Article provided by: Bodman Law
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020. Under the CARES Act, businesses with no more than 500 employees generally can qualify for Paycheck Protection Program (“PPP”) loans of up to $10M. The PPP is administered by the Small Business Administration (“SBA”) in consultation with the Department of Treasury (“Treasury”). A key benefit of these PPP loans is that the loaned amounts may be forgiven if the funds are used exclusively for payroll and eligible expenses, and payroll levels are maintained during a statutorily defined eight-week period. The details relative to PPP loans are nuanced, but the purpose of the PPP is plain: to benefit and support specified United States businesses by assisting with liquidity to fund the payroll of workers. The PPP has, at least in part, relieved state unemployment insurance burdens by shifting employee payment responsibilities to private employers during the COVID-19 crisis. To the extent borrowed PPP funds are used to fund payroll and other eligible expenses, the loan, including interest, is forgiven under the CARES Act.
Since the CARES Act was signed into law, the SBA and Treasury have worked to fund nearly $660B in PPP loans. During this funding process, the SBA has issued guidance in the form of Frequently Asked Questions (“FAQs”) and Interim Rules to provide guidance to both borrowers and lenders. Importantly, the guidance has consistently indicated that businesses are eligible for both the loan and for forgiveness based on a certification “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the applicant. While borrowers and lenders reasonably anticipated that they would be required to comply with additional rules and guidance under the program, it was generally understood that if small businesses were adversely impacted by the current economic uncertainty, they would be eligible for PPP loans and could qualify for loan forgiveness if the funds were spent appropriately.
In recent weeks, and in response to significant public pressure, the SBA and Treasury appear to have determined that certain companies should not receive the benefits of PPP loans for which they qualified under the law. On April 24, 2020, the SBA issued an interim final rule announcing that publicly traded companies with substantial market value and access to capital markets likely would not be able to meet the “necessity” certification standard, and should therefore be prepared to demonstrate the basis for their PPP loan request or otherwise repay their PPP loans. On April 28, 2020, the SBA issued additional guidance that expanded this guidance to “businesses owned by private companies with adequate sources of liquidity.” Importantly, the SBA has advised that “all borrowers should review carefully the required certification” that current economic uncertainty makes the loan necessary after taking into account their current business activity and access to other sources of liquidity. The actual language in the relevant SBA guidance (FAQ 31) is nuanced and vague, which has led to substantial confusion for both borrowers and lenders.
As an incentive for companies who are unable to make the good faith certification of necessity to repay the loans, the SBA created a “safe harbor” to provide that borrowers would be deemed to have met the necessity certification requirements if the loans were repaid in full on or before May 7, 2020. The deadline for the repayment safe harbor was subsequently extended to May 14, 2020, but the guidance from the SBA regarding which companies should return PPP funds remains confusing. As additional incentive for companies to repay PPP loans during the safe harbor, the federal government has indicated that it will investigate PPP borrowers and may pursue criminal investigations in cases in which certifications on the loan application are determined to be fraudulent.
Prepare for an SBA Audit: Review of All Loans of More than $2 Million
On April 29, 2020, more than one month after the CARES Act was signed into law, the SBA announced that it intends to review (i.e., “audit”) all PPP loans of more than $2M, along with other loans, “as appropriate.” One key motivation for such audits is the government’s view that the benefits of the PPP should not be afforded to companies that have alternative sources of liquidity to fund ongoing operations “in a manner that is not significantly detrimental to the business.” Borrowers should compare this new “audit” standard with the plain language of CARES Act Sec. 1102(a)(2)(I), which exempts applicants for PPP loans from the usual SBA requirement that they be unable to borrow from other sources.
Potential for Fraud: For small businesses that borrowed funds under the PPP, if the federal government determines that there has been a false certification, the company or individual signing the certification could face serious civil and, potentially, criminal charges related to this “fraud.”
Documentation of Necessity or Repayment of PPP Loan: Any business that borrowed PPP loan funds should consider whether, and how, it can document compliance with the CARES Act necessity “certification” requirements. A meaningful review of necessity for PPP loans is recommended for all borrowers, and could prove to be absolutely critical for any borrower that: is publicly traded; is a United States subsidiary of a foreign parent; has access to other sources of liquidity; or is a borrower of more than $2M. Unless the full loan is repaid by May 14, every such borrower should be prepared for an SBA audit of both its PPP loan application, and its uses of PPP loan funds.
If you have questions regarding whether your business can provide the PPP certification in good faith, whether PPP funds should be returned, or how to prepare for an SBA audit, we recommend that you contact experienced counsel to work through the applicable law, rules, and guidance. Moreover, for any PPP borrower that has received a subpoena or other contact from any governmental agency, legal representation should be secured immediately – prior to responding.