On Thursday, April 23, 2020, the U.S. Small Business Administration (SBA), in consultation with the U.S. Department of the Treasury, added new guidance to their Paycheck Protection Program (PPP) FAQ document, located here, which addresses certain questions regarding PPP loans under the CARES Act. This guidance was issued as Congress passed legislation that adds an additional $310 billion to the PPP. Most critically, SBA addressed the requirement that PPP borrowers certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Then, on Friday, April 24, 2020, SBA issued an interim final rule (IFR) adding to this guidance, found here.

Media outlets are reporting that certain public companies received large PPP loans. SBA’s guidance and the IFR appear to come in response to that public criticism. While the current targets of media outrage are public companies with substantial market value and access to capital markets, all borrowers should review this guidance and the IFR.

Thursday’s guidance reads in relevant part:

[B]efore 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. 

The SBA goes on to provide that borrowers who applied for a PPP loan prior to the issuance of this guidance may repay the loan by May 7, 2020, and, by doing so, will be deemed by SBA to have made the required certification in good faith.

Friday’s IFR, as relevant to the necessity certification, reads:

b. Do the SBA affiliation rules prohibit a portfolio company of a private equity fund from being eligible for a PPP loan?

Borrowers must apply the affiliation rules that appear in 13 CFR 121.301(f), as set forth in the Second PPP Interim Final Rule (85 FR 20817). The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. However, in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483) stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Based on our reading of the guidance and the IFR, key takeaways for all borrowers include:

• Loan Certification. The certification requirement is important. The SBA emphasizes that borrowers should consider “current business activity” and “their ability to access other sources of liquidity.” The guidance does not define either phrase, but the phrase “current business activity” suggests SBA could be focused on whether businesses were “current[ly]” affected as of the date of loan application. Some businesses have not been impacted by the ongoing pandemic. The latter phrase―“their ability to access other sources of liquidity”―suggests SBA could be focused on whether businesses already have sufficient funds to support ongoing operations, or if they can solicit such funds from owners. It is also unclear when SBA will recognize that using an otherwise available source of liquidity would be “significantly detrimental” to the business. We recommend that PPP loan borrowers document the need for PPP loans (for example, by documenting the limits of available liquidity and by documenting impacts of COVID-19 or shutdown orders on business activities) and carefully trace loan proceeds.
   
• Public Scrutiny. PPP loan borrowers should anticipate public scrutiny. Public disclosure by public companies resulted in these businesses being early targets, but all borrowers should anticipate scrutiny and be prepared to address questions regarding the necessity of any PPP loan request.
   
• Safe Harbor. SBA recognizes that its guidance on this subject came out after many borrowers made the certification and submitted their PPP applications. Therefore, if a borrower reads this guidance and decides that it should not have made the certification, SBA is allowing it to return the loan money by May 7, 2020, without risking a determination by SBA that the certification was made in bad faith. The implication is that penalties may follow for borrowers that fail to satisfy this new guidance.
   
• Clarification Regarding Eligible Businesses. The IFR reinforces prior statements by SBA that the affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. The IFR also warns that “all borrowers should carefully review the required certification” prior to apply.  
   
• Further Guidance Necessary. More guidance is needed from the SBA. As stated above, it is unclear what the SBA means by “current business activity” or “access [to] other sources of liquidity.” It is also unclear how other sources of liquidity (e.g., raising outside capital, incurring debt at extraordinary or rising interest rates, etc.) could achieve the retention goals that the PPP loans were designed to address.

Please contact your Miles & Stockbridge lawyer for further advice regarding your individual circumstances.

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