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Paycheck Protection Program-Economic Uncertainty Requirement

Posted by Admin Posted on May 04 2020

Dear Client:

Implementation of the Paycheck Protection Program (PPP) continues to evolve.  Below are important updates you should be aware of:

Economic Necessity Certification

On the PPP application, borrowers must make a certification that "current economic necessity makes the loan request necessary to support ongoing operations of the applicant".  When the program launched, large public companies were able to secure millions in funding under the program.  This was not the intent of Congress when the legislation was enacted.  On April 23rd, the Treasury Department issued new guidance in FAQs #31 which provides as an example that it's unlikely that a "public company with substantial market value and access to capital markets" would be able to make this economic necessity certification in good faith.  Furthermore, the Treasury Department and SBA issued a new Interim Final Rule on April 24 that included the following loan eligibility certifications:

 

  • Hedge funds and private equity firms are NOT eligible for PPP loans
  • Portfolio companies of private equity funds may be eligible for PPP loans, however, they must apply the SBA's affiliation rules and must carefully review the economic necessity certification

Given these developments, all PPP loan applicants should confirm that they meet the required criteria for the economic necessity certification taking into account their particular economic situation and facts surround their business.  If the certification cannot be made in good faith, then the PPP loans should be paid back in full by May 7, 2020 to avoid penalties for making the certification in bad faith.  

We recommend borrowers take the following action:

  • Document the financial analysis made to support your conclusion that your PPP loan request was necessary to support ongoing operations.  This should take into account both the revenue and expense sides of the business, with particular focus on how current economic conditions will impact cash flow
  • Show how the financial analysis would lead the company, in the absence of  the PPP loan, to terminate workers and/or miss mortgage, rent, or utility payments.  The use of PPP funds for payroll expenses is the primary component of the CARES Act loan forgiveness program
  • Document whether the owners were/are willing to contribute additional capital to the company.  
  • If you had substantial liquid net working capital and or liquid reserves at the time of your application, you should consider whether you properly made the good faith certification in light of the new guidance, and determine if you should return the PPP funds by the May 7, 2020 amnesty date.  

Loan forgiveness: Laid off employee / Attempted to rehire / Employee declined

SBA updated FAQs #40 on May 3, 2020 to state that a borrower will still be eligible for loan forgiveness if they attempted to rehire a laid off employee but the employee declined the offer.  SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act's loan forgiveness reduction calculation.  The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee's rejection of that offer must be documented by the borrower.  Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation. 

I will be participating on a call with Senators Marco Rubio (Chairman), and Ben Cardin (Ranking Member) US Senate Committee on Small Business & Entrepreneurship on Wednesday May 6th to discuss relief programs for small businesses.  We will continue to keep you informed on these developments.