SBA Paycheck Protection Program Frequently Asked Questions regarding Certification of the Need for PPP Loan Funds

Many small businesses have applied for and received funds from the Paycheck Protection Program.  Amidst the public outcry against large companies receiving funds the SBA has released additional Frequently Asked Questions (FAQs) relating to the eligibility of the companies applying for the loans.

FAQ No. 31 was issued by the Treasury Department on April 23rd, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” In the response, the Treasury stated that borrowers are required to certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In addition, the FAQ notes that “Borrowers must make this certification in good faith, considering 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 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 …”

On April 28, FAQ No. 37 was released, “Do businesses owned by private equity with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The treasury responded with “See response to FAQ #31.” This FAQ response is in contradiction to previous SBA guidance that affirmed businesses did not need to first look for other funds before applying to the PPP loan program.  The SBA waived the requirement that businesses try to obtain some or all of the loan funds from other sources.  Also, on April 28th, Interim Final Rule No. 4 was released reiterating the required certification and providing a safe harbor to avoid prosecution and potential criminal liability under the False Claims Act. The safe harbor provides that “Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 (this safe harbor was subsequently delayed to May 14, 2020) will be deemed by SBA to have made the required certification in good faith.” The following day, April 29th, FAQ No. 39 was issued and states that SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate …”.

Many borrowers have expressed concern over the release of these FAQs and latest guidance. The Act and the SBA have yet to define the vague terms used such as “necessary” or “ongoing operations.”  The latest FAQ noted that further guidance is forthcoming.

At this time, we recommend that borrowers review their documentation of the business uncertainties and needs that were contemplated at the time of the application.  Creating a projection and a narrative that supports your rationale of the need for the funds is prudent documentation.  In addition, if the business has a board of directors or finance committee, a formal review and acceptance of the needs assessment should be sought, along with discussion of your position with legal counsel.   This exercise should be done as we await further guidance from the Treasury and SBA on these latest FAQs and Interim Rules.

This document is effective as of 5/6/2020.