The Treasury and SBA today updated a set of Frequently Asked Questions (FAQs) with respect to the Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in order to address open issues raised by program participants. Among other things, the revised FAQs (see question 43) extend the safe harbor repayment date with respect to earlier “economic certifications” made by borrowers under the PPP from May 7 until May 14. The FAQs (see question 44) also make it clear that the employees of foreign affiliates of a borrower are taken into account in determining if the borrower is an eligible “small business” under the program.
The Economic Certification Issue. By way of background, on April 23, 2020, the Treasury and SBA provided new guidance on the economic certification requirement under the PPP (i.e., that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”). Specifically, the answer to Question 31 stated that a borrower applying for a PPP, in certifying its economic uncertainty, must take into account:
- its current business activity and,
- its ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
The FAQs also noted 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 … .” Treasury and SBA also jointly noted that the SBA will review, on a case by case basis, all PPP loans over $2 million as well as others “as appropriate.”
In light of this new guidance, the Treasury and SBA announced that for any borrower that previously applied for a PPP loan prior to April 23, 2020, SBA will view the certification to be made in good faith if the loan is paid in full by May 7, 2020.
Given the new guidance and the upcoming May 7, 2020 safe harbor date, numerous prior borrowers have been evaluating whether to return the PPP funding they had received, taking into account potential criminal and civil liability risks the False Statements Act and False Claims Act in connection with their prior certification,1 the prospect of a time-consuming and costly SBA audit, their access to credit, and whether they continue to have need for the funds today to support ongoing operations.
Extension of the Safe Harbor Date Until May 14. In the response to newly issued FAQ 43 today, the “safe harbor” repayment date has now been extended from May 7 to May 14, 2020. The SBA is expected to memorialize this date in a new rule shortly. Additionally, Treasury and the SBA announced that the “SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.”
In short, any borrower that applied for a PPP loan prior to the issuance of the April 23 guidance will be deemed to have made the economic certification in good faith if it repays it in full by May 14, 2020. In effect, such borrowers now have additional breathing room to evaluate their circumstances and options.
Moreover, it should be noted that this safe harbor date only relates to the economic certification and not to other potential inaccurate certifications borrowers may have made in haste to apply for PPP funding (e.g., on whether the business is "small," taking affiliated entities into account). Nevertheless, as a practical matter, such borrowers also will probably face a lower likelihood they will face liability risks if they return such funds by May 14, 2020.
Consideration of Foreign Affiliates. Finally, among other things, newly issued FAQ 44 confirms that the employees of foreign affiliates of a potential PPP borrower must be taken into account in determining whether that borrower is an eligible small business. Specifically, under the PPP’s affiliation rules issued in April 2020, the employees of borrowers, together with the employees of affiliated entities, must be aggregated to determine if they meet the employee size standard established by SBA. The answer to the FAQ makes it clear that, absent a waiver or the application of an exception, the employees of foreign affiliates of a potential PPP borrower must be considered in this evaluation as well.
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1 For more information on potential False Claim Act litigation, see Eversheds Sutherland’s Legal Alert: CARES Act loans and related programs come with increased oversight and risk of False Claims Act prosecution: Borrowers beware.
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