Tag Archive for: covid

Whistling Past the Pandemic: The Increasing Trend of Whistleblower Reports during COVID-19

Whistling Past the Pandemic: The Increasing Trend of Whistleblower Reports during COVID-19

Whistling Past the Pandemic: The Increasing Trend of Whistleblower Reports during COVID-19

One of the collateral impacts of employee anxiety due to COVID-19 has been an increase in whistleblower reports to the Securities and Exchange Commission (SEC). According to Steven Peikin, Co-Director of the Division of Enforcement, the SEC received 35% more tips, complaints and referrals for investigation between mid-March and early May 2020 than during the same period in 2019. This uptick may lead to additional SEC enforcement actions and penalties, giving SEC-regulated companies cause for concern.

The SEC’s Whistleblower program

The SEC’s Whistleblower program, initiated as a result of the 2010 Dodd-Frank Act, accepts information from members of the public regarding potential violations of the securities laws. Such violations may arise from activities by publicly-traded companies, as well as securities industries professionals like registered investment advisers and broker-dealers. 

Since August 2011, the SEC has awarded more than $500 million for tips that led to monetary sanctions of more than $1 million. Three of the ten largest awards were issued in the last six months: an award of $50 million in June and awards of $27 million and $18 million in April. According to the SEC’s most recent annual report, the money available for payouts to whistleblowers was about $400 million as of September 30, 2019.

Clearly, the SEC’s whistleblower program is here to stay, and conditions created by the pandemic may increase whistleblowing activity. For companies that are regulated by the SEC, this has important implications. 

Considerations for SEC-regulated companies

  1. Both the Dodd-Frank Act and Sarbanes-Oxley Act of 2002 prohibit retaliation against whistleblowers. The U.S. Supreme Court has held that the broader whistleblower protections of Dodd-Frank only apply when the whistleblower made a report to the SEC, not if the matter was only reported internally. But it would be a rare case indeed for an employer to know that an employee submitted a tip to the SEC hotline. As a result, employers must use care in handling any potential whistleblower, both to avoid employee claims and to avoid a possible SEC action for retaliation.

  2. The SEC has taken enforcement action against companies whose employment agreements contain language that can be read to discourage whistleblower reports to the SEC. All employment agreements (including severance agreements), compliance manuals, and codes of ethics should be drafted and reviewed carefully to avoid such a finding.

  3. Regulated companies should continue to investigate potential violations of the securities laws, including those where a potential SEC whistleblower may be involved. Any internal investigation must avoid disclosure of the whistleblower’s identity, if discovered, and retaliation. But good governance and risk mitigation both require critical self-examination, and internal investigations fill that role. In the event of an SEC investigation, companies can receive cooperation credit for investigating and remediating, as well as self-reporting, potential violations of the securities laws. 

As businesses navigate the COVID-19 pandemic, responding to increased whistleblower activity does not require a new playbook, just good execution of existing strategies.

Mary O'Connor | Farrow-Gillespie & Heath LLP | Dallas, TX

Mary L. O’Connor’s practice focuses on representing companies and their officers and directors in commercial litigation and arbitration, securities litigation, internal investigations, and regulatory investigations and enforcement proceedings. Mary is currently listed among the Best Lawyers in Dallas by D Magazine, and the Best Lawyers in America by US News and World Report.

COVID-19 and Social Justice on Non Profit Corporate Governance

Potential Impact of COVID-19 and Social Justice Issues on Non-Profit Corporate Governance

COVID-19 and Social Justice on Non Profit Corporate Governance

The novel coronavirus (COVID-19) pandemic and the resurgence of social justice movements are likely to have lasting repercussions on how non-profit entities approach corporate governance. The very-intense national conversations about the following issues should cause non-profit boards of directors to expect certain traditional governance practices to change in response to the lessons and experiences gained from these issues:

