SBA Provides NEW Updates on the PPP: Good Faith Certification and Amnesty
Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
On April 23rd, 2020, the U.S. Small Business Administration updated its FAQ list on the Paycheck Protection Program. The FAQ document provides answers to most commonly asked questions relating to payroll cost calculation, business eligibility, affiliation, application requirements, and others.
In addition to the FAQs, the update contains an important message to those who already applied or still intend to. In FAQ#31 the SBA warns that loans under the PPP are not meant to be distributed to “small” businesses of considerable size that have adequate sources of liquidity and access to capital markets:
“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 “[c]urrent 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.
The SBA provided an opportunity for companies that won’t qualify, but have already applied to the PPP to get “amnesty,” adding the following:
“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 7th, 2020 will be deemed by SBA to have made the required certification in good faith”.
Such measures became necessary because companies with market values exceeding hundreds of millions have already received aid under PPP. In addressing the issue, Treasury Secretary Steven Mnuchin said “there are severe consequences for people who don’t attest properly to this certification. And again, we want to make sure this money is available to small businesses that need it, people who have invested their entire life savings.”
Companies that have not yet applied but are considering doing so should closely examine the FAQ’s to reduce the legal risks associated with the hardship certification. Companies that receive SBA assistance should consider segregating the loan funds in a separate account and documenting that such funds were only used for SBA-approved purposes.
Please note that this article does not constitute legal advice, and you should seek advice of competent counsel before making a decision to seek or not to seek SBA assistance.
Louis Lehot is a business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel. Louis is a corporate, securities and M&A lawyer helping clients, whether public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He was formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team.
Kate Mamyko-Golomb (kate.golomb@L2Counsel.com) is law clerk and business development consultant at L2 Counsel, and advises corporate clients, startups, and investors. Kate graduated cum laude from Northwestern University Pritzker School of Law. Previously, Kate clerked with a major global law firm in Silicon Valley. Prior to receiving her LLM, Kate led an independent corporate law practice in Central and Eastern Europe and served as General Counsel for one of the leading startup accelerators in the region.
Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital, M&A and Transactions Practices and the Technology, Health Care, and Energy Industry Teams. Louis focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and to successfully obtain optimal liquidity events. Louis was the founder of a Silicon Valley boutique law firm called L2 Counsel. He previously served as both the co-managing partner and co-chair of the emerging growth and venture capital practice of a global law firm in Silicon Valley.
