SBA and Treasury just published FAQ #46(pasted below) which appears to be a significant win for PPP borrowers, and seems to be a move toward cooler, more rational analysis and away from their earlier heated rhetoric. We need to review in more detail but the key points are:
1. SBA will not review the borrower’s “need’ or “access to other sources of liquidity for any borrower who, together with its affiliates, received loans totaling less than $2 million.
a. It is not immediately clear how SBA will gather the information to aggregate loans across affiliates, but be prepared for ask borrowers to now have to report aggregate PPP loan borrowings for their affiliates as part of their forgiveness application.
b. At the risk of stating the obvious, if you and your affiliates have loans totaling less than $2M and have accurately calculated the loan amounts, and properly use the proceeds, you appear to be free from second guessing by the SBA.
2. For borrowers above the $2M threshold, the sole consequence of a failure to meet the required certification appears to be that SBA will deem the loan ineligible for forgiveness and will “seek repayment of the outstanding PPP loan balance.” If the loan is so repaid, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. This means that there is no False Claims Act (FCA) liability from a government-initiated suit. This is a HUGE win for borrowers.
a. It does leave open the door for private relator (“whistleblower”) claims under the FCA, but this seems to be a strong signal that any such relators should not expect government support or intervention in pursuing such claims.
b. The timing of such repayment is not clear, so we don’t know if this means that the loan is essentiallyaccelerated, or if the borrower will simply have to repay it over the 18 month payment term.
c. The same affiliation standards and exemptions (NAICS 72, franchise, and SBIC) apply to that test as apply to the PPP size standards calcs on the front end.
3. SBA provides that it will review the loans for “compliance with program requirements set forth in the PPP Interim Final Rules and the Borrower Application Form”. This seems to further signal that the IFRs will trump any contradictory guidance in the FAQs.
a. This initially seems helpful on the question around foreign employees. IFR 1 refers to 500 employees whose principal place of residence is in the US, which would hopefully supersede the contrary guidance in FAQ 45. The certifications section in the Borrower Application Form refer only to 500 employees, without the US residence, while question 7 specifically asks if the US is the principal place of residence for all employees included in the payroll calculation. So the guidance here remains murky, but overall this seems helpful to support the idea that borrowers who had already applied for loans as of May 5, should be able to rely on IFR 1 and FAQ 17.
b. Also, SBA has been incorporating some statements from FAQs into IFRs, so we will keep an eye out for that as well.
IMPORTANT NOTE: None of this will any way lessen the risk of public scrutiny under FOIA or otherwise, and private FCA claims remain possible. In fact, it could be seen to increase that risk as certain “watchdog” organizations may feel that SBA and Treasury have abdicated some responsibility to police this program and to impose the promised “severe consequences” on borrowers who didn’t truly need the loan. We also have recently hear that the SEC had launched a voluntary inquiry into public PPP borrowers, asking some borrowers for voluntary information relating to their eligibility for such loans.
For private borrowers, however, these concerns could be mitigated by the apparent excess availability remaining in the PPP funding allocation. As of last night, only $191.4B had been funded out of the $310B PPP 2.0 allocation. We know at least $411 million has been returned by public company borrowers, and probably some multiple of that has been return by private borrowers, so there should be at least $120 billion remaining available for borrowers. SBA seems to be approving about $2-3B of loans per day, so while the program may still run out of funds, it does not appear that borrowers will lose out simply because they were a few days late to the game.
This unfortunately comes on the eve of the safe harbor leaving borrowers not much time to make a decision, but we believe that this guidance significantly reduced the risk calculus for borrowers worried about whether to retain their loan. In fact, we expect that some borrowers may not be second (or third?)-guessing their decision to return loans. At this point, it is not clear whether such a borrower could reapply for a new PPP loan, but it might be worth contacting your lender.
Still no guidance on forgiveness. We will also get out an update on the proposed HEROES Act later today, which contains important and significant proposed extensions to the PPP forgiveness period and changes to other key features of the PPP program. For now, that remains a “wish list” of the House Democrats, but some of these features seem likely to be adopted in the next stimulus bill. Stay tuned.