Interim Final Rules
On April 24, 2020, the U.S. Small Business Administration (SBA) released a fourth Interim Final Rule for the Paycheck Protection Program (PPP), which provides borrowers and lenders with clarity on certain questions regarding eligibility and affiliation. The new rule can be found in its entirety here.
- Hedge Funds and Private Equity Funds. The rule confirms that hedge funds and private equity funds are ineligible to receive a PPP loan. The rule also provides that affiliation rules apply to private equity-owned businesses, and that these borrowers should pay careful attention to the certification regarding whether “current economic uncertainty makes this loan request necessary.”
- Bankruptcy. If a borrower is involved in a bankruptcy proceeding at the time the applicant applies for a PPP loan or becomes involved in a bankruptcy proceeding at any time before the loan is disbursed, the applicant is ineligible for a PPP loan. The rule clarifies that if an applicant enters bankruptcy while its application is pending and fails to contact the lender to withdraw the loan application, the applicant will be found to have misused the funds.
- Safe Harbor. The rule provides that if a borrower repays its PPP loan by May 7, 2020, it will be considered to have taken the funds in good faith. This point is meant to protect borrowers who may have misapplied or misunderstood the certification stating that the PPP loan is necessary due to the current economic uncertainty.
- Government-Owned Hospitals. The rule notes that hospitals owned by governmental entities are not ineligible for a PPP loan, provided that they receive less than half of their funding from government sources.
- Legal Gaming. The rule regarding the eligibility of businesses that revenue from legal gaming was altered slightly to maintain the SBA’s purpose of making loans available to many businesses.
- Employee Stock Ownership Plans. The rule clarifies that participation in an employee stock ownership plan does not result in the affiliation between the business and the plan.
Frequently Asked Questions
The SBA also revised the Frequently Asked Questions, which can be found in their entirety here. These FAQs were revised on April 24, 2020 and April 26, 2020 to provide clarity regarding the inclusion of housing stipends and allowances in payroll costs, how to determine whether an employee’s principal place of business is located in the United States, the eligibility of agricultural farmers, producers and other cooperatives for a PPP loan, and when the employee count should include all employees and when it should include only full-time equivalent employees.
The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.
Author Matthew McDonald is a partner in the Corporate & Securities Department at Klehr Harrison.
 We note that Judge Jones in the Southern District of Texas has issued a temporary restraining order enjoining the SBA and a participating lender from denying a PPP loan solely on the basis that the applicant was a debtor in bankruptcy. This decision was limited to the debtor in question, and the judge declined to make a ruling that would affect other businesses or the PPP loan process in general. It is not clear at this time what impact the interim final rules will have on similar cases that may be brought in the future.