On May 13, 2020, the SBA issued SBA FAQ # 46 that addresses the required good-faith certification by Paycheck Protection Program (“PPP”) applicants concerning the necessity of the applicant’s loan request. A link to FAQ # 46 is here.

The SBA previously issued guidance indicating that borrowers must 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.” A safe harbor was created which provided that any borrower that repaid its PPP loan in full prior to May 7, 2020 would be deemed to have made the necessity certification in good faith. This deadline was later extended to May 14, 2020.

The key takeaways from SBA FAQ #46 include:

• Any borrower, together with its affiliates, that received a PPP loan in an original principal amount of less than $2,000,000 “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” For purposes of the safe harbor, the total loan amount calculation will include all loans made to affiliates “to the extent required under the interim final rule on affiliates”. This means that the SBIC, NAICS Code 72 and franchise exceptions provided for under the CARES Act would also apply here.
• For borrowers with loans in excess of $2,000,000, the SBA provides that such borrowers “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.” No additional guidance was provided on what specific circumstances would provide a borrower with an adequate basis for making the required good-faith certification. For example, there has yet to be clarification regarding whether potential availability of loan proceeds from a line of credit or additional investment from principals could impact the adequate basis for the certification.
• The SBA reiterated that all loans in excess of $2,000,000 will be “subject to review”. If the SBA determines a borrower did not have an adequate basis for making the certification, the SBA will require the borrower to repay the entire outstanding PPP loan balance and will inform the borrower’s lender that the borrower is not eligible for loan forgiveness. For borrowers that repay the entire amount, the 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.” It is not clear from the language in the FAQ whether the entire loan amount will be due and payable at the time the SBA makes its determination or if borrowers will be permitted to pay back the loan over the remainder of the two year term if the determination is made prior to the original loan maturity date.

What this means for recipients of PPP loans is that (a) for borrowers with loans under $2,000,000, they can feel confident that they won’t be challenged by the SBA on the necessity certification and (b) for borrowers with loans over $2,000,000, the risk of SBA enforcement associated with keeping the PPP loan proceeds has been reduced to a significant degree. However, please note that this guidance from the SBA does not totally eliminate the risk of False Claims Act claims.

Despite this additional favorable guidance, borrowers should still consider preparing and documenting an analysis demonstrating the necessity of the loan. This is especially important for borrowers with loans in excess of $2,000,000, but still remains the best practice for all borrowers. Borrowers should also continue to consider the public relations risks associated with keeping the funds.

Koley Jessen continues to monitor the legal developments occurring alongside the progression of COVID-19. We encourage you to contact a member of the Finance practice group with any questions regarding the foregoing.

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