Types of Businesses Ineligible for P3s: Evolving Guidelines Leave Many Small Businesses Confused
Small businesses have experienced great confusion when trying to determine their eligibility for a Paycheck Protection Program (PPP) loan under the Coronavirus Help, Relief and Economic Security Act ( CARES Act). The United States Small Business Administration (SBA) and the United States Department of the Treasury (Treasury) provide ad hoc advice by issuing a number of interim final rules (individually an IFR and collectively, IFRs) and issuing a frequently asked questions (FAQ). Yet IFRs and FAQs have led to more questions than answers. Distressed businesses are now spending their limited time, resources and money determining whether they are allowed to apply for or keep a PPP loan that could determine the fate of their employees’ livelihoods.
On March 31, 2020, the Treasury published the “Top-Line Overview of PPP” announcing in large bold print that “All Small Businesses [Are] Eligible. ”This conforms to congressional language in the CARES Act, which states that any business with fewer than 500 employees or meeting other applicable SBA size standards is eligible. This announcement has given hope to all small businesses struggling to survive the economic hardships of the COVID-19 pandemic.
Despite Congress’s stated goal of relieving as many businesses as possible through the PPP program, the SBA announced in its first IFR on April 2, 2020, that any business previously deemed ineligible under the current loan program of the SBA would also be considered ineligible. for a PPP loan under 13 CFR § 120.110 (b) (Ineligibility Rules), unless the CARES Act provides otherwise. Regardless of demonstrating the need for PPP funds, adherence to the applicable size standard, and legitimate use of PPP funds, the First IFR prevents many companies from obtaining PPP loans, including financial firms, speculative businesses, faith-based businesses, state-owned entities, businesses deriving more than one-third of their gross annual revenues from legal gambling activities, businesses that offer live shows of a lascivious sexual nature, and more.
To further complicate this problem, the SBA later determined that some of the companies previously ineligible under the ineligibility rules are now eligible for PPP loans. For example, the second IFR found faith-based enterprises eligible, the third IFR relaxed restrictions on the ineligibility of gambling enterprises, and the fourth IFR allowed certain public entities, such as hospitals, to obtain loans. PPP.
As the SBA rolls out its own ineligibility rules, they simultaneously reinforce the ineligibility of certain types of businesses. For example, the SBA’s Second IFR declared that hedge funds were ineligible under the rules of ineligibility as a speculative enterprise. Meanwhile, the Treasury publicly berated eligible large companies that received PPP loans, leading to eligible companies returning PPP funds.
The SBA and Treasury’s contradictions with the CARES Act and piecemeal application of its own rules have prompted many business owners to try to determine if they are eligible for relief. Even small businesses that are not expressly prohibited by the ineligibility rules, but are linked to ineligible businesses, such as management companies, are at a loss as to their eligibility.
To make matters worse, IFRs allow PPP lenders to rely on borrower certifications regarding eligibility, and the SBA will hold lenders harmless for granting loans to ineligible borrowers. This shifts the risk of taking out a non-compliant PPP loan to the borrower, which can lead to fines and possible jail time.
With the choice between risking criminal prosecution, penalties, or letting their small business go bankrupt, some ineligible candidates have decided to take legal action against the SBA. On May 11, the United States District Court for the Eastern District of Michigan found that the SBA had exceeded its statutory authority in enforcing the ineligibility rules for PPP loans. Here, the SBA has ruled forty-two gentlemen’s clubs ineligible as businesses offering live shows of a lustful sexual nature. However, Judge Matthew Leitman interpreted the CARES Act to apply to any business that otherwise meets the requirements for a PPP loan. As a result, Leitman J. granted a temporary restraining order preventing the SBA from denying the plaintiff’s PPP loan applications. While this ruling only applies to named plaintiffs in this case, it illustrates the ambiguity surrounding PPP ineligibility and the justice system’s willingness to uphold the congressional intent of the CARES Act: “Keep workers Americans paid and employed ”. The Sixth Circuit later dismissed the SBA’s motion to stay Justice Leitman’s order pending the SBA’s appeal. Other previously ineligible companies, such as finance companies, have also filed a lawsuit against the SBA with similar arguments.
Although the Eastern District Court ruling gave hope to previously ineligible small businesses, the SBA and the Treasury declined to comment on the ruling, allowing the confusion surrounding ineligibility to escalate to no end. apparent in sight. Additionally, Congress has amended the CARES Act three times and is now debating further changes when it passes the next coronavirus relief bill. This has undoubtedly created more hurdles for small businesses in determining their eligibility for relief under the CARES Act.
Below are some steps that small businesses should take into account when applying for a PPP loan:
- Examine carefully IFR, Faq, 13 CFR § 120.110 (b), the SBA Standard Operating Procedures, and the Office of Hearings and Appeals Database, as there may be exceptions or precedents that support eligibility.
- Document all the facts demonstrating that the applicant will lose their business if they are unable to obtain a P3 immediately.
- Confirm that the applicant’s business meets applicable SBA size standards.
- Memorize management and board deliberations, decision making and analysis supporting eligibility.
- Document the impact of COVID-19 on business operations, including the applicant’s plan to use PPP funds to avoid downsizing.
Below are additional steps that a small business that has received a PPP loan should consider if they are concerned about their ineligibility in order to prepare for the SBA’s audit and scrutiny of the PPP loan:
- Consult with advisers to review the PPP loan application for accuracy, full disclosure and transparency, as this can help demonstrate that at the time the PPP loan application was made, all of the facts available to the claimant at that time were considered, disclosed and that he had no intention of misleading the government.
- Consult with legal counsel to determine if there is precedent to support eligibility in the applicable jurisdiction.