On March 27, Congress passed the $2 Trillion CARES Act, the largest financial relief bill in history, aimed at providing financial assistance to businesses and individuals to alleviate the economic fallout caused by the COVID-19 public health crisis. A core focus of the CARES Act is $350 billion in financial aid for small businesses through federal loans under a new Small Business Administration (“SBA”) loan program called the Paycheck Protection Program (the “PPP”). The highlights of the program for qualifying businesses include the following:
- Eligibility. Eligible businesses include any business that already meets the applicable regulations to constitute “small business concerns” under the Small Business Act, businesses with up to 500 employees, non-profit organizations, businesses in the accommodation (lodging) and food services businesses with no more than 500 employees at each location, and eligible sole proprietorships and independent contractors.
- Terms. An eligible business can borrow 2.5 times their monthly payroll costs, up to $10 million. “Payroll costs” includes salaries, wages, paid sick leave, health insurance premiums, retirement benefits, tips, state and local taxes on employee compensation, but does not include compensation to any individual employee or independent contractor in excess of $100,000.
- Permitted Uses of Proceeds.Businesses may use PPP proceeds for the following business expenses: payroll costs (as defined above), rent, utilities, and interest payments on any mortgage or debt obligations incurred before February 15, 2020, excluding payments or prepayments of principal.
- Loan Forgiveness. Borrowers may apply for loan forgiveness in an amount equal to funds used to pay eight weeks of payroll costs, mortgage interest, rent and utilities starting from the date of such Borrower’s PPP loan. The amount of loan forgiveness available is limited to the principal amount loaned under the PPP loan. Furthermore, in an effort to incentivize businesses to keep employees and maintain salaries or wages, the amount of loan forgiveness available is subject to reduction if the Borrower’s average number of full-time employees during the eight week period is lower than the average number of full-time employees in the 12-month period prior, or if there is a 25% reduction of the total salaries or wages of such employees during the eight week period. The 25% reduction guideline does not apply to employees whose annual salary or wages for any pay period in 2019 was greater than $100,000. An exemption from the reductions in loan forgiveness applies if the Borrower had reduced employees or salaries or wages as a result of the COVID-19 pandemic, but eliminates such reduction by rehiring the laid off employees or increasing salaries or wages to prior levels by June 30, 2020.
The highlights of the CARES Act is intended to be a summary of the over 800 page relief bill. The CARES Act is subject to change over time during the legislative process. For questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.
Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.