  1. Lines of Authority
    Non-Profit boards and management traditionally work together to allocate decision making between the two parties. However, the line separating the responsibility of the board from the responsibility of management tends to blur in times of crisis.  Boards and management should analyze how they worked together during the COVID-19 crisis and social justice protests to ascertain whether work is needed to avoid future crisis-related confusion.
  1. Workforce Culture and Hiring Practices
    Special efforts should be made to address workforce culture and to have meaningful oversight of hiring practices. Improving diversity in employment is critical, but so are practices relating to recognizing culturally-significant issues and events. Board engagement in acknowledging social justice issues, regardless of the nature of the non-profit’s mission, setting realistic goals, and insisting on management focus will need to be ongoing.
  1. Focus on Risk to the Enterprise and Oversight of Business “Resiliency”
    The pandemic validates the need for strong board involvement in risk identification and disaster response. There is a heightened obligation to exercise oversight of the future business “resiliency” of the non-profit. Federal loans have helped many non-profits during the COVID-19 crisis but the next crisis may not have this resource to help the non-profit “bounce back.” Boards will need to monitor management’s plans to recover from future catastrophes or social justice activities, not only from a financial perspective but also a “brand image” perspective.
  1. Oversight of Patron Safety
    The pandemic has shown the need for enhanced focus on customer safety in many lines of for-profit business, primarily retail and restaurants. Non-Profits also have patrons/visitors whose safety must be protected. A greater board collaboration with management on the quality of patron engagement matters should result in shifts that include more awareness and increased oversight of the resources necessary for emergency preparedness, infection control, and regulatory compliance.
  1. Reliability of Key Technology
    Depending on the nature of the non-profit’s mission and business model, directors will want to exercise greater diligence on the acquisition and implementation of key technologies and more detailed contingency planning for the possibility of critical technology, equipment, or personnel being unavailable.
  1. Employee Health and Safety
    Addressing employee concerns for workplace health and safety matters is now an important element of the board’s oversight of workplace culture. Employee concerns in this regard are likely to remain a key part of business resiliency planning long after the advent of a vaccine or other treatments for the COVID-19 virus.

In short, non-profit boards should anticipate, for the foreseeable future, an increased level of engagement with their governance responsibilities. This higher level of engagement will be necessary to assure that the non-profit has, in fact, rebounded, and evaluated potentially broader changes to accomplishing its mission in light of “lessons learned.”

Scott Chase is Board Certified in Health Law by the Texas Board of Legal Specialization and has practiced health law, corporate law, and intellectual property law for more than 40 years. His primary practice focus is business transactions for physicians and healthcare facilities, as well as healthcare regulatory issues, such as the Affordable Care Act and HIPAA. Mr. Chase also handles general corporate matters and trademark/copyright issues for a variety of non-healthcare clients.

PPP Loan Program and Certification Guidance

PPP Loan Program: Am I in Trouble? What the New Certification Guidance Means for You *********Update 5/06/2020*********

Information regarding PPP loans are constantly changing. New updates are highlighted in red.

PPP Loan Program and Certification Guidance

Last week, an additional $310 billion in funding was approved for the Paycheck Protection Program. Given that the initial $349 billion was used within weeks, it’s likely the second tranche will go quickly as well.

Meanwhile, though SBA updates its Frequently Asked Questions nearly daily and periodically releases additional interim rules, we still await more detailed guidance on loan forgiveness.

A few recent updates to the FAQ about the borrower certification has drawn a lot of attention:

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 14, 2020*. will be deemed by SBA to have made the required certification in good faith.”

Then, a few days later, with #37, SBA stated that businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations are also covered by the guidance in #31.

And then the next day came #39:

39. Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

Why did we get this new guidance?

Well, you might think of this as the “Ruth’s Chris” rule. When the initial tranche of loan funds ran out, many small businesses were left on the outside looking in. That frustration led to anger once stories broke about the large loans received by Ruth’s Chris Steak House and other publicly traded companies. In response to the backlash, Ruth’s Chris and many other companies returned their loan funds and SBA added this additional guidance about the borrower certification on the loan application.

While this guidance is given to all borrowers it’s written with a fairly narrow target audience in mind: big companies, both public and private, with other options, and particularly those taking large loan amounts. You know those emails that go out to the whole office about not burning popcorn in the microwave when it’s just one person who does it? It’s kind of like that. If you’re not the monster who assaults your colleagues’ olfactory senses, it’s not really directed at you.

What does it mean?

I’ve had several clients ask me what to make of this new guidance. What does it mean for the loan request to be necessary? Must you be at the point where you’d be forced to close your doors tomorrow to qualify for a loan? Does this mean that a borrower who reasonably believed their business would be impacted by the pandemic, took a loan, and then doesn’t suffer the business impact they feared is now in trouble?

