CARES ACT — THE SBA’S PPP:  NEW FAQ PROVIDES CLARITY TO ‘NECESSITY’ CERTIFICATION

On May 13, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury posted additional guidance on eligibility for the Paycheck Protection Program (PPP) by updating the SBA’s Frequently Asked Questions (FAQs) on the PPP to further address the good-faith certification by PPP applicants, which required applicants to certify that the current "economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant" (see question 46 of the FAQs). Question 46 clarifies some of the uncertainty created by questions 31 and 37 of the FAQs, which provided that PPP applicants needed to assess "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."

The newly-issued question 46 of the FAQs provides a safe harbor for any PPP borrower that, together with its affiliates, received a PPP loan with an original principal amount of less than $2 million. The safe harbor provides that such borrowers will be deemed to have made the required certification concerning the necessity of the loan request in good faith. Question 46 states that borrowers with PPP loans with principal amounts less than $2 million are less likely to have adequate sources of liquidity and determined that this safe harbor will promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.

Borrowers with a PPP loan with an original principal amount greater than $2 million are not eligible for this new safe harbor, but such borrowers “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.” Furthermore, if the SBA determines in the course of its review that a borrower with a PPP loan with an original principal amount greater than $2 million lacked an adequate basis for the required certification concerning the necessity of a PPP loan, the SBA will not pursue administrative remedies or make referrals to other agencies relating to such certifications as long as the borrower repays the loan. It is important to note that this new guidance does not impact potential qui tam actions by private whistleblowers under the False Claims Act.

While borrowers with loans an original principal amount greater than $2 million should still consider whether alternate sources of liquidity exist and determine whether they can make the good faith certification concerning the necessity of the PPP loan, this new guidance provides borrowers with more certainty regarding remedies if the SBA disagrees with the certification.

Borrowers should note that this new guidance does not modify any other eligibility requirements under the PPP and only addresses the uncertainty surrounding the “need” certification.