Department of the Treasury Releases New Guidance on Certification of PPP Loan “Necessary to Support Ongoing Operations” | Moore & Van Allen SARL
[co-author: Tyler Carpenter]
On April 23, 2020, the Treasury Department issued updated guidelines (“FAQ 31”) regarding a puzzling aspect of the popular CARES Act Payroll Protection Program (“P3”). A day later, on April 24, 2020, the Treasury Department issued a new provisional final rule (the “IFR”) formally implementing and extending the scope of some of the PPP guidelines in FAQ 31. In applying for a PPP loan, among others, applicants are required to certify that “the current economic uncertainty makes this request loan required to support the borrower’s ongoing operations ”(the“ Certificate of Necessity ”). Since the launch of the PPP, this certification of subjective necessity has given potential candidates a difficult choice between two imperfect options: complete the certification without complete data regarding the extent of the effect of the COVID-19 crisis on their businesses or forgo the PPP funds until they see a proven need and risk of running out of PPP money before they can apply. However, on May 13, 2020, the Treasury Department and the SBA published a new FAQ, discussed below (“FAQ 46”), which brought clarity and relief to many borrowers who were confused by FAQ 31 and the ‘IFR – namely, FAQ 46 has provided a safe harbor (the “small loan exemption”) for borrowers who, along with their affiliates, have received less than $ 2 million in PPP loans, estimating that these borrowers have made the certification of necessity in good faith.
FAQ 31 and parts of the IFR deal with certification of necessity and in doing so both resolve some existing confusion and create more uncertainty for borrowers. More importantly, FAQ 31 states, and the IFR reiterates, that PPP applicants must do the Necessity Certification “taking into account their current business activity and their ability to access other sources of liquidity to support their businesses. ongoing operations in a manner that is not significantly detrimental. to the company. Focusing first on the “access to cash” element, the CARES Act removed for PPP loans the requirement for other SBA loans that applicants be unable to obtain financing from other sources. The removal of this requirement has led many PPP applicants to infer that they do not need to take into account non-PPP sources of cash to establish the necessity certification; however, FAQ 31 and IFR specify that such access should be considered, without however specifying what types of liquidity should be available, nor how far borrowers should go to obtain such access before determining that it is not. ‘does not exist. Furthermore, neither FAQ 31 nor the IFR specifies whether capital or debt increases should be attempted or whether extensions of fully drawn credit facilities should be requested, leaving many applicants with little additional practical advice.
In addition to the ‘access to cash’ element, the ‘current business activity’ element focuses on the activity from the date the applicant completes the necessity certification. Although the ‘current business activity’ element was a more intuitive element of necessity certification prior to FAQ 31 and the IFR, the new guidance indicates that current business activity should be viewed in conjunction with access to cash. and that such a combination does not need to maintain operations at pre-COVID-19 levels, but only at levels that “are not significantly detrimental to the business”. It is not clear whether “current business activity” can be considered to refer to future periods for the purpose of analyzing an applicant’s ability to obtain certification of necessity (i.e., Can applicants consider a significant trade slowdown expected at the end of May despite the stability at the end of April?).
To mitigate the impact of the tighter necessity certification discussed above, FAQ 31 and IFR also provide relief to PPP borrowers who have already received funds based on previously available guidelines. The safe harbor included in FAQ 31 and the IFR, which was extended by subsequent guidelines, allows borrowers who applied for PPP funds before the issuance of FAQ 31 to repay the PPP loan in full by May 18. 2020 – in this case, the SBA will consider that the certification of necessity was made in good faith, implying that the SBA will not take legal action against borrowers repaying their PPP loans in accordance with the Safe Harbor. This safe harbor is a key part of FAQ 31 and the IFR for companies that have already received PPP funds and are struggling to determine whether they have completed the necessity certification correctly. The IFR explains that the Safe Harbor is “necessary and appropriate to ensure that borrowers promptly repay PPP loan funds … obtained on the basis of a misunderstanding or misapplication of the required certification standard.” Secretary Mnuchin referred to this safe harbor in an April 21 briefing providing an overview of FAQ 31 and subsequently alerted non-conformers, stating that “as long as these companies don’t understand this and reimburse loans, that will be OK, and if not there will potentially be other consequences. Clearly, the Treasury Department is pushing for prompt repayment based on the updated guidelines in FAQ 31 and the IFR.
