Editor’s Note: Jeremy L. Freifeld practices in the areas of corporate law, corporate finance, mergers and acquisitions and securities law at Hutchison PLLC.

On December 27, 2020, the Hard Affected Small Businesses, Nonprofit Organizations and Institutions Economic Assistance Act (the “Act”) came into force. The law provided $ 284 billion in additional funding under the Paycheque Protection Program (the “P3”). The US Small Business Administration and the Department of Treasury subsequently issued interim final rules under the law (here and here).

In particular, there is now a first-draw PPP loan program (the “PPP1”) and a second-draw PPP loan program (the “PPP2”). Both are available until March 31, 2021. For the purpose of this update, all PPP loans issued in 2020 are included in references to PPP1 loans.

PPP2 is aimed at smaller and harder-affected businesses and allows borrowers who have already received a PPP1 loan (either in the original instance or in the new instance created by law) to receive a second loan. Due to this narrower focus, PPP2 is subject to additional requirements compared to PPP1. Generally, to be eligible, a potential borrower must have:

• 300 employees or less;
• Experienced a reduction in revenue in a calendar quarter of 2020 of at least 25% compared to the same calendar quarter in 2019.
  • The borrower calculates this reduction in income by comparing the quarterly gross receipts in quarter 2020 to the gross receipts of the corresponding quarter in 2019.
    • Gross revenue is usually made up of gross revenue more cost of goods sold, but excludes any PPP loan amount that is canceled.
    • Borrowers should include gross revenue from all affiliates, including affiliates acquired in 2020 (in this case, gross revenue should include the entire measurement period, not just the period after which the affiliation arose).
  • Has used or will use the total amount of his PPP1 loan on eligible expenses at or before the disbursement of PPP2 loans.

In most cases, PPP2 loan amounts are capped at the lesser of (a) 2.5x monthly salary costs and (b) $ 2 million. It should also be noted that the membership rules continue to apply and that certain entities, whether or not they meet the above criteria, are not eligible (including certain lobbying firms, entities organized in or having some links with the People’s Republic of China and traded companies).

Thanks to the law, PPP1 and PPP2 loans now benefit from greater flexibility in certain areas, in particular:

• When calculating the maximum loan amount, the borrower can calculate the average monthly salary costs based on calendar year 2019 or 2020;
• Eligible expenses have been expanded to include, among others, worker protection expenses, vendor costs, cloud computing and other software services that facilitate business operations;
• The definition of salary costs eligible for a rebate has been broadened to include payments for employee benefits consisting of group health care insurance or group life, disability, vision or dental insurance; and
• The period for spending the loan proceeds on the expenses eligible for the forgiveness can be between 8 and 24 weeks (depending on the borrower’s selection).

If you have any questions, please do not hesitate to contact Jeremy Freifeld ([email protected]) or Dan Fuchs ([email protected]).