May 5, 2020

Evolving Guidance on Paycheck Protection Program's Certification of Necessity

Under the Paycheck Protection Program (“PPP”), each borrower is required to certify, in good faith, that “[c]urrent economic uncertainty makes [their] loan request necessary to support the ongoing operations of the applicant.” Until last week, the Small Business Administration ("SBA") had not provided guidance on how to interpret that certification of necessity, leaving borrowers to determine what level of economic harm – or expected economic harm – is sufficient.

By way of context, as it designed the PPP, Congress decided to forge a new program – complete with its own terminology, rules, and concepts – rather than mirror existing programs. The novelty of many aspects of the PPP has led to differing interpretations and disagreement amongst lawyers, accountants and commentators. In response, the Treasury Department and the SBA has continued to periodically issue guidance surrounding many aspects of the PPP Loans.

As borrowers looked at the certification of necessity, one critical contextual factor in making sense of the requirement has been that Congress specifically provided that the customary “availability of credit elsewhere” requirement for SBA program “shall not apply” to PPP loans. Since borrowers with access to lines of credit or other liquidity may still feel pressure to reduce their workforce, this provision seems in keeping with Congress’ stated goal of maintaining employment during the Covid-19 pandemic. However, last week the SBA updated its Frequent Asked Questions guidance for the PPP (“FAQ”) in response to reports of large, publically traded companies receiving large PPP loans, and said that “businesses owned by large companies with adequate source of liquidity” would likely be deemed unable to make the certification of necessity. According to the SBA, those businesses should consider whether they can make the certification of necessity “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.”

Although this additional guidance raises many additional questions that haven’t been answered – including whether the SBA has the authority to take a position that appears to be contrary to the plain language of the CARES Act – we recommend that all recipients of a PPP loan document the factual basis for their certification of necessity as it stood on the date they made it. Further, recipients should identify, to the extent they have other sources of liquidity, how reliance on that liquidity would be significantly detrimental to their business compared to receipt and use of a PPP loan. Until the SBA provides more detailed guidance, documenting the basis for your loan is the best way to prepare to respond to questions from your lender and from the government. Also note that the Treasury has announced the desire to audit all recipients who receive $2,000,000 or more, and some number of recipients who receive less.

It is also worth noting, for those recipients concerned with publicity, that we expect that the names of each recipient and the amount received will become part of the public record.

For recipients that are unable to document the factual basis for their certification of necessity to their satisfaction, the SBA has said that any borrower that applied for a PPP loan prior to the issuance of last week’s 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.

We will continue to update our clients on any further information regarding the Paycheck Protection Loan program as it becomes available. For further assistance, please contact your regular Katz Teller attorney, or John Gierl at jgierl@katzteller.com, Gabriel Kurcab at gkurcab@katzteller.com, or Jake Purcell at jpurcell@katzteller.com.

Be sure to follow us on Twitter and LinkedIn for the latest updates!