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CARES Act: SBA Issues Guidance for Eligibility of Businesses Owned by Large Companies Under Paycheck Protection Program
Practical Law Legal Update w-025-2359 (Approx. 4 pages)
CARES Act: SBA Issues Guidance for Eligibility of Businesses Owned by Large Companies Under Paycheck Protection Program
by Practical Law Finance
| Published on 28 Apr 2020 • USA (National/Federal) |
On April 23, 2020, the Small Business Administration (SBA) issued further guidance on whether businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a Paycheck Protection Program (PPP) loan, a program created under Title 1 of the CARES Act. The SBA said that it is unlikely that a public company with substantial market value and access to capital markets will be able to certify in good faith the need for a PPP loan. However, any borrower who applied for a PPP loan prior to the issuance of this guidance and repays the loan in full before May 7, 2020 will be deemed to have made the certification in good faith.
On April 23, 2020, the Small Business Administration (SBA) issued further guidance on whether businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a Paycheck Protection Program (PPP) loan, a program created under Title 1 of the CARES Act.
The SBA said that 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 and must certify in good faith that their PPP loan request is necessary. Specifically, borrowers must be able to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In making this certification, borrowers should consider 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.
The SBA said 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. Any such company should be prepared to demonstrate the basis for its certification if requested by the SBA. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the PPP loan in full by May 7, 2020 will be deemed to have made the certification in good faith. Lenders may rely on a borrower’s certification regarding the necessity of the loan request.
This guidance was likely issued in response to criticism in the market of the issuance of PPP loans to some large public companies when there were insufficient funds for other smaller businesses with a greater need for assistance. Several larger companies have since returned their PPP loan funds.
In addition, the Federal Reserve announced that it will begin publishing monthly reports with details about the recipients of funds issued under its loan and liquidity programs developed in response to the COVID-19 crisis, including the Main Street Loan Facilities and the Municipal Liquidity Facility (but not the PPP, which is administered by the SBA) (see Practice Note, COVID-19: Federal Reserve Lending and Liquidity Facilities).