On April 28, 2020, U.S. Department of Treasury (Treasury) Secretary Steven T. Mnuchin and U.S. Small Business Administration (SBA) administrator Jovita Carranza issued a Joint Statement stating that a “review” will be conducted for businesses seeking loan forgiveness for loans in excess of $2 million under the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  Treasury Secretary Mnuchin and SBA administrator Carranza added that “regulatory guidance implementing this procedure will be forthcoming.”

COVID-19, Mnuchin

The Joint Statement was published on the heels of Treasury Secretary Mnuchin’s interview with CNBC during which he stated that the SBA and Treasury will conduct a “full review” and “full audit” of businesses receiving PPP loans greater than $2 million.  Treasury Secretary Mnuchin’s message and the Joint Statement stems from increasing public scrutiny of businesses that, while technically eligible for PPP loans, may be perceived as larger or better capitalized than the “small business concerns” the PPP was established to assist.  Treasury Secretary Mnuchin elaborated on CNBC that the purpose of the PPP is to “help small businesses” who do not “have liquidity,” and suggested that businesses that are deemed to not make the required PPP certifications in good faith could face “criminal liability”.

Last week, the Treasury and SBA issued interpretative guidance through its Frequently Asked Questions fact sheet (FAQ)[1] and Fourth Interim Final Rule with respect to the obligation of a PPP applicant to certify on its application form that “[c]urrent economic uncertainty makes this [PPP] loan request necessary to support the ongoing operations of the [a]pplicant” (the Economic Uncertainty Certification).[2]  PPP applicants must make the Economic Uncertainty 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.”[3] As an example, the FAQ adds that it is “unlikely that a public company with substantial market value and access to capital markets” will be able to make the Economic Uncertainty Certification in good faith, and that such PPP applicant should be “prepared to demonstrate to SBA, upon request, the basis for its certification.”  On April 28, 2020, the Treasury issued an updated FAQ adding Question #37, which confirms that private companies with adequate sources of liquidity must also be able to make the Economic Uncertainty Certification in good faith to qualify for a PPP loan.

The SBA provides a safe harbor for businesses that have already received PPP loans but determine that they are no longer able to make the Economic Uncertainty Certification in good faith in light of the updated FAQ.  Such businesses that received PPP loans prior to the issuance of the updated FAQ will be deemed by the SBA to have made the Economic Uncertainty Certification in good faith if they prepay their PPP loans in full by May 7, 2020.

At the time of this publication, there is no guidance as to how the SBA and Treasury intend to investigate or penalize businesses that are found to not have made the Economic Uncertainty Certification in good faith.  However, if the SBA’s guidance in its First Interim Final Rule with respect to the general misuse of PPP funds by businesses and Treasury Secretary Mnuchin’s comments on CNBC is any indication, remedies could include a demand for repayment of loan proceeds spent and, if the Economic Uncertainty Certification was intentionally made in bad faith at the time of the PPP application, assertions of civil and, potentially (in what likely would be egregious cases), criminal liability.

For in-depth analysis on the Economic Uncertainty Certification and the safe harbor provisions, please visit our article on the subject matter.

Things are changing quickly and the measures and interpretations described here may change. Our analysis is necessarily limited by the time sensitivities of the current crisis as well as the absence of precedent for some of what is contained here. This analysis represents our best interpretation and recommendations based on where things currently stand.

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[1] The FAQ does not carry the force and effect of law independent of the CARES Act and regulations on which it is based.

[2] FAQ, Question #31.

[3] FAQ, Question #31.