Following extensive publicity regarding large or publicly-traded businesses that have received loans under the Paycheck Protection Program (PPP), the Treasury Department has updated its PPP guidance to further clarify that most public companies and potentially other non-public companies with adequate sources of liquidity are likely not eligible for the program. Companies that have received PPP funds have until May 7, 2020, to return the funds to the SBA if they deem themselves ineligible under the new guidelines provided.
As outlined in SBA’s FAQ #31 below, PPP borrowers are required to certify in good faith that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower. In an update to its FAQ, the Treasury states that it is “unlikely that a public company with substantial market value and access to the capital markets” can make this certification in good faith. In addition to public companies, the new guidance could apply to any company with adequate sources of liquidity for the company’s ongoing operations.
Furthermore, the SBA indicated that each PPP borrower should carefully assess its economic need for a PPP loan, taking into account not only current business activity levels but also access to capital that could support ongoing operations without significant detriment, and consider returning any PPP funds borrowed to the extent it can no longer make the certification that the loan is economically necessary to support operations.
On April 23, 2020, the SBA added a new question and answer to its Frequently Asked Question relating to the PPP. Recipients and applicants of PPP funds should carefully review the newly added Question 31 as detailed below.
31. 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.
The answer applies to all borrowers and even though the example applies to public companies, borrowers and applicants are required to take 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.
Importantly, for borrowers that have received a loan prior to the updated guidance, the certification will be deemed to have been made in good faith if the loan is paid in full by May 7, 2020.
We encourage you to confer with legal counsel as to the applicability of the new guidance on your PPP loan or application prior to the May 7, 2020 safe-harbor date.