On Thursday, April 23 and Friday, April 24, 2020, the U.S. Department of Treasury and Small Business Administration issued additional guidance through its evolving FAQ document and a new Initial Final Rule Notice (IFRN) regarding borrower eligibility and the required borrower need certification for a Paycheck Protection Program (PPP) loan.
Hedge Funds and Private Equity Ineligible for PPP Loans
The IFRN states 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” and that the SBA administrator, in consultation with the treasury secretary, “do not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.”
Borrower Certification Regarding Economic Need
Both the IFRN and the FAQ document address the issue of the required certification borrowers must make regarding their need for a PPP loan. The IFRN states:
[A]ll borrowers should carefully review the required certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483) stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The FAQ states:
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. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification 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. 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.
Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request
Both the IFRN and the FAQ document establish a safe harbor permitting borrowers who have received PPP loans to return the loan proceeds by May 7, 2020, if they believe they made the need certification improperly in light of this new guidance. The IFRN states:
Any 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. The administrator, in consultation with the secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay obtained PPP loan funds based on a misunderstanding or misapplication of the required certification standard.
This new guidance has altered the need and eligibility analysis for potential borrowers. PPP applicants should carefully review their need and eligibility for PPP loans in light of these new guidelines.
For further information, please contact any member of Taft’s SBA Task Force.
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