When Congress enacted the CARES Act, and originally allocated $350 billion to save small businesses via the bipartisan Payroll Protection Plan (“PPP”) loan program, it did so while proudly proclaiming “the requirement that a small business concern is unable to obtain credit elsewhere…shall not apply to a [PPP] loan.”  This was a major departure from prior law.  Under prior law, “[n]o financial assistance” could be extended to a small business if the business could “obtain credit elsewhere.”

Unintentionally, this amounted to ringing the dinner bell for many sophisticated, well-financed businesses … businesses that nonetheless somehow meet the definition of “small” under the SBA’s hyper-technical “size” and “affiliation” rules.  The likes of Harvard, Yale, USC, Shake Shack, Ruth Chris’ and the LA Lakers thus rushed in to get their, often quite large, slice of the PPP pie.

Before this unintended consequence of Congress’ action became generally known, the U.S. Small Business Administration (“SBA”) began issuing “guidances.”  It did so by asking and answering frequently asked questions (“FAQs.”)  These FAQs explain how the SBA interprets the CARES Act and how, according to that branch of the U.S. Treasury Department, the PPP program should operate.  One such guidance, published on April 6, reads:

Question: I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?

Answer: No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.

(FAQ # 17)

Once the media caught wind that ivy league universities with multi-billion-dollar endowment reserves and publicly traded corporations were cashing in on the PPP bonanza, however, the Treasury Department and SBA abruptly changed course.  In a widely publicized interview on April 28, 2020, United States Treasury Secretary Steven Mnuchin announced all recipients of PPP loans “for more than $2 million” will “face full audits, with spot checks for [those receiving] smaller amounts.”  On the same date, the SBA issued further guidances that read:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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. For example, 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

(FAQ # 31, italics added.)

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

(FAQ # 37)

Wait a minute, you ask!  Doesn’t FAQ # 31, by stating PPP borrowers were always required to consider their “ability to access other sources of liquidity,” “market value” and “access to capital markets” before certifying their need for a PPP loan, contradict Congress’ original proclamation that PPP borrowers need not show they could not obtain the money elsewhere?  Doesn’t the suggestion that borrowers who obtained PPP loans before FAQ # 31 and 37 were published on April 28 might face civil and criminal prosecution if they don’t give the money back by May 7 contradict what the SBA said in FAQ # 17?  Isn’t the SBA changing the rules after many already played the game?

For many, the answer to both questions is a resounding “yes.”  Nonetheless, Secretary Mnuchin’s promise of “full audits,” combined with the threat of significant civil (treble damage) and criminal liability, has been enough for many PPP borrowers to give back their loans before today’s “no questions asked” return deadline.

Others, however, have decided to stand and fight.  For example, yesterday Zumasys, Inc., a California software company, sued the Treasury Department and SBA in federal court seeking to have the SBA withdraw FAQ # 31 and 37.

Confronted with this growing uproar, and just hours before expiration of today’s deadline, the SBA blinked.  It issued FAQ # 43 that reads:

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

(Italics added.)

Clearly, the Administration is seeking to head off an even greater problem than the one Congress created when it inadvertently allowed major companies with vast cash reserves to borrow PPP money.  It is seeking to head off a flood of lawsuits over the SBA changing the rules of the game after thousands of technically eligible borrowers relied on the express language of the CARES Act.

Stay tuned to see what “additional guidance” the SBA provides explaining “how it will review” borrower certifications of financial need in advance of the extended May 14, 2020 “give the money back” deadline.

Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group