SBA Issues Guidance Regarding Certification of PPP Loan Necessity - May 6, 2020
UPDATE: Following FAQ 43 issued by the U.S. Treasury and SBA on May 5, 2020, this article has been updated to reflect May 14, 2020 as the safe harbor repayment date. The deadline was extended from May 7, 2020.
Following the news that public companies and well-funded private companies are obtaining Paycheck Protection Program (PPP) loans, on April 23, 2020, the Small Business Administration (SBA) issued guidance in the form of an additional FAQ. The guidance, outlined in FAQ 31, reminds borrowers that they "should review carefully the required certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."
More specifically, FAQ 31 provides:
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, 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, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower's certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith."
(As noted above, on May 5, 2020, the U.S. Treasury and SBA extended the safe harbor repayment date to May 14, 2020.)
Safe Harbor: As this guidance is retroactive to certifications that pre-dated the guidance, the SBA has provided a limited safe harbor. Any borrower that applied for a PPP loan prior to April 23 will be deemed to have made the necessity certification in good faith if the loan is repaid in full by May 14. Those borrowers questioning whether their certification that "current economic uncertainty makes this loan request necessary to support the ongoing operations" was appropriate may repay the loan in full prior to May 14 and will be deemed to have made the certification of necessity in good faith.
A number of borrowers have observed that the amount of their PPP loans, determined based on the application formula of 2.5 times average monthly payroll costs, may be more than they require as a business necessity and have questioned whether they can partially repay their PPP loans on or before May 14. So far, the only safe harbor guidance is with respect to a payment in full of a PPP loan by such date.
Hedge Funds and Private Equity Firms Ineligible: In its Interim Final Rule dated April 24, 2020, the U.S. Treasury stated that hedge funds and private equity firms are ineligible for a PPP loan because they are "primarily engaged in investment or speculation."
Ramifications for Certifications Not Made in Good Faith: Borrowers may be subject to audits and enforcement scrutiny. Borrowers that fail to make their certifications in good faith may be subject to civil and criminal penalties, including liability under the False Claims Act. Violations of the False Claims Act could lead to treble damages and per-claim penalties in excess of $21,000. Borrowers should note that the False Claims Act does not require specific intent to defraud the government. Recklessly disregarding the rules can give rise to liability.
Audits for Loans Over $2 Million: Both the SBA and U.S. Treasury have signaled a very strong enforcement bias, publicly stating that any borrower that has received over $2 million in PPP loan proceeds will be subject to an audit, with spot checks for smaller loans.
What Should Borrowers Do? While the new FAQ offers some limited guidance, it provides no objective test or metrics and many questions remain outstanding. For example, it is unclear how the SBA will interpret "access to other sources of liquidity" and "not significantly detrimental to the business." Unfortunately, there is no bright-line test, and every borrower's situation and analysis will be different.
Accordingly, borrowers that have not already submitted an application should carefully evaluate whether they can make the necessity certification in good faith. Borrowers that submitted their applications prior to April 23 should revisit the necessity certification in light of the latest SBA guidance, and if the borrower is uncertain about its ability to make the necessity certification, it should give serious consideration to repaying the loan before the May 14 safe harbor deadline. If a borrower makes the necessity certification, it should take affirmative steps now to document its need, and prepare and maintain detailed records and analyses supporting its determination of necessity, including a detailed analysis of its working capital and liquidity at the time the application is submitted, as well as the availability of capital from other sources. Borrowers must be prepared to demonstrate to the SBA their bases for the certification.