The Coronavirus Assist, Reduction, and Financial Safety Act (as amended and modified, the “CARES Act”) was enacted to supply quick help to people, households, and companies affected by the COVID-19 emergency. Amongst different provisions, the CARES Act allowed Congress to authorize the Small Enterprise Administration (“SBA”) to quickly assure forgivable loans underneath a brand new 7(a) mortgage program titled the Paycheck Safety Program (“PPP”).
On December 27, 2020, the Financial Assist to Exhausting-Hit Small Companies, Nonprofits, and Venues Act (the “Financial Assist Act”) was enacted and licensed further funds for brand spanking new First Draw PPP Loans and for Second Draw PPP Loans. On January 6, 2021, the SBA and the Division of Treasury launched an Interim Remaining Rule known as “Enterprise Mortgage Program Short-term Adjustments; Paycheck Safety Program as Amended by Financial Assist Act.” That rule restates present regulatory provisions right into a single regulation on borrower eligibility, lender eligibility, and mortgage purposes or origination necessities points for brand spanking new first time PPP debtors (the “First Draw PPP Loans”), in addition to basic guidelines regarding First Draw PPP Mortgage will increase and mortgage forgiveness. The SBA additionally launched an Interim Remaining Rule known as “Enterprise Mortgage Program Short-term Adjustments; Paycheck Safety Second Draw Loans” (“Second Draw Guidelines”). For extra details about the First Draw PPP Mortgage adjustments and Second Draw Guidelines, see our articles “Economic Aid Act: 10 Things to Know about Second Draw PPP Loans ” and “What to Know about the Paycheck Protection Program, Round Two.” On March 3, 2021, the SBA launched an Interim Remaining Rule on Mortgage Quantity Calculating and Eligibility (“March 2021 IFR”) which modified sure eligibility restrictions, akin to elimination of the one-year look again for non-financial fraud felonies and elimination of the exclusion because of defaulted and delinquent federal pupil loans. On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, sure eligibility adjustments have been made to the PPP, and an extra $7.25 billion was added for PPP Loans. On March 12, 2021, the Steadily Requested Questions (“FAQs”) have been up to date. On March 18, 2021, the SBA posted an Interim Remaining Rule on Paycheck Safety Program as Amended by American Rescue Plan Act (“Eligibility IFR”) and posted up to date borrower and lender software types for First Draw and Second Draw PPP Loans.
This text summarizes which companies are not eligible for First Draw PPP Loans and Second Draw PPP Loans.
Eligibility in Basic: A enterprise is eligible for a First Draw PPP mortgage if it was working on February 15, 2020, with 500 or fewer staff whose principal place of residence is in the US, or if it’s a enterprise that operates in a sure business and meets the relevant SBA employee-based dimension requirements for that business or relevant annual receipts-based dimension requirements. There are different classes, together with sure nonprofit organizations, veteran organizations, and tribal organizations, and self-employed employees and impartial contractors. Beneath the Financial Assist Act, 501(c)(6), vacation spot advertising organizations, eligible nonprofit information organizations, and housing cooperatives are additionally eligible, though some have a 300 worker limitation. Beneath the ARP, further entities have been made eligible. As well as, the Treasury Division and the SBA have issued interim ultimate guidelines and FAQs indicating that companies should additionally meet the SBA’s definition of a “small enterprise concern,” except that requirement is particularly waived within the CARES Act and different steering. For basic eligibility necessities for First Draw PPP Loans, see our article “What to Know about the Paycheck Protection Program, Round Two.”
The eligibility necessities for Second Draw PPP Loans are narrower than the eligibility necessities for First Draw PPP Loans. For the final eligibility necessities for Second Draw PPP loans, see our article “Economic Aid Act: 10 Things to Know about Second Draw PPP Loans.”
For PPP functions and as amended by the Financial Assist Act, the ARP Act and guidelines, some companies are ineligible for each First and Second Draw PPP Loans. There are PPP particular exclusions and basic SBA classes of ineligible companies relying on the homeowners’ or companies’ standing, actions, or business, and there are different eligible companies. There have additionally been challenges to the ineligibility guidelines for PPP loans.
