Well, we thought we had this figured out. Yet here we are a week later and we keep hearing conflicting reports.
The question remains, can a foreign-owned company receive a Paycheck Protection Program loan or not? Let’s try to figure it out.
Last week, on the eve of the program going live, we wrote that the form being circulated seemed to disqualify companies who are 20 percent or more owned by foreign nationals or entities. At some point, either that night or early the next morning, the form was updated to ask instead whether the workers the loan would be used to pay were Americans or permanent residents of America. Problem solved, right?
In the intervening days, we’ve heard from a number of businesses who said that they’ve been denied or instructed not to apply because of their foreign ownership.
So, let’s just follow the bouncing ball on this and see if we can figure it out.
We’ll start with the text of the Coronavirus Aid, Relief, and Economic Security (CARES) Act because it is what created the program. The CARES Act says that PPP loans are for small business concerns as defined by the Small Business Act.
In other words, a small business is whatever the SBA says it is. And why shouldn’t it be? It is the expert after all.
As we’ve noted before, the SBA Office of Hearings and Appeals has said that a foreign-owned entity can be a small business so long at it is 1) organized for profit, 2) has a place of business in the U.S., and 3) contributes to the U.S. economy by paying taxes or using American products, materials, or labor.
Those OHA decisions were about size and eligibility to perform a contract, not about loan eligibility. So, let’s go back to the CARES Act again and see what else it says. It defines “eligible recipient” as any individual or entity that is “eligible to receive a covered loan[.]” A PPP loan is technically a 7(a) loan.
The SBA says on its website that in order to be eligible for a 7(a) loan a business must be “engaged in, or propose to do business in, the U.S. or its territories[.]” So that does not disqualify a concern with foreign ownership.
But is there more? Oh yes.
Because it’s ultimately on the SBA to say who is and who is not eligible, let’s dig in to its guidance. Under the sub-headline “Who Can Apply” the SBA says any “small business concern that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)”. It does not say that foreign-owned entities are excluded.
The SBA has also published its Interim Final Rule on the PPP. So you know, an interim final rule is a rule that is effective immediately and issued without first publication and public comment. Generally, agencies will still take public comment on an interim final rule and consider changing it if warranted and this rule is no different.
Here, the PPP interim final rule states: “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States[.]” So, again, it’s concerned with protecting American jobs, not keeping foreign-owned companies out. Right?
Well, the final rule also states that some businesses will be ineligible and redirects to the list in 13 C.F.R. § 120.110. (Bit ridiculous at this point. I feel like a ping pong ball.) There, you’ll find a list of ineligible businesses. It says specifically that businesses located in a foreign country are ineligible but that “businesses in the U.S. owned by aliens may qualify”. Again, not crystal clear but not expressly prohibitive of foreign ownership.
Is there yet still more? Oh yes.
On April 8, the SBA published a list of frequently asked questions. None of the answers directly address this issue, but even the lack of data is data. If foreign ownership was prohibited, wouldn’t the SBA eventually say so?
Finally, there’s the SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2. This document explains that businesses are not eligible for SBA assistance if “Located in a foreign country with no activities in the United States”. So, being located in a different country is prohibitive, but being owned by people in a different country is not necessarily prohibitive.
Again, we could be wrong, but if foreign ownership was disqualifying, wouldn’t it be easier just to say so?
Apparently, some of the banks have not gotten the message and are denying otherwise eligible businesses. This is just anecdotal, but we’ve heard a lot this week from companies who believe they are eligible and don’t know what to do. Maybe the banks designed their application portals using the previous version of the form. Or maybe they just don’t know and are denying them to be safe. We don’t know.
Given that the funds associated with the program will eventually run out, the sooner the SBA can provide some direct guidance on this issue the better.
Questions about this post? Email us or give us a call at 785-200-8919.