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Legal Alert

CARES Act Update: New SBA Guidance on PPP Loan 'Necessity'

CARES Act Update: New SBA Guidance on PPP Loan 'Necessity'

Key Points:

  • New guidance from the SBA clarifies the "necessity" requirement for PPP loans.
  • Start-ups should proceed with caution when planning to apply for a PPP loan.

Since the passage over the Coronavirus Aid, Relief, and Economic Security Act, or the CARES ACT (the “Act”) start-ups and emerging companies have received mixed signals and guidance regarding their eligibility for loans and loan forgiveness under the Paycheck Protection Program ("PPP"). While most of the uncertainty for start-ups to date has focused on affiliation rules that are difficult to apply to venture-backed companies, the most recent Frequently Asked Questions issued by the SBA on April 23, 2020 should further caution start-ups considering applying for loans under the PPP.

From the outset, the PPP loan application has required applicants to certify that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations. Following a flurry of reporting on chain businesses and other public companies that received loans under the quickly-exhausted first tranche of funding for the PPP, the SBA has provided guidance on the "necessity" requirement in new Question 31.

While borrowers are not subject to the usual SBA requirement that they be unable to obtain credit from other sources, before certifying that a PPP is necessary, borrowers should consider:

  • their current business activity; and
  • their ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business

Although the FAQ specifically states that public companies with access to the capital markets would be able to make the necessity certification in good faith, the latest FAQ should also prompt venture-backed start-ups to pause before applying for a PPP loan.

In light of this guidance, before applying for a PPP loan and in addition to reviewing the other required certifications, boards of directors should:

  • ensure that there has been a thorough consideration of other sources of capital that may be available to the company, whether from existing investors or other third parties,
  • consider the terms of such potential capital, and the impact on the company's ongoing operations, and
  • document the process used by the board to review and determine its eligibility in preparation for potential requests from the SBA

For companies that have already been approved for and received a PPP loan that are unsure of their eligibility in light of the newly issued FAQ, borrowers can repay their loan in full by May 7, 2020, and be deemed to have made their original certification in good faith. Borrowers that fail to make their certifications in good faith may be subject to civil and criminal penalties.

UPDATE: On May 5, 2020, the SBA released additional FAQ 41 extending the safe harbor deadline to return funds to May 14, 2020, and noted that additional guidance on how certifications will be reviewed will be released prior to that deadline.

For More Information, Please Contact:

Natalie Wilson
Natalie Wilson
San Francisco, CA