On May 13, 2020, the Small Business Administration (“SBA”) updated its Frequently Asked Questions on the Paycheck Protection Program (“PPP”) loans with a new Question 46 regarding a borrower’s certification that its PPP loan request is “necessary to support [its] ongoing operations” in light of the “current economic uncertainty” (such certification, the “Need Certification”).

Safe Harbor for PPP Loans under $2 million

Question 46 creates a safe harbor for PPP loans of less than $2 million.  Any borrower that, together with its affiliates (as determined pursuant to pre-existing guidance on affiliation rules applicable to these PPP loans), has received PPP loan(s) with an original principal amount of less than $2 million will be deemed to have made the Need Certification in good faith.  In justifying this safe harbor, the SBA explained that it is intended to provide those borrowers to which it applies with additional economic certainty as to their PPP loans and, in light of the high demand for these PPP loans, to enable the SBA to focus its audit resources on larger PPP loans.

PPP Loans Greater Than $2 million

For those borrowers that, together with their respective affiliates, received PPP loans greater than $2 million,[1] no safe harbor rule applies.  Such a borrower must assess its own unique circumstances to determine if it can, in good faith, make the Need Certification, particularly in light of pre-existing guidance, which, in relevant part, provides that a borrower must take into account its “current business activity and [its] ability to access other sources of liquidity sufficient to support [its] ongoing operations in a manner that is not significantly detrimental to the business.”[2]  Question 46 does not provide any further insight into how the SBA will review each borrower’s relevant facts and circumstances in making the Need Certification.

In the event that the SBA determines that a borrower “lacked an adequate basis” for making the Need Certification, the SBA will seek for that borrower to repay the outstanding PPP loan balance and, moreover, will inform that borrower’s lender that its PPP loan is not eligible for forgiveness.  The borrower will be given the opportunity to repay the PPP loan after receiving this notification from the SBA, and, so long as the borrower repays its loan, the SBA provides that it will not pursue further administrative enforcement or refer the matter to other agencies (such as, for example, the U.S. Department of Justice).   Notably, while guidance in Question 46 provides that the SBA will not refer a borrower to another agency for prosecution, nothing in Question 46 would bar a third party from bringing a qui tam lawsuit under the False Claims Act against such a borrower, to the extent applicable.

The new guidance in Question 46 comes one day before the termination of the separate safe harbor period in which borrowers who had received PPP loan funds may repay those funds in full and be presumed to have made the Need Certification in good faith.  More information on this separate safe harbor period and other aspects of these PPP loans may be found here.

[1] Due to unclear drafting, it is uncertain whether the SBA intends that the safe harbor should apply to PPP loans of $2 million.  It is clear that loans of less than $2 million are entitled to the safe harbor, and it is also clear that loans of greater than $2 million are not entitled to the safe harbor.

[2] See Questions 31 and 37 of the Frequently Asked Questions.

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