Inside the CARES Act: Paycheck II the Paycheck Protection Program and Health Care Enhancement Act

For those who have been following the latest with the Paycheck Protection Program (PPP) loans, it was a busy end to last week! We’ve previously issued an analysis of the CARES Act of 2020 through our “Inside the CARES Act” series on the Norris McLaughlin Biz Law Blog, but this past week saw the passage of the Paycheck Protection Program and Health Care Enhancement Act (Paycheck II), as well as updated FAQs from the Treasury Department and additional guidance from the Small Business Administration (SBA) in another Interim Final Rule issued on Friday, April 24.

So, what does it all mean?

Well, unless you are truly living off the grid or believe you can contract COVID-19 through the news, you know that the PPP loan program ran out of money faster than Target seems to run out of toilet paper. Paycheck II recharges the PPP loan program with another $310 billion, but also sets aside $30 billion in covered loans to be made by banks and credit unions with between $10 billion and $50 billion in assets, while another $30 billion in covered loans has been set aside by Paycheck II to be made by banks and credit unions with less than $10 billion in assets, as well as “community financial institutions.” This is obviously welcome relief for businesses, but for my tired friends in the banking industry who feel like every day is Black Friday at the price choppers, they may be reconsidering their career choices.

In other Paycheck II news...

The other big news stories this week related to the PPP loan program were several high-profile businesses and chain restaurants (who shall remain nameless) returning their PPP loans due to public outcry. In response, the Treasury Department updated its FAQs on the PPP loan program Thursday night, and the SBA issued additional guidance today making it clear that the PPP loan program was NOT meant for the big shots in hedge funds and private equity firms. The SBA is now cautioning that all borrowers must review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification must be in good faith and take into account current business activity and a borrower’s ability to access other sources of liquidity sufficient to support their ongoing operations which would not be “significantly detrimental.”

In other words, just because you have access to a loan shark does not mean the Treasury Secretary expects you to put your knees up for collateral. This guidance also makes it clear that 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. Furthermore, the guidance specifically states that hedge funds and private equity firms are not eligible for PPP loans. While a portfolio company owned by a private equity fund could potentially be eligible, they must not only take into consideration the applicable SBA affiliation rules, they must also carefully consider the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” If a business with reasonable access to liquidity through the capital/debt markets and private equity has already taken a PPP loan prior to April 24, the SBA has provided a safe harbor so that if that business pays back or returns its PPP loan by May 7, 2020, the SBA will consider their original certification for eligibility to have been made in good faith.

What else?

We have also learned in this latest guidance that businesses participating in ESOPs will not trigger the SBA’s affiliation rules for determining eligibility for PPP loans and that while businesses that receive revenue from legal gaming (i.e., not from the machine downstairs at the steak shop downtown) are eligible borrowers, anyone in bankruptcy proceedings is not an eligible borrower. I guess they had to draw the line somewhere with our tax dollars…

We will continue to stay on top of all developments related to the PPP loans and we are happy to help the business community however we can. If you have any questions about this post or any other related matters, please email me at gsimmons@norris-law.com. For other topics related to the coronavirus, visit our Coronavirus Thought Leadership Connection.