Today, just one day before the safe-harbor deadline for returning Paycheck Protection Program (PPP) loans, SBA released new guidance (FAQ # 46) on the good-faith certification of economic uncertainty. While this new guidance does not provide the clarity that many borrowers were seeking, it appears to reduce the risks associated with this certification by adopting a new safe harbor for loans under $2 million and limiting the potential penalties for loans above $2 million.
The PPP application requires borrowers to certify in good faith that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.” During the first round of PPP funding, many borrowers assumed they could make this certification in good faith based on the dramatic impact that COVID-19 was having on their revenues.
SBA threw a wrench into that assumption by releasing FAQ #31 on April 23, 2020. In making the certification of necessity, FAQ #31 now requires borrowers to take “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.”
Recognizing that FAQ #31 was a significant change, SBA also created a “safe harbor” period. SBA will deem any borrower that repays their PPP loans in full by May 7, 2020 (subsequently extended to May 14, 2020) to have made the certification of necessity in good faith. SBA later confirmed that FAQ #31 also applies to private companies. (See FAQ # 37).
Over the last few weeks, FAQs #31 and #37 have created substantial anxiety over the risks of accepting a PPP loan. And unfortunately, the SBA has yet to provide any further guidance on what qualifies as “other sources of liquidity,” how much is “sufficient to support ongoing operations,” or what terms are “significantly detrimental to a business.”
However, today, SBA released new guidance that appears to have at least lowered the risks associated with this certification. Specifically, FAQ #46 creates a new “safe harbor” for loans under $2 million. For those loans, SBA will deem the borrower to have made the certification of necessity in good faith. Be aware, though, that the safe harbor only applies to businesses that, when aggregating all their affiliates, accepted loans under $2 million. Businesses with multiple affiliated PPP borrowers should thus carefully assess whether the safe harbor applies to them.
FAQ #46 also reduces the risks for many borrowers that accepted loans over $2 million. Pursuant to prior guidance, loans above $2 million are subject to mandatory SBA review prior to loan forgiveness. Under FAQ #46, if SBA determines in the course of that review that a borrower lacked an adequate basis for the certification of necessity, SBA will now seek repayment of the outstanding loan balance and inform the lender that the borrower is not eligible for loan forgiveness. And if the borrower repays the loan, SBA will not pursue administrative enforcement or criminal referrals based on the certification of necessity.
As a practical matter, this should significantly reduce the risks for borrowers that are able to repay PPP loans, since following an adverse SBA review, they will simply be required to repay the loans rather than face government-initiated False Claims Act claims and civil penalties or, in the most egregious cases, criminal referrals. Note, however, that although the new guidance likely reduces the risk to PPP borrowers, it does not technically prevent a private relator from initiating a False Claims Act proceeding or the Department of Justice from bringing criminal charges without an SBA referral.
Borrowers should be aware that while the stakes on this certification may now be lower, the impending deadline is still looming. Borrowers that have concerns about their certification of necessity now have until May 18, 2020, to repay their loans in full to take advantage of the SBA’s offer to deem their certification to have been made in good faith.
In addition, we continue to recommend that all PPP borrowers internally document their basis for the certification now. The types of information to document can include the impact of the crisis on the company’s revenues, profitability and cash flow, any layoffs, furloughs and wage cuts implemented (and any additional cuts that would be required without the PPP loan), the company’s existing debt and ability to service it, financial forecasts for the next 6-12 months, and the company’s ability to access other sources of liquidity, including the terms that would be demanded for that liquidity.
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