On Thursday, April 23, the Small Business Administration (SBA) and United States Department of Treasury released a new question 31 and related answer as a supplement to the Paycheck Protection Program (PPP) Loan Frequently Asked Questions (FAQs), which they previously published and have periodically updated since the program began. The recent addition, which is quoted below, appears to us to demonstrate the effects that public pressure is having on the SBA following the inability of a number of small businesses to participate in the first round of PPP funding:
“31. 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.”
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While the SBA seems to take the position that nothing has changed, the timing and tone of this new FAQ, released on its own, imply that there may be political pressure to aggressively police PPP loans made to better-funded businesses or upon allegedly fraudulent pretenses.
At best, it gives banks and their borrowers more reasons to be concerned about whether or not loan forgiveness may be denied based upon the fact that certain borrowers, particularly public company borrowers, cannot show that “their PPP loan request is necessary.” At worst, it may well be a veiled threat to use certifications made by borrowers in the Form 2483 Application Form as a basis for either civil or criminal liability.
While this updated PPP FAQ states that the lenders “may rely on borrower’s certification regarding the necessity of the loan request,” that may be of little consolation if the loan they make is ineligible for forgiveness because of such statements that are found to be “false,” in which case they may be forced to collect an unsecured loan accruing 1% interest over two years. Therefore, both lenders and borrowers would be wise to consider this addition to the PPP FAQs as well as the apparent shift in political and regulatory sentiment as they prepare for the new round of PPP funding.