New FAQ 46 from the SBA provides a “safe harbor” for borrowers of less than $2 million under the Paycheck Protection Program provisions of the CARES Act. Under the safe harbor, for borrowers of amounts below the $2 million threshold, the SBA will deem their certifications regarding the “necessity” of the loans to have been made in good faith. What’s more, while loans over the $2 million threshold will be subject to SBA review (as has been widely publicized), if the SBA determines that the borrower “lacked an adequate basis” for the required “necessity” certification, but the borrower then repays the loan, the SBA “will not pursue administrative enforcement or referrals to other agencies” with respect to the “necessity” certification.
You might recall that under the PPP, to be eligible for a loan, a borrower must certify, in good faith, that the loan is necessary to support continuing operations. More specifically, borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Prior FAQs have indicated that 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. However, the FAQs have made clear that the certification may be difficult in some cases. For example, according to the FAQs, “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.” Borrowers that repay the loan in full by May 18 (as just extended in FAQ 47) will be deemed by SBA to have made the required certification in good faith. The uncertainty created by these FAQs led many companies, especially public companies, with PPP loans of various sizes to question whether they should retain their loans. (See this PubCo post. See also this PubCo post regarding demands by a House oversight committee for repayment of PPP loans by certain public companies.)
Under the new safe harbor, if a borrower, together with its affiliates (to the extent required under the interim final rule on affiliates), received PPP loans with an original principal amount of less than $2 million, the borrower “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The $2 million threshold was determined by SBA to be appropriate because borrowers with “loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The safe harbor is being implemented to help “promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees” and focus the SBA’s limited audit resources on larger loans “where the compliance effort may yield higher returns.”
But borrowers of larger amounts are not necessarily in hot water, although they will be subject to SBA review. According to the FAQ:
“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.”
Does this FAQ reflect some serious softening on the part of the SBA and Treasury? At the end of April, as reported in the Washington Post, Treasury Secretary Steven Mnuchin told CNBC that “‘I want to be very clear it’s the borrowers who have criminal liability if they made this certification and it’s not true…We will make sure that what was the intent for taxpayers is fulfilled here.’” [Emphasis added.]
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