Amidst negative publicity from the media regarding publicly traded and other large companies receiving Paycheck Protection Program loans (PPP) and lawmakers demanding action by the Treasury Department to rectify the situation, the Small Business Administration (SBA) issued additional guidance regarding PPP eligibility. On Thursday, the SBA issued Frequently Asked Question Number 31 to address these concerns. The exact wording to this new FAQ is listed 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 issuance of this new guidance has added confusion to an already complicated process. Since there is no “bright-line test” for determining if a “business has adequate sources of liquidity”, it’s unclear how to interpret this new guidance. The law presumes that an impacted borrower has been adversely impacted by COVID-19. Additionally, the law requires an applicant to make a good faith certification “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient”. This overly broad and vague statement does not provide much clarity for determining when a loan is “necessary” for purposes of making this certification.
One thing that seems clear is that this is a warning to publicly traded companies who fall within the statutory criteria for obtaining a PPP loan to not apply. Unfortunately, other business owners are left to wonder what this new guidance means and if it may apply to their business and PPP loan. If a business is unsure if they can make the required certification in good faith after considering this new guidance, they may want to discuss their potential exposure with legal counsel.