Ahead of a second round of lending, the Small Business Administration (SBA) announced that businesses applying for loans under the Paycheck Protection Program (PPP) must consider other sources of liquidity before certifying that they need a PPP loan. The agency also announced a new "safe harbor" for businesses that received a loan before it released its new guidance. Businesses wanting to take advantage of the safe harbor must repay their loans by May 7, 2020.

The PPP provides low-interest, forgivable loans to small businesses affected by the COVID-19 pandemic. While Congress initially allocated $350 billion to the program, borrowers exhausted those funds within two weeks. Congress then refreshed the program with another $310 billion, and the SBA reopened the program for a second round of lending on April 27.

Ahead of this second round, the SBA issued new guidance about which businesses are eligible for a PPP loan, including a new FAQs document. The FAQs responded to recent controversies over large businesses that received loans in the initial round of lending. The FAQs state that before applying for a loan, all businesses must certify that a PPP loan is "necessary." And a business may not be able to make that certification in good faith if it has access to liquidity through other sources:

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.

This statement is the first time the SBA has said that borrowers must consider other sources of liquidity. And though publicly traded companies may have particular trouble making the required certifications in good faith, the FAQs emphasize that the certification requirement applies to all businesses, not just large ones.

The SBA followed the FAQs with a new interim final rule-its fourth such rule in a month. Perhaps recognizing that some borrowers would be caught flat-footed by the new FAQs, the rule created a safe harbor for borrowers that "misunderstood or misapplied" the certification rules. These borrowers will be held harmless if they repay their loans in full by May 7, 2020. In addition, a previous version of the FAQs stated that borrowers could rely on guidance "available at the time of the relevant application." That statement remains in the updated FAQs.

Even so, this safe harbor may become more important as the PPP comes under closer scrutiny. Already, major media outlets have criticized large companies for accepting funds aimed at small businesses. And lawmakers have signaled their intent to investigate borrowers this fall. For example, Marco Rubio (R-Fla.) announced that his committee intends to "aggressively" look into how program funds were distributed.

As a result, businesses that accept PPP loans should proceed cautiously, and make sure they can document how the pandemic disrupted their business operations and their access to liquidity. Publicly traded companies in particular may want to consider taking advantage of the SBA's safe harbor. As the crisis proceeds, the PPP will come under more scrutiny, and borrowers should expect public authorities to closely examine PPP applications.

The SBA and other agencies are continuing to issue guidance on PPP and other programs daily, if not hourly. Littler Workplace Policy Institute (WPI) will continue monitoring these developments and providing updates on significant developments. Businesses looking for advice on the PPP or other COVID-19-relief programs should consult with experienced counsel.

Article originally published on 30 April 2020

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