Due to recent guidance from the Small Business Association (SBA) and the Securities and Exchange Commission (SEC), registered investment advisers (RIAs) should carefully consider their eligibility for a loan under the Paycheck Protection Program, and whether they must disclose the circumstances that led to the loan, or the fact of receiving the loan itself, on form ADV.
The PPP Loan Certification
In order to qualify for a PPP loan, an applicant must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Our view of this language was that it was very broad, so as to apply to any business that reasonably anticipated a reduction in revenue that could result in curtailment of its current operations. If an RIA believed in good faith that its revenue will decrease or has decreased as a result of the pandemic, and also anticipated that it will have to terminate any employees without the loan, then it is eligible for the loan. Since the primary purpose of the loan program was to minimize unemployment, in our view such an RIA should have easily been able to make the certification in good faith. However, later SBA guidance effectively altered the standard, and any RIA who applied for a loan should reevaluate the certification under the new standard.
April 23, 2020 — SBA Guidance
There was political backlash in mid-April when it was revealed that certain large companies, including publicly-traded companies that had access to capital markets, were receiving PPP loans. This led the Small Business Administration to issue formal Q&A guidance last Thursday, April 23, 2020. As a result of the guidance, the SBA stated that, 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. While it is tempting to read the SBA guidance as applicable only to large businesses with access to capital, the Q&A made it clear that the “significantly detrimental” standard applies to “all borrowers.”Furthermore, while the guidance could be interpreted to apply only to public companies, the SBA clarified that it applied to private companies by updated guidance issued on April 28, 2020.