CARES Act PPP Loan Enforcement Targets Five Companies; Safe Harbor Date Approaches

May 12, 2020

On May 8, 2020, the U.S. House Select Subcommittee on the Coronavirus Crisis wrote letters to five companies calling on them to return Paycheck Protection Program loans or produce supporting documentation by May 15. The press release announcing the action included the names of the companies and characterized them as “large” and not the intended beneficiaries of the Coronavirus Aid, Relief, and Economic Security (CARES) Act Paycheck Protection Program (PPP) loans.

According to the press release, these companies were selected based on the following stated criteria: The companies “(1) are public; (2) have market capitalization of more than $25 million; (3) have more than 600 employees; and (4) sought and received ‘small business’ loans of $10 million or more.”

However, the CARES Act does not specify these criteria as conditions for a PPP loan, nor has subsequent guidance from the Treasury Department and Small Business Administration (SBA) expressly excluded businesses from obtaining PPP loans based on the foregoing criteria (subject to compliance with the employee threshold or alternate size test). Under the PPP, business concerns are eligible if they comply with one of the following categories:

  1. Applicant with not more than the greater of — 500 employees; or , if applicable, SBA employee-based size standard by NAICS code.
  2. A business concern that meets the SBA revenue-based size standard corresponding to its primary industry.
  3. A small business concern that already met existing SBA employee-based size standards.
  4. Under the “alternative size standard” as of March 27, 2020, the business concern is a small business concern that satisfies the following: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

There are also exemptions from the SBA’s affiliation rules for companies that receive financial assistance from small business investment companies, business concerns classified under NAICS Code 72 (the accommodation and food services sector), and certain franchise entities.

The CARES Act does not require applicants to be privately held business concerns. In addition, many eligible NAICS codes allow size standards well in excess of 600 employees, as could application of the additional exception for NAICS Code 72 businesses, which are permitted to apply the 500-employee threshold on a per-location basis.

This congressional demand comes on the heels of significant changes in the PPP loan borrower certification requirements, as described in public statements and written guidance published by the Treasury Department and SBA since April 22, 2020. Notwithstanding apparently contradictory provisions of the CARES Act, all borrowers under the PPP loan program have been directed to review their original certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” in light of guidance set forth in questions 31, 37, 39 and 43 of the SBA’s Frequently Asked Questions and related rules, by “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.” A safe harbor was created and extended to May 14, 2020, for borrowers to repay in full PPP loans in order to be deemed to have made the original necessity certification, in light of the retroactive guidance, in good faith.

The PPP eligibility criteria are complex, continue to be updated and can be confusing. Given ongoing enforcement efforts of the Treasury Department, SBA and now Congress, PPP loan borrowers should carefully and contemporaneously document the analysis used in determining eligibility for PPP loans to consider the safe harbor and otherwise mitigate risk and potential future liability.

If your company requires assistance in navigating these complex standards, please contact one of the authors of this alert, your regular McGuireWoods attorney or a member of McGuireWoods’ COVID-19 Response Team, which helps clients navigate legal and business issues and meet federal, state and local government relations challenges arising from the pandemic.

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.