Earlier today the Small Business Administration (“SBA”) issued an interim final rule (the “Interim Final Rule”) that, in pertinent part, supplements and clarifies previously posted rules related to eligibility for the Paycheck Protection Program (the “PPP”). The Interim Final Rule is effective immediately, although the SBA has solicited public comments and has indicated that it will consider the need to revise its guidance based on any such comments. The Interim Final Rule is available here. In addition, late Thursday the SBA issued an additional “FAQ” that seeks to clarify a particular borrower certification required to be made when applying for a PPP loan. The relevant FAQ is Question 31 and is available here.

The Interim Final Rule provides the following regarding borrower eligibility:

Is a hedge fund or a private equity firm eligible for a PPP loan?

No. Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does 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.

Do the SBA affiliation rules prohibit a portfolio company of a private equity fund from being eligible for a PPP loan?

Borrowers must apply the affiliation rules that appear in 13 CFR 121.301(f), as set forth in the Second PPP Interim Final Rule (85 FR 20817). The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. However, in addition to applying any applicable affiliation rules, all 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.”

FAQ Question 31 provides the following regarding a particular borrower certification required to be made when applying for a PPP loan:

Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in Section 3(h) of the Small Business Act), 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 the SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith. (emphasis added)

Our previous client alerts related to the PPP are available here and here.

We will continue to monitor any developments related to the PPP and update our clients and friends as necessary.

Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.