The CARES Act created the Paycheck Protection Program through which small businesses and not-for-profit organizations with fewer than 500 employees are eligible to receive low-interest, small business loans to provide a much-needed cash infusion to help weather the storm created by COVID-19. During the first tranche of business funding financial institutions made loans to such small businesses as Shake Shack, Ruth’s Chris Steakhouse, Harvard University, and the Los Angeles Lakers. Close to 100 publicly traded companies received loans as well. Not exactly a roster of American small businesses that provide the majority of jobs created in this country, and that Congress intended to target with the program.
Because of the popularity of the Paycheck Protection Program – and the awarding of multi-million dollar loans to large publicly traded companies that really had no business receiving those funds – the original tranche of funds appropriated for the program were depleted by mid-April. Many small businesses did not receive any of those funds. On April 24, 2020, Congress appropriated an additional $310 billion for the program. The Treasury Department and Small Business Administration recently issued guidance to try to ensure the second tranche of funds is provided to genuinely small businesses that are vulnerable to financial collapse because of the Coronavirus. The Treasury has clarified what it means for a loan to be “necessary” under the Act – which is a requirement for receiving funds through the program – and by excluding and discouraging larger borrowers from applying for loans under the program. Hopefully small businesses will now have a real chance to benefit from the program.
Applicants Must Certify the Loan is Necessary for On-Going Operations
The program expands eligibility for small businesses and not-for-profit organizations to receive small business loans under the Small Business Act, and waives the requirement under Section 3(h) of that Act that small businesses must be unable to obtain credit elsewhere. Businesses, however, must now certify in good faith that the uncertainty of the current economic conditions caused by the Coronavirus pandemic makes the loan request necessary to support the on-going operations of the company or non-profit.
On April 23, 2020 the Treasury issued guidance instructing applicants to consider both their current business activity and their ability to access other sources of financing that are not detrimental to their business. It specifically states that public companies with substantial market value and access to the capital markets likely cannot make the certification required to receive a loan under the program. The guidance states an applicant should be prepared to demonstrate the basis for its certification to the SBA if asked. A lender, however, can rely on an applicant’s certification somewhat blindly. As reported by several media outlets, numerous businesses have already returned loan proceeds received under the program because they came to understand the program was not created for their large publicly traded businesses with access to capital markets.
Auditing Businesses Receiving More Than $2 Million
On April 27, 2020, the Treasury Secretary told the media that borrowers will face potential criminal liability for falsely certifying the necessity of any loans applied for. On April 29, 2020, the Treasury updated its Frequently Asked Questions for the program by announcing that borrowers that have received or will receive loans over $2 million will be subject to audit. Borrowers can face civil liability under the False Claims Act for making false certifications. Borrowers that applied for a loan under the program before April 23, 2020, and repay it in full by May 14, 2020, will be deemed to have made the certification in good faith, and will not be penalized. Treasury is expected to issue additional guidance on these issues.
$20 Million Maximum for Businesses Part of a Single Corporate Group
On April 30, 2020, the SBA announced an interim final rule, which set a maximum aggregate loan amount of $20 million for businesses that are part of a single corporate group under the program. (See 13 C.F.R. Part 120) This loan cap will apply to any loans not fully disbursed as of April 30, 2020. Businesses are considered part of a single corporate group if they are at least majority owned, directly or indirectly, by a common parent. This interim rule is in direct response to the high demand for loans and the previous exhaustion of funds available through the program. Applicants that have applied for loans or borrowers that have received loans after April 30, 2020, in excess of $20 million must withdraw or request cancellation of any pending application or approved loan not in compliance with this rule. Applicants and borrowers that fail to withdraw or request cancellation will not be eligible for loan forgiveness under the program. A lender, however, can rely on the applicant’s representation that it is in compliance with this limitation without further inquiry.
The Treasury Department’s guidance and the SBA’s interim final rule are intended to ensure that small businesses and not-for-profit-organizations that do not typically have large cash reserves or easy access to capital will have access to loans under the Paycheck Protection Program. A step in the right direction, but probably not enough to save many small family businesses all across the country that are suffering from the effects of the Coronavirus outbreak.