I don’t believe that this new guidance is intended to suggest that SBA is going to second-guess a small business who applied in good faith but whose business conditions look better today than when they applied, or that businesses must be at the brink of ruin to be eligible. Rather, it’s intended to remind potential borrowers that this is a taxpayer-funded program of limited resources intended to help businesses in need. PPP isn’t meant to support big companies with ample funding options but rather a lifeline for businesses that might otherwise be seriously impacted by COVID-19.

The key sentences in the FAQ are here:

“Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

Let’s look at that certification language again, this time broken out into subparts:

Borrowers must [certify] that current economic uncertainty makes this loan request necessary to support [ongoing operations]

  • in good faith, taking into account
    • their current business activity and
    • their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

So, you might think of this certification as a two-pronged “good faith” test. The first prong refers to current business activity; that is, how is the borrower’s business as of the date of application? Has business declined compared to a typical month? Has the business had to lay off employees or reduce hours? Is it reasonably likely that the decline may continue? A business that, as of date of application, has seen a decrease in sales and/or had to reduce staff can likely meet that prong of the good faith test.

The second prong mentions the ability to access other sources of liquidity in a manner not significantly detrimental to the business’s ongoing operations. What does that mean? Notably, while other SBA loans apply a Credit Elsewhere test, PPP does not.

But, going back to the Ruth’s Chris example, if your business is sitting on piles of cash or has ready access to capital on favorable terms, it may be hard to show the good faith needed for a PPP loan. If, however, your only other options are to burn through your limited capital reserves or to take a loan elsewhere on unduly onerous terms, you can likely meet this second prong. After all, supporting ongoing operations means taking prudent steps today that will enable your business to ride out the crisis and remain in operation once this is over.

If you are still unsure if your application is in good faith, consider this: Imagine the local paper ran a story announcing you’d gotten an SBA loan. What would your reaction be? Would you be worried about a PR disaster, or proud to share that you’re doing all you can to keep your business going and your employees paid?

What should you do?

This new guidance reminds borrowers to keep good documentation not only of how loan proceeds are used but also of the circumstances that gave rise to the loan request in the first place. My advice to SBA borrower clients is to gather such documentation so that if the need arises to explain why you applied, you’re not relying on your memory to recreate the record after time has passed.

For example, records showing that your business activity had declined significantly, or that you’d had to lay off employees, or been declined for credit elsewhere, would be strong evidence that the application was made in good faith. In other words, I think it’s important for borrowers to have evidence that they carefully considered their options.

While SBA has expressly stated it will review loans over $2 million, borrowers of any amount should be prepared to provide documentation. In general, I believe, the larger the loan amount and/or the borrowing company, the more likely it is to be reviewed.

Should my business give back its loan funds in light of this guidance?

The FAQ offers a “safe harbor” to borrowers who return their loan funds by May 14. If you give the loan back right away, SBA will deem you to be in compliance, no questions asked. This has led some borrowers to wonder if they should pay their loans back now out of an abundance of caution.

For some eligible borrowers, it may be worth the peace of mind to repay now, and those with loans of $2 million or more should evaluate this option knowing that their loans will be reviewed if they keep them. But if you’re a small business owner who applied in good faith and have the appropriate documentation, this warning is not directed at you. And, these warnings do not mean that a business which received a large loan should automatically give it back, only that you should carefully consider your options.

If you’re a bigger business, public or private, with ample reserves or credit options, though, this certification should make you think twice about applying or prompt you to consider returning loan funds you’ve already received. Those are the proverbial popcorn-burners that the all-office email is meant for.

After all, the guidance says, “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” To me, that’s a pretty clear warning that if you’re nominally an eligible borrower but don’t need the loan, you should think carefully about proceeding.

No one wants to be the popcorn-burner.

*The repayment date has been extended from May 7, 2020 to May 14, 2020.

For more information regarding SBA loans and the PPP program, please visit: https://fghwlaw.com/covid-19-sba-loan-update-04-15-2020/

Ellen Daniel Williamson | Farrow-Gillespie Heath Witter LLP

Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and has practiced probate, estate planning, and guardianship law since 2013. She spent much of her early career with the Small Business Administration Office of Disaster Assistance as liaison with federal law enforcement in the investigation and prosecution of disaster loan fraud. She earned a J.D. from SMU Dedman School of Law.