PPP Particular Industries, Actions, and Different Components: The next actions and industries make a enterprise ineligible:
- criminal activity underneath federal, state, or native legislation;
- family employer (people who make use of family staff akin to nannies or housekeepers);
- an proprietor of 20% or extra of the fairness of the borrower is presently incarcerated or, for any felony, presently topic to an indictment, felony info, arraignment, or different means by which formal felony fees are introduced in any jurisdiction; or has been convicted of, pleaded responsible or nolo contendere to, or commenced any type of parole or probation (together with probation earlier than judgment) for a felony involving fraud, bribery, embezzlement, or a false assertion in a mortgage software or an software for federal monetary help inside the final 5 years;
- an proprietor, or any enterprise owned or managed by the proprietor or any of its homeowners, has ever obtained a direct or assured mortgage from SBA or some other Federal company made or assured by way of a program administered by the Division of Schooling that’s presently delinquent or has defaulted inside the final seven years and triggered a loss to the federal government;
- the President, the Vice President, the pinnacle of an Government Division, or a Member of Congress, or the partner of such individual as decided underneath relevant widespread legislation, straight or not directly holds a controlling curiosity within the enterprise;
- an issuer, the securities of that are listed on an change registered as a nationwide securities change underneath part 6 of the Securities Alternate Act of 1934 (15 U.S.C. 78f) (sure circumstances for information organizations);
- the enterprise has completely closed;
- the enterprise or the proprietor is a debtor in a chapter continuing, both on the time it submits the applying or at any time earlier than the mortgage is disbursed (see Type 2483). Word: if the borrower or proprietor turns into a debtor in a chapter continuing after submitting a PPP software however earlier than the mortgage is disbursed, it’s the applicant’s obligation to inform the lender and request cancellation of the applying; or
- a hedge fund or non-public fairness agency as a result of they’re primarily engaged in funding or hypothesis.
Basic SBA Ineligible Companies as Modified by the PPP Guidelines: Normally, the ineligibility restrictions in 13 CFR 120.110 apply to all PPP loans, however sure sections don’t apply or are suspended for PPP loans—akin to nonprofits, authorized playing, sure non secular organizations, sure lobbying actions, and the foundations regarding incarceration, probation, parole, or indictment for a felony or a criminal offense of ethical turpitude. For a basic record of ineligible companies, see 13 CFR 120.110 (“What companies are ineligible for SBA enterprise loans?”) and the SBA’s Commonplace Working Process (SOP) 50 10 6 Half 2, Part A. Chapter 3 (efficient October 1, 2020).
In abstract, ineligible companies embody:
- companies which have defaulted on federal loans, if there’s a “prior loss” to the federal authorities, or if the borrower is in delinquent standing for nontax debt to the federal authorities (excluding federal pupil loans);
- companies positioned abroad or owned by undocumented (unlawful) aliens;
- companies using a pyramid sale distribution plan;
- non-public golf equipment and companies that restrict the variety of memberships for causes apart from capability, with some exceptions;
- firms which have discriminatory hiring practices (akin to a restaurant that employs solely servers of 1 gender);
- government-owned entities, excluding Native American tribes; and
- passive companies:
- owned by builders and landlords that don’t actively use or occupy the property acquired or improved with the mortgage proceeds;
- primarily engaged in subdividing actual property into tons and creating it for resale or its personal account;
- primarily engaged in proudly owning or buying actual property or leasing it for any goal—akin to buying facilities, and comparable enterprise fashions that generate earnings by renting house to accommodate impartial companies that present companies to the general public;
- that lease land for the set up of mobile phone towers, photo voltaic panels, billboards, or wind generators, besides that companies working the mobile phone tower, photo voltaic panel, billboard, or wind turbine are eligible;
- companies which have entered right into a administration settlement with a 3rd celebration that provides the administration firm sole discretion to handle the operations of the enterprise, together with management over the workers, the funds, and the financial institution accounts of the enterprise, with no involvement by the proprietor;
- condominium constructing and cellular residence parks; and
- residential services that aren’t licensed as nursing houses or assisted residing services and don’t present healthcare and/or medical companies;
- companies engaged in lending, like banks, life insurance coverage firms, finance firms, factoring firms, funding firms, bail bond firms, and different companies whose stock-in-trade is cash; nonetheless, there are restricted exceptions;
- companies engaged in any criminal activity, akin to marijuana or cannabis-related companies (each direct and oblique marijuana companies); nonetheless, the SBA clarified that some cannabidiol (“CBD”) firms could also be eligible relying on, partially, the place its CBD is derived from and whether or not the merchandise being bought adjust to the foundations issued by the Meals and Drug Administration;
- companies principally engaged in selling faith;
- companies deriving greater than a specific amount of gross annual income from merchandise or reside performances of a prurient sexual nature;
- companies with an affiliate of poor character;
- companies primarily engaged in political or lobbying actions; and
- speculative companies akin to these dealing in shares or bonds, mining gold or silver in apart from established fields, wildcatting in oil, partaking in analysis and growth, and constructing houses for future sale.
