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SBA Again Revises PPP "Necessity" Certification; Introduces $2 Million Safe Harbor and Extends Deadline to May 18th

Client Updates

On May 13, 2020, the Small Business Administration ("SBA") issued additional guidance on the Paycheck Protection Program ("PPP") by updating its "Frequently Asked Questions" ("FAQ") release on the program, which can be found here. Specifically, new FAQ 46 provides guidance on the SBA's review of borrowers' required good faith certification of "necessity" in their applications for loans under the PPP. This is important for PPP borrowers, as the previously-announced safe harbor for borrowers to return their PPP loan if they determine that their PPP loan was not necessary expires May 18, 2020, as extended by FAQ 47.

FAQs 31, 43 and 47 and the "May 18" Safe Harbor

As noted in previous Baker Botts client alerts here and here, the PPP requires borrowers to certify that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant" (the "Original Certification"). In FAQ 31, the SBA stated that 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" (the "Enhanced Certification"). (emphasis added)

The SBA also announced in FAQs 31, 43 and 47 that any borrower that applied for a PPP loan prior to the issuance of FAQ 31 but repays the loan in full by May 18, 2020, having determined that they did not meet the "necessity" certification, will be deemed by SBA to have made the required certification in good faith, thereby avoiding potential scrutiny by the SBA. The SBA, in FAQ 37, also applied the Enhanced Certification to private companies.

FAQ 46 and the "$2 Million" Safe Harbor and "Repayment" Safe Harbor

Since FAQs 31 and 37, borrowers have been grappling with how to apply (or re-apply) the facts and circumstances of their businesses to the requirements of the Enhanced Certification.

$2 Million Safe Harbor

Fortunately for some of these borrowers, the SBA provided clarity on this issue just before the deadline to return PPP funds. In FAQ 46, the SBA announced a new safe harbor providing that any borrower (together with its affiliates) that received PPP loans aggregating less than $2 million will be deemed to have made the Original Certification concerning the necessity of the loan request in good faith. This new $2 million safe harbor provides objective clarity for many borrowers who struggled with the prior guidance.

In a nod to the purpose of the PPP, the SBA noted that the new safe harbor will "promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees."

In addition, the SBA suggested that its prior guidance and Enhanced Certification was intended for larger borrowers, and may have unintentionally swept in many smaller borrowers which the PPP was intended to support, noting that "borrowers with loans below [the $2 million] 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."

Moreover, the new guidance creates a bright line threshold for the SBA, which will ultimately have to assess the certifications, and "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."

FAQ 46 is a significant change from the guidance in FAQ 31 and establishes a bright line dollar threshold below which borrowers are deemed to have satisfied the necessity requirement without further evidence. The amount of the loan itself indicates the borrower is more likely to be a small business without access to adequate sources of liquidity. Notably, in creating this safe harbor, the SBA reserved the ability to review PPP loans other than those in excess of $2 million "as appropriate." Additionally, borrowers continue to be subject to criminal liability if they commit fraud in obtaining the PPP loan.

For borrowers that received PPP loans of $2 million or greater, the SBA will continue to review these loans for compliance with the program requirements. However, the SBA further stated that these borrowers falling outside of the safe harbor 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 Enhanced Certification and SBA guidance. As a result, these borrowers may successfully complete the SBA's review process, retain the loan and remain eligible for forgiveness. Borrowers with loans greater than $2 million would continue to be required to meet the Enhanced Certification standards and be prepared to provide documentation supporting its good faith determination of necessity, including showing that it considered "other sources of liquidity" in providing the Enhanced Certification.

Calculating the $2 Million Safe Harbor Threshold

FAQ 46 clarified that the $2 million threshold applies to funds received by the borrower and its affiliates "to the extent required under the interim final rule on affiliates." The interim final rule dated April 15, 2020,1 which can be found here, outlined existing SBA policy in which entities may be considered affiliates based on factors including stock ownership (including contractual control), overlapping management and identity of interest. For this reason, portfolio companies of private equity firms and certain portfolio companies of venture capital firms continue to risk falling outside the number of employee caps for PPP loan eligibility. The interim final rule also provided affiliation guidance with respect to faith-based organizations.

