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Additional Nelson Mullins Alerts

May 6, 2020

SBA Releases Two New FAQs Extending Safe Harbor Deadline

By E. Peter Strand

Late last night the SBA released two new FAQs, one of which extends the deadline for the safe harbor previously set forth in FAQ #31 from May 7, 2020 to May 14, 2020, and another that seeks to address counting employees of foreign affiliates.

1. Extension of Safe Harbor to May 14, 2020

Companies that return PPP funds by May 14, 2020 will be deemed to have made the certification in good faith that “the uncertainty of current economic conditions make the loan necessary to support ongoing operations.” SBA also announced that they would be issuing additional guidance on its review process on the certification prior to May 14, 2020.

FAQ #31 was issued nearly two weeks ago, and stated that PPP borrowers must, when making the economic necessity certification, take into account “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.” Public companies “with substantial market value and access to capital markets” would be unlikely to 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.”  Subsequent FAQs clarified that private companies would also need to consider alternative sources of liquidity to support the business’ ongoing operations. Secretary Mnuchin also stated at that time that companies receiving over $2 million in PPP loans will be audited by the SBA before receiving forgiveness. Borrowers that did not make the certification in good faith may be ineligible for forgiveness, required to repay the funds immediately, or exposed to False Claims Act or other criminal liability.

Borrowers that are considering repaying the loans in an overabundance of caution but think that they can make a good faith certification of economic necessity may want to hold off on repaying the loans until they can review the upcoming SBA guidance.

2. Counting Employees of Foreign Affiliates

The other FAQ released states that for the purpose of applying the SBA’s affiliate rules, applicants must count all employees of its US and foreign affiliates. The FAQ does not specify whether it means all foreign and domestic employees; if it includes foreign employees, it would seem to directly contradict the Interim Final Rule, which states that “you are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States….” (emphasis added).

New FAQs released May 5, 2020:

FAQ 43. Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

FAQ 44. Question: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?

Answer: For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.