New FAQs guidance published
Certifying economic uncertainty
Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers still must certify in good faith that their PPP loan request is “necessary to support…ongoing operations” due to “current economic uncertainty.” Borrowers who do not make this certification in good faith could face future criminal and civil penalties.
On April 23, 2020, the SBA in consultation with the Department of the Treasury published a new FAQ (FAQ 31) that specifically addresses this certification requirement. FAQ 31 specifically notes 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. It further states that such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.
Although the FAQs use the example of a “public company with substantial market value,” the guidance is not limited to public companies. Both private and public companies will need to demonstrate an inability to access alternative sources of liquidity “sufficient to support their ongoing operations in a manner that is not significantly detrimental to their businesses.”
Importantly, if a borrower applied for PPP funds prior to April 23, 2020, and is concerned about its certification in light of this new guidance, it may avoid future penalties by repaying the loan in full by May 7, 2020.
Additional FAQ guidance
Further updated FAQs were released on April 24, 2020, and on April 26, 2020. The April 26 FAQs clarified that, for the purposes of determining if a potential borrower has 500 or fewer employees, a borrower must count both full-time and part-time employees.2 However, for purposes of calculating loan forgiveness, borrowers only need to count “full-time equivalent employees” (part-time employees are not included).
SBA publishes new interim final rule
On April 24, 2020, the SBA published its fourth interim final rule (the April 24 Rule or the Rule) clarifying eligibility requirements for loan applicants under the PPP. Among other things, the Rule prohibits private equity funds and hedge funds from receiving PPP loans and reemphasizes FAQ 31, which (as discussed above) covers borrowers’ good faith certifications with respect to necessity.
Declaring private equity firms and hedge funds ineligible for PPP loans
The April 24 Rule drew a hard line by affirmatively stating that private equity firms and hedge funds are not eligible for PPP loans because they are primarily engaged in investment and speculation. The SBA reasoned that Congress did not intend to provide PPP loans to these types of businesses. As discussed in FAQ 31, any private equity firm or hedge fund that applied for a PPP loan prior to the publication of the Rule must repay the loan by May 7, 2020.
Portfolio companies of a private equity firm may be eligible for a PPP loan
The April 24 Rule clarifies that portfolio companies of private equity firms are still subject to the same affiliation rules that are applicable to other businesses. In addition to any applicable affiliation rules, in light of FAQ 31, the April 24 Rule urges portfolio companies to be particularly mindful when certifying in their PPP applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Lender guidance
Lenders may use their own promissory notes or SBA forms when making PPP loans.
A lender does not need a separate SBA authorization for the SBA to guarantee a PPP loan. However, lenders must execute SBA form 2484 to issue PPP loans and receive a loan number for each originated PPP loan.
Hospital eligibility
A hospital may be eligible to receive a PPP loan as a business concern or nonprofit organization despite being partially owned by a state or local government as long as it receives less than 50 percent of its funding from state or local government sources, exclusive of Medicaid.
Gambling institutions
Businesses involved in legal gambling are eligible for PPP loans despite their receipt of gambling revenues. This guidance creates an exception to 13 C.F.R. 120.110(g) and marks a shift in the SBA’s guidance previously presented in the SBA’s third interim final rule published on April 14 (85 Fed. Reg. 21747, 21751).
Other guidance
- A business’s participation in an Employee Stock Ownership Plan (ESOP) does not result in an affiliation between the business and the ESOP for purposes of the PPP.
- If a potential PPP loan borrower, or the owner of the borrower, is the debtor in a bankruptcy proceeding, either at the time it submits an application or at any time before the loan is disbursed, the applicant is not eligible to receive a PPP loan.
SBA publishes new guidance on calculating maximum loan amounts
On April 24, 2020, the SBA published guidance to help businesses calculate their payroll when applying for a PPP loan. The document compiles guidance that the SBA previously released and creates a central document that borrowers can refer to when calculating their payroll based on the business’s entity type.
SBA publishes new interim final rule to guide seasonal employers
On April 27, 2020, the SBA published its fifth interim final rule (the April 27 Rule) which establishes an alternative criterion that seasonal employers can use to calculate their maximum loan amounts. Prior to the April 27 Rule, a seasonal employer could only determine its maximum loan amount by reference to the employer’s average total monthly payments for payroll over “the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.” Now, with the April 27 Rule, a seasonal employer may alternatively determine its maximum loan amount by calculating its average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019, and September 15, 2019. This alternative method of calculation is only permitted for seasonal businesses. Additionally, a seasonal business that was dormant or not fully operating as of February 15, 2020, can still be eligible for PPP loans, as long as it was in operation for any eight-week period between May 1, 2019, and September 15, 2019.
Please use the following links to access additional information about the PPP:
Reed Smith Client Alert - SBA Publishes Interim Final Rule on Implementation of Paycheck Protection Program (April 3, 2020)
Interim Final Rule 1 (April 2, 2020)
Interim Final Rule on Applicable Affiliation Rules (April 3, 2020)
Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (April 14, 2020)
Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (April 24, 2020)
Interim Final Rule on Additional Criterion for Seasonal Employers (April 27, 2020)
SBA Treasury PPP FAQs (updated April 26, 2020)
- The PPP is a key program under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or the Act) signed into law by President Trump on March 27, 2020. The PPP is meant to incentivize small businesses to maintain their payrolls as the COVID-19 pandemic continues to unfold.
- Some small business concerns can still be eligible even if they have more than 500 employees, so long as they satisfy the definition of a “small business concern” under section 3 of the Small Business Act or the alternative size standard.
Client Alert 2020-275
