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April 27th, 2020
PPP Loan Program Updates: Additional Funding and Additional Guidance
The Frankfurt Kurnit Corporate Group has been tracking developments in the Paycheck Protection Program (the “PPP”), adopted as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Below we highlight some key developments since our last update.
Additional Funding. On April 24th, President Donald Trump signed into law an extension to the PPP loan program that provides an additional $320 billion for small businesses. This funding supplements the original $349 billion in program funding which had been fully allocated by the Small Business Administration, the agency that administers the PPP. Eligible borrowers may apply for PPP loans beginning at 10:30am EDT on Monday, April 27th. If you have already applied, you can check on the status by calling 1-800-659-2955 24 hours a day (expect significant wait times). Additional general information on the PPP, as well as the SBA’s Economic Injury Disaster Loan and Economic Injury Disaster Grants, can be found here: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options.
Updates to Rules: Economic Need. Since the initial passage of the CARES Act, the SBA has issued several guidances and “FAQs” to clarify certain PPP provisions. The latest FAQ, which was updated through April 26th, can be found here and addresses concerns raised by legislators, applicants and the media regarding eligibility and application requirements.
One key element of the new FAQ was the SBA’s directive refining the requirement that applicants demonstrate economic need for PPP funding. Prior to the CARES Act, Section 7(a) of the Small Business Act had made loans available to “small business concerns” who could show that they were unable to obtain “credit elsewhere”. The CARES Act expanded the scope of businesses eligible for Section 7(a) loans to cover not only companies previously defined as “small business concerns” but also other companies that employed no more than 500 employees (or such other size limit that the SBA may establish for particular industries). When the CARES Act was originally adopted in March, however, the legislation primarily focused on an applicant’s economic need rather than their access to capital, requiring applicants to certify in good faith that "[c]urrent economic uncertainty makes th[e] loan request necessary to support . . . ongoing operations.” When the first tranche of PPP funding was exhausted a few weeks later, public attention focused on the number of established businesses – including large public companies – that received millions of dollars in PPP funding.
The April 23rd update to the FAQ indicates a renewed focus on the principles of Section 7(a) of the Small Business Act. This update provides, in response to question 31, that applicants, in certifying economic need for PPP funding, must “[take] 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.” This FAQ response went on to note that, as an 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 new guidance may require applicants to consider their “good faith” certifications more carefully. For those applicants who received funds prior to this new guidance but who may not be able to make the required certification in light of the increased emphasis on access to capital, the SBA appears to be offering a form of amnesty if the loan is returned in full by May 7th. In addition, potential applicants should note that while public company borrowers were specifically called out in the recent guidance, the SBA’s statement regarding access to capital likely is intended to apply to private companies as well, particularly those with relationships (or who are “affiliated”, in the parlance of the legislation) with investment funds or other sources of capital. Such companies may need to either demonstrate how the pandemic has caused an actual economic hardship or develop a supporting analysis explaining the need for a PPP loan.