Financial Institutions Law Alert

This is an update to a previous alert that was published on  May 7, 2020.

Today, the SBA released additional guidance to PPP loan borrowers on how the SBA will determine whether borrowers certified in good faith that “current economic uncertainty [made the] loan request necessary to support the ongoing operations.” The new guidance is seemingly candid and favorable to borrowers.

The SBA splits borrowers in two groups: those who received less than $2 million and those who received $2 million or more in PPP loan proceeds. For a business who has received less than $2 million, the SBA has explicitly stated that the business “…will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The SBA provides two rationales for choosing to accept these borrowers’ certifications: (1) companies below this threshold “are generally less likely to have access to adequate sources of liquidity in the current economic environment” and (2) the SBA will yield higher returns by applying its limited resources to audits of companies who accepted loans over $2 million. Therefore, advisers under the $2 million threshold will be presumed to have made the certification in good faith.

For businesses who received $2 million or more in loan proceeds, the SBA has now disclosed on more than one occasion that these businesses can expect an audit and scrutiny of their good faith certification. However, the SBA has explicitly stated that if it determines after such audit that the business did not properly make its good faith certification, it will give the business the opportunity to repay the loan proceeds (presumably with interest) during an undisclosed period of time. If the business does in fact repay the loan balance in full, the SBA “will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification” and the business may still be eligible for the SBA’s loan guarantee. Thus, even if advisers are found not to have made the certification in good faith, they may still avoid regulatory fines, public censure, and possibly criminal charges if they repay the loan.

Of note, the good faith certification and fraud are two different concepts. If the SBA determines that a business has committed fraud or violated some other law or administrative rule, the business will likely not be able to avail itself of the presumption of good faith or the repayment remedy.

While RIAs who obtained loans less than $2 million seem to be shielded from the SBA’s review of their good faith certification and RIAs who obtained more than $2 million may one day be able to avoid sanctions by repaying the loan, RIAs should put themselves in the best position possible by:

(1) conducting and documenting their good faith analysis and justification for retaining the loan;

(2) disclosing the loan on their Form ADV in conjunction with SEC guidance;

(3) determining potential long-term economic impacts of this disclosure from a business standpoint;

(4) carefully utilizing the proceeds in connection with SBA guidance to ensure loan forgiveness; and

(5) determining whether the amount of the loan justifies the potential costs of retaining it.

For businesses who obtained loans under $2 million, the SBA’s newest guidance appears to provide a sigh of relief in making the otherwise difficult determination on the future forecast and sustainability of their businesses. However, the guidance with regard to the PPP loan is ever-changing and notably, the tone of the guidance has morphed several times with respect to its apparent stringency. Advisers should stay on top of SBA, SEC, NASAA, and state guidance on the issue. Advisers can still take advantage of the SBA’s safe harbor by contacting their banker through May 14, 2020 to return the loan proceeds. 

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