Executing Texas Estate Plans in the Era of COVID-19

These are unprecedented times, even for estate planning attorneys. The advent of COVID-19 has “persuaded” many clients to either consider establishing an estate plan for the first time or to re-assess their current estate plans. As a result, estate planning attorneys across Texas are working hard during this period of great uncertainty to develop and protect their clients’ legacies.

Yet a finely crafted estate plan is useless if it is not properly signed and executed. Texas law has strict parameters for the signing of certain estate planning documents. For example, a valid will in Texas must be in writing, signed by the individual making the will (the testator), and attested by two or more witnesses. The witnesses must be within the physical presence of the testator when witnessing the execution of the will. A notary public signs the will as well (though this is technically not a requirement under Texas law). Between the testator, witnesses, notary, and estate planning attorney, a total of five or more people typically attend a will-signing ceremony. In the era of COVID-19, that’s a social faux pas. Government regulations may forbid a gathering of such size, and in the author’s experience, clients are presently uncomfortable with exposure to more than one non-family member at a time. Therein lies the chief problem facing estate planners: how to safely convene with clients to sign and execute their essential documents?

Governor Greg Abbot’s Emergency Order

In recent weeks, Texas Governor Greg Abbot has attempted to provide estate planners with a method for electronically notarizing wills, powers of attorney, and other estate planning documents. Typically, a notary public must also be in the physical presence of a client while he or she is executing a will. Governor Abbot’s emergency order enables a notary to instead observe a will-signing ceremony over Zoom or similar “electronic means.” The notary would then need to receive a faxed or scanned copy of the will (or other estate planning document) and affix his or her signature and stamp to the same. The notarization process is complete upon the notary’s return of the will and other estate planning documents to the client by scan or fax. This temporary fix aims to alleviate the need for large gatherings and can help clients execute their estate plans without undue delay.

Concerns with Electronic Notarization

But as with any temporary amendment to the law, Governor Abbot’s relaxation of notarial standards remains fraught with questions and legal concerns. For one, the required witnesses must still physically attend a will-signing. That fact alone may still dissuade clients from pursuing execution of their estate plan during the pandemic. Questions also remain about the extent of Governor Abbot’s authority to authorize such a suspension of Texas law. Probate litigators may later capitalize on the legal uncertainty surrounding wills notarized by electronic means and initiate a contest in probate court[1]. All this to say, estate planners must proceed with caution when utilizing electronic notarization for estate plans. Certain clients and potentially contentious dispositions of property in an estate plan may not warrant this unproven method of execution.

Trusts and Holographic Wills

However, estate planners have developed another creative approach to this executionary quandary brought on by COVID-19. Trusts can provide a workaround for the more stringent execution requirements of a will. A valid trust in Texas only requires the signature of the client seeking to establish the trust. As a result, clients may print the final version of a trust instrument and sign in the safety of their own home. No public gatherings are necessary.

A trust’s terms provide for the disposition of the client’s property upon death, much like a will. But for a trust’s terms to be effective, a client must transfer his or her assets into the trust. This can be a tedious task involving the drafting of deeds, assignments of interest, and many more documents. A client might also need to personally visit a financial institution to change accounts into the name of the trust: another no-no in the era of COVID-19.

A holographic will might serve as the catchall for assets that have yet to be transferred into a client’s trust. Unlike typewritten wills, a holographic will is entirely in a client’s handwriting. Texas law does not require witnesses or a notary to sign holographic wills. A client could then print and sign the trust while also drafting his or her own holographic will (with an attorney’s instruction) to sign as well.

These homemade, holographic wills are only intended as an interim solution. But they ensure that the assets in a deceased client’s estate will “pour over” into the trust that he or she established, thereby making the estate assets subject to the trust’s dispositive terms. In short, a properly drafted trust and holographic will can provide clients with a temporary fix to the dangers of gathering in larger groups for signing a will and other estate planning documents. Together with the electronic notarization of wills and estate planning documents, these methods give estate planners a chance to achieve their clients’ goals in the midst of the current pandemic.

Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner has focused his legal efforts primarily in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer is a graduate of from Baylor University School of Law. 

[1] Few things excite probate litigators more than a video of an elderly testator executing his or will. An astute attorney can use a recorded Zoom session to sow doubt and concern among members of the jury regarding the elderly testator’s mental capacity.


