Private companies with “adequate liquidity” unlikely to remain eligible for PPP loans.

Prompted by the public clamor surrounding the participation of large, publicly traded and deeply capitalized companies in the Paycheck Protection Program (“PPP”), on April 23, 2020, the Small Business Administration (“SBA”) published guidance narrowing the eligibility of large applicants. At issue is the required Borrower’s certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The guidance reaffirms that “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.”

However, the guidance further sought to prompt the return of PPP funds by establishing that “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.” The guidance also declared a safe-harbor for those companies who promptly returned their loan funds by May 7, 2020, confirming that such companies will be deemed to have made the certification in good faith.

Now furthering its efforts to narrow program eligibility, on April 28, 2020, the SBA extended this guidance to “private companies with adequate sources of liquidity to support the business’s ongoing operations.” The safe harbor date remains May 7, 2020.

Private companies are no longer immunized by the SBA’s initial guidance directed at publicly traded companies. Instead, all loan recipients should re-consider their level of financial liquidity and Borrower’s certification. Documentation of such analysis should be made and kept for the event of any subsequent audit. Although it remains true that “Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application,” Borrowers who retain doubts about whether their loan proceeds were “necessary” only have eight days left to seek safe-harbor.

What Happens to “Safe Harbor” Returned Funds?

Despite the safe harbor, it's not clear whether the returned funds will actually get recycled back into the system. If a bank issues a loan but the funds aren't yet disbursed, the money can be recycled into the program rather easily. However, if the money has already been disbursed to the borrower, it's not clear that those funds can be recirculated back through PPP. According to guidance from the National Association of Government Guaranteed Lenders, a national trade association, if a loan has been disbursed and is repaid based on the Treasury's new guidance, "those funds will be lost to the program and will not benefit other borrowers."

The problem of recycling funds into the program is more complicated if the borrower attempts to return the funds before May 7 but after the program funds are again depleted, which is likely to occur soon. Then, there will have to be some newly developed federal loan mechanism for that money to be redeployed, perhaps a third tranche of the CARES Act. The SBA has not issued its own guidance on how returned funds may be recycled or whether lenders may retain their fees.