SBA Issues New Guidance on Eligibility of Certain Businesses to Participate in Paycheck Protection Program

On April 24, the Small Business Administration (SBA) issued an interim final rule, effective immediately, regarding the implementation of the Paycheck Protection Program (PPP) that provides guidance on borrower eligibility with respect to hedge funds, private equity funds, publicly owned hospitals, businesses that receive revenue from legal gaming and businesses involved in bankruptcy proceedings. The interim final rule additionally clarifies the application of the SBA’s affiliation rules to the portfolio companies of private equity funds and businesses that participate in employee stock ownership plans (ESOPs). The interim final rule also provides additional guidance on the recently announced “safe harbor” for borrowers to return PPP loan proceeds if they have misunderstood or misapplied the PPP application’s certification of need.

In addition, on April 24, the Treasury Department released an updated FAQ with respect to determining the number of employees for PPP eligibility purposes.

Prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance. The newly issued interim final rule can be found here: Treasury Department – PPP Interim Final Rule – Promissory Notes, Authorizations, Affiliation, and Eligibility.

This alert summarizes certain material information provided in the newly issued interim final rule that was either not previously covered in, or serves to update a portion of, our previous alerts issued in connection with the financial assistance programs available under the CARES Act, which are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide.

Eligibility for PPP Loans

Hedge Funds and Private Equity Funds

The interim final rule definitively states that hedge funds and private equity funds are not eligible for PPP loans because they are businesses primarily engaged in investment and speculation. These are business types generally ineligible for SBA Section 7(a) loans and not the types intended by Congress to be eligible for participation in the PPP. These exclusions are consistent with our previous guidance on hedge fund and private equity fund PPP eligibility drawn from the SBA’s April 2 interim final rule, which clarified that the SBA’s exclusion of certain ineligible businesses (including investment companies and speculative businesses) from its Section 7(a) business loan programs will continue to apply to the PPP.

Businesses That Receive Revenue From Legal Gaming (Casinos)

Businesses receiving revenue from legal gaming activities that are otherwise eligible to participate in the PPP will no longer be deemed ineligible on account of such legal gaming revenue. The interim final rule revises the SBA’s previously issued April 14 interim final rule to supersede the SBA’s standing ineligibility rules prohibiting certain businesses that receive revenue from legal gaming activities from participating in SBA loan programs (including the rule in 13 CFR 120.110(g), which is made expressly inapplicable to the PPP). Businesses that receive illegal gaming revenue remain categorically ineligible for PPP loans.

Businesses Involved in Bankruptcy Proceedings

Businesses in bankruptcy are ineligible to participate in the PPP. The interim final rule confirms previous SBA guidance (and the PPP application) that if a PPP applicant, or its owner(s), is a debtor in a bankruptcy proceeding, either at the time it submits its PPP loan application or at any time before a PPP loan is disbursed, the applicant will be ineligible to receive a PPP loan. If the PPP applicant, or the owner(s) of the applicant, becomes the debtor in a bankruptcy proceeding following submission of a PPP loan application but before the loan is disbursed, it will be the applicant’s obligation to notify its SBA lender and request cancellation of its application. Failure by the applicant to do so will be regarded by the SBA as a use of PPP proceeds for unauthorized purposes and may result in fines, criminal charges or other penalties. PPP lenders may rely on a PPP applicant’s representation concerning the applicant’s, or an owner of the applicant’s, involvement in a bankruptcy proceeding.

Publicly Owned Hospitals

A hospital that is otherwise eligible to receive a PPP loan as either a business concern or nonprofit organization will not be ineligible for a PPP loan due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid. This rule represents a direct exception to the general ineligibility of government-owned entities for SBA Section 7(a) business loans.

Application of SBA Affiliation Rules to the PPP

• Portfolio Companies. The interim final rule reiterates that for purposes of determining PPP eligibility based on size, the SBA affiliation rules found at 13 CFR 121.301(f) apply to the portfolio companies of private equity funds just as they would apply to any other businesses subject to outside ownership or control. However, the interim final rule restates the CARES Act to note that such affiliation rules are waived for PPP borrowers, including the portfolio companies of private equity funds, that receive financial assistance from an SBA-licensed Small Business Investment Company (SBIC) in any amount, including any type of financing listed at 13 CFR 107.50, such as loans, debt with equity features, equity and guarantees. Such waiver of the affiliation rules is irrespective of whether the borrower has otherwise received investment from other non-SBIC sources.
• Businesses Participating in ESOPs. For purposes of the PPP, a business’s participation in an ESOP (as defined in 15 U.S.C. § 632(q)(6)) does not result in an affiliation between the business and the ESOP.

Limited Safe Harbor With Respect to Certification Concerning Need for PPP

The interim final rule reiterates the Treasury Department’s April 23 FAQ #32 with respect to the PPP, providing that PPP borrowers who applied for a PPP loan prior to the issuance of the interim final rule but as a result of the newly released April 23 FAQ guidance determined that they had received PPP loan funds based on a misunderstanding or misapplication of the required need-based certification may repay their loan in full by May 7, 2020, and be considered by the SBA to have made the required certification in good faith (and as such, should not expect enforcement action by the SBA, Treasury Department and/or the Inspector General in respect of its prior certification of need).

Counting Employees for PPP Eligibility

Previous SBA guidance has indicated that for purposes of determining whether a potential PPP borrower employs less than the maximum number of employees permitted for participation in the PPP (500 or the applicable NAICS-based industry standard), only those employees whose principal place of residence is in the United States are counted. The updated FAQ of April 24 refers potential borrowers, and PPP lenders, to the IRS regulations found at 26 CFR § 1.121- 1(b)(2) for guidance on factors to be considered when determining whether an individual employee’s principal place of residence is in the United States, including property ownership, place of employment and mailing address.