On Friday, April 24, 2020, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act (the Act), which amends the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The relief package includes a $310 billion increase in funding for the Paycheck Protection Program (PPP), bringing the total authorized funding for the PPP to $659 billion. The initial $349 billion for the PPP was exhausted in less than two weeks of the passage of the CARES Act.
The PPP expands the existing Small Business Administration (SBA) Section 7(a) loan program until June 30, 2020, to provide 100% federally-backed loans to eligible businesses. For a detailed primer on the PPP, please see the prior Eversheds Sutherland legal alert available here (the Prior Alert).1
This alert provides information on recently issued Department of Treasury (the Treasury) and SBA guidance on the eligibility of borrowers and other key rules with respect to the PPP.
PPP Lending Operational Updates
In connection with the availability of additional funding, PPP loan processing resumed on April 27, 2020. The SBA and the Treasury issued the following operational updates to be implemented concurrently with the second round of funding:
- Loans will be processed at paced rates to avoid any logistical issues with the SBA’s E-Tran system. There were some reported system crashes on April 27, but they appear to have been resolved relatively quickly.
- Each lender will only be permitted to issue loans in amount up to 10% of the available PPP funding.
- The SBA has instituted a bulk-submission process for lenders that have a large number of SBA-ready PPP loan applications. Details of the bulk submission process are available here.
- The SBA will ensure that the PPP continues to operate on a first-come, first-serve basis so that every small business has access to PPP loans to sustain their business and retain their employees.
Additionally, and as discussed further below, if a company has already received a PPP loan and, based on subsequent SBA and Treasury guidance, has determined that it is not eligible for the PPP loan because it cannot make the certification that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations,” it may then repay the PPP funds to its lender on or before May 7, 2020, and the SBA will deem the company to have made the required certification in good faith.
Lessons from the First Round of PPP Funding
A study evaluating the first round of funding indicated that small businesses in Texas received the greatest number of PPP loans, and the largest proportion of dollars was provided through loans between $350,000 and $1 million.2 Small businesses in the construction sector received more dollars through PPP loans than any other industry, receiving nearly 14% of all of the initial round of the funding. Professional services and manufacturing followed, receiving 12% each. Some sectors, particularly hard hit by closures, received less, such as the arts, entertainment and recreation sector, which received only 1.5% of the initial round of funding.
Of the new $310 billion allocated to the PPP, (i) $30 billion will be available to authorized lenders with less than $10 billion in assets and to authorized community financial institutions, (ii) $30 billion will be available to authorized lenders with between $10 and $50 billion in assets, and (iii) $250 billion will be allocated to all authorized lenders as per the initial round of PPP funding. This helps to provide smaller lenders with the opportunity to access a portion of the available PPP funding, and also helps local small businesses who may already have a relationship with a community bank to access the newly available PPP funding quickly.
Asset Managers Not Eligible for PPP Loans
On April 24, 2020, the SBA and Treasury adopted an additional PPP interim final rule (the Rule)3 that includes clarifications on eligibility of asset managers, private equity funds and their portfolio companies to receive PPP loans.
The Rule makes clear that any businesses that are primarily engaged in investment or speculation, including the investment adviser to a Business Development Company (BDC) or other similar platforms, are ineligible to receive PPP loans. The Rule highlights that Congress did not intend for investment advisers, traditional venture capital firms, private equity firms, hedge funds or other asset managers to obtain PPP financing, as these types of investment platforms are generally ineligible for Section 7(a) loans under existing SBA regulations.
If an asset manager has already received a PPP loan, the PPP funds may be repaid to their lender on or before May 7, 2020, and the SBA will deem the asset manager to have made the required certification in good faith.
BDC Portfolio Companies May Be Eligible for PPP Loans
The Rule also confirms that portfolio companies of private equity funds and other asset managers may be eligible for PPP loans. However, portfolio companies, like any other borrower, must apply the SBA affiliation rules applicable to PPP loan applicants (the PPP Affiliation Rules).4 The PPP Affiliation Rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.
Additionally, the Rule emphasizes that all portfolio company applicants 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.”
Large Businesses Not Eligible for PPP Loans
The SBA has released additional guidance in its list of Frequently Asked Questions to clarify that businesses that have “other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to [their] business,” including public companies “with substantial market value and access to capital markets,” should carefully evaluate their need for PPP funds and their ability to make the required certifications in the loan application.
The new FAQ includes the following:
- a reminder to applicants and borrowers that the PPP loan application includes a good faith self-certification (made under penalty of perjury) that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”;
- a clarification that certain businesses likely do not qualify for PPP loans, including: (i) businesses that have “other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” and (ii) public companies “with substantial market value and access to capital markets,”; and
- a confirmation that each PPP borrower should be “prepared to demonstrate to the SBA, upon request, the basis for its [good faith] certification.”
The SBA provided an example of a public company with access to capital markets and substantial market value as a company that is unlikely to be eligible for a PPP loan, and such a company should be prepared to demonstrate to the SBA, upon request, the basis of its eligibility certification. This FAQ comes after days of press coverage on several large businesses obtaining (and in some cases now returning) PPP funds.
On April 28, the Secretary of the Treasury also stated that the SBA expects to audit any PPP loans over $2 million.
If borrowers already received a PPP loan and now believe that they cannot make this certification, the PPP funds may be repaid to their lender on or before May 7, 2020, and the SBA will deem the borrower to have made the required certification in good faith.
SBA Clarifying Guidance for SBICs
As described in the Prior Alert, the SBA’s affiliation rules, as applied to the PPP, are specifically waived for any business that receives financial assistance from a Small Business Investment Company (SBIC). This waiver may result in a significant number of investment opportunities in companies being presented to SBICs solely to permit those companies to qualify for the affiliation waiver for purposes of obtaining a future PPP loan.
On April 28, 2020, the SBA issued guidance to SBICs clarifying that all investments (whether or not in connection with a future PPP loan) must be made in accordance with the SBIC’s limited partnership agreement and business plan approved by the SBA, which includes, among other things, strategy type (venture, buyout, etc.), geography, stage of investment, portfolio mix (equity, debt, loans), investor role (sole, lead, co-/minority investor), expected total number of portfolio companies financed, average deal size and capital invested per year.
If an SBIC is concerned that the SBA may view a potential investment as inconsistent with its business plan, the SBIC should reach out to its SBA financial analyst to discuss.
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