Type: Law Bulletins
Date: 04/24/2020

SBA Part Nine: New Guidance Issued on PPP Borrower Eligibility and Good Faith Certifications Regarding Economic Need

*The original article published on April 24, 2020 has been updated to reflect changes as of June 18, 2020.

The U.S. Department of Treasury and Small Business Administration (SBA) issued additional guidance through its evolving FAQ document and a new Initial Final Rule Notice (IFRN dated April 24, 2020) regarding borrower eligibility and the required borrower need certification for a Paycheck Protection Program (PPP) loan. The Department of Treasury and SBA issued additional guidance through Interim Final Rule Notice (IFRN dated May 8, 2020), Interim Final Rule Notice (IFRN dated May 18, 2020), Interim Final Rule (IFRN dated June 5, 2020), and Interim Final Rule (IFRN Dated June 10, 2020).

Hedge Funds and Private Equity Ineligible for PPP Loans
The IFRN dated April 24, 2020 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.”

Certain Felons Eligible for PPP Loans
Previously, borrowers were ineligible for a PPP loan if an owner of 20% or more of the equity of the applicant has been convicted of a felony within the last five years. The IFRN dated June 10, 2020 amends this rule, broadening the eligibility for convicted felons by stating these borrowers are only ineligible if 20% or more of the equity applicant “has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year” (emphasis added). This change is likely the result of several lawsuits challenging the previous felony rule and opens up PPP loans to several borrowers who were previously ineligible solely as a result of an equity owner with a felony.

Telephone Cooperatives Eligible for PPP Loans
The IFRN dated June 5, 2020 states that “telephone cooperatives provide telephone services and return any excess of net operating revenues over their cost of operations to their member-owners, such as through capital credits.” Accordingly, for purposes of the PPP, a telephone cooperative that is exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code will be considered to be “a business entity organized for profit” and that such entities are eligible PPP borrowers, as long as other eligibility requirements are met.

Employees of Foreign Affiliates Are Included for Purposes of Determining Whether a PPP Borrower has more than 500 Employees
The IFRN dated May 18, 2020 states that “SBA’s affiliation regulations provide that to determine a concern’s size, employees of the concern “and all of its domestic and foreign affiliates” are included. 13 C.F.R. 121.301(f)”. Therefore, to calculate the number of employees of an entity for purposes of determining eligibility, a borrower must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules expressly do not apply to the entity. An entity that, together with its domestic and foreign affiliates, does not meet the 500 employee or other applicable PPP size standard is ineligible for a PPP loan.

However, the SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S. employees from the borrower’s calculation of employees if the borrower had no more than 500 employees whose principal place of residence is in the US.

Borrower Certification Regarding Economic Need 
Both the IFRN dated April 24, 2020 and the FAQ document address the issue of the required certification borrowers must make regarding their need for a PPP loan. The IFRN dated April 24, 2020 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 dated April 24, 2020, as updated by the IFRN dated May 8, 2020, and the FAQ document establish a safe harbor permitting borrowers who have received PPP loans to return the loan proceeds by May 18, 2020 (originally May 7, 2020, then later extended to May 14, 2020 by the IFRN dated May 8, 2020 and again to May 18, 2020 by the SBA and Department of Treasury's FAQ document, FAQ#47), if they believe they made the need certification improperly in light of this new guidance. The IFRN dated April 24, 2020 states:

Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 18, 2020 (originally May 7, 2020, then later extended to May 14, 2020 by the IFRN dated May 8, 2020 and again to May 18, 2020 by the SBA and Department of Treasury’s FAQ document, FAQ #47) 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. See SBA alerts Part Ten, Part Eleven, and Part Twelve for information on the safe harbor PPP loan certification repayment.

For further information, please contact any member of Taft’s SBA Task Force.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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