The Small Business Association (SBA), under pressure to make sure that the Paycheck Protection Program (PPP) funds are properly distributed and used, is closely scrutinizing the recipients of PPP resources. Further, large corporations are facing public (and potential legal) backlash for participating in the program, which is designed to help small businesses.

Paycheck Protection Program Requirements 

The SBA resumed accepting Paycheck Protection Program (PPP) applications from April 27, 2020, after receiving a second round of Congressionally appropriated funding through bi-partisan legislation. As discussed in greater detail in our other articles, the new federal guaranteed, unsecured loan program aims to help businesses keep workers on their payroll amid the economic challenges caused by the COVID-19 pandemic. The PPP loans are forgivable (converted to a grant) but the portion that is forgiven can be impacted based on hitting certain criteria, including whether the requisite threshold of employees is kept on the payrolls at the threshold salary level for eight weeks, and ensuring that the PPP funds are used for payroll, rent, mortgage interest, or utilities or other permitted purposes.

Loans are available to (provided the program has the funding):

  • Any business, nonprofit, veterans’ group, or tribal business with 500 or fewer employees, or a number set by the SBA for the relevant industry; 
  • Sole proprietors, independent contractors, and eligible self-employed workers; and 
  • Restaurants, food service, caterers, and hotels that employ 500 or fewer employees per physical location.

Recipients may use the loans to cover the following, subject to certain limitations:

  • Payroll costs, employee salaries, commissions, or similar compensations; 
  • Costs related to group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • Mortgage interest payments, rent, and utilities; and
  • Interest on any other debt obligations that were incurred before February 15

When applying for a PPP loan, businesses must provide a good faith certification that the loan is needed to address the economic uncertainty caused by COVID-19 and that loan funds will be used to maintain payroll and make other necessary payments. The specific language of the certification included in the PPP application is: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

New Paycheck Protection Program Guidance

On April 21, 2020, U.S. Treasury Secretary Steven T. Mnuchin addressed concerns that large corporations were taking advantage of the PPP at the expense of small businesses. He warned of "severe consequences" for large companies that took advantage of PPP loans, although technically qualifying for aid. "If, to the extent these companies didn't understand this and they repay the loans, that will be okay," Mnuchin said. "And if not, there'll be potentially other consequences."

On April 23, the SBA updated its Frequently Asked Questions (FAQs) to officially address loan eligibility requirements. The guidance also states that the SBA will provide amnesty to companies who repay their loans by May 7, 2020. Below is the text of Question 31:

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.

Going forward, the SBA will be more closely scrutinizing larger loans. On April 28, Mnuchin and SBA Administrator Jovita Carranza issued a statement that there would be a review procedure for PPP loans in excess of $2 million. “We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan,” Mnuchin and Carranza said in the statement. “To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.  Regulatory guidance implementing this procedure will be forthcoming.”

Key Takeaway

Additional guidance and enforcement is on the horizon. In the meantime, companies that have previously obtained or applied for a PPP loan should review the basis for their certification to verify that they can demonstrate the PPP loan was necessary. It is also advisable to reconfirm that you meet all the other elements of eligibility in consultations with your accountants and attorneys. Scarinci Hollenbeck is here to help.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Cassin, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.