On May 13, the Small Business Administration (SBA), in consultation with the Department of the Treasury, posted Frequently Asked Question #46 which provides further clarity on how the SBA will review borrowers' required good-faith certification concerning the necessity of their loan request.

As described in our prior articles, in submitting an application for a Paycheck Protection Program (PPP) loan application, applicants make a certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On April 23, SBA posted Frequently Asked Question #31 which clarified 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. Question #31 went on to clarify 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 in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Finally, Question #31 provided that a borrower that applied for a PPP loan prior to the issuance of such guidance that repays its PPP loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. On April 28, SBA posted Frequently Asked Question #37, which clarified that the analysis contained in Question #31 also applies to private companies with adequate sources of liquidity to support the business's ongoing operations. On May 5, SBA posted Frequently Asked Question #43, which extended the deadline for repayment of PPP loans by one week from May 7, 2020 to May 14, 2020 to take advantage of the deemed good faith certification contained in Question #31. 

Pursuant to Question #46, a safe harbor will apply to any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million, such that the borrower will be deemed to have made the required certification concerning the necessity of the loan request in good faith. For purposes of the foregoing, borrowers must be careful to consider affiliation in light of the SBA's existing affiliation rules and regulations. Under these rules and regulations, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest. As the rules and regulations are detailed and lengthy, if there is any question as to whether entities may be considered affiliates, please consult with your Pryor Cashman contact to discuss how the rules and regulations may apply.

Question #46 goes on to clarify that borrowers with loans greater than $2 million that do not satisfy the foregoing 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 previously stated in Frequently Asked Question #39 that SBA will review all loans in excess of $2 million following the lender's submission of the borrower's loan forgiveness application. 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.

Question #46 does not provide any additional information on the circumstances under which SBA may determine that a borrower lacked an adequate basis for the making of the required certification. Borrowers should carefully consider whether they are able to make the certification in good faith based on the guidance available. To the extent they determine they are not able to make the certification, they should return the money by May 14, 2020 to take advantage of the deemed good faith certification contained in Question #31.

To the extent they believe that they are able to make the certification, we suggest that borrowers keep detailed records of how that determination was made, including any financial projections that were reviewed and alternative sources of liquidity that were considered, to provide to the SBA in connection with its review. While there can be no assurance that SBA will come to the same conclusion, having contemporaneous records of how the decision was reached should be helpful to rebut a claim that there was no adequate basis for the making of the certification. Borrowers should be aware that if SBA reaches a contrary conclusion, they may be required to repay the loan. However, it is helpful to know that as long as the PPP loan is repaid, SBA will not pursue additional remedies.

We continue to monitor SBA guidance and will post additional updates when available. Organizations with questions on the required certification for PPP loans should reach out to their Pryor Cashman contact to discuss.

Originally published Pryor Cashman, May 2020

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