By: Christopher Candon
May 12, 2020
The Paycheck Protection Program (“PPP”) is one of the most significant programs for businesses under the Coronavirus Aid, Relief, and Economic Security, or CARES, Act. While designed to support small businesses to navigate the financial crisis caused by COVID-19, the PPP administration by the Small Business Administration (“SBA”) and guidance from the U.S. Department of the Treasury has evolved since the application process commenced in early April, resulting in much uncertainty for small businesses. Most notably, eligibility requirements that were unclear or not stated at the outset of the PPP application period have caused the creation of a May 14, 2020 safe-harbor deadline for the return of PPP funds. The May 14 date allows borrowers to return PPP funds if they now believe they did not qualify for the PPP loans despite having approved applications and, in many cases, having received and started using the PPP funds in the manner contemplated under the CARES Act.
PPP Loans and Shifting Guidance
The response to the PPP application process was unprecedented, resulting in two rounds of funding totaling more than $600 billion. But the rollout and subsequent administration of the PPP loans and shifting guidance has resulted in many unknowns for applicants and borrowers.
While questions initially focused on the nuts and bolts of the PPP application process, uncertainty continues to persist around the PPP administration (i.e., eligibility and forgiveness), especially as the landscape evolves – sometimes daily – with guidance from the SBA and U.S. Department of the Treasury. Most recently, in connection with the second round of PPP funding, Treasury Secretary Steven Mnuchin warned that any borrower who received a PPP loan over $2 million and seeks loan forgiveness will be audited, and he threatened criminal action for false certifications that the loan funds were necessary for the business.
May 14, 2020 Safe Harbor Deadline Established
When the PPP application process was launched in early April, the SBA had not issued guidance on what it meant for businesses to certify that the current economic uncertainty made their loans necessary to support ongoing business operations. But after the preliminary funding for PPP was exhausted and the second round of funding was approved by Congress, the SBA issued the following statement in one of the FAQs on its website, providing some additional explanation, although introducing further uncertainty in the PPP administration:
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.
Because this additional explanation announced a standard previously unknown to PPP applicants, the SBA granted borrowers a short safe-harbor period currently until May 14, 2020 to return the loans (or deny funding of loans in process) they may have obtained “based on a misunderstanding or misapplication of the required certification standard.” The SBA stated that any borrower that applied for a PPP loan prior to the issuance of the new guidance and repaid the loan in full by May 14, “will be deemed by SBA to have made the required certification in good faith.” Initially, the SBA guidance only referenced public company borrowers but in a subsequent FAQ the SBA expanded the scope to “private companies with adequate sources of liquidity to support the business’s ongoing operations.”
Unfortunately, there is no clear guidance on what the “new” interpretation of the certification requirement means. Unless the May 14 deadline is extended, definitively determining what “other sources of liquidity…not significantly detrimental to the business” means may not be possible until after the safe harbor date has passed. As a result, on or before May 14, entities that received PPP funds must consider eligibility and the certifications made without the benefit of established and understood guidelines. Those that received funds in excess of $2 million should expect to be subject of an audit and all should be aware of the potential liability associated with a certification that is determined to be false.