The Small Business Administration and the Treasury Department finally have eased the minds of many Paycheck Protection Program borrowers who borrowed less than $2 million about whether the funds had to be returned because they might not have been borrowed in good faith. Nothing like having the government wait until the last minute, since borrowers who were considering returning their funds had a deadline of today (May 14) to return them (now extended to Monday, May 18).

This all started because publicly-traded chain restaurants like Shake Shack and Ruth’s Chris Steak House were excoriated when it became known by the American public that they borrowed PPP money that was promoted as helping small businesses. Facing scorn and public outcry, Treasury Secretary Stephen Mnuchin and SBA Administrator Jovita Carranza promulgated a scary and overly-broad FAQ #31, which said in part:

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Mnuchin promised that every business that borrowed more than $2 million would be audited, but he didn’t say that smaller borrowers would not be audited. On top of that, he also threatened criminal action against borrowers whose loans weren’t “necessary”.

He also established a safe harbor date by which companies who now believed their loans might not be absolutely “necessary” could return the money and avoid jail. That date was May 7. Then it was extended to May 14 (today). And then extended again to Monday, May 18.

These pronouncements terrified many small business owners who were now second-guessing whether they should have borrowed PPP funds at all.

I received calls from clients who had small lines of credit available at the time that they borrowed PPP funds and now were worried about going to jail if that line of credit meant that their PPP loan wasn’t “necessary”. The best I could tell them was to document all the economic uncertainty reasons that led them to take out the PPP funds in the first place. I believed that Mnuchin’s declarations made contrary to the stated purpose of the PPP legislation and after the funds were borrowed were legally unenforceable, and that the federal government did not have the resources to audit or prosecute my small business clients who were genuinely looking for a safety net from economic free fall when they borrowed the money. But I certainly didn’t want my clients to become test cases for those legal theories. 

Today, the SBA provided relief for my concerned clients and small businesses across the country. The SBA released the new FAQ #47 extending the return the money date to May 18. But more importantly, the SBA also issued FAQ #46, which should provide most PPP borrowers with more certainty. (I have some strong opinions about the late timing of this guidance and governing by FAQ, in general, but those opinions cannot be politely shared).

FAQ #46 says:
When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because 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. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, 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.

In other words, if you borrowed less than $2 million in PPP funds, the SBA is not going to jail you or audit you or even prevent your PPP loan forgiveness (although the SBA still hasn’t issued any FAQs on how that forgiveness is going to work, even though we are only a couple of weeks from our PPP “covered period” of 8 weeks expiring).

Your PPP loan is legally deemed to have been “necessary” if it was less than $2 million. Even if you borrowed more than $2 million, the FAQ now says that you will be given an opportunity to pay back the money after the audit without facing “administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.” So as an employer, you can go back to just wondering how you are going to keep your business afloat when these PPP funds run out.