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Paycheck Protection Program Loans Over $2M Will Now Be Audited Before Being Forgiven

The Paycheck Protection Program (PPP) has been the subject of criticism since the initial $349B pool of money associated with the program was exhausted in just 2 weeks, and details emerged regarding large, publicly traded companies receiving millions of dollars in loans through the program. There are several examples of public companies with substantial market value and access to capital markets applying and being approved for PPP loans. The criticism of the program led Treasury Secretary Steven Mnuchin to say that the Small Business Administration will be doing a full review of any loan over $2M before there is loan forgiveness. He went on to say, “This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity.”

In addition to the comments from Secretary Mnuchin, the SBA has added the following question and answer to their program guidance:

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 “[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. 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.