The interim final rule did not change the affiliation exceptions set forth in the CARES Act for businesses in the restaurant industry, franchised businesses and businesses that receive Small Business Investment Act loans, all of which can apply for PPP without aggregating employee headcount.

FAQ 46 states that a borrower that "received PPP loans with an original principal amount of less than $2 million" are deemed to have made the required certification in good faith. (emphasis added). Accordingly, companies who were initially approved for amounts in excess of $2 million, but elected to return a portion (but not all) of the funds, may not necessarily be afforded access to the safe harbor. Presumably, lenders will ultimately report to the SBA the amounts loaned to borrowers. Therefore, any borrower in this particular situation may consider contacting their lender to determine the "original principal amount" of their loan reported by the lender to the SBA.

Repayment Safe Harbor

The SBA further provided in FAQ 46 that if it finds that a borrower does not have a sufficient basis to make the necessity certification, SBA will require repayment of the loan, and if the borrower repays the loan, the SBA will not pursue enforcement or refer the borrower to other agencies for enforcement regarding the necessity certification. While not stated specifically, this statement is clearly directed at $2 million+ borrowers who are not subject to the new safe harbor.

Borrowers previously expressed concern about potential civil and criminal liability if SBA determined that their certification was false. FAQ 46 appears to be an effort to "turn down the temperature." It gives the borrower the opportunity to repay the loan - even if SBA ultimately concludes the borrower lacked a basis to make the necessity certification - and thereby avoid the SBA pursuing further action or referring the borrower to other agencies for enforcement over the necessity certification. However, borrowers are still required to certify they understand that knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable, depending on the circumstances, by imprisonment of up to thirty years and/or a fine of up to $1,000,000.

Importantly for lenders, the SBA added that, even if SBA determines that the borrower is ineligible, this determination would not change the SBA's full guarantee of the loan.

Impact of FAQ 46 on Enforcement

For loans less than $2 million, FAQ 46 will likely diminish the potential for government investigations and private litigation. The SBA "deem[s]" the necessity certification for any such loan to have been made in good faith. To be sure, a False Claims Act ("FCA") plaintiff could still come forward purporting to have "original information" that a particular company's certification was not made in good faith. But such a plaintiff would likely have an uphill battle now in light of the safe harbor. In particular, the safe harbor makes it less likely the Department of Justice would choose to intervene in an FCA case based on the necessity certification, given that another branch of the government (the SBA) "deem[s]" - not merely "presumes" - such certifications are in good faith.

For loans above $2 million, the impact of FAQ 46 is less clear. A "clean" audit from the SBA is certainly a good fact for the company in any litigation or investigation. But it may take some time before SBA makes that finding, and the qui tam plaintiffs' bar will likely be active before then. There are also some theories of FCA damages that would allow for significant awards even if the loan was ultimately repaid. And plaintiffs' risk appetite is likely to be higher in light of the higher potential recovery at the above $2 million mark. Further, the fact that the SBA might not make a referral to Treasury or the Department of Justice ("DOJ") following repayment does not change the fact that DOJ will learn about a private qui tam lawsuit because it is served with a copy of the complaint (before even the defendant does) under the FCA statute.

Further, the risk of other enforcement action may manifest.  For example, the SEC's Division of Enforcement has requested, on a voluntary basis, information from certain issuers with PPP loans regarding their qualifications to receive PPP proceeds.

Finally, it bears noting that the necessity certification is not the only aspect of the PPP that could generate interest for private plaintiffs or the government. Borrowers should ensure they are complying with all requirements, including, for example, affiliation rules and limitations on the use of proceeds (particularly if the borrower chooses not to repay the loan).

