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PPP FAQ Update #31: Businesses Owned by Large Companies

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

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

PPP Frequently Asked Questions Update (#31)

On April 23, 2020, the U. S. Small Business Administration provided an update to the PPP Frequently Asked Questions:

“31. 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 “current 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.”

Additional Insights on Question #31

Question and Answer #31 was issued in direct response to various large businesses and institutions receiving substantial PPP loans when these various large businesses and institutions had access to financing sources and/or endowments to support their ongoing operations. Given the speed of the PPP rollout, there wasn’t a clear definition provided to borrowers on what qualifies as a ‘current economic uncertainty which makes the loan request necessary to support the ongoing operations of the Applicant.’ Is it a reduction in current and future revenues, reduction in cash collections, restrictions on ongoing operations, supply chain interruptions, etc.? Unfortunately, Question and Answer #31 doesn’t provide a definition. However, Question and Answer #31 does outline a scenario in which a company should be prepared to demonstrate to the SBA, upon request, the basis of their need. This would indicate that on a case by case basis, the SBA may request additional documentation to support the PPP loan need. Borrowers should be prepared to support their need of a PPP Loan.

If you have any questions on what would satisfy the ‘current economic uncertainty which makes the loan request necessary to support the ongoing operations’ requirement, please consult with your legal counsel.

Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (4/24/2020)

On April 24, 2020, the U. S. Small Business Administration issued Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility. The guidance covers the following areas:

  1. Requirements for Promissory Notes and Authorizations
  2. Clarification Regarding Eligible Business
  3. Business Participation in Employer Stock Ownership Plans
  4. Eligibility of Businesses Presently Involved in Bankruptcy Proceedings
  5. Limited Safe Harbor with Respects to Certification Concerning Need for PPP Loan Request

Some items to note:

  • Hedge funds and private equity firms primarily engaged in investment or speculation and such businesses are ineligible to receive a PPP Loan
  • Portfolio companies of a private equity fund may be eligible for a PPP loan (subject to application of the SBA affiliation rules). However, the portfolio companies should carefully review the requirement addressed in Question and Answer #31
  • Applicants that are debtors in a bankruptcy proceeding are ineligible to receive a PPP Loan
  • Borrowers who misunderstood or misapplied the applicable rules have until May 7, 2020 to repay the loan without penalty

Given this additional guidance, please consult with your legal counsel to determine if any of the above guidance applies to your organization.

COVID-19 Business Resources

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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