Paycheck Protection Program: New FAQ Addresses Retroactive “Economic Uncertainty” Certification Requirement and May 7, 2020 Safe Harbor

On April 24, 2020, the Paycheck Protection Program (PPP) and Health Care Enhancement Act were signed into law. The Act includes an additional $310 billion for the PPP, which ran out of funds in mid-April. The additional funds will allow small business an opportunity to obtain potentially forgivable loans.
On April 23, 2020, the Small Business Administration (SBA) and the U.S. Department of Treasury issued further guidance on its PPP, which included adding Question 31 to its Frequently Asked Questions (FAQ), as detailed below.

  1. Question: Do business 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 the SBA to have made the required certification in good faith.

Pursuant to the new guideline, a borrower must certify that the “economic uncertainty” renders the PPP loan “necessary to support the ongoing operations” of the borrower. In determining if the PPP loan is necessary, a borrower should consider “their ability to access other sources of liquidity,” which is retroactive. In other words, both potential borrowers and borrowers who have already secured funds, must consider alternative sources of funds, especially if the borrower (or potential borrower) is a public company.

The SBA has provided a safe harbor repayment period until May 7, 2020. This means that any borrower that applied for the PPP before April 23, 2020, and the new retroactive guidelines have changed the validity of their application, may repay their loan (in full) by May 7, 2020 to avoid legal consequences for false certifications or statements.

Borrowers and potential borrowers should consider (or reconsider) their applications carefully taking into account the new “economic uncertainty” certification requirement.
Please contact your Ward and Berry lawyer if you need assistance complying with the requirements of the Paycheck Protection Program.