Alert 04.24.20
Alert
Alert
By John E. Jensen, David B. Dixon, Matthew Oresman, Dinesh C. Dharmadasa,
05.06.20
On April 24, 2020, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act, whose provisions we summarized here. PPP applicants are required to make a number of certifications in connection with their applications, for example concerning their eligibility and the purposes for which they will use the loans. Attention to these certifications is extremely important, given the severe penalties that are possible for submitting false or misleading certifications to the government. One such certification that has drawn particular scrutiny is the certification that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Many applicants have noted that this certification is vague and have sought guidance on it.
On April 23, 2020, the SBA and Treasury added the following new FAQ concerning this certification, reproduced below in full:
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.
Although FAQ No. 31 referred only to public companies, on April 28, 2020, the SBA effectively confirmed, via FAQ No. 37, that private companies also are required to consider alternative sources of liquidity. We summarized the key takeaways from this new guidance here.
On May 5, 2020, the agencies issued FAQ No. 43, which states that SBA has extended the safe harbor date to May 14, 2020. Importantly, this FAQ also states:
This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Thus, in addition to extending the safe harbor date, the SBA has put borrowers on notice to closely monitor further changes to the available guidance over the next week. Such changes could materially impact a borrower’s decision to retain its PPP loan.
The SBA forecasted the importance of the safe harbor provision in a separate FAQ issued April 29, 2020, wherein the agency announced that it plans to audit all loans of more than $2 million at the time of loan forgiveness. Specifically, FAQ No. 39 provided:
39. Question: Will SBA review individual PPP loan files?
Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.
Pillsbury attorneys can help clients interpret and assess the PPP requirements as clients assess and strategize regarding the availability of SBA loans. We are proactively monitoring any forthcoming regulations and guidance.
Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.