U.S. Treasury Provides Guidance on Paycheck Protection Program, Demands Repayment From Applicants With ‘Adequate Sources of Liquidity’

Since the launch of the Paycheck Protection Program (PPP), evolving guidance has been frequently released on the website of the U.S. Treasury Department (Treasury) related to this loan program administered by the Small Business Administration (SBA). On April 23, 2020, the Frequently Asked Questions document (April 23 FAQs) posted on Treasury’s website resulted in significant news coverage and debate and may have resulted in more questions than answers, as publicly-traded companies in particular scrambled to interpret this guidance. The April 23 FAQs were followed by updated rules issued by the SBA on April 24, 2020. This guidance was released after applicants exhausted the $349 billion allocated to the PPP and public statements on April 22, 2020, from Treasury Secretary Steven Mnuchin and Brian Benczkowski, Assistant Attorney General of the U.S. Justice Department’s Criminal Division threatened companies with investigations if they received PPP loans without a legitimate need for them. The day after the April 23 FAQs, an additional $310 billion was made available for PPP loans.

April 23 FAQs

The new FAQ included in the April 23 FAQs drawing all this attention is as follows: “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The answer responds, in part:

“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.”

This FAQ concludes by encouraging applicants and borrowers to carefully review the certifications and both the FAQ and the updated interim final rules provides an apparent limited safe harbor window of opportunity, until May 7, 2020, for borrowers to return funds that in retrospect they should not have received. SBA has also indicated that if the funds are returned it would deem the original certification (included in both the application and the loan documentation) as made in good faith.

Commentators have noted a tension between (i) the suspension by the CARES Act of the ordinary requirement that borrowers must be unable to obtain credit elsewhere, and (ii) the requirement by this FAQ that borrowers must now take into account “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.” This requirement applies to all borrowers and commentators have also noted that the SBA and Treasury may have specifically chosen to focus on publicly-traded companies in light of various media reports and negative public reactions related to the fact that publicly-traded companies applied for and received PPP loans. In other words, companies of all sizes may have access to capital. Following the release of the April 23 FAQs, it remains unclear the extent to which companies (publicly-traded companies in particular) will need to conduct due diligence and pursue alternative capital sources prior to certifying in good faith that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower.

The Upshot

Given this limited guidance, many questions remain (and others have been created) as a result. In particular, of the “ability to access other sources of liquidity” requirement. For example, it is unclear how publicly-traded companies could adequately demonstrate the good faith basis for their PPP certifications. Borrowers that elect to retain the funds should document among other things:

• current economic uncertainty and projections related to ongoing challenges that make the loan request necessary;
• post-pandemic operations and decline of current business activity and revenue and customer demand, including budget forecasts related thereto;
• employee-related decisions that may or may not be affected by the current economic uncertainty and the obtaining of (or the failure to obtain) the PPP loan; and
• the availability of capital (and the cost of such capital) and the timing to procure such capital.

Various regulatory statements have made it clear that there will be aggressive oversight and auditing of this loan program but, like many matters under the PPP, it is unclear how that will unfold or be implemented. It is worth noting that the certifications included in the PPP documentation impact eligibility, not forgiveness. If loan certifications were not made in good faith, the borrower is subject to both civil and criminal sanctions – including under the False Claims Act, which provide for treble damages.

We believe that Treasury and the SBA will continue to issue additional guidance related to the PPP and may provide additional insight into the issues discussed in this alert.

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