How Much Should a PPP Borrower Worry About SBA FAQ Question 31?

Small business owners across America have scrambled over the past month to obtain over $5 billion in PPP loans with the promise that such loans will be forgiven if proceeds are used to retain employees and cover certain types of business expenses defined by the CARES Act and subsequently released interpretive guidance.  While the SBA has released interpretive guidance and “FAQs” on more than a dozen occasions since April, FAQ #31 published by the SBA on April 23, 2020, has been generating quite a bit of debate and stress.

FAQ Question #31 asked:

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.  (emphasis added)

Now, as a result of the release of FAQ #31, some small business owners are second-guessing their decision to apply for a PPP loan and contemplating returning the funds during the SBA’s “amnesty” period in which businesses that applied for the PPP before the issuance of the relevant guidance may return the money before May 14, 2020, without risk of being deemed in violation of the required certification in good faith.

But who really should return the PPP loan before the “amnesty” deadline? The simple answer is that businesses with sufficient liquidity or publicly traded companies with access to capital markets should return the PPP loan before the “amnesty” deadline. On April 28, Treasury Secretary Steven Mnuchin clarified that the PPP “was a program designed for small businesses [….]. The certification was very clear in saying that if people had other sources of liquidity, they could not take this loan.” Mnuchin further explained that such borrowers may “have criminal liability if they made this [good faith] certification and it’s not true.” In the wake of the announcement of FAQ #31 and the amnesty deadline, examples of larger companies who returned their PPP loans include the Los Angeles Lakers, Harvard University, and Nathan’s Famous. Those borrowers were the specific targets of FAQ #31 as those businesses arguably could not in good faith certify that they needed the loan to continue their business operations. As gathered from recent trends, the businesses that are returning the money already have sufficient endowments or easy access to capital markets that permit the business to continue operations without significant hindrance during this COVID-19 pandemic.

Therefore, before hitting the panic button, honest small business owners who applied for and obtained a PPP loan in good faith should not unreasonably fear being audited, fined, prosecuted, or otherwise penalized, nor should they feel compelled or guilted into returning PPP funds, thereby putting the survival of their small business in jeopardy. Small business owners that (1) reasonably considered their need for the PPP loan and (2) determined that the loan is necessary should not worry, but instead focus their attention on ensuring that their small business is properly documenting the business purpose and application of loan proceeds.

In the meantime, small business owners should continue to monitor new SBA interpretive guidance releases and updates, which likely will continue for the foreseeable future.

For additional information or assistance with your small business legal, transaction, and compliance needs, please e-mail or call Eric Perkins at [email protected] or (804) 205-5162.

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