What's Missing from FAQ 46 and Remaining Questions regarding Necessity Certification

While FAQ 46 provides a response to certain questions from borrowers, it leaves unresolved a number of issues:

  • The SBA has not provided, and may never provide, standards or factors for determining whether a certification of necessity has an "adequate basis" and would be approved or denied and whether borrowers would be entitled to forgiveness (other than the arithmetic of the use of funds). Accordingly, borrowers should assume that a considerable amount of discretion is reserved to the SBA in reviewing the necessity certification. Borrowers need to perform the same analysis in reviewing the relevant factors and the circumstances of the borrowers' business and applying them to the Enhanced Certification in light of FAQs 31 and 46 to determine whether they can make the necessity certification in good faith and retain the PPP loan proceeds and be eligible for forgiveness.


  • FAQ 46 does not indicate whether the determination by the SBA is subject to appeal  or a request for redetermination. Although  the SBA administrative system contains an Office of Hearings and Appeals, the current regulations of that office do not appear to contemplate resolution of a dispute on this sort of issue. The question of the treatment of the PPP loan pending redetermination of an inaccurate denial of forgiveness remains open.


  • In explaining the rationale for the $2 million safe harbor, the SBA observed that 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. However, for borrowers with loans below this threshold, it is unclear whether the safe harbor would still apply if they have potential access to other sources of liquidity, and whether borrowers would need to show an inability to obtain such liquidity after attempting to do so before availing themselves of the safe harbor. In addition, the SBA did not expressly address whether such borrowers would still fall within the safe harbor if borrowers are able to actually obtain other funding during the PPP's coverage period.

FAQ 46 did not answer questions about FAQ 31 and the Enhanced Certification, including:

  • What is the threshold for “substantial market value” for a public company?
  • Does a public company that is currently unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way?

  • Should debt financing be considered "significantly detrimental" to a business as compared to equity capital since it burdens the borrower?

  • If a borrower has undrawn but committed capital under its current financing arrangements, can it make the good faith certification required by the PPP application?

  • If a borrower raises capital during this period (either prior to or after receiving the loan, during the coverage period) for other purposes (e.g. hiring new personnel or product development), is it required to give the funds back?

And there remain questions in interpreting the language in the Original Certification, for example:

  • Does "current economic uncertainty" include both the immediate financial impact on the company and the expected loss of future business as a result of anticipated economic downturn?

  • Does "necessary" also mean "exclusive", prohibiting borrowers that obtain a PPP loan from obtaining other funding for other necessary uses, such as R&D, product development, manufacturing and production, and sales and marketing?

  • Does "ongoing operations" include previously budgeted plans for new businesses or growth or, rather, solely current and historical operations?

These are only some of the questions that borrowers will continue to deal with under the new SBA guidance, and applicants and borrowers should answer these questions with an appropriate level of care. The PPP loan application continues to require specific certifications and representations and the SBA continues to have wide discretion to review.  In connection with this review, the CARES Act established a Special Inspector General for Pandemic Recovery to carry out audits to regulate waste, fraud, and abuse.

What should you do now?

Borrowers with loans aggregating less than $2 million (together with their affiliates) will have the benefit of the $2 million safe harbor, but should continue to ensure that they have assessed their financial condition and eligibility for the loan and make the required certifications.

Borrowers with loans aggregating $2 million (together with their affiliates) and above should reassess their financial condition and eligibility for the program, paying close attention to whether alternative means of financing are available. These borrowers must be prepared to provide documentation supporting their good faith determination of necessity, including showing that it considered "other sources of liquidity" in providing the Enhanced Certification.

All applicants should keep in mind that their PPP application is not the last time that a certification will be required. The CARES Act provides that when requesting forgiveness at the conclusion of the 8-week borrowing period, borrowers are required to certify that their forgiveness documentation is true and correct and that the amount for which forgiveness is requested was used to retain employees or for other permitted uses.

As we have noted in prior alerts, all applicants should engage their advisors, management and boards of directors in reviewing the factors relevant to recent guidance. Those factors can include cash on the balance sheet, cash flows and cash runway, access to additional capital and the terms of such capital, an analysis of the business as a going concern, financial forecasts, budget and business plan, planned headcount, and the economic need for the loan and its impact to the business and its operations.

185 FR 20817.

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