April 27, 2020

SBA Issues Third Interim Rule Implementing the Paycheck Protection Program

Holland & Knight Government Contracts Blog
Mary Beth Bosco
Government Contracts Blog

On April 24, the Small Business Administration (SBA) issued its Third Interim Rule containing guidance for execution of the Coronavirus Aid, Relief, and Economic Security (CARES) Act's Paycheck Protection Program (PPP). Although this is a final rule, SBA will be taking comments from interested parties through May 25, 2020.

Among other items the Interim Rule responds to specific questions concerning application of the affiliation rules, eligibility for the program and justification for the necessity determination. These topics are discussed in the following section.

Rule Provisions

Affiliation. The Interim Rule addresses application of the affiliation test in the context of large companies, including private equity and hedge funds.

  • Because they are primarily involved in investment or speculation, private equity funds and hedge funds are not eligible for PPP loans. Their portfolio companies, however, may be eligible for loans if they can demonstrate that they still fit within the applicable size standards, taking into account affiliation issues. SBA's discussion of portfolio company eligibility also contains a warning: All borrowers must carefully review the certification they made on their PPP application form that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

Eligibility Determinations. The new rule contains a discussion of whether loans are available to specific industries.

  • Hospitals that otherwise qualify for the loan program are not excluded by reason of ownership by a state or local government if the hospital receives less than 50 percent of its funding from state or local government sources, exclusive of Medicaid.
  • An otherwise eligible business that receives legal gaming revenues can participate in the program, but business receiving illegal gaming revenue cannot receive PPP loans.
  • Participation in an Employee Stock Ownership Program (ESOP) alone does not cause the business to be affiliated with the ESOP.
  • An applicant or the owner of the applicant is not eligible for a loan if it is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed. If a bankruptcy proceeding is initiated after an application is submitted but before the loan is disbursed, the applicant must notify the lender and cancel its application. Failure to give notice and cancel will be treated as an unauthorized use of the loan proceeds.

Safe Harbor. In order to apply for a CARES Act PPP loan, prospective borrowers must certify that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Following media reports of large companies receiving PPP loans, SBA in its April 23 Frequently Asked Questions (FAQ) issued a strong warning to loan applicants:

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. For example, 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.

SBA thus signaled that, once oversight and auditing of the PPP loans begins, an area of focus will be the necessity determination.

At the same time, SBA has provided borrowers a safe harbor: If a borrower applied for a loan prior to the April 23 FAQs and repays the loan by May 7, SBA will consider the borrower to have made the necessity certification in good faith. The April 24 Interim Rule essentially codifies the FAQs' safe harbor provision. Implicit in this safe harbor provision is that ineligible borrowers who do not return funds by May 7 will face heightened sanctions in subsequent audits and enforcement proceedings in the oversight phase of the PPP program. For more about the enforcement landscape, please read the Holland & Knight alert, Ineligible PPP Borrowers Granted Safe Harbor Period to Return Money by May 7.

In addition to the new Interim Rule, SBA is expected to issue guidance of the loan forgiveness process any day now. Holland & Knight will continue to monitor new guidance and rules and will provide information and analysis of SBA's future publications.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this alert for timely advice.

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