New PPP Guidance Offers $2M Safe Harbor + Reduces Penalties

Smart Summary 

  • The SBA and Treasury released new guidance that should bring peace of mind to small businesses. 
  • PPP borrowers of less than $2M are now automatically assumed to have made their “operational necessity” loan certifications in good faith. 
  • Borrowers of $2M+ may still have to provide justification, but the penalties for failing to do so have been substantially reduced.

Since the release of the PPP application almost six weeks ago, uncertainty has surrounded one simple certification borrowers were required to make in their applications: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The Original Guidance

Although the certification did not seem controversial when PPP applications went live, the SBA and the Treasury sent shockwaves through the small business community with the guidance issued on April 23. This guidance reiterated the necessity of certification and encouraged borrowers to reassess their situations based on their business activity and access to liquidity at the time of their application. The guidance also provided a safe harbor, allowing for those who did not make such certification in good faith to return their PPP loan proceeds by May 7th (since extended to May 14th) without penalty. Adding more discomfort for small businesses, the SBA and the Treasury later vowed to review all PPP loans in excess of $2 million.

As a result, many borrowers returned their PPP loan funds out of fears stemming from their ability to substantiate their “good faith” basis for requesting the funds and the potential civil and criminal penalties that could result from running afoul of the ever-moving goalpost that has been PPP guidance from the SBA and the Treasury.

The New Guidance

Earlier today, businesses with PPP funds in hand received a bit of positive news. The SBA, in conjunction with the Treasury, released additional guidance in the form of a new Q&A added to their FAQs. Importantly, the new guidance clarifies two things: (1) borrowers with loans of less than $2 million will be deemed to have made the “necessity of the loan” certification in good faith automatically, and (2) if a borrower did not make its initial certification in good faith, then the SBA will seek only repayment of the outstanding PPP loan balance as a consequence, removing concerns of criminal penalties.

New Safe Harbor for Borrowers of Less Than $2 Million
Businesses that received PPP loans in an original principal amount of less than $2 million will be deemed to have made the required certification relating to the necessity of the loan in good faith. However, it is important to note that this safe harbor amount includes loans of affiliates. So if a borrower, along with its affiliates, received PPP funds in an aggregate amount that is equal to or greater than $2 million, then the borrower may not rely on this new safe harbor. With that in mind, it is still important to analyze your affiliates under the appropriate  affiliation rules. Just as affiliates matter for initial eligibility, they also matter for purposes of this new safe harbor.

Reduced Penalties for Borrowers of More Than $2 Million That Can’t Justify Certification
In the event a borrower does not fall under the $2 million safe harbor threshold, it can still receive loan forgiveness and not be subject to penalty if it can substantiate a “good faith” basis for making the certification that the loan was necessary. However, in light of the SBA and the Treasury signaling that they were going to apply heavy scrutiny to such certification, many borrowers looked to the potential penalties that might occur. Prior to the newly issued guidance, the potential penalties ran the spectrum from simple repayment to civil and criminal liability. Fortunately, the new guidance provides some certainty with respect to penalties.

If the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will (1) seek repayment of the outstanding PPP loan balance, and (2) inform the lender that the borrower is not eligible for loan forgiveness. Upon receiving notice from the SBA, the borrower will not face other penalties, so long as it repays the outstanding PPP loan balance.

Moving Forward

Overall, there are still many open questions surrounding the PPP. However, the newest guidance from the SBA and the Treasury provides some comfort for those under the new safe harbor amount. Those above the safe harbor amount can find some comfort in that: 1) they can still make a case for their “good faith” basis for requesting the loan; and 2) in the event they are not able to establish a “good faith” basis, the consequences are limited to repaying the loan without forgiveness.

Cody Myers is a business lawyer with Kegler Brown, working with clients on their funding strategies during the pandemic, including optimizing PPP and SBA EIDL funds. He can be reached directly at [email protected] or (614) 462-5495.