SBA: It’s (Maybe) Fine if You Didn’t Count the Employees of Your Foreign Affiliates for PPP Purposes

In what might be a classic “now you tell me” scenario, the SBA issued a new rule May 21 saying that if an applicant failed to count the employees of its foreign affiliates when it was determining its eligibility, the SBA will not hold that against the applicant so long as the application was submitted before the SBA clarified that requirement.

The problem with that, however, is that because the safe harbor ended May 18, it’s highly likely that a lot of those businesses already gave their PPP loan back. They’d be forgiven for thinking they had to, as earlier this month Sen. Marco Rubio was indicating that Congress would investigate companies who took PPP funds for which they weren’t eligible.

For the record, the general rule is—and has always been—that in order to be eligible for a PPP loan, a concern and its affiliates must have less than 500 employees combined. The regulation explicitly states that, in determining its size, a concern must include both foreign and domestic affiliates.

But the SBA has recognized that some of its guidance may have been misleading on that point. On April 15, the SBA issued an interim final rule that said, “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States[.]”

A fair but oversimplified reading of that statement led some to believe that if the applicant itself had less than 500 U.S.-based employees then it was eligible.

The SBA cleared up the confusion on May 5, when it updated its list of Frequently Asked Questions to make it clear that “an applicant must count all of its employees and the employees of its U.S. and foreign affiliates[.]”

Because of the somewhat contradictory guidance, the SBA has now decided that it will simply forgive companies that went ahead and applied for a PPP loan so long as the application came in before the SBA addressed the question in its May 5th addition to the FAQ.

Specifically, it said:

[A]s an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.

In other words, “our bad.”

But what of businesses who did apply in that window who returned the money after the SBA said on May 5 that foreign affiliates did need to be counted? Can those businesses reclaim the funds?

Seems as though they are out of luck. They can’t apply again, because they know for a fact now that they are not eligible. This rule has therefore rewarded companies who misread a single statement by SBA to their own advantage, then ignored later guidance, and elected not to take advantage of the safe harbor.

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