FAQs on PPP First Draw Loans

Numerous changes have been made to the Paycheck Protection Program (PPP) in recent months, primarily stemming from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) signed into law in December 2020 as part of the overall Consolidated Appropriations Act, 2021, and related administrative rules and guidance issued by the Small Business Administration (SBA). In this article, we address frequently asked questions and guidance regarding the initial PPP loans taken out by Borrowers (First Draw Loans).

Are there new entities eligible to receive PPP loans?

Under the Interim Final Rule for the Paycheck Protection Program as amended by the Economic Aid Act, certain additional entities are eligible for First Draw Loans, including: housing cooperatives, certain 501(c)(6) organizations, certain destination marketing organizations that employ no more than 300 employees, and Federal Communications Commission license holders and newspapers that employ no more than 500 employees.

Are there changes to entities prohibited from receiving a PPP loan?

The new laws and rules outline new prohibited Borrowers. Some of these additional prohibited Borrowers include but are not limited to:

• Entities that are an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f)
• An entity that received a Shuttered Venue Operator Grant
• An entity that was not in business on February 15, 2020
• An entity that has permanently closed
• The President, Vice President, head of an Executive Department, or member of Congress; or spouse of such person directly or indirectly holding a controlling interest in a business

Importantly, even Borrowers who received their First Draw Loans prior to December 27, 2020, will now be required to disclose to the SBA if they fell into any of the new prohibited categories at the time the Borrower submitted its original First Draw Loan Application. Borrowers that received a PPP loan prior to December 27, 2020, must fill out the Borrower’s Disclosure Form of Certain Controlling Interests and submit it to the PPP Lender.

What about those who have declared bankruptcy?

The SBA, through prior PPP rules and guidance and as reiterated in the Interim Final Rule with respect to PPP as amended by the Economic Aid Act, has taken the stance that an Applicant or owner of an Applicant that is the debtor in a bankruptcy proceeding, either at the time of Application, or at any time prior to disbursement of the loan, is ineligible to receive a PPP loan. While the Economic Aid Act did contain provisions allowing for certain categories of debtors to be eligible for PPP loans if the SBA consented and deemed them eligible, no such move has been made by the SBA to date, and therefore, the bankruptcy exclusion rules still apply. It is notable that the SBA’s stance on excluding Borrowers in bankruptcy from obtaining PPP loans has prompted significant litigation in which courts are currently split – some have upheld the SBA’s viewpoint, while others have ruled it unenforceable.

If the Applicant or owner of the Applicant becomes the debtor in a bankruptcy proceeding after submitting an Application, the Applicant or owner of the Applicant must notify its PPP Lender and request the PPP Application be cancelled. If the Applicant or owner of the Applicant does not request cancellation, it is considered by the SBA to be an unauthorized use of PPP funds.

The bankruptcy provision is reflected in the form of a certification on the Borrower Application Form, and the SBA has made clear that Lenders may rely on the Borrower’s certification and representation concerning the Applicant’s or owner of the Applicant’s involvement in a bankruptcy proceeding.

What is the Covered Period for First Draw Loans?

The covered period for purposes of determining loan forgiveness (Covered Period) for First Draw Loans…