Today the Small Business Administration (SBA) issued additional guidance with respect to the “necessity” certification required under the CARES Act in connection with the Paycheck Protection Program (PPP).

The relevant guidance appears in FAQ 46, and it is very good news for borrowers who received PPP loans under $2 million (together with PPP loans to affiliates, if any). The SBA, in consultation with the U.S. Department of Treasury, has determined that a safe harbor will apply with respect to SBA’s review of the certification of necessity with respect to such loans. Specifically, “[a]ny borrower that, together with its affiliates,[footnote omitted] 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.”

FAQ 46 also stated that PPP loans in amounts of $2 million or more (along with other PPP loans as appropriate) will be subject to review. This statement represents a departure from SBA’s previous guidance in FAQ 39 stating that all loans of $2 million or more would be reviewed following forgiveness requests. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required necessity certification, 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 learning of the SBA’s determination regarding repayment, SBA will not pursue administrative enforcement or make referrals to other agencies based on its determination with respect to the necessity certification. But the guidance does not specify that this enforcement relief will apply to borrowers that, together with affiliates, have loans of $2 million or more (and as such do not qualify for the safe harbor covering the necessity certification described above, even for a borrower that individually has a loan in an amount less than $2 million), but it seems as though the enforcement relief should be available.

Borrowers should keep in mind that in both cases the guidance relates only to the necessity certification and thus has no impact on risks related to other certifications. Further, a variety of other risks still remain. For example:

• a relator (or whistleblower) still could bring a qui tam case under the federal False Claims Act, but the risk associated with such cases is now much lower;
• another government agency, such as the Department of Justice, still could pursue fraud or other charges;
• borrowers still could be the subject of negative press coverage;
• Congressional committees may still hold hearings and call borrowers to testify;
• Congress could take action intended to clarify that the SBA guidance did not correctly interpret Congressional intent under the CARES Act.

Given that a federal False Claims Act case can result in the payment of treble damages (which could be viewed under certain circumstances as three times the loan amount), substantial civil penalties, and attorneys’ fees, the remaining risks cannot be easily dismissed. Borrowers seeking further assistance in assessing these matters should contact a member of the Mintz team.

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