finale Rule issued by the SBA on April 24, 2020; (v) Fifth Interim Final Rule issued by the SBA on April 27, 2020; (vi) Sixth Interim Final Rule issued by the SBA on April 28, 2020; and (vii) the Frequently Asked Questions fact sheet issued by the U.S. Department of Treasury, which was last updated on April 29, 2020.