Please note: On May 5, 2020, the safe harbor deadline for repayment of PPP loans was extended from May 7 to May 14. Read our follow-up alert here.
The original intent of Congress was that the Paycheck Protection Program (PPP) would serve to disburse federal funds into the hands of many of the nation's employees who were either furloughed or soon-to-be furloughed as a way to help people afford basic necessities such as food and shelter while they aided the country's battle against the COVID-19 virus by staying at home. Congress wanted a simple program designed to work quickly and efficiently. As crafted, however, many find the PPP to be anything but clear and it was engineered somewhat piecemeal. Employers who had access to counsel found themselves asking lots of questions about whether they were eligible to apply for a PPP loan and how much they could borrow attracted by the program's promise to forgive loans used for proper purposes, including payroll costs. But underlying the PPP is Congress' desire that an applicant certifies that the uncertainty of current economic conditions makes it necessary to apply for the PPP loan to support its ongoing operations.
Although certification isn't new, the U.S. Small Business Administration (SBA) released FAQ 31 on April 23, 2020, cautioning prospective borrowers that they need to certify that the loan is indeed necessary to support ongoing operations and providing those who have received PPP loan proceeds already who wish to reconsider their certifications the opportunity to return the proceeds by May 7, 2020 — no questions asked.
SBA released the FAQ in response to public outcry about some companies who have access to other forms of capital getting in line ahead of other companies commonly recognized as small businesses for PPP loans. Granted, the CARES Act told potential borrowers that they were eligible even if they had access to other forms of capital, something which would otherwise have disqualified them from SBA 7(a) loans. The SBA's FAQ focuses on publicly traded companies, but the warning applies equally to non-listed companies too – especially if they are sponsor-backed or have access to substantial liquidity from family offices, revolving lines of credit or otherwise.
The question is: What should companies do now? Boards and management of prospective borrowers under phase 2 of the PPP, as well as those who have already closed PPP loans, should take the time to think through the necessity analysis with counsel. There is no bright-line test, and every company's situation is different. Just because a company might be listed on the New York Stock Exchange does not in and of itself disqualify it under the necessity test. Whether a company needs the funds to support ongoing operations requires a facts-and-circumstances analysis that must take into account the totality of the circumstances present at the time of submitting the application.
The question is critical because the SBA has a history of vigorous enforcement and because the public outcry about the competitive race to the banks that the PPP created will only heighten SBA's enforcement interest in companies who might not have had a true necessity at the time of application. No one will want to face a moment where, in a flurry of public outcry, they must decide to return PPP funds.
It is impossible to provide an exhaustive list of factors that might disqualify a company's need within the scope of this alert, but some important items to consider with management or your board include:
Again, this is not an exhaustive list. Your company's situation will certainly be different than anyone else's. Our team of Holland & Knight attorneys is well versed in the PPP and stands ready now to assist you, your management team and your board in making critical decisions about your company's specific situation during this uncertain time.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
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