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Apr 30, 2020

CARES Act - The SBA’s Paycheck Protection Program: New FAQs Regarding ‘Necessity’ Certification

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CARES ACT – THE SBA’S PAYCHECK PROTECTION PROGRAM: NEW FAQS REGARDING ‘NECESSITY’ CERTIFICATION

On April 23, 2020 and April 28, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury posted additional guidance on eligibility for the Paycheck Protection Program (PPP) by updating its Frequently Asked Questions (FAQs) release on the PPP. The FAQs, which were issued in response to reports regarding PPP loans received by certain companies, address the good-faith certification by the Applicant that the current “economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (see questions 31 and 37). While question 31 is addressed to “large companies with adequate sources of liquidity,” question 37 clarifies that the guidance contained in question 31 applies to “businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations.” Thus, the guidance provided by question 31 should be considered by portfolio companies of private equity and venture capital firms.

Question 31 provides that Applicants will need to assess “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.” Applicants should consider whether alternate sources of liquidity exist and, if so, whether the capital is available on terms or otherwise in a manner that is not significantly detrimental to the business. If alternative capital is available, boards should consider, among other things, the certainty and timing of closing such capital, the additional preference overhang that might be created, the dilutive effect upon existing owners, and/or the repayment terms. As a result, each applicant should carefully review its own facts and circumstances, and document its decisions appropriately. While the FAQs do not provide any bright line test or objective criteria upon which to make a decision regarding eligibility, the FAQ specifically notes “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.”

Question 31 also specifically provides that any borrower that applied for a PPP loan prior to the issuance of this FAQ will be deemed to have made the necessity certification in good faith if the loan is repaid in full by May 7, 2020. Accordingly, if an Applicant has already received PPP loan funds, it should still review and document the considerations noted above and should consider repaying the loan prior to May 7, 2020 if it determines the ability to obtain other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While question 31 does not address whether returning the funds will have an impact on the SBA’s review of any other certifications (such as the size standard or other eligibility matters), it seems unlikely the SBA would seek to review loans repaid by May 7, 2020.

In addition, on April 28, 2020 the SBA and the Treasury Department announced that the SBA would review all PPP loans in excess of $2 million (in addition to other loans as appropriate) in connection with applications for forgiveness.

Regardless of whether the Applicant is holding a PPP loan in excess of $2 million, loan recipients should carefully document the use of funds for purposes of justifying forgiveness. These steps may include segregating the funds in a separate account, planning their usage for approved purposes during the applicable 8-week period, logging the usage carefully, and maintaining copies of records and supporting documentation. In addition, we advise coordinating carefully with payroll providers to ensure the funds are utilized within the applicable period (even if a short payroll run is needed to show the funds being used by a specified date, depending on when funds are received).

Authors and Contributors

Alan Bickerstaff

Partner

Emerging Growth

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+1 512 647 1903

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J. Russel Denton

Partner

Emerging Growth

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+1 512 647 1906

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Brian Dillavou

Partner

Emerging Growth

+1 512 647 1905

+1 512 647 1905

Austin

Michael Dorf

Partner

Mergers & Acquisitions

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+1 415 616 1246

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+1 650 838 3640

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Christopher Forrester

Partner

Capital Markets

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+1 650 838 3772

Menlo Park

Carmelo Gordian

Partner

Emerging Growth

+1 512 647 1902

+1 512 647 1902

Austin

J. Matthew Lyons

Partner

Emerging Growth

+1 512 647 1901

+1 512 647 1901

Austin

Daniel Mitz

Partner

Mergers & Acquisitions

+1 650 838 3805

+1 650 838 3805

+1 415 616 1136

+1 415 616 1136

Menlo Park