New SBA Guidance on PPP Necessity Certification and Forgiveness

Below we’ve summarized recently released information related to the Paycheck Protection Program Loan (“PPP Loan”) program.

• New Guidance With Regard to the Certification of “Necessity” of PPP Loan.
  • The application for a PPP Loan required the applicant to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the applicant. We refer to this certification as the “necessity certification.”
  • Previous updates regarding the “necessity certification” are available here and here.
  • On May 13, the Small Business Administration (“SBA”) released additional FAQs regarding the necessity certification (see Question 46 here).
    • Safe Harbor for Recipients of Less Than $2 Million:
      • If a recipient of PPP Loan funds received less than $2 million (when combined with any PPP Loan funds received by any of its affiliates), such recipient will be automatically deemed to have made the “necessity certification” in good faith.
      • Although we still recommend that all borrowers, including those that received less than $2 million, maintain documentation regarding the necessity of their PPP Loan application, this should give comfort and provide clarity to borrowers of less than $2 million.
    • Return of PPP Loan Funds by Recipients That SBA Determines Lacked Adequate Basis for Making the “Necessity Certification”
      • If a recipient of PPP Loan funds is determined by the SBA to have “lacked an adequate basis” for making the “necessity certification,” that recipient may repay the outstanding balance of the PPP Loan and “SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification.”
      • In other words, if an SBA audit determines that a recipient of more than $2 million in PPP Loan funds did not actually need the loan request to support its ongoing operations, the recipient may repay the PPP Loan and avoid enforcement by the SBA.
      • Although this should provide comfort to all borrowers of PPP Loan funds, it may not eliminate all potential sources of liability with respect to the “necessity certification.” As noted above, we recommend that all borrowers maintain documentation regarding the necessity of their PPP Loan application.
    • If a Laid Off Employee Declines an Offer to be Rehired, PPP Loan Forgiveness Will Not Be Affected
      • As described in greater detail here, PPP Loans may be forgiven if the borrower uses the funds on certain prescribed expenses. The amount eligible for forgiveness will be reduced if the borrower reduces employee headcount or certain employee salaries or wages.
      • An SBA FAQ (see Question 40 here) provides that if a borrower has laid off an employee, offers to re-hire that employee, but the employee declines, the borrower’s loan forgiveness amount will not be reduced on account of such decline in employee headcount.
      • To take advantage of this exception, the borrower must have made a good faith, written offer of re-hire, and the employee’s rejection of such offer must be documented by the borrower.