The HIPAA-Potamus in the Room: HIPAA During the COVID-19 Pandemic


In light of the novel COVID-19 pandemic, it is now more important than ever to make sure you are complying with patient privacy matters. HIPAA, HITECH, and state laws all impact the responsibilities of health care providers and their business associates regarding the treatment and disclosure of confidential medical and health records. The HIPAA Security Rule, in particular, requires that covered entities must keep electronically-stored Protected Health Information in a manner that maintains the records’ confidentiality, integrity, and availability. Even during the pandemic, covered health care providers must do the following:

  • Carefully identify potential risks and vulnerabilities;
  • Protect against reasonably-anticipated threats or hazards to the security of confidential information;
  • Protect against reasonably-anticipated impermissible uses or disclosures;
  • Ensure compliance by their employees; and
  • Provide access to usable electronically-stored Protected Health Information to authorized persons on demand. 

However, on March 15, 2020, the Secretary of the U.S. Department of Health and Human Services (HHS) waived certain provisions of the HIPAA Privacy Rule. HHS will waive sanctions and penalties arising from a hospital’s noncompliance with the following:

  • The requirement to obtain a patient’s agreement to speak with family members or friends;
  • The requirement to honor a patient’s request to opt out of the facility directory;
  • The requirement to distribute a notice of privacy practices;
  • The patient’s right to request privacy restrictions; and
  • The patient’s right to request confidential communications.

The waiver applies only to hospitals in an emergency area as identified in a public health emergency declaration, that have instituted a disaster protocol. In addition, the waiver only lasts for seventy-two hours after the disaster protocol is initiated.

Moreover, under a public health emergency, like the current COVID-19 pandemic, the HIPAA Security Rule does allow covered entities and business associates to disclose Protected Health Information in the following certain situations, even if the covered entity or business associate does not apply for the recent waiver:

  • Protected Health Information about the patient as necessary to treat the patient or to treat a different patient;
  • To a public health authority that is authorized by law to collect or receive such information;
  • To persons at risk of contracting or spreading a disease if other law authorizes it to prevent or control the spread of the disease or carry out public health activities;
  • To a patient’s family members, relatives, friends, or other persons identified by the patient as involved in the patient’s care;
  • To a patient as necessary to identify, locate, and notify family members, guardians, or anyone else responsible for the patient’s care, of the patient’s location, general condition, or death; or
  • With anyone as necessary to prevent or lessen a serious and imminent threat to the health and safety of a person or the public – consistent with applicable law and the provider’s standards of ethical conduct.

It is also important to remember that HIPAA requires a risk analysis and security assessment if the following has occurred:

  • When an entity has experienced a security incident;
  • A change in ownership;
  • Turnover in key staff; or
  • When the entity is planning to incorporate new technology.

Healthcare activities are being affected by the current COVID-19 crisis and one or more of the aforementioned actions may occur.  If so, risk analysis may be called for.

During this pandemic, HIPAA, HITECH, and state medical privacy laws are still applicable and, even with waivers, care should be exercised in all patient privacy matters.

For more information, contact Board Certified health care attorney Scott Chase.

Scott Chase, JD, has practiced health law, corporate law, and intellectual property law for more than 40 years. Mr. Chase is Board Certified in Health Law by the Texas Board of Legal Specialization. Mr. Chase is a partner at Farrow-Gillespie Heath Witter, LLP. His primary practice focus is business transactions for physicians and healthcare facilities, as well as healthcare regulatory issues, such as the Affordable Care Act, HIPAA and peer review. Mr. Chase handles general corporate matters and trademark/copyright issues for physicians and also for a variety of non-healthcare clients.

SBA Loan for COVID-19

COVID-19? There’s an SBA loan for that *****UPDATE 04/15/2020*****


On April 3, the Paycheck Protection Program launched with much fanfare and some speed bumps as lenders struggled to adapt to new Interim Final Rule which had been released late the night before. Many applicants reported that their banks were not taking applications or were only taking from customers who had existing loans, and some bank websites couldn’t handle the heavy traffic. Meanwhile, the Interim Final Rule was short on detail on many important aspects, creating confusion as lenders and businesses struggled to get up to speed.

But as we get closer to the 2 week mark, with every passing day we get a little more guidance about the PPP loans. The Treasury Department has a Frequently Asked Questions page which is updated daily or nearly so with new questions added at the end. I would imagine that at some point, the questions will be reorganized topically rather than sequentially in the order answered. The SBA has also indicated intention to give more details about the loan forgiveness aspect of the program and the process of applying for it.

