Client Alert: Rethinking “Necessity” - SBA Provides Additional Guidance and Amnesty in Latest FAQs
If the recent media attention for high profile borrowers such as Shake Shack and others has you rethinking your certifications under the PPP loan, you may be in luck. In an updated set of FAQs released on April 23, 2020, the SBA clarified its guidance regarding the “necessity” certification required for all PPP loans. Specifically, the SBA stated that certain businesses which have access to other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business may be ineligible for loans under the PPP program. The entirety of the FAQ as it appears as of the time this article was written is copied below:
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.
While the actual language of the guidance is not significantly different than previous guidance, it does put well-capitalized private company borrowers and large, public company borrowers on notice that they will have a significant challenge in meeting the necessity standard.
Perhaps more importantly, the last sentence provides a form of amnesty for these early borrowers by eliminating liability for the necessity certification provided the borrowed funds are repaid in full by May 7, 2020. If such repayment is made, those borrowers will be “deemed by the SBA to have made the [necessary] certification in good faith” regardless of any facts or circumstances to the contrary, effectively shielding them from liability.
All information regarding the PPP is subject to change as the information regarding the program coming from the SBA and Treasury Department is updated. If you have questions or would like additional information, please feel free to contact Dan Fuchs at firstname.lastname@example.org or Jeremy Freifeld at email@example.com and they would be happy to assist you.