Paycheck Protection Program (PPP) FAQ Updated to Address Certification Liability – Applicants and Borrowers Should BewareApril 23, 2020
As readers of our prior alerts (which can be found here) know, the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA), while offering much needed financial assistance to small businesses, has also been a source of much confusion for businesses interested in the program. While the interim final rules and official guidance have answered some questions, many were left unanswered due to ambiguities or inconsistencies in the CARES Act, the interim final rules, and the SBA’s Paycheck Protection Program Frequently Asked Questions (FAQs) (the “FAQ”), which was most recently updated the morning of April 23, 2020.
With legislation increasing funding for the PPP (which ran out of funds last week) expected to be approved by Congress and signed into law by President Trump this week, businesses that did not previously obtain a PPP loan are preparing to apply when lenders start accepting applications again. Businesses that previously received a PPP loan need to ensure they comply with the PPP requirements, including complying with other relevant requirements during the application process. This alert discusses a new question and answer introduced in the most recent update to the FAQ, and explores the implications thereof for potential applicants for PPP loans, and businesses that previously borrowed under the PPP that may already be considering (or may want to consider) whether doing so was proper.
The updated FAQ from the SBA now includes the following new question and answer (emphasis added):
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.
Scrutiny of PPP
The update to the FAQ comes after the PPP came under scrutiny in the media and by Congress for PPP loans made to businesses that many would not have expected to qualify based on their size and assumed financial resources. Senator Marco Rubio (R-FL), Chairman of the Senate Committee on Small Business and Entrepreneurship, among others, announced this Committee would conduct aggressive oversight of the PPP, including whether companies made false certifications to the federal government to receive PPP loans. Sen. Rubio put out a statement on April 20, 2020 that read, in part:
“Any business, regardless of size, must certify it has been harmed by the coronavirus crisis and that PPP is necessary to maintain operations,” Chairman Rubio continued. “This fall, the Senate Committee on Small Business and Entrepreneurship will conduct aggressive oversight into the use of the PPP. If companies are not forthcoming, the Committee will use its subpoena power to compel cooperation.”
On Twitter, Sen. Rubio has been vocal about the need for businesses to make truthful certifications in connection with obtaining a loan under the PPP, noting potential disconnects between legislative intent and the regulations and guidance issued to date, and describing how Congress intends to investigate and ultimately address these matters.