UPDATED: On May 13th, the Treasury and SBA have released favorable guidance for the PPP economic need certification. They have also clarified that an employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be able to receive the Employee Retention Credit as long as they are eligible.
Treasury Releases Favorable PPP Economic Uncertainty Guidance
The Treasury and SBA released May 13th updated “Frequently Asked Questions” #46 which addresses the “good-faith” economic uncertainty certification. Specifically the guidance clarifies the following:
Safe Harbor for Loans under $2 million – automatically granted economic uncertainty “good faith certification.”
Businesses that together with their affiliates accepted Paycheck Protection Program (PPP) funds of less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
The SBA will NOT review loans under $2 million for economic need. The Treasury and SBA made this determination based on the following:
- Borrowers with loans of $2 million or under are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.
- Granting a good faith certification for all loans of $2 million and under promotes economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.
In addition, due to the large volume of PPP loans, this approach will enable SBA to focus its reviews on larger loans, where the compliance effort may yield higher returns.
Loans over $2 million.
Loans of greater than $2 million will be reviewed. Importantly, the Treasury and SBA, recognize that even if borrowers are determined ineligible based on economic need, this certification may have been made in good faith. As a result, if a borrower is identified as ineligible and repays the loan promptly upon request, no “further enforcement or referrals to other agencies will occur related specifically to this certification.” This will apply even if the loan is repaid after the May 14th safe harbor deadline.
- All loans over $2 million will be reviewed by SBA specifically for compliance with program requirements set out in Interim Final Rules and in the Borrower Application Form.
- If SBA determines borrower lacked an adequate basis for the required certification concerning the necessity of the loan, SBA will seek immediate repayment of the loan and borrower will NOT be eligible for loan forgiveness.
- If borrower repays the loan after receiving SBA notification of ineligibility, no further enforcement or referrals to other agencies will occur specific to the certification concerning necessity of the loan request. This will also apply to loans determined ineligble and repaid after the May 14th Safe Harbor period ends.
- Determination of ineligibility will not affect SBA’s loan guarantee.
This action is to further ensure PPP funds go to intended recipients. This is a follow-up to information that large businesses and public companies received at least $1 billion in round 1 PPP funding.
Economic Uncertainty Certification
PPP applicants are required to make a number of certifications in connection with their applications, for example concerning their eligibility and the purposes for which they will use the loans. One such certification is that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Mnuchin said PPP loans will be scrutinized to assess whether the business really needed the funding, which is supposed to help struggling small businesses keep people employed. Companies that can’t show proof of need will not have those loans forgiven.
The Treasury and SBA responded to large companies receiving PPP funding in Frequently Asked Question 31. “Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan? The answer provided by the Treasury and the SBA indicated that it is unlikely 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 for economic need.
Borrowers must also have considered “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 is the first time that SBA or Treasury has suggested the need to consider alternative liquidity. PPP loan recipients were granted a safe harbor through May 14th (extended) to return loan proceeds.
Key Certification Considerations
- the borrower’s current activity;
- the borrower’s access to other sources of liquidity sufficient to support its ongoing operations; and
- an evaluation of whether these other options, if any, could be implemented in a way that was not significantly detrimental to the borrower’s business.
- The current and projected impact of COVID-19 to the business, and the uncertainties surrounding those projections, including any communications from customers or clients regarding their level of business with the borrower and their respective economic conditions;
- Recent history of the business and its performance in the wake of other economic downturns;
- Existing levels of cash reserves or cash equivalents, and the borrower’s ability to access other sources of capital and what the terms and conditions of such sources of capital might be;
- Current or projected plans for retention or reduction of workforce or payroll costs of such workforce, and the ability of borrower to reinstate such workforce to pre-COVID-19 levels;
- Actions or measures that borrower is considering, or has already taken, to address the economic uncertainty outside of workforce or payroll reduction.
Corporate Groups Interim Final Rule
In addition, a newly released Interim Final Rule addresses the question: Can a single corporate group receive unlimited PPP loans? The answer provided is “No.” The SBA states that businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. This limitation shall be immediately effective with respect to any loan that has not yet been fully disbursed as of April 30, 2020. Once again, it is the It is the responsibility of the PPP applicant to notify the lender if they have applied for or received PPP loans in excess of the $20,000,000 aggregate total and to withdraw or request cancellation of any pending PPP loan application or approved PPP loan above the limit.
In summary, key points to note in the new guidance are as follows:
- Borrowers should clearly document the reasons supporting the economic uncertainty certification.
- Borrowers must have considered “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 is the first time that SBA or Treasury has suggested the need to consider alternative liquidity.
- This requirement is retroactive to certifications that pre-dated the guidance (and loans already issued).
- In light of the requirement’s retroactivity, the SBA has announced a safe harbor until May 14, 2020, (extended) for borrowers to return loans if any of the SBA’s subsequent guidance has changed the validity of their application certifications.
- An Interim Final Rule released 4-30-2020, states that businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.
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