Paycheck Protection Program (PPP) FAQ Updated to Address Certification Liability – Applicants and Borrowers Should Beware

As readers of our prior alerts (which can be found here) know, the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA), while offering much needed financial assistance to small businesses, has also been a source of much confusion for businesses interested in the program. While the interim final rules and official guidance have answered some questions, many were left unanswered due to ambiguities or inconsistencies in the CARES Act, the interim final rules, and the SBA’s Paycheck Protection Program Frequently Asked Questions (FAQs) (the “FAQ”), which was most recently updated the morning of April 23, 2020.

With legislation increasing funding for the PPP (which ran out of funds last week) expected to be approved by Congress and signed into law by President Trump this week, businesses that did not previously obtain a PPP loan are preparing to apply when lenders start accepting applications again. Businesses that previously received a PPP loan need to ensure they comply with the PPP requirements, including complying with other relevant requirements during the application process. This alert discusses a new question and answer introduced in the most recent update to the FAQ, and explores the implications thereof for potential applicants for PPP loans, and businesses that previously borrowed under the PPP that may already be considering (or may want to consider) whether doing so was proper.

New Q&A

The updated FAQ from the SBA now includes the following new question and answer (emphasis added):

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. 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.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Scrutiny of PPP

The update to the FAQ comes after the PPP came under scrutiny in the media and by Congress for PPP loans made to businesses that many would not have expected to qualify based on their size and assumed financial resources. Senator Marco Rubio (R-FL), Chairman of the Senate Committee on Small Business and Entrepreneurship, among others, announced this Committee would conduct aggressive oversight of the PPP, including whether companies made false certifications to the federal government to receive PPP loans. Sen. Rubio put out a statement on April 20, 2020 that read, in part:

“Any business, regardless of size, must certify it has been harmed by the coronavirus crisis and that PPP is necessary to maintain operations,” Chairman Rubio continued. “This fall, the Senate Committee on Small Business and Entrepreneurship will conduct aggressive oversight into the use of the PPP. If companies are not forthcoming, the Committee will use its subpoena power to compel cooperation.”

On Twitter, Sen. Rubio has been vocal about the need for businesses to make truthful certifications in connection with obtaining a loan under the PPP, noting potential disconnects between legislative intent and the regulations and guidance issued to date, and describing how Congress intends to investigate and ultimately address these matters.

Considerations for Applicants and Existing PPP Borrowers

It is important to note that while the lead-in to new Question 31 of the FAQ refers to “businesses owned by large companies,” the answer would appear to apply to all borrowers, regardless of size. Accordingly, all businesses, whether large or small and whether publicly or privately held, should take heed of this additional guidance in the FAQ and the scrutiny currently given to the PPP, and determine whether it can, in good faith, meet the certifications necessary to obtain a PPP loan. Furthermore, businesses that have already received PPP loans should evaluate whether they can substantiate the certifications made in obtaining their PPP loans, and consider whether they should take advantage of the safe harbor introduced at the end of the answer to Question 31 of the FAQ (that does not appear in the CARES Act, the regulations, or prior official guidance), which states that “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

Based on the foregoing, it appears that PPP borrowers that applied for PPP loans prior to April 23, 2020 can repay their PPP loans (presumably with interest) in full by May 7, 2020 and avoid potential liability for making a false certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Potential Liability

The False Claims Act (31 U.S.C. §§ 3729-33) prohibits any person or entity from knowingly presenting or causing to be presented to the federal government a false or fraudulent claim for payment of government funds, or knowingly making or causing to be made a false or fraudulent statement material to a false claim. The three primary elements of a False Claims Act violation are: (1) falsity (of a claim or statement material to a claim); (2) scienter (knowledge, including reckless disregard); and (3) materiality (reasonably capable of influencing the payment decision of the recipient of the claim). Actual knowledge is not required under the False Claims Act, as the requisite “knowledge” can be shown if a person acts in reckless disregard or deliberate ignorance of the truth or falsity of the claim or statement made.

Of particular relevance to the PPP, False Claims Act violations may be based on instances where an applicant for government assistance (such as a PPP loan) falsely certifies, either expressly or implicitly, compliance with eligibility criteria, contractual requirements, or applicable legal requirements. Furthermore, False Claims Act violations may arise from false claims or false statements made to private lenders implementing loan programs that are federally-funded or federally-guaranteed. 

