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US$484 Billion in New Funds for CARES Act Small Business Loans and Health Care Programs

April 24, 2020

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted to inject an additional US$321 billion in funds into the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) programs, and to provide US$75 billion for hospitals and health care providers and US$25 billion for COVID-19 testing research and development.

Paycheck Protection Program

The CARES Act provided US$349 billion in funding for loans through the PPP, a new expansion of the Small Business Administration’s (SBA) existing 7(a) loan program, aimed at supporting small businesses and encouraging them to retain their workers. As explained in detail in our prior alert, borrowers can use PPP loan proceeds to cover costs incurred between February 15, 2020 and June 30, 2020, and amounts borrowed for the first eight weeks of the loan may be forgiven if the proceeds are used for certain qualified expenses like payroll costs, utilities, and rent.

The application process opened on April 3, and the funds were completely exhausted within two weeks. The new law allocates an additional US$321 billion to the PPP. In an effort to target the new round of PPP loans toward small business who lacked strong pre-existing relationships with pre-approved SBA lenders, the new measure sets aside US$60 billion of the new funds for loans to be issued by small and minority-owned lenders who are more likely to service local small businesses.1

While businesses facing severe economic uncertainty due to the current crisis rushed to apply for PPP loans before the initial expected shortfall, it is important first to weigh the legal and practical implications of applying for a PPP loan.

First, borrowers must ensure they meet the small business size limitations taking into account the SBA’s rules for “affiliated” businesses. As we previously explained, this is particularly important for private equity- and venture capital-backed businesses, as their employee or revenue figures may be combined with those of other portfolio companies for purposes of calculating size and eligibility.

Economic Necessity Certification

Second, PPP loan applications require applicants to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the company. Neither the CARES Act nor SBA rules or regulations define the meaning of “necessary” for the purpose of the PPP, and many businesses have struggled with whether their circumstances allow them to make that certification. Further, the CARES Act explicitly eliminates the ordinary requirement for 7(a) loans that borrowers must be unable to obtain credit elsewhere.

On April 23, 2020, in updating its Frequently Asked Questions (FAQs) regarding the PPP, the SBA added a new question and answer aimed particularly at large public companies, but applicable to companies of all sizes. In addressing the question of whether “large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan,” SBA instructs “all borrowers” to “tak[e] into account their current business activity and ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The SBA notes that it is “unlikely” that large public companies with access to capital will be able to make the required certification and warns such companies to prepare to provide evidence as to the basis for its certification. However, a safe harbor is provided to any applicant who applied for a PPP loan prior to April 23 and pays the loan in full prior to May 7.

Even companies eligible for the PPP that can comfortably certify their need in good faith should consider the impact on public and investor relations before filing an application. A public company that receives a PPP loan must file a Form 8-K and may be required to disclose that loan to its shareholders and the public. A number of companies have thus far suffered significant backlash for participating in the program. At the same time, companies of all sizes with genuine need tied to the crisis should not hesitate to explore taking advantage of this program, which is designed to facilitate the continuation of employment and operations under a relatively flexible standard. Potential applicants should carefully weigh the risks and benefits of all potential sources of capital and measures to preserve cash during these extraordinary times.

Hedge Funds, Private Equity Firms, and Companies in Bankruptcy

Today, SBA issued another Interim Final Rule applicable to the PPP specifically addressing the issues of affiliation and eligibility for certain categories of businesses. Among other provisions, the rule clarifies that hedge funds and private equity firms, which are generally ineligible for 7(a) loans, are also ineligible for PPP loans because they are “primary engaged in investment and speculation.” It also reaffirms the applicability of the affiliation rules to private equity portfolio companies and reiterates the warning from the April 23 FAQs that borrowers must “carefully review” the required certification of necessity on their PPP loan applications.

The new rule provides an additional piece of clarity for those applicants who may receive financial assistance from an SBA-licensed Small Business Investment Company (SBIC) in any amount, even if they also have investment from other non-SBIC investors, providing that the affiliation rules are waived in that case.

Furthermore, the rule sets forth that if a PPP applicant or the owner of an applicant is a debtor in a bankruptcy proceeding, either at the time it submits its application or at any time before the loan is disbursed, it is ineligible to receive a PPP loan. If an applicant or its owner files for bankruptcy while its application is pending but before the loan proceeds are disbursed, it must notify the lender and request to cancel the application.

Safe Harbor for Returning PPP Funds Obtained by Ineligible Businesses

Through both the April 23 FAQs and today’s interim rule, the SBA has established a safe harbor for businesses that have received PPP funds that are now clearly ineligible under these rules, providing that “[a]ny borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

Economic Injury Disaster Loans

The EIDL program is a pre-existing program authorized under Section 7(b)(2) of the Small Business Act of 1953 (15 U.S.C. § 636(b)(2)). It is available to certain small businesses located in areas subject to a presidential disaster declaration that have suffered a substantial economic injury as a result. The CARES Act included US$10 billion to expand the EIDL program to businesses beyond previous size limits. Additionally, a new EIDL “grant” provision allowed applicants to request an immediate advance of up to US$10,000 in an effort to get money into the hands of small businesses as soon as possible.

The new law authorizes an additional US$10 billion for EIDL grants. It also provides an additional US$50 billion for the SBA 7(b) disaster loan program, of which the EIDL is a part. Finally, it extends eligibility for EIDL loans and grants to small agricultural businesses with 500 or fewer employees. While these agricultural businesses were previously eligible under the CARES Act for PPP loans, they were not eligible for EIDL grants or loans. The same SBA Affiliation Rules apply to these agricultural businesses as they do to all other participants in the PPP and EIDL programs.

Health Care

The Paycheck Protection Program and Health Care Enhancement Act allocates US$100 billion in supplemental appropriations to the Department of Health and Human Services Public Health and Social Services Emergency Fund. US$75 billion of that money is directed toward reimbursement of health care providers for expenses and lost revenues attributable to COVID-19. The Secretary of Health and Human Services has broad discretion to distribute these appropriations, and consistent with the CARES Act, the new measure specifies that health care providers may—but are not required to—use the funds for construction of temporary structures, leasing of additional properties, medical supplies and equipment including personal protective equipment, increased workforce and training, and surge capacity.

The remaining US$25 billion is for the research, development, and production of COVID-19 tests (including both active infection and prior-exposure tests) as well as surveillance and contract tracing. Specific funding amounts are allocated to: states, localities, territories, and tribes; the Centers for Diseases Control and Prevention; the National Institutes of Health; the Biomedical Advanced Research and Development Authority; the Food and Drug Administration; community health centers; rural health clinics; and testing for the uninsured.


1 Depository institutions and credit unions with consolidated assets of between US$10 billion and US$50 billion, as well as community development financial institutions and minority depository institutions.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Laurel Loomis Rimon, an O’Melveny partner licensed to practice law in California and the District of Columbia, Warren Lazarow, an O’Melveny partner licensed to practice law in California and New York, David Makarechian, an O’Melveny partner licensed to practice law in California, Sung Pak, an O’Melveny partner licensed to practice law in New York, Paul Sieben, an O’Melveny partner licensed to practice law in California, Evan N. Schlom, an O’Melveny counsel licensed to practice law in the District of Columbia and California, and Braddock Stevenson, an O’Melveny counsel licensed to practice law in New Jersey and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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