The net effect of the FAQs is that a borrower that, with its affiliates, has PPP loans of more than $2 million must decide whether to repay the loan by May 18, or to undergo SBA’s review of the good-faith basis for the certification of economic necessity when the borrower’s loan forgiveness application is filed. The SBA has outlined the nature of its review in only general terms. Borrowers with PPP loans of $2 million or less are generally safe from such a review.
The safe harbors relate to the requirement in Section 1102(a) of the CARES Act that an applicant for a PPP loan certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the applicant. This certification has been the basis for criticism by, among others, the Secretary of the Treasury that successful applicants for large amounts of PPP loans may have had access to liquidity elsewhere and thus would have lacked a good-faith basis for the economic necessity certification. On April 23, 2020, in FAQ 31, the SBA addressed whether businesses owned by large companies with adequate sources of liquidity qualified for PPP loans and created a safe harbor from SBA inquiry for all companies that repaid their PPP loans by May 7, 2020. On April 28, 2020, in FAQ 37, the SBA extended this standard to businesses owned by private companies with adequate sources of liquidity. On April 29, 2020, in FAQ 39, the SBA announced that it would review all PPP loans of more than $2 million upon submission of loan forgiveness applications. On May 5, 2020, in FAQ 43, the SBA extended the repayment deadline from May 7 to May 14, observing that it intended to provide additional guidance before then on how it would review the good-faith basis for the economic necessity certification.
With FAQ 46, a borrower and its affiliates with PPP loans of less than $2 million in total will be deemed to make their certifications in good faith, but still may be subject to audit for other eligibility issues and could face investigations from other agencies for certifications that are clearly not plausible. A borrower and its affiliates that collectively have more than $2 million in PPP loans are outside this safe harbor and must decide whether to take advantage of the first safe harbor by repaying the PPP loans by May 18 or to prepare for SBA review when a PPP loan forgiveness application is filed. Such a borrower should be prepared to show “an adequate basis for the economic necessity certification, based on … individual circumstances in light of the language of the certification and SBA guidance.” A source of such guidance is FAQ 31, which advises that, in order to make a good-faith certification, a borrower must take into account its current business activity and its ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business. FAQ 31 goes on to observe that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification and should be prepared to demonstrate the basis for the certification to the SBA.
Borrowers of larger loans that decide to proceed will not face further enforcement action or criminal referrals from the SBA if the SBA disagrees with the borrower’s position on the certification during an audit, provided that the borrower repays the loan after the SBA makes this determination. However, as with respect to the safe harbor for affiliate groups with loans collectively valued at less than $2 million, the SBA’s position will not necessarily govern investigations or enforcement actions from other agencies like DOJ, qui tam plaintiffs under the False Claims Act, or congressional inquiries.
For additional analysis on considerations for whether to return a PPP loan, see our colleagues’ post here.