May 11, 2020
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law that included the Paycheck Protection Program, its expanded SBA 7(a) loan program to offer payroll protection loans (“PPP loans”). The SBA and Department of Treasury issued their Interim Final Rule on April 1, 2020, which can be found here. Additionally, the SBA and Department of Treasury have continuously posted their interpretation of the Interim Final Rule via a working Frequently Asked Questions document (“FAQ”) located here. The FAQ is guidance that both Borrowers and Lenders are permitted to rely on as an official interpretation of the Rules, and actions in conformance with the FAQ will not be challenged. That being said, many have had ongoing questions about the lack of specificity and direct guidance in the FAQ document.
Given how quickly the initial $349 billion was exhausted and the amount of small businesses unable to obtain access to PPP loans, there has been intense scrutiny on both borrowers and lenders. There have been lawsuits filed against some of the biggest lenders in the country for “playing favorites” with its biggest clients at the expense of small businesses. Additionally, there has been public scrutiny on big businesses (even if eligible) receiving funds through the program.
As a result, the SBA and Department of Treasury have issued some additional guidance on certifications and enforcement that have led some businesses to take a second look at whether they are actually eligible.
The CARES Act specifically states that “the requirement that a small business concern is unable to obtain credit elsewhere…shall not apply to a [PPP] loan.” Nonetheless, the Borrower (and individual certifying the application on behalf of the Borrower) that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” That certification is required to have been made in good-faith.
SBA has issued additional guidance in the FAQ that provides “current business activity and ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” More specifically, the SBA states that “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.”
Given that this guidance may contradict the initial rules, the SBA provided “limited safe harbor” regarding the economic necessity certification, as teased in the FAQ guidance, for those businesses having applied for a PPP loan before the regulation’s issuance that repay the loan in full by May 7, 2020.” That “limited safe harbor” has since been extended to May 14, 2020, and the SBA has stated that additional guidance is forthcoming.
Additionally, the SBA has issued guidance dictating that all loans over $2 million will be subject to an automatic audit relating to the eligibility. Penalties for businesses deemed ineligible may range from mandatory repayment of all PPP funds to civil or criminal penalties.
The Hill has reported that more than forty (40) publicly traded companies have already decided to return the money, including Shake Shack, Ruth’s Chris Steak House, Potbelly Sandwich Shop and Ashford Hospitality Group. Additionally, at least one lawsuit has been filed challenging the additional guidance arguing that it contradicts the intent of Congress in the CARES Act which clearly stated that the “credit elsewhere” test does not apply to PPP loans.
For businesses that have already received PPP funds, it is essential that they reexamine the certifications they have made given the additional guidance, and keep up to date with additional guidance that is expected in the next week. It is prudent that all companies fully analyze the sources of liquidity available and whether it would be significantly detrimental to the business to access such capital, especially public companies and private equity backed companies.
Finally, while the good-faith certification ( “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”) is unquestionably vague, it would be prudent for Borrowers to begin assembling documentation supporting the financial need for the loan. The CARES Act does not specifically provide what documentation would support such a request in the PPP loan program, but did provide some guidance in the Employee Retention Tax Credit section. Borrowers can look to those provisions to show “economic need,” including the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or a significant decline in gross receipts of 50% of more from the same calendar quarter in the prior year.
The Gordon & Rees team will continue providing updates on this issue as they arise. Please contact a member of the Gordon & Rees team with questions or to analyze your specific situation.
Visit our COVID-19 Task Force for ongoing updates.
This article was authored by Jonathan Boulahanis