Necessity certification impacts eligibility, not forgiveness (about which Moore & Van Allen posted other comments). While PPP funds deemed unforgivable would require borrowers to repay those funds at 1.00% interest, borrowers who are deemed not to have made the Good Faith Necessity Certification will be deemed ineligible for receiving the PPP loan first. place, bringing much more serious consequences. If a borrower takes out a PPP loan, does not repay it in full by May 18, 2020, and it is determined that the certification of necessity was not made in good faith, the borrower could be submitted, among other things, liability for false claims. Take action, which could result in triple (3x) damages applied to the PPP loan amount itself or even criminal penalties. However, in addition to the exemption for small loans, FAQ 46 also provided clarification on the enforcement actions that the SBA plans to take with respect to borrowers who, along with their affiliates, receive $ 2 million. dollars or more in PPP loans. More specifically, if the SBA determines that such a borrower did not have an adequate basis for making the certification of necessity, it will ask that borrower to repay the outstanding loan balance; if the borrower complies, the SBA will not initiate administrative proceedings against that borrower. This review policy does not bind the Department of Justice and other enforcement regimes, nor does it extend to any failure of a PPP request other than with respect to certification of necessity (for example, application of membership rules). However, given updated guidelines, published in an FAQ on April 29e (“FAQ 39”) and later codified into an interim final rule, stating that the SBA “will review all loans over $ 2 million, in addition to other loans, if any, after the lender’s submission of borrower’s loan forgiveness request, “FAQ 46 should give borrowers of $ 2 million or more greater assurance that, despite mandatory SBA audits as part of their forgiveness requests, the damages -Triple interests or criminal charges associated with faulty certification of necessity are remote.
Looking at the types of companies that gained media attention for participating in a PPP and the example scenario involving a state-owned company in FAQ 31, we first suspected that FAQ 31 was primarily aimed at public enterprises with access to public debt and equity markets. However, by specifically referring to private equity holding companies (and unambiguously stating that private equity and hedge funds themselves are not eligible for participation in the PPP), the IFR makes it clear that this It’s not just public company PPP borrowers who should review their certification of necessity, but private companies and investors as well. Specifically, PPP borrowers who have the availability (or the ability to increase) their existing credit facilities, equity investors with deep pockets or operations that have yet to see a significant impact due to COVID -19 should tire of FAQ 31 and the potential of IFR. to reach. While we do not anticipate that the SBA will require the circulation of private placement memorandums and the holding of fundraising road shows before a necessity certification can be made in good faith, the Treasury Department is clearly sending a message. PPP applicants (and current PPP borrowers) that they should think twice before applying for or keeping PPP funds. Once the dust settles on the COVID-19 crisis, the federal government will have broad support under FAQ 31 and the IFR for suspected borrowers in close cases did not certify need in good faith.
For PPP applicants and borrowers who find themselves in a dilemma as to whether they can do (or have done) the necessity certification in good faith, consider Shake Shack (NYSE: SHAK). FAQ 31 can be termed a “Shake Shack Rule” because it almost directly follows the high-profile actions of Shake Shack Inc .: Shake Shack received negative media coverage regarding securing a $ 10 million PPP loan as a large public company, which led it to reconsider whether it had other sources of liquidity other than PPPs. Once Shake Shack was able to raise non-PPP capital to ensure its long-term stability, it paid off the loan in full and is now back in the good graces of the media and the government.
The favorable reactions Shake Shack’s actions have garnered (including praise in a tweet from secretary Mnuchin) are an example of how PPP borrowers can use the repayment of PPP loans under the “safe harbor” of FAQ 31 and the IFR not only as a way to avoid the liability of the law on bogus claims, but as a show of marketable solidarity with small businesses that may need PPP funding more. Shortly after the publication of FAQ 31, larger public PPP borrowers such as Ruth’s Hospitality Group, Inc. (chain owner Ruth’s Chris Steak House, NASDAQ: RUTH) and investment firm Manning and Napier Inc. ( NYSE: MN) have publicly announced their intention to repay their PPP loans under the aforementioned Safe Harbor, albeit amid the earlier public outcry.
This article was updated on April 24 and May 14, 2020 to include a discussion of IFR and FAQ 46, respectively.