Earlier today, the Small Business Administration (SBA), in consultation with the Department of the Treasury, published important clarifying guidance concerning the SBA's review of Paycheck Protection Program (PPP) loan applications, specifically with respect to the certification that all borrowers were required to make in good faith at the time of applying for a PPP loan that "current economic uncertainty [made] the loan request necessary to support the ongoing operations of the Applicant." Today, the SBA announced in #46 of its growing list of Frequently Asked Questions (FAQs) that all borrowers who, together with their affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made that certification in good faith. This is a significant development, as other guidance published in recent weeks by the SBA in FAQs #31, #37, and #43 and public comments made by Treasury Secretary Steven Mnuchin, among others, created uncertainty about how the SBA would review and interpret the inherently ambiguous certification and caused many PPP borrowers and applicants to reconsider their loans and applications, and in some cases, repay those loans, reject approved loans, or withdraw applications.

As justification for creating this new safe harbor, the SBA stated that it believes borrowers with loans less than $2 million are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers who received larger loans and that the safe harbor is intended to provide economic certainty to allow borrowers with smaller loans to retain and rehire employees. The SBA also offered that the safe harbor will allow it to focus its limited audit resources on larger loans.

The SBA also acknowledged in FAQ #46 that borrowers with loans greater than $2 million who cannot avail themselves of this new safe harbor may still have an adequate basis for making the required good-faith certification based on their individual facts and circumstances, but repeated its prior guidance that these larger loans would be subject to audit by the SBA for compliance with the requirements in the PPP loan application and applicable Interim Final Rules and published guidance. Additionally, the SBA stated that if it finds in the course of its audit that it believes a borrower lacked an adequate basis for making the required necessity certification, it will inform the borrower that it is not eligible for forgiveness and will seek repayment of the outstanding loan balance. Importantly, however, the SBA added that if the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies for enforcement based on its audit findings. This latter point in effect extends the SBA's previously announced amnesty deadline to repay PPP loans beyond May 14, 2020,¹ for those companies where the support for the necessity certification may ultimately be deemed inadequate by the SBA.

It is important for PPP borrowers and applicants to keep in mind that this new safe harbor announced by the SBA today merely creates a rebuttable presumption that the "necessity" certification was made in good-faith and that applicants and PPP borrowers are still advised to have undertaken a thorough analysis and to maintain adequate records supporting their good-faith belief that the PPP loan, regardless of size, is "necessary to support the ongoing operations of the Applicant" in light of the economic uncertainty created by the COVID-19 pandemic. It is also important to note that the SBA's safe harbor and other guidance announced today does not bar other government agencies and private litigants from independently bringing separate enforcement actions, claims, and inquiries that may make these PPP loans problematic for some borrowers, so careful consideration should still be given in applying for and in deciding whether or not to repay these loans. Lastly, we note that the SBA affiliation rules are likely the applicable standard for aggregating the total loan amount when determining whether such amount exceeds $2 million, so venture-backed companies should proceed with caution and make sure to coordinate with any affiliates when determining whether this safe harbor will apply.

[1] The amnesty deadline was subsequently extended by the SBA to May 18, 2020 pursuant to FAQ #47.