On March 27, 2020 President Trump signed into law the CARES Act which included the Paycheck Protection Program (PPP) loan provisions designed to help small businesses pay their employees during the COVID-19 pandemic. Since passage of the bill, the Treasury Department and the Small Business Administration have published numerous guidelines and posted numerous Frequently Asked Questions (FAQ’s). Many of the guidelines and FAQ’s contained provisions that were not directly addressed in the bill itself and have caused some confusion and concern.
One such area of concern was included in the SBA’s Frequently Asked Questions Document update on April 23rd. In that update the SBA added FAQ 31 which reads –
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.
Although the FAQ was directed towards ‘large companies with adequate sources of liquidity…’ the reference to ‘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…’ has raised some concern as to eligibility for the loan. Unfortunately, the SBA did not provide specific guidance on what they would consider when determining if a business had access to other sources of liquidity. Additionally, on April 28th the SBA released FAQ 37 that made it clear the provisions of FAQ 31 are applicable to all businesses, regardless of size.
Additionally, loan recipients will not remain anonymous as EINs will be made public. We anticipate heightened government scrutiny will be forthcoming to investigate potential fraud and abuse. Businesses who have received PPP loans and are later found to have not qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences. Further, businesses may experience reputational damage for having pursued these loans.
Given the revised guidance issued by the SBA and the pending May 7, 2020 deadline for returning loan proceeds, we strongly encourage you, your organization’s management, and board of directors to carefully and immediately review your company’s financial situation and reconsider the relief you may have already received with a PPP loan. Specifically, consider whether your circumstances fall within the spirit and intent of this economic relief program and if your business had other sources of liquidity to support ongoing operations. We encourage you to consult with legal counsel if you have questions regarding your organization’s eligibility to receive funds.
If you do receive and keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. This documentation will be crucial were your business to be audited and/or investigated. This defensive documentation will greatly minimize your potential exposure to fraud and abuse allegations related to your participation in this loan program.
Although the Treasury Department was given 30 days from the signing of the bill to issue guidance on the calculation of loan forgiveness, they have yet to provide such guidance. We will continue to monitor the situation and share the guidance as it becomes available.
On April 28, Treasury Secretary Mnuchin announced the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”
Please call your CPA if you have questions about the content of this update.