The PPP, which previously lapsed due to exhaustion of available funding, was replenished by CARES Act 2.0.
On April 23, 2020, the United States House of Representatives passed the Paycheck Protection Program and Health Care Enhancement Act (CARES Act 2.0), which, among other provisions, replenishes the funding for the Payment Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Recovery Act (CARES Act). The United States Senate previously passed CARES Act 2.0, and the bill is expected to be signed into law by the president shortly.
In addition, the Treasury Department released further guidance on the eligibility of companies for access to other funding sources with respect to PPP loans and clarified the need for borrowers to review the certifications in the PPP loan application.
Certain key aspects of CARES Act 2.0 and related guidance are summarized in this Alert.
This information should also be reviewed along with prior Duane Morris Alerts on the CARES Act and PPP loan program, including:
- Paycheck Protection Program Loan Forgiveness Update – Overview of aspects of use of proceeds for loan forgiveness and borrower certifications.
- SBA and Treasury Release FAQs on Paycheck Protection Program Loans – Information on affiliation rules and eligibility for loans.
- New Guidance on Affiliate Rules for Paycheck Protection Program Loans – Detailed guidance on application of affiliation rules.
- Paycheck Protection Program Opens with Updated Guidelines – Details on the application process and form of application.
- SBA Releases Loan Application for Paycheck Protection Program – Updates on aspects of PPP loans.
- CARES Act Offers Employers Aid with Some Strings Attached – Employer incentives to retain workers, including tax incentives.
- CARES Act Offers Small Businesses Relief Through Paycheck Protection Program – Overview of the PPP.
PPP Funding Replenished
The PPP, which previously lapsed due to exhaustion of available funding, was replenished by CARES Act 2.0 with an additional $310 billion in available funds, to an aggregate total amount of $659 billion.
Borrowers who previously applied for a PPP loan should not submit another application. The interim final rule previously released by the Small Business Administration (SBA) provided that borrowers may only apply for one PPP loan. Borrowers who previously applied should reach out to the applicable lender to inquire as to the status of their application.
Borrowers who have not applied for a PPP loan may submit an application with an approved lender. However, given that many applicants were in the queue at the time that the first wave of funds ran out, it is likely that the second wave of funds will be used to make loans to those preexisting applicants.
EIDL Funding Replenished
The Economic Injury Disaster Loan (EIDL) program, which like the PPP loan program was also suspended due to use of allotted funds, was replenished by an additional $10 billion, to a total amount of $20 billion.
Treasury Updates FAQs – Certification for Loan Eligibility and Grace Period for Good Faith Immunity
On the same day that the House passed CARES Act 2.0, the Treasury Department released updated guidance on the PPP’s frequently asked questions page, adding Question 31.
It has recently come to light that, either as a result of continued business operations or otherwise, a significant number of public companies and companies that have access to funds to maintain their ongoing business operations have successfully applied for and received PPP loans. While the COVID-19 pandemic has caused significant disruptions to the American economy as a whole, not all companies are affected equally by the pandemic. It is now clear that the Treasury Department and SBA have narrowed the group of intended PPP loan recipients to companies that have (i) sustained economic injury from the COVID-19 pandemic and (ii) have limited means to obtain financing to support their continuing operations (not business expansion).
A primary concern for many applicants has been the requirement that the borrower certify in the PPP application form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In issuing Question 31, the Treasury Department has provided additional guidance on the intent of this certification.
The answer to Question 31 states in part:
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.
This response suggests that public companies with the ability to access financing through the capital markets are not the intended recipients of PPP loans, absent extenuating circumstances. While the example references a public company, the concept is not likely intended to be exclusive to public companies, and all applicants and/or recipients should carefully review their continued business activity and need for a PPP loan.
In light of this updated guidance, the Treasury Department has provided an immunity period to repay the PPP loan for a presumption of a good faith certification. Borrowers who applied for PPP loans prior to the issuance of this guidance, and who repay their PPP loans in full by May 7, 2020, are deemed by the SBA to have made the required certification in good faith. This allows borrowers who applied for PPP loans prior to the release of the updated FAQs to escape unfavorable public scrutiny and potential legal liability. It is not clear that if a borrower determines that it needs some but not all of the loan proceeds applied for and received (for example, if the business was not completely shut down and part of the workforce was retained), a partial return of the loan proceeds will also create a presumption of good faith. We expect additional SBA guidance on this topic.
Ineligible Businesses and Affiliation Rules Applicable to Private Equity Portfolio Companies
In addition to updated FAQs issued on April 23, on April 24, 2020, the SBA issued an interim final rule, effective immediately, and applicable on all PPP loan applications submitted through June 30, 2020, or until available funds are exhausted. This interim final rule provides additional clarification on questions raised in the past regarding private equity firms, hedge funds and portfolio companies.
Ineligible Businesses: Hedge Funds and Private Equity Firms
The SBA expressly identified hedge funds and private equity firms as businesses that are ineligible for PPP loans. The SBA further explained that these businesses are “primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.” This is consistent with the guidance relating to passive businesses outlined in SOP 50 (10) 5(F).
Affiliation Rules for Private Equity Fund Portfolio Companies
The SBA did not exclude portfolio companies of private equity funds from eligibility for PPP loans. The SBA reiterated that the affiliation rules in 13 CFR 121.301(f) and the second PPP interim final rule (85 FR 20817) apply to such portfolio companies in the same way as other businesses subject to outside ownership or control. This is consistent with guidance given to date. (Note that the small business investment company prior financing waiver for application of the affiliation rules still applies.) Similar to Question 31 issued by the Treasury on April 23, portfolio companies, as borrowers, were instructed to carefully review the required certification on the PPP application form: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
SBA Guarantees Loans to Smaller Insured Depository Institutions, Credit Unions and Community Financial Institutions
Under CARES Act 2.0, the SBA is required to guarantee at least $30 billion in loans made by insured depository institutions with consolidated assets between $10 billion and $50 billion and credit unions with consolidated assets between $10 billion and $50 billion.
In addition, the SBA must also guarantee at least $30 billion in loans made by community financial institutions, insured depository institutions with consolidated assets less than $10 billion and credit unions with consolidated assets less than $10 billion.
About Duane Morris
Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.
For More Information
If you have any questions about this Alert, please contact Nanette C. Heide, Sandra G. Stoneman, Stephen Morrissey, Mark Zhuang, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
 Note that many loan documents provided by the lenders require a bring-down of all certifications in the loan application at the time of execution of the promissory note for the PPP loan.
 In Question 17, the Treasury has stated that borrowers can rely on guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in the FAQs and the interim final rules. Accordingly, borrowers who still have applications in process (and based on new Question 31, those accepting the loan proceeds) should review their need in light of the new guidance.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.