Updated SBA "Safe Harbor": Presumed "Economic Uncertainty" for PPP Forgivable Loans

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Good news! The Small Business Administration released updated guidance today clarifying "economic uncertainty" certifications made by PPP borrowers.  Under Q&A #46 the requisite good-faith certification of economic uncertainty will be conclusively presumed for loans of less than $2 million. As set forth in the SBA’s answer, this “safe harbor” allowance takes an essentially prudential and easily applicable approach:

When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA . . . has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, 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. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

See the SBA Updated PPP FAQs here. Consequently, nonprofits that receive less than $2 million in PPP loan funds should fall squarely and unequivocally within this updated SBA “safe harbor,” with no later adverse government action based on this economic uncertainty certification. Now that’s certain!

Background on PPP Loans

As many have learned by now, the PPP is part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is intended to provide significant financial assistance to nonprofits, small businesses, and others facing economic harm and other risks resulting from pandemic-related conditions. The federal SBA issued FAQs dated April 3, 2020, with several periodic updates thereafter as well as a related “Interim Final Rule,” including today’s update.

Thus far, the PPP has received mixed reviews. Marked by highly problematic rollouts and insufficient funds to meet the widespread demand, distribution of PPP loans has also caused serious questions to arise about whether all recipients are truly deserving. Against this backdrop, many nonprofits have determined that these loans may still provide the critical financial assistance needed for sustaining operations through uncertain times of shut-downs, gradual re-openings, and questionable donor support.

As reported in our law firm’s prior blog, the PPP is a forgivable loan intended to cover payroll and occupancy costs, measured over a two-and-a-half month time period of expenses. The PPP provides a strong incentive to keep the proverbial doors open – at least in the short-term. More specifically, so long as the funds are properly spent over an eight-week period from a loan’s receipt date, they need not be repaid. This forgivable feature makes the PPP loan program extremely attractive. The PPP loan application requires a brief certification by loan applicants that the “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” (See SBA FAQ # 9).

SBA FAQ Guidance on PPP Loan Certification

This certification seems quite flimsy, given the present worldwide pandemic, record-high unemployment, and shuttered businesses and nonprofits everywhere. Just about any applicant could make such certification. Or could it? By what standard – cash reserves? Access to other funds? Operational strength? What happened to deserving “small businesses” and other modest operations that were more deserving but got shut out from any funding thanks to larger and reportedly better resourced applicants? One such applicant, Shake Shack, reportedly received $10 million in PPP funds but then returned the funds.

Following such intense criticism, the SBA issued new FAQ #31, on April 23, 2020, answering the additional question of whether “businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan,” as follows:

All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. . . . Borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and 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. For example, 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, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.[1]

This Q&A #31 is specific to only “businesses owned by large companies,” but some lenders and applicants have considered the question as more broadly applicable. Correspondingly, government officials announced their intentions to scrutinize borrowers for eligibility, bringing the threat of unwelcome intrusion into loan applicants’ operations and even potential criminal fraud allegations based on false representations.[2] Also of concern, the SBA’s FAQ #39 indicates that the SBA will review “all loans in excess of $2 million, in addition to other loans as appropriate,” following loan forgiveness.

The SBA subsequently further updated its FAQ guidance, allowing a safe harbor for PPP loan recipients to return the funds by May 14, 2020. If so, then such “economic uncertainty” requirement would be deemed satisfied, as made in good faith.[3] And then came today’s much more “certain” safe harbor clarification for loans under $2 million!

Troubling Concerns Despite SBA’s Newly Announced Certainty

The SBA is essentially building this loan program airplane in the sky, determining what guidance should apply after loan applicants have received funds. Such an approach presents numerous problems. Among other things, applicable legal standards for potential criminal or civil fraud charges should warrant much clearer upfront standards for loan applicants. The SBA’s post hoc pronouncements, and after-the-fact loan conditions should be legally prohibited - at least involving any potential criminal violations, based on generally applicable ex post facto legal prohibitions. But as of today, the SBA’s new FAQ #46 brings welcome clarification - at least for nonprofits receiving less than $2 million in PPP loan funds.

For nonprofits that receive $2 million or more in PPP loan funds, the question of whether to return their PPP loan funds is ultimately a leadership judgment call. A nonprofit’s next steps should include the following considerations:

  • A thorough evaluation of the organization’s finances, including savings or other reserve funds, operating budget, expected revenues (for nonprofits – their charitable gifts and other sources), and expected expenses.
  • Leadership should consider the nature of the organization’s nonprofit activity or business, and the extent to which revenues can otherwise be expected. Does the organization depend on widescale in-person participation or attendance, which is highly problematic now, or does it have a different model not so much affected by shut-down orders?
  • Timing is important too: the economic uncertainty should not be just to get to summer or even through summer, but with a view toward potential year-end reduced revenues - particularly in light of such extreme unemployment rates.
  • Geography counts as well: is the organization in a location like New York, which has been so drastically affected, or in a state with a much smaller adverse impact from COVID-19?
  • What about donor and other stakeholder relations? Will donors consider the organization’s leaders wise and prudent in obtaining PPP funds for continued operations, or will donors reduce support in the wake of such government support?
  • What are other potential optics issues for PPP loan recipients?
  • Is the PPP recipient willing to accept the risk of a potential government audit or other scrutiny later?

These questions should be considered together, with no one-size-fits-all easy answer, and all as a matter of wise stewardship and business judgment – consistent with each leader’s fiduciary duties of diligence, loyalty, and obedience to the corporate mission. To protect against potential later scrutiny regarding the requisite certification, these larger nonprofit organizations would be wise to evaluate and to document all such considerations now – rather than face later questions and second-guessing without the benefit of current understandings.

[1] See the SBA FAQ publication here, at FAQ #31.

[3] See the SBA FAQ publication here, at FAQ #43.