The Small Business Administration (“SBA”) has issued a supplemental Interim Final Rule (the “Rule”), along with additional Frequently Asked Questions issued in consultation with the Department of Treasury (released on Friday, April 24, 2020 (as further modified on Sunday, April 26, 2020)), each providing additional guidance with respect to the implementation and administration of the Paycheck Protection Program (“PPP”).
Below is a high-level summary of certain new questions and clarifications addressed by the Rule and related Frequently Asked Questions, specifically with respect to eligibility requirements and certifications:
- Clarifications Regarding Eligible Businesses
- Hedge Funds and Private Equity. The Rule explicitly excludes hedge funds and private equity firms from eligibility under the PPP, as such businesses are primarily engaged in investment or speculation.
- Portfolio Companies. The Rule clarifies that SBA affiliation rules apply to private equity-owned businesses in the same manner as any other business concern subject to outside ownership or control. The Rule reminds applicants that eligibility is contingent upon the businesses ability to make the required certification demonstrating need for a PPP loan due to economic uncertainty.
- Government-Funded Hospitals. Any hospital that would otherwise be eligible to receive a PPP loan as a business concern or non-profit organization shall not be rendered ineligible due to ownership by a state or local government, so long as the hospital receives less than 50% of its funding from such sources (exclusive of Medicaid).
- ESOP Participation. For purposes of the PPP, a business’s participation in an Employee Stock Ownership Plan (ESOP) does not create an affiliation between such business and the ESOP.
- Bankruptcy. In the event that an applicant or any owner of such applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan proceeds are disbursed, such applicant is ineligible to receive a PPP loan. If a bankruptcy proceeding is commenced after submission of a PPP application but prior to disbursement, the applicant is obligated to notify the lender and request cancellation of the application. Failure to do so will be deemed an unauthorized use of PPP funds.
- Employees for Purposes of Eligibility. Per the updated version of the Frequently Asked Questions issued by the SBA last week, for purposes of determining PPP loan eligibility specifically with respect to the 500-employee threshold, an applicant must include all individuals employed on a full-time, part-time, or other basis when calculating total employee headcount. Conversely, for purposes of loan forgiveness, the CARES Act uses a “full-time equivalent employee” standard to determine the extent to which a borrower’s forgiveness amount will be reduced in connection with COVID-related workforce reductions.
- Limited Safe Harbor Regarding Required Certification. As previously noted, the PPP Borrower Application Form requires applicants to certify that “[c]urrent economic uncertainty makes [this] loan request necessary to support the ongoing operations of the Applicant.” Any borrower that submitted an application prior to the issuance of this Rule, and repays such loan in full by May 7, 2020, will be deemed to have made the required certification in good faith. This “safe harbor” is intended to ensure that borrowers promptly repay PPP loans that were obtained based on misunderstanding or misapplication of the required certification standard, taking into account updated guidance on such standard.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.