April 28, 2020

Highlights of the Paycheck Protection Program and Health Care Enhancement Act

The Congress passed the Paycheck Protection Program and Health Care Enhancement Act, sometimes known as “Stimulus 3.5.”

Here are highlights of this law’s impact on the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) loans:

  • More money. The law adds $310 billion in additional guaranty authority to SBA. Based on SBA’s previous loan approvals of 1.6 million PPP loans, this should allow approval of an additional 1.5 million PPP loans.
  • More lenders. In addition to regulated banks, the bill authorizes Community Development Financial Institutions (CDFIs) and SBA microlenders to make PPP loans.
  • Agricultural borrowers. The bill adds “agricultural enterprises” to the category of firms under 500 employees that may apply for these loans.
  • More emphasis on small lenders. The bill sets aside $60 billion of guaranty authority for lending by smaller banks and credit unions (with assets less than $50 billion).

New Developments on PPP Certification

The Department of the Treasury released additional FAQs on April 23 and 26, 2020 and the SBA issued an additional Interim Final Rule on April 24, 2020 regarding the PPP. Both the FAQs and a part of the interim rule relate to the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Key points are:

  • The certification must be made 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.”
  • The FAQ response states that “public companies with substantial market value and access to capital markets” are unlikely to be able to make the required certification in good faith. These types of applicants should be prepared to demonstrate the basis for the certification to the SBA upon request.
  • The interim rule confirmed the affiliation rules in 13 CFR 121.301(f) apply to portfolio companies of private equity (PE) firms for purposes of determining if a business meets the applicable size standard.
  • A business that applied for a PPP loan prior to these new directions regarding the certifications will be deemed to have made the required certification in good faith if they repay their PPP loan by May 7, 2020. As of the date of this alert, more than $2 billion from the first round of funding was declined or returned and will be made available for new PPP loans.

Audits of PPP Loans Over $2 Million

On April 28, 2020, Treasury Secretary Steven Mnuchin stated that all PPP loans over $2 million will be audited by the SBA to ensure that such loans were justified. This statement follows public scrutiny of the types of businesses that received PPP loans during the first round of loan applications. In making this statement, Secretary Mnuchin pointed out that PPP loans are not designed for public companies and that borrowers may face criminal liability for making a false certification in connection with a PPP loan application.

Other New SBA Interpretations and Guidance

Below are other highlights of this new interim rule and the updated FAQs:

  • Hedge funds and PE firms are not themselves eligible for PPP loans.
  • Businesses receiving legal gaming revenue are not ineligible for PPP if they otherwise qualify.
  • If a business participates in an employee stock ownership plan (ESOP), that does not result in affiliation for purposes of determining if the business meets the applicable size standard.
  • Businesses in bankruptcy at the time of the loan application or when the loan is disbursed are not eligible for PPP.
  • Payroll costs includes all cash compensation paid to employees, including housing allowances, subject to the $100,000 annual compensation per employee limitation.
  • Agricultural producers, farmers, and ranchers are eligible for PPP loans if (i) the business has 500 or fewer employees or (ii) the business fits within the revenue-based size standard, which is average annual receipts of $1 million. Agricultural producers, farmers and ranchers can also qualify for PPP loans as a small business concern if their business meets SBA’s “alternative size standard.” The “alternative size standard” is currently (1) maximum net worth of the business is not more than $15 million, and (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

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