The Small Business Administration (“SBA”) and Treasury Department have just published guidelines regarding qualifications for the Payroll Protection Program (“PPP”) loans. These guidelines apply retroactively to the PPP loans your small business received in April and carry the risk of investigation and criminal penalties. It is very important that you consider these new guidelines carefully.
The PPP loan program was enacted to make loan funds broadly available to qualifying businesses so that those businesses could keep their employees on the payroll.
Following enactment, the federal government repeatedly encouraged businesses to apply for (and lenders to quickly process) PPP loans. Even as late as April 15, 2020, Treasury Secretary Mnuchin announced that “we want every eligible small business to participate and get the resources they need.” The CARES Act affirmatively eliminated existing eligibility restrictions in the SBA loan program. The Act created a presumption that loan applicants were adversely impacted by covid-19 stay-at-home orders.
That approach has changed.
After significant press reporting and commentary on certain businesses benefiting from the PPP loans, the SBA and Treasury Secretary abruptly shifted course. On April 23, 2020, the SBA published revised guidelines for the PPP loan program (in the form of frequently asked questions (“FAQs”)). Of particular concern is new FAQ Question 31, which states, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
On April 28, the SBA issued Question 37 making it clear that this same answer applies to smaller privately owned companies as well by referring businesses owned by private companies to Question 31 for qualification. Question 31 provides that the certification each borrower makes in its application, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” must be made “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.” (Emphasis ours).
Businesses that participate in the PPP loan program will be required to demonstrate to the SBA – upon the SBA’s request – the basis for the business’s certification that the loan was necessary.
The SBA announced that if the loan is found not to be “necessary,” the applicant may be subject to criminal fines of up to $1,000,000 and imprisonment for up to thirty years.
The phrase “necessary to support the on-going operations of the applicant” is not defined, but “necessary” likely means that at the time of the application the business was uncertain to have revenue or cash to cover operating expenses and needed PPP loan funds in order to continue operations while maintaining the workforce at pre-crisis levels. This determination should be made based on the information and uncertainty that existed at the time the application for the loan was submitted.
The answer to Question 31 also provides 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.” The deadline has since been extended to May 14, 2020.
Despite the ambiguity and confusion, the SBA will be auditing PPP loan recipients for their eligibility. If it is found that a business falsely claimed they needed the PPP loan and did not return it by May 14, 2020, criminal liability may apply.
We highly recommend that businesses analyze their need for the loan at the time of loan application. If that analysis concludes that the loan was necessary, the business should prepare adequate documentation as to why their loan was “necessary,” and seek competent legal advice to ensure their eligibility for PPP loans and compliance with the SBA’s revised guidelines. If the analysis shows that the loan was not necessary, the business should return the funds by May 15 to avoid potential criminal legal exposure.
If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.