A little more than one week after the Small Business Administration (SBA) Paycheck Protection Program (PPP) exhausted its initial $349 billion of funding, Congress has authorized an additional $310 billion for the program. President Trump is expected to sign the legislation, opening up the doors for more companies to receive forgivable loans to assist with payroll and other qualified costs over the next eight to ten weeks. Public comments indicate the program is expected to reopen on Monday, April 27th.
In the interim between the lapse in appropriations and the reopening of the PPP, the SBA has updated its Frequently Asked Questions (FAQ) and issued an additional Interim Final Rule (IFR) that covers promissory notes, authorization, affiliation, and eligibility. For those companies that have already received funding, the SBA should be issuing more guidance on loan forgiveness in the coming days.
Of significant importance, the SBA FAQ now provides additional clarity on the required certification that borrowers must make that “[c]urrent economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant.” This representation is part of the SBA loan application, but examples of conditions that would or would not support the representation have not been provided by the SBA.
The FAQ does now provide a specific example stating, “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.”
While the FAQ does not carry the force and effect of law independent of the statute and regulations on which it is based, the additional FAQ item raises concern about how a company is to demonstrate the ‘current economic uncertainty’ and good faith certification. Factors that indicate uncertainty would be helpful, but with how quickly the second round of funding may be exhausted, companies may not have guidance to rely upon. Accordingly, companies should document the factors of the good faith representation and be prepared to potentially substantiate the representation at a later date.
The IFR issued on Friday, April 24, 2020 provides a safe harbor for a company that may have applied for funding and now wishes to refund the money to the SBA. Should a company determine that it applied for and received PPP funding based on a misunderstanding or misapplication of the good faith certification it can repay the money in full by May 7, 2020 and be deemed by the SBA to have made the required certification in good faith. As the SBA has not issued factors that demonstrate the need for funding, other than market value and access to capital markets, companies should review their other avenues of liquidity and any cash reserves to determine if the good faith representation is still accurate.
The IFR also provides clarification regarding eligible businesses. Specifically, the IFR addresses hedge funds and private equity firms as well as the portfolio companies of private equity firms. In addition, hospitals owned by governmental entities and gaming businesses are provided increased eligibility. Finally, businesses presently involved in bankruptcy proceedings are stated to be ineligible to receive a PPP loan.
Hedge funds and private equity funds are primarily engaged in investment or speculation per the IFR. Those types of businesses are generally ineligible under the SBA business loan programs and ineligible to obtain PPP financing.
While the IFR indicates that portfolio companies of private equity funds may be eligible for PPP financing, the IFR reiterates that the affiliation rules of the PPP loan program apply. We should note there are exceptions to these affiliation rules, such as if the borrower receives funding from an SBA licensed Small Business Investment Company (SBIC). In addition, the SBA warns these companies to carefully review the required certification that “[c]urrent economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant.” Again, such companies should review and document the factors that would support the ‘current economic uncertainty’ and be able to provide if requested by the SBA.
Finally, the IFR makes an exception to the general ineligibility rules for certain government-owned entities. Hospitals that are otherwise eligible for PPP funding will not be rendered ineligible due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid. In addition, the IFR revises and expands the eligibility of legal gaming businesses, which are generally ineligible to receive funding under the SBA business loan programs.
Overall, this guidance on eligibility is helpful for companies as round two of applications and funding begin shortly. In addition, the clarity and safe-harbor to return funds received due to a misunderstanding or misapplication of the good faith certifications is welcomed. Due to the emergent nature of COVID-19 and the uncertainty around the application and eligibility process, there may have been companies that misapplied or misunderstood tests and certification of the program and this affords a penalty free opportunity to correct any misunderstanding.