PPP Loans: The Good Faith Certification
To date, the Small Business Administration (SBA) and Treasury have issued a number of Interim Final Rules governing the Paycheck Protection Program (PPP). The SBA and Treasury have also published: a summary of the applicable affiliation rules; PPP fact sheets for borrowers and lenders; and responses to certain Frequently Asked Questions (FAQs), which have been updated several times.
On April 23, 2020 the SBA issued new guidance that makes it “unlikely” that big publicly traded companies can access the next round of PPP funding as they would not be able to meet the “good faith certification” requirement. The SBA indicated that large public companies who received a PPP loan before the rule change can avoid scrutiny by returning the relief loans by May 7, 2020 – this would serve as a safe harbor period for companies to return the PPP loan. If a borrower determines that it needs some, but not all, of the loan proceeds applied for and received (for example, if the business was not completely shut down and part of the workforce was retained), the guidelines from the SBA and the U.S. Treasury are as of now unclear as to whether the borrower should partially return the PPP Loan.
On April 28, 2020, after new revelations about big businesses getting money in the first wave, including the Los Angeles Lakers and Shake Shack, Treasury Secretary Steve Mnuchin stated that the SBA would undertake a “full review” of any loan that exceeds $2 million under the PPP, including with respect to the borrower’s analysis and certification of eligibility to participate in the PPP. It has been indicated that the SBA will conduct spot checks for smaller loans of under $2 million, although it is unclear as to what that will look like.
Recent developments have shown that the SBA wants borrowers to seriously consider their certification that the loan was “necessary” to support ongoing operations.
The SBA stated in FAQ 31 (published on April 23, 2020) and FAQ 37 (published April 28, 2020) that while the CARES Act waives the “credit elsewhere” requirement, borrowers, whether private or publicly-traded, must nonetheless carefully review and make in good faith the “necessity” certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.
FAQ 31 introduced the first SBA guidance regarding “good faith certification,” which comprises three elements:
- An organization’s “current business activity”;
- An organization’s “ability to access other sources of liquidity sufficient to support… ongoing operations” (alternate sources of liquidity); and
- Access to alternate sources of liquidity “in a manner that is not significantly detrimental to the business” (significant detriment element).
However, the SBA has not provided direction on what constitutes “liquidity” or when the use of such liquidity would be “significantly detrimental.”
On May 5, 2020, the SBA published FAQ 43 acknowledging the uncertainties of the “good faith certification” and extended the repayment date for the safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. The SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.