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Additional guidance from the SBA on “available liquidity” element of certifications for PPP Loans – Safe Harbor extended to May 18, 2020.

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Since the passage of the CARES Act and the SBA completing the first round of PP Loans, companies have been dealing with an ever changing set of guidelines interpreting the eligibility requirements for a PPP Loan and the eventual forgiveness of the Loan.  Unfortunately, no clear guidance is yet available.

On April 23, 2020, the Treasury Department issued its Question 31 to its Frequently Asked Questions guidance on the CARES Act, which states:

    1. 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. [Emphasis added]

The Treasury Department further emphasized the “adequate sources of liquidity” issue on April 28 and 29 when it published Questions 37 and 39, as follows:

    1. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

    1. Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.

This guidance abruptly focused the attention on the certification given by each borrower that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” and that the certification must be made “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” [Emphasis added].

The fear has been that the borrower’s decision to seek a PPP Loan, the rationale for making the certification and whether the certification was made in good faith will be judged in retrospect.    Are businesses and their owners required to evaluate their own wealth, liquidity positions, and borrowing capacity before making the certification when seeking a PPP Loan?  The CARES Act suspends the normal requirement that a borrower be unable to obtain credit elsewhere.  Thus, it appears that availability of funds on a line of credit loan or the ability to obtain a loan from a lender, are not the equivalent of having access to other sources of liquidity.  Further confusing is the caveat that available liquidity not be “significantly detrimental to the business.” Does that mean “significantly detrimental” to the current business owners in terms of dilution or the like, or does this important phrase instead mean just what it says — such alternative available liquidity is not “significantly detrimental to the business” the company?  

On May 13, 2020 the Treasury Department provided some additional guidance that will be a relief to all of the businesses that received a PPP Loan of less than $2 million and provides some comfort to borrowers with larger PPP Loans.  The new guidance states, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith” [Emphasis added].  The guidance also recognized that borrowers with loans greater than $2 million can still have an adequate basis for making the required good-faith certification, based on their individual circumstances, but will remain subject to review by SBA for compliance with program requirements.  If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. But the guidance does provide that if the borrower repays the loan after receiving notification from SBA, the SBA will not pursue administrative enforcement or referrals to other agencies.

Thus, we do expect that public companies, large private companies, portfolio companies of private equity funds and any other company that may be presumed to have “adequate sources of liquidity to support operations”  and received a PPP Loan in an amount exceeding $2 million, will receive increased government scrutiny relating to the certification.  But should the SBA determine that the borrower is not eligible for loan forgiveness, the borrower can repay the PPP Loan and have the protection of SBA assurance of no further action.

To satisfy the requirement imposed by this guidance, companies that have received a PPP Loan or are considering applying for a PPP Loan in excess of $2 million must determine whether the company has access to liquidity to support operations and, if it does, whether such access would have been significantly detrimental to the business.   If the answer to either of these inquiries is negative, then the company should compile all documents, correspondence, minutes, e-mail messages, research and notes that it relied upon in coming to such conclusion and that otherwise support the “good faith” obligation in making the necessary certification. The evidence amassed by the company should include information about advice sought from outside sources, including attorneys and CPAs.  This evidence will be critical in the event the PPP Loan obtained by the company is audited by the government.

Those borrowers that determine, in light of the SBA’s recent guidance, that they had adequate sources of liquidity at the time of application and that accessing such sources would not have been significantly detrimental to the business can return the loan proceeds in full by May 18, 2020[1] and the company will “be deemed by SBA to have made the required certification in good faith.” The same holds for any company that determines that due to the affiliation rules it was not eligible to receive a PPP Loan.  This safe harbor was established to ensure prompt repayment of PPP Loan proceeds that were obtained “based on a misunderstanding or misapplication of the required certification standard.” Furthermore, it binds the SBA.


[1] Initially the SBA set May 7, 2020 as the deadline, but the deadline was extended to May 14 and now to May 18.

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