Originally published on Forbes.com.
The wording in the CARES legislation about the certification required for a Paycheck Protection loan was so vague- uncertainty of current economic conditions makes necessary the loan request – that it was very hard to see how anybody would have trouble making it.
As I noted earlier this week when Daryl Carter of Maury L Carter & Associates read the certification and examined his conscience, he decided he could not sign, because even though he might not have much in the way of revenue for the rest of the year, he had adequate cash reserves to keep paying his people.
There was one law firm that put out a warning about the certification and possible reputational risks, but I thought they were being Nervous Nellies. So I was wrong.
There has been an uproar about some of the companies that have taken the money and now we have new guidance from the ever growing FAQ on the Treasury website. In a few years we may be reading a lot about FAQ 31 litigation as not everyone will attend to or be intimidated by the latest guidance. Here is it in full.
“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 “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.” (Emphasis added)
I don’t know exactly what the penalty for signing not in good faith is. I think it is likely to be pretty nasty and may involve loss of liberty.