Different Eligible Companies: Traditionally, nonprofits and sure companies engaged in authorized playing actions weren’t eligible, however this system and steering enable a majority of these companies to take part.
Moreover, there are restricted circumstances underneath which sure companies engaged in renting or leasing could also be eligible. For instance, eligible companies embody:
- companies licensed as nursing houses or assisted residing services and offering healthcare or medical companies;
- companies that lease gear, family items, or different objects;
- companies akin to barber retailers, hair salons, nail salons, and comparable sorts of private companies companies; and
- motels, leisure automobile parks, marinas, or comparable sorts of companies if greater than 50% of the enterprise’s income for the prior 12 months is derived from transients who keep for 30 days or much less at a time. If the applicant is a start-up, the applicant’s projections should present that greater than 50% of the enterprise’s income might be derived from transients who keep for 30 days or much less at a time.
There are additionally restricted circumstances underneath which sure non-speculative companies could also be eligible. For instance, eligible companies embody:
- A enterprise, akin to a grain elevator, that makes use of a commodity contract to lock in a value;
- A farmer who makes use of a commodity contract to lock within the sale value of his or her harvest;
- A enterprise engaged in drilling for oil in established fields; and
- A enterprise engaged in constructing a house underneath contract with an recognized purchaser.
Moreover, restricted circumstances underneath which sure companies engaged in lending could also be eligible are as follows:
- A pawn store that gives financing is eligible if greater than 50% of its income for the earlier 12 months was from the sale of merchandise reasonably than from curiosity on loans;
- A enterprise that gives financing within the common course of its enterprise (akin to a enterprise that funds credit score gross sales) is eligible, offered lower than 50% of its income is from financing its gross sales;
- A mortgage servicing firm that disburses loans and sells them inside 14 calendar days of mortgage closing is eligible. Mortgage firms primarily engaged within the enterprise of servicing loans are eligible. Mortgage firms that make loans and maintain them of their portfolio aren’t eligible;
- A examine cashing enterprise is eligible if it receives greater than 50% of its income from the service of cashing checks; and
- A enterprise engaged in offering the companies of a monetary advisor on a charge foundation is eligible offered they don’t use mortgage proceeds to spend money on their very own portfolio of investments.
Challenges to Ineligibility Guidelines: There have been challenges to the SBA’s authority to disclaim loans to sure companies primarily based on the historic SBA guidelines. These challenges have been within the areas of chapter and candidates engaged in “prurient” companies. The primary challenges have been that the CARES Act broadened eligibility for PPP loans and its goal is completely different from conventional SBA lending applications.
The instances have been combined. Companies in Wisconsin and Michigan within the authorized grownup leisure business efficiently obtained preliminary injunctions in federal courtroom requiring that their PPP loans be permitted and funded by SBA lenders (offered that the candidates met the opposite relevant necessities for PPP loans). The reasoning was that the CARES Act broadened eligibility for PPP loans, and one courtroom discovered that administrative guidelines and steering promulgated by the SBA, just like the SOP and ineligibility guidelines, aren’t relevant or controlling with respect to the clear intent of Congress to broaden eligibility necessities for PPP loans. Nevertheless, a federal courtroom in New York subsequently denied a preliminary injunction and got here to the other outcome. The realm stays unsettled.
The SBA’s place has been that companies in chapter have been disqualified from receiving PPP loans. In Alaska, a federal courtroom granted a abstract judgment for a debtor that challenged its ineligibility for a PPP mortgage as a result of it was in “chapter.” Nevertheless, there’s a cut up amongst courts which have thought of the query. The Financial Assist Act has addressed a few of this subject for debtors which might be continuing underneath Subchapter V of Chapter 11, in addition to Chapter 12 and Chapter 13 debtors, by offering that the chapter courtroom, after discover and a listening to, might authorize such a debtor in possession or a trustee to acquire a First Draw PPP Mortgage or Second Draw PPP Mortgage. As well as, the SBA has addressed some points of their steering. Nevertheless, this stuff don’t resolve pending litigation over the SBA’s prohibition in opposition to extending PPP loans to Chapter 11 debtors that aren’t continuing underneath Subchapter V.
In abstract, PPP debtors should rigorously evaluation enterprise ineligibility. The Treasury and the SBA have launched in depth steering on the eligibility of companies. This useful resource is just not a complete abstract of the related company steering. This text summarizes facets of the legislation related to the PPP program, it doesn’t represent authorized recommendation. For authorized recommendation in your scenario, it is best to contact an lawyer.
 For PPP loans permitted earlier than December 27, 2020, see SOP 50 10 5(Okay), Subpart B, Chapter 2 for ineligible sorts of companies.