In addition to actions brought by the federal government, the False Claims Act authorizes private citizens (i.e., whistleblowers), referred to as “relators,” to file qui tam complaints on behalf of the federal government. Once filed, the qui tam complaint will be investigated by the Department of Justice, which will determine whether to intervene and take over the action, to allow the private citizen to proceed in the name of the federal government, or to dismiss the action entirely.

Civil penalties for violations of the False Claims Act may include treble damages (with damages calculated as the loss to the federal government or the amount improperly obtained), plus statutory civil penalties of over $22,000 per false claim. The federal government may also pursue criminal penalties, including jail time, under the False Claims Act and other federal statutes for false claims and statements made in connection with the PPP. 

In the PPP loan application form, applicants are required to certify “that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”

The financial pressures arising from the COVID-19 pandemic, the disjointed roll-out of the PPP regulations and guidance, and the pressure to submit applications for PPP loans before allocated funds were exhausted (as PPP loans would be made on a “first-come, first-served” basis) may have created a “perfect storm” for potential False Claims Act violations. Many businesses that applied for PPP loans had no prior familiarity with SBA or its affiliation rules, which are very complex, or the False Claims Act and its significant penalties, and the required certification was (and remains) confusing.

Questions Remain

The new Question 31 of the FAQ raises a slew of questions, including:

  1. In “taking into account their current business activity,” should applicants or existing borrowers consider anticipated impacts on business activity? 
  2. If the applicant or existing borrower would, in the event it did not receive a PPP loan, significantly reduce its workforce, the wages and salary of its workforce, or both, is that a sufficient basis to determine that the current economic uncertainty makes the PPP loan necessary to support its ongoing operations?
  3. In determining whether a business has “access to other sources of liquidity”:
    • what “other sources of liquidity” should be considered (i.e., assets of the applicant or existing borrower, assets of its direct and indirect owners, existing credit facilities, inability to obtain financing elsewhere on reasonable terms despite efforts to do so)?
    • does it matter whether the applicant or existing borrower has actually made an effort to access such liquidity? 
    • does it matter if the potential source of liquidity is contractually obligated to provide such liquidity?
  4. What level of “other sources of liquidity” should be considered that is “sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business”? 
  5. Does the phrase “not significantly detrimental to the business” apply to access to other sources of liquidity (such that other sources of liquidity must be available on commercially reasonable terms), to the state of ongoing operations (such that a business is required to forgo a PPP loan if doing so would not be significantly detrimental to its ongoing operations), or both? Would it be sufficient if the business could get by with a reduced workforce, scaled-back operations, or both, and, if so, how should those determinations be made?  Does “significantly detrimental to its operations” include layoffs?
  6. What kind of documentation or supporting information would the SBA (and, potentially, the Department of Justice) look to in determining whether the certifications by the applicant or borrower were substantiated and made in good faith?

Unfortunately, it appears that significantly more guidance and clarification will be needed to determine how these questions should be answered.


You may have seen in media coverage the discussion of the concept of the R0 of the virus that causes COVID-19. R0 (pronounced R zero or R naught) is the basic reproduction number (sometimes called basic reproductive ratio), which is the expected number of cases directly generated by one case in a population where all individuals are susceptible to infection. R0 thus seeks to provide a metric for answering the question of “how contagious is this?” It seems as though the FAQ, the interim final rules, and the other official guidance relating to PPP likewise has an R0 well above 1, as for every question introduced, there seem to be multiple questions that arise from it.

Submission of a PPP loan application, a loan forgiveness application, or other documentation relating to the PPP may result in liability under the False Claims Act or other statutes if the applicant or existing borrower made such submission knowing that it did so falsely or if it recklessly failed to substantiate the certifications made and information contained therein. Businesses that are interested in applying for the recently-refunded PPP should carefully consider whether they can make the required certifications in good faith and whether they can substantiate the basis for such certifications. Borrowers that previously received PPP loan proceeds need to do the same, and consider whether it is prudent to repay their PPP loans in full by May 7, 2020 to avoid potential liability. 

Lewis Rice will continue to monitor these developments and provide updates as needed.

To stay abreast of the emerging legal issues raised by the coronavirus pandemic, Lewis Rice has formed a COVID-19 Task Force, which brings together subject matter authorities from various practice areas within the Firm who stand ready to assist our clients as they navigate these complex challenges. Our attorneys are closely monitoring these developments as they occur and will make regular updates to our COVID-19 Resource Center. If you have any questions about the federal government programs available, or the implications and disruptions of COVID-19 on your business, please reach out to one of the authors above or another member of the Task Force.