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CARES Act: SBA Issues Further Guidance on Promissory Notes, Authorizations, Affiliation, and Eligibility Under Paycheck Protection Program
Practical Law Legal Update w-025-2693 (Approx. 5 pages)
CARES Act: SBA Issues Further Guidance on Promissory Notes, Authorizations, Affiliation, and Eligibility Under Paycheck Protection Program
by Practical Law Finance
| Published on 29 Apr 2020 • USA (National/Federal) |
On April 27, 2020, the Small Business Administration (SBA) issued a fourth interim final rule (IFR) providing further guidance on requirements for promissory notes and authorizations, affiliation, and eligibility under the SBA’s Paycheck Protection Program (PPP) created under Title 1 of the CARES Act. The IFR clarifies requirements for PPP promissory notes and authorizations and eligibility for PPP loans for hedge funds, private equity firms, government-owned hospitals, legal gaming businesses, and businesses in bankruptcy. In addition, it clarifies the application of the PPP affiliate rules to portfolio companies of private equity funds and businesses that participate in employee stock ownership plans (ESOPs). Finally, it provides a limited "safe harbor" for borrowers that misunderstood or misapplied the certification as to need for PPP funding, provided they promptly repay the PPP loan.
On April 27, 2020, the SBA issued a fourth interim final rule (IFR) providing further guidance on requirements for PPP promissory notes and authorizations and eligibility for PPP loans for hedge funds, private equity firms, government-owned hospitals, legal gaming businesses and businesses in bankruptcy. In addition, it clarifies the application of the PPP affiliate rules to portfolio companies of private equity funds and businesses that participate in employee stock ownership plans (ESOPs). Finally, it provides a safe harbor for borrowers that misunderstood or misapplied the certification as to need for PPP funding, provided they promptly repay the PPP loan. This IFR is effective immediately. Public comment on the proposed rule must be received on or before May 28, 2020.
Requirements for Promissory Notes and Authorizations
This section is substantively identical to previously posted SBA FAQ guidance.
Lender Promissory Notes
Lenders may use their own promissory note or an SBA form of promissory note for PPP loans.
SBA Authorizations
Lenders do not need a separate SBA Authorization for the SBA to guarantee a PPP loan, but they must have executed the Lender Application Form - Paycheck Protection Program Loan Guaranty (SBA Form 2484) to issue PPP loans and receive a PPP loan number for each loan.
Eligibility of Certain Businesses
Hedge Funds and Private Equity Firms
Hedge funds and private equity firms are not eligible for PPP loans because they are primarily engaged in investment or speculation. Since these types of businesses are generally ineligible for § 7(a) loans under existing SBA regulations, they are not intended to be eligible for PPP financing.
Portfolio Companies of Private Equity-owned Businesses
In determining if a portfolio company of a private equity fund is eligible for a PPP loan, borrowers must apply the affiliation rules in 13 CFR § 121.301(f). These rules apply to private equity-owned businesses to the same extent as any other business subject to outside ownership or control. However, the affiliation rules are waived if the borrower receives financial assistance from an SBA-licensed Small Business Investment Company (SBIC), including any type of financing listed in 13 CFR § 107.50, such as loans, debt with equity features, equity, and guarantees, even if the borrower has investment from other non-SBIC investors. In addition to applying any applicable affiliation rules, all borrowers must be able to make the required certification in the PPP Borrower Application (SBA Form 2483) stating that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." (See Legal Update, CARES Act: SBA Issues Guidance for Eligibility of Businesses Owned by Large Companies Under Paycheck Protection Program.)
Government-owned Hospitals
A hospital owned by a state or local government that is otherwise eligible to receive a PPP loan, will still be eligible if it receives less than 50% of its funding from state or local government sources, exclusive of Medicaid. This exception was made to the general ineligibility of government-owned entities under 13 CFR § 120.110(j) in order to achieve the purposes of the CARES Act.
Legal Gaming Businesses
Legal gaming businesses that are otherwise eligible to receive a PPP loan, are not rendered ineligible due to their legal gaming revenue. Further, the IFR clarifies that 13 CFR § 120.110(g) is inapplicable to PPP loans. This revises the prior interim final rule published on April 20, 2020 which required certain conditions to be met for legal gaming businesses to be eligible for PPP loans. Businesses that received illegal gaming revenue remain ineligible for PPP loans.
Business Participation 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 and does not trigger application of the PPP affiliation rules.
Eligibility of Businesses Presently Involved in Bankruptcy Proceedings
A business in bankruptcy is not eligible for a PPP loan. If the applicant or its owner is the debtor in a bankruptcy proceeding (Debtor), either at the time it submits the application or at any time before the loan is disbursed, it is ineligible to receive a PPP loan. If the applicant or its owner becomes a Debtor after submitting a PPP application but before the loan is disbursed, the applicant must notify the lender and request cancellation of the application. Failure by the applicant to do so is a use of PPP funds for unauthorized purposes, potentially subjecting the applicant to sanctions. Lenders may rely on an applicant’s representation concerning it or its owner's involvement in a bankruptcy proceeding.
Limited "Safe Harbor" for Certification Concerning Need for PPP Loan
The PPP Borrower Application (SBA Form 2483) requires applicants to certify that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Any borrower that applied for a PPP loan prior to the issuance of the IFR 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. This is a limited "safe harbor" for borrowers who previously obtained a PPP loan based on a misunderstanding or misapplication of the required certification standard, provided they promptly repay the PPP loan.
More Information
For summaries of the SBA PPP, see:
For additional guidance from the Treasury Department, see: