New Guidance Available Regarding Necessity of PPP Loans

New Guidance Available Regarding Necessity of PPP Loans
Riker Danzig Corporate Client ALERT re New Guidance Available Regarding Necessity of PPP Loans

The U.S. Department of the Treasury and the Small Business Administration (SBA) have once again updated their Frequently Asked Questions (FAQs) regarding the Paycheck Protection Program (PPP).  The FAQs now include a new Question 46 addressing the SBA’s approach to reviewing borrowers’ good faith certifications concerning the necessity of their loan requests.  Question 46 comes in the wake of the stir caused by Question 31 of the FAQs, which placed a seemingly new emphasis on the importance of a borrower’s good faith certification that funds received under PPP are necessary for ongoing operations, and Treasury Secretary Steven Mnuchin’s announcement that the SBA will audit all borrowers who received PPP loans in excess of $2 million to determine whether they made the certification in good faith.  Question 31 also created a safe harbor providing that a borrower who repays its loan in full by May 14, 2020 (previously May 7), will be deemed by the SBA to have made the required certification in good faith. 

Question 46 provides that any borrower that, together with its affiliates, received loan funds of less than $2 million will be deemed to have made the required certification regarding the necessity of the loan request in good faith.  The SBA has determined this $2 million threshold to be appropriate on the basis that borrowers with loans under $2 million are generally less likely to have had access to adequate sources of liquidity.  Unfortunately, for borrowers with PPP loans in excess of $2 million, Question 46 does not provide any further guidance on what it means to have access to other sources of liquidity.  For example, is short-term debt at market interest rates considered an adequate source of liquidity, even if a borrower would have to lay off employees to be able to service the debt?   

Although Question 46 provides little guidance on the SBA’s approach to its impending audits, there are a few key takeaways:

Note that Thursday, May 14, 2020, is the last day by which to return loan funds in order to qualify under the safe harbor.

Please contact Jason NavarinoRich LomuscioHannah Greendyk or any member of Riker Danzig’s Corporate and Tax Departments if you have questions or concerns about how Question 46 or the safe harbor apply to you.

Please visit Riker Danzig’s COVID-19 Resource Center to stay up to date on all related legal issues.