COVID-19 Response: Treasury Department Guidance on Small Business Loan Program: Well-Financed Borrowers Need Not Apply
Washington, D.C. (April 23, 2020) - The Treasury Department released new guidance on April 23, 2020 regarding the Paycheck Protection Program (PPP) in an effort to curtail the fallout from news that publicly traded companies and financially secure universities obtained millions of dollars from the program meant to provide a financial lifeline to struggling small businesses. Recently added guidance on questions regarding the affiliation rule and rules governing the eligibility of franchises might also affect the ability of certain entities to access the PPP loans.
PPP Loans and “Economic Need”
In this latest installment of its PPP Frequently Asked Questions (FAQs), Treasury addresses the “economic need” issue head on at Question 31:
- Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?
- Answer: “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.” While certain requirements of the SBA 7(a) loan program are suspended, “borrowers still must certify in good faith that their PPP loan is necessary … ‘to support ongoing operations of the Applicant.’”
In addition to certifying that current economic circumstances make the loan request necessary and that funds will be used as intended, a PPP borrower must certify that the information provided in the application and supporting documents is true and accurate and makes borrowers aware that “knowingly making a false statement to obtain a guaranteed loan” is punishable by both imprisonment and a monetary fine up to $25,000. To assist borrowers in determining whether they are likely to fall outside the intended beneficiaries of the program, the FAQ says “that a would-be borrower that is a public company with substantial market cap and access to capital markets likely could not make this certification in good faith and should expect lenders to require it to demonstrate need for the PPP funds.”
Finally, the FAQ reiterates that it is the borrower’s responsibility to certify its eligibility, and that banks are allowed to rely on the borrower’s certification. So, if there is any investigation afterward, the borrower will be held responsible and cannot rely on the bank’s approval of the application to escape prosecution. Helpfully, a borrower that applied for PPP assistance prior to April 23 but now, upon reflection, determines it is not eligible, has until May 7, 2020 to return the funds it has received, or withdraw its application if still pending.
Affiliation Rule Clarified
In addition, the FAQs provide additional clarification on the application of the SBA’s affiliation rules to franchises, and to hotels and restaurants that fall under the NAICS 72 code.
If you applied for and received PPP funds but there is a question as to whether you qualify for those funds under the Treasury Department’s April 23, 2020 guidance, or need assistance with understanding how the affiliation rules apply to your situation, you should reach out to legal counsel. Those submitting and processing applications for stimulus funds must exercise extreme care with certifications and should consult with counsel as appropriate.
Lewis Brisbois’ COVID-19 Response Team includes attorneys who are well-versed in all of the CARES Act programs and who can assist clients with the analysis and advise on appropriate next steps. Visit our COVID-19 Response Resource Center for more information.
Karen C. Bennett, Partner
Katherine I. Funk, Partner
Jane C. Luxton, Partner