As the initial $349 billion in funding provided by the CARES Act gets closer to being fully obligated, negotiations continue between the House and Senate on providing additional funding and related measures. It’s also possible that the program may be amended to provide for more than 8 weeks of funding and to continue beyond the current June 30 end date. 

Meanwhile, the EIDL program has had speed bumps of its own. While loan eligibility was for up to $2 billion and a $10,000 emergency grant was to be given to applicants within 3 days of applying, this program too is in need of further funds. Borrowers report that loans are being capped at $15,000 for now and that, rather than $10,000 per business, grants are being given for only $1,000 per employee up to $10,000. SBA has not stated as much officially, but borrowers have reported this response.

I’m reminded of an occasion in my time at SBA Disaster Assistance when we were awaiting new funding to be available before we could approve more loans and obligate the funds. That morning, loan officers had reviewed the loans and recommended them for approval and the attorneys reviewed them and, if approvable, worked them right up to the point of obligation. Then, once word came that the funds were available, we obligated a slew of loans. I wonder if something similar may be happening now, where loans are ready to obligate for higher amounts once the funding is there. If that’s the case, I would expect the loans to be increased relatively quickly once more funding is available.

If this seems like a lot to understand, it is! In the past few weeks I’ve listened to two webinars, read the CARES Act, the Interim Final Rule, and supporting documents, plus dozens of articles. I’ll continue to update this page as new information comes in.

SBA Loan for COVID-19

In the wake of the COVID-19 pandemic, there’s been a lot of discussion of two different types of loans offered by the Small Business Administration (SBA) to help affected businesses.

The first, economic injury disaster (EIDL) loans, are offered through the SBA Office of Disaster Assistance and were made available through disaster declarations relating to COVID-19. The second, Paycheck Protection Program (PPP) loans, are offered through the traditional SBA 7(a) loan program and were authorized within the CARES Act recently passed by Congress and signed into law.

These two programs share the same broad goal of helping small businesses get through the coronavirus pandemic but differ in several important respects. While each is an SBA loan in name, they are different products, administered in different ways in different offices. It’s as if Ford Motor Company sold cars at some dealerships and motorcycles at others. While both are modes of personal transportation bearing the Ford name, they serve different needs.

Here’s a quick overview of these programs and how they work:

What’s the purpose of this loan?

EIDL:    To provide working capital to help businesses cover financial obligations and operating expenses it would have been able to meet during the disaster period had the COVID-19 disaster not occurred.

PPP:     To help small businesses meet payroll and other short-term operating expenses, such as rent, utilities, mortgage interest (not principal), and interest on debt existing before 2/15/2020. 

Who’s eligible to apply?

EIDL:    Certain small businesses, generally defined as having fewer than 500 employees and less than $35 million in revenue, private nonprofits, and Native American tribal small businesses. Some organizations, including lending or investment concerns, multilevel marketing (MLM) concerns, casinos, and religious organizations are not eligible.

PPP:     Small businesses, nonprofits, and veterans’ organizations, generally defined as those which employ no more than the greater of 500 employees or the size standard established by the SBA for certain industries.

What’s the maximum loan amount?

EIDL:    $2 million

PPP:     $10 million. The PPP loan program was funded with $349 billion in the CARES Act.

What are the loan terms?

EIDL:    Up to 30 years at 2.75% (nonprofits) or 3.75% (small businesses). Repayment deferred 6 months with interest accruing. As with all SBA disaster loans, COVID-19 EIDL loans have no fees or closing costs.

PPP:     2 years at 1% (Note: CARES Act had authorized up to 10 years at 4%, but Treasury has set terms at 2 years and 1% as of late April 2). 6-month deferral with interest accruing. No SBA fees, but lenders may have processing fees.

Is collateral required?

EIDL: Yes, general security interest in business assets will be used as collateral. Loans under $25,000 need not be secured. Note: this is an exception to SBA Disaster loan typical practice to require real estate as collateral.

PPP:     No.

Must the owner(s) personally guarantee the loan?

EIDL:    Yes, owners of >20% must guarantee the loan, for loans over $200,000.

PPP:     No. But per Treasury guidelines: “***However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.***”

Can the loan be forgiven?

EIDL:    No. But, you can get the first $10,000 as an emergency advance grant, which does not need to be repaid.

