Based on the text of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the fact that a company has foreign owners shouldn’t necessarily disqualify it from participating in the Paycheck Protection Program (PPP).
But the form used to apply says otherwise.
A company seeking to participate in the program must fill out an application designated as Small Business Administration Form 2483. It requires the applicant to answer several questions, one of which is whether it is a U.S. Citizen or Permanent Legal Resident. If the applicant answers “no” to the question, the application, according to the form, is automatically denied.
The program, however, is for “small business concerns”–not necessarily domestically-owned small business concerns. In fact, the CARES Act defines small business concern according to the Small Business Act. In general, the Small Business Act gives the SBA the authority to determine what businesses are small and what are not. As mentioned previously, the SBA has defined a “business concern” as “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.”
Did you catch the “or” in there? As we’ve written about before—although under wildly different circumstances—that “or” means that a foreign-owned entity can be a small business under the SBA’s rules so long as 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.
In short, if you have a U.S. office and you employ U.S. citizens, the SBA says you can be a small business concern. So why does the PPP application say you have to be a U.S. citizen or permanent resident? No idea.
We know the purpose of the program is provide funds that allow businesses to keep workers on payroll who might otherwise be laid off due to the coronavirus. In fact, the form in question requires the applicant to certify that it will use the funds to retain workers and maintain payroll (or to make certain payments) or face criminal fraud charges. So, there should be no reason why a domestically-owned entity that employs 20 U.S. citizens should be eligible while a foreign-owned entity that employs 400 U.S. citizens should not if the overall goal is to keep jobs from going away.
You might be asking yourself, what’s to prevent such an entity from using that money to fund overseas jobs? Well, the application already requires the offeror to make certain promises as to how it will use the money or face criminal fraud charges. It could easily say that the applicant certifies it will use the funds to keep American workers on payroll.
Reportedly, the approval process will be handled by the lender, with no SBA oversight. That means, even if the SBA might consider a foreign-owned entity eligible, a lender would probably default to what the form says, and the form says U.S. Citizens and permanent residents only.
Where does that leave a foreign-owned entity with a significant U.S. presence, and more importantly where does that leave their workers? Potentially, in the lurch.
If this is a mistake, there’s not much time to correct it. PPP loans go live April 3.