On May 13, 2020, the SBA announced a new economic necessity safe harbor for certain borrowers under the Paycheck Protection Program. The new guidance includes a bright line test that every borrower that took a loan in an amount of less than $2 million will be deemed to have made the certification in good faith. Borrowers with loans in excess of $2 million should also be comforted by this latest guidance because it provides that these borrowers will be given the chance by the SBA to repay the loans outside of the previously announced safe harbor deadline and avoid the penalties associated with the lack of a good faith certification. In sum, it appears that the prior safe harbor no longer applies and borrowers should proceed under this newest guidance.
As background, the Paycheck Protection Program was passed as part of the CARES Act. The loans, which can be either partially or fully forgivable, were made available to borrowers to maintain operations, retain works and to allow these companies to make mortgage, lease and utility payments. The popular program was quickly oversubscribed and Congress provided more funding to the program through the Paycheck Protection Program and Health Care Enhancement Act.
The Paycheck Protection Program relaxed many of the rules associated with typical SBA loans, but the program required each borrower to certify, in good faith, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
As KJK has previously written, on April 23, 2020 and April 28, 2020, the SBA issued guidance that called into question whether borrowers could meet that certification. Specifically, the SBA instructed both private and public companies to analyze “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” and noted that robust companies with access to capital may not be able to meet the good faith certifications under the program. This guidance caused much uneasiness and worry among borrowers. Not only did this guidance substantially alter the terms of the program, but under prior guidance, if a company was deemed to not have made the required certification in good faith, the punishment would have been steep—fines from $5,000 to $2 million and from one to 30 years in prison. Previous guidance from the SBA included a safe harbor whereby companies could repay the loan on or before May 14, 2020 to avoid any penalties. This latest guidance appears to depart from the prior guidance and institutes a new safe harbor. [5/13/2020 UPDATE: The SBA has issued new FAQ #47 extending the repayment date for the safe harbor to May 18, 2020]
This new guidance is significant. First, the SBA announced a bright line test that “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Accordingly, these borrowers can take comfort that they meet the program’s certification requirements.
Second, the SBA noted that borrowers who took loans greater than $2 million “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.” Further, the SBA announced that for those borrowers with loans of more than $2 million, there will not be an immediate referral to enforcement action if it is deemed that the loan should not have been taken. Specifically, the SBA noted that if, as part of its auditing, it is later determined that the borrower lacked “an adequate basis for the required certification concerning the necessity of the loan,” the SBA will first seek repayment of the loan. And if the borrower repays the loan, the SBA advised that it 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.” Accordingly, borrowers with PPP loans in excess of $2 million should take steps to document the basis for the taking of the loan and be prepared to defend that decision when audited. These borrowers should also take comfort that, if the SBA later disagrees with that decision, they will be afforded the opportunity to repay the loan without fear of criminal penalties.