Increased PPP Funding
On Friday, April 24, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was amended to provide an additional $310 billion of funding for the Paycheck Protection Program (PPP), which provides for loans to small businesses to provide a direct incentive for small businesses to keep their workers on their payroll.
The SBA also released additional guidance with respect to calculating the maximum loan amount by business type. Please see the following link from the Treasury department which provides a roadmap for calculating the loan amount: https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf
The Small Business Administration (SBA) indicated that it will resume accepting Paycheck Protection Program applications from participating lenders on Monday, April 27.
Small businesses that are considering applying should confirm that their lender is still accepting applications and submit their applications as soon as possible.
Guidance on Eligibility
An Interim Final Rule was also released late last week providing additional guidance with respect to eligibility for the PPP loans. The guidance confirmed that hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. Small businesses that are owned by private-equity may apply, subject to the affiliation rules and other eligibility requirements. In addition, it also clarified that (1) certain governmental owned hospitals and businesses that conduct legal gaming may also be eligible, (2) entities that are currently a debtor in bankruptcy or that become the debtor in a bankruptcy proceeding prior to disbursement of the loan are not eligible, and (3) a business’s participation in an employee stock option plans (“ESOP”) do not result in affiliation between the business and the ESOP.
The guidance did note that, 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, borrowers still must certify 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. The guidance notes, by way of example, that "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." At this time there is no specific guidance on what is required with respect to “access to other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This requirement also applies to those PPP loans that have already been funded. Applicants should carefully consider whether they can meet this certification and assemble and maintain documentation substantiating all of the information in an application for a PPP loan, including eligibility for the PPP loan. An applicant that is found to have made a false statement in application may be subject to civil and criminal penalties.
The Interim Final Rule also provides that “[a]ny borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” It was noted that “[t]he Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.” The ability to repay the loan and be deemed to be in compliance specifically refers to the need for the PPP loan, so it is unclear if it would apply to borrowers who repay their loan because they subsequently determined that they violated any of the other requirements of the programs, such as being an ineligible type of business or violating the affiliation rules or maximum employee requirement. See "Client Alert: Requirements and Considerations for Paycheck Protection Program Loans."
This guidance is likely driven by the negative scrutiny in the media with respect to certain borrowers that have received PPP loans. Information regarding the recipients of PPP loans will be made publicly available. There is expected to be a high level of oversight on the PPP loans, both by Congress and governmental watchdogs and by members of the public under the Freedom of Information Act, to identify the recipients of PPP loans who were not eligible for PPP loans. Steve Mnuchin, Secretary of the Treasury, was quoted as telling CNBC that "the Small Business Administration would undertake a 'full review' of any loan that exceeds $2 million under the Paycheck Protection Program." Applicants should consider the foregoing when deciding whether to apply for a PPP loan.
Any borrowers who have received a PPP loan should re-confirm their eligibility for the PPP loan. If they determine they were not eligible, they should prepay such loan prior to May 7, 2020.
If you have questions about this new guidance or any other matters related to the PPP program, please contact Chadwick Hoyt, Michael Gray, Robert Gerber, David Milligan, Tom Wolford or your Neal Gerber Eisenberg attorney.
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