COVID-19: PPP Loans – Economic Need Determinations

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***Update*** On April 28, Treasury Secretary Steven Mnuchin announced that the SBA will do a full review of any loan more than $2,000,000 under the PPP program. He also warned of criminal liability for borrowers who improperly received funds under the program.

In an apparent response to recent media focus on public companies receiving Paycheck Protection Program (PPP) loans, the Small Business Administration and the Department of the Treasury updated their Frequently Asked Questions to provide additional, although limited, guidance on the subject of a borrower’s need for a PPP loan.

To receive a PPP loan, borrowers have been required to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Many borrowers and potential borrowers wrestled with what “necessary” means in such an uncertain time, with predictions for the economic fallout from the pandemic varying dramatically on a macroeconomic scale, as well as from industry to industry and business to business.

The new FAQs provide slightly more guidance on the analysis: potential borrowers must “take 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.” Furthermore, the guidance provides, as an example, that a public company with substantial market value and access to capital markets is unlikely to be able to make the required certification in good faith.

The questions of “necessity” and whether a business accessing other sources of liquidity would be “significantly detrimental to the business” requires a complex analysis regarding the business’ particular circumstances measured against a range of outcomes. That analysis will necessarily vary from geographic region to geographic region, industry to industry, and business to business. In other words, there is no one-size-fits-all equation.

If a borrower determines that it cannot certify as to their need in good faith, they may return the funds by May 7, 2020, and be deemed to have made the required certification in good faith.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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