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-- SBA Adds Guidan…

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UPDATE -- SBA Adds Guidance Regarding Necessity
Certification Under the Paycheck Protection Program
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Terakedis,
J. Troy Kulick, Peter
J. VanderVeen,
M. Katherine.

April
2020

Industry Alerts

On April 23, 2020, the Small Business Administration (“SBA”) issued
additional guidance (in an update to its previously published FAQs, a current
version of which can be found here) regarding whether businesses owned by large companies
qualify for a Paycheck Protection Program (“PPP”) loan under Section 1102 of the
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Specifically, the SBA has indicated that in addition to reviewing other
applicable eligibility requirements and rules, a borrower must assess their
economic need for the PPP loan under the standard established by the CARES Act
and the PPP regulations that existed at the time of loan application.

As part of the PPP loan application process, borrowers are required to make
certain certifications, including certifying in good faith that “[c] urrent
economic uncertainty makes this loan request necessary to support the ongoing
operations of the Applicant. ”

The SBA, in the newly added question #31 of the FAQs, expands on this
necessity certification by providing that a borrower must take into account (1)
their current business activity, and (2)  their ability to access other
sources of liquidity sufficient to support the borrower’s ongoing operations in
a way that does not have a significant detriment to their business;
notwithstanding the carve-out created by the CARES Act that a borrower not be
required to show they are unable to obtain credit elsewhere in order to be
eligible for a PPP loan (“no-credit-elsewhere” is an eligibility requirement for
other SBA loans).  The new FAQ goes on to state, by way of example, that it
is unlikely that a public company with substantial market value and access to
capital markets would be able to make the aforementioned certification in good
faith.

A borrower that applied for a PPP loan prior to the addition of the new FAQ
(April 23, 2020) will be deemed to have made the required necessity
certification in good faith, despite such certification not being accurate in
light of the additional SBA guidance, if the borrower returns all PPP loan
proceeds it received in full by May 7, 2020.

While the example in the new FAQ is directed at public companies, the general
guidance set forth in the new FAQ is applicable to all borrowers (including
private companies).  As such, all borrowers should evaluate their necessity
certification based on this new guidance to determine whether they meet the
standards as set forth in the new FAQ and whether such loan proceeds should be
returned.

Importantly, making any knowingly false statement in the PPP loan application
(which includes the certifications) could subject the borrower (and/or person
making such statements) to criminal punishment including imprisonment and
substantial fines.

In any event, it is recommended that all borrowers take steps to adequately
document that the PPP loan was necessary to support their ongoing operations
given economic uncertainty as well as that the borrower did not have access to
liquidity (beyond the PPP loan) to support such operations in a way that would
not be significantly detrimental to the borrower’s
business.

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Contacts

Peter
Kulick

Member and
Taxation Practice Group Co-Chair
Lansing

T:517-487-4729

E:[email-masked]

J.
Troy Terakedis

Member and
Taxation Practice Group Co-Chair
Columbus

T:614-744-2589

E:[email-masked]

M.
VanderVeen

Associate
Detroit

T:313-223-3098

E:[email-masked]

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