PPP:     Yes, amount of forgiveness is calculated based on the amount spent on payroll costs, interest payments on mortgages, and payment of rent and utilities. It’s expected that to qualify for forgiveness, no more than 25% of proceeds should be used for uses other than payroll costs. Note that if you received a $10,000 EIDL emergency advance grant, the $10,000 grant will be subtracted from the forgiveness amount.

How can I apply? How is the loan administered?

EIDL:    EIDLs are direct loans of US Treasury funds. Apply with the SBA Office of Disaster Assistance, not through a bank. The application form is online.

PPP:     You can apply through an SBA-approved lender. These are SBA-guaranteed loans administered through banks and other lenders. Some banks are limiting PPP loan availability to only existing customers, while others will allow new customers.

Can I apply now? How long does the loan application process take?

EIDL:    Yes. This program is already up and running. Applications are typically taking 2-3 weeks on loan processing to approval decision, plus another 5 or so for funding. Emergency grants are to be issued within 3 days of application to eligible applicants.

PPP:     The CARES Act was signed into law on Friday, March 27. PPP loans are available from participating lenders as early as Friday, April 3, for small businesses and sole proprietorships and Friday, April 10, for independent contractors and self-employed individuals.

Some lenders are planning with a goal to approve, close, and fund loans on the spot, though mileage may vary on that. However, as Treasury did not release the final interim guidance on PPP loans until late on April 2, there are reports that some lenders are having issues with the roll-out on April 3, so some borrowers may find they cannot get applications in until next week.

Can I get both EIDL and PPP loans?

Yes. If you took out an EIDL between February 15, 2020-June 30, 2020, you can refinance it into a PPP loan and add the outstanding loan amount to the “payroll” portion of the PPP loan. Also, as noted above, if you accept the $10,000 EIDL emergency grant and then secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount (with result that the EIDL grant was then, in effect, an advance on the PPP loan.)

It’s important to note that disaster loans, in general, must not duplicate benefits received from another source, and the PPP also does not allow for duplication of benefits.

What should I do?

Given SBA rules about duplication of benefits, if a business has already borrowed under PPP, some or all of that business’s EIDL eligibility may be reduced by the amount of the PPP loan, to the extent that the PPP loan covered losses the EIDL would otherwise cover. So, getting PPP first may obviate need or eligibility for EIDL.

However, you need not delay applying for EIDL. You generally have 60 days from loan approval to decide to accept an EIDL and can get extensions to give more time to consider. If you later qualify for a PPP loan you may be able to refinance that EIDL loan, which isn’t forgivable, into a forgivable PPP loan. So, to the extent your EIDL loan covered items which would be PPP-eligible, it appears your PPP loan would replace the EIDL loan.

Given that PPP loans can be for up to $10 million and EIDLs max out at $2 million, it’s possible that even if you get the max EIDL loan, you may still be able to get PPP funds. Likewise, you may have a need that isn’t eligible for PPP funds but for which you could get an EIDL. Put another way, if you created a Venn diagram of EIDL eligibility and PPP eligibility, there would be a great deal of overlap but not necessarily 100%.

Thus, it may be helpful to think about loan funding in several tiers. First, loan funds that need not be repaid. This includes the first $10,000 of EIDL funding and any portion of a PPP loan that is forgivable. Businesses should plan carefully to maximize this tier.

Second is loan funds that are not eligible for forgiveness. Under PPP, these loan funds incur 1% interest and have a 2 year repayment term. For needs that don’t fit within the PPP loan’s relatively narrow definitions, EIDL funds may serve as a backstop, with repayment terms of 2.75% (nonprofits) or 3.75% (businesses) of up to 30 years.

Some organizations may be eligible for one type but not the other. Religious organizations, for example, may apply for PPP but not EIDL. And some loan uses may be covered under EIDL but not PPP.

For more information on how to determine if you are eligible for the Paycheck Protection program, click here for the useful infographic prepared by the U.S. Chamber of Commerce.

Ellen Daniel Williamson | Farrow-Gillespie Heath Witter LLP
Ellen Williamson

Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and has practiced probate, estate planning, and guardianship law since 2013. She spent much of her early career with the Small Business Administration Office of Disaster Assistance as liaison with federal law enforcement in the investigation and prosecution of disaster loan fraud. She earned a J.D. from SMU Dedman School of Law.