SBA Extends Paycheck Protection Program "Safe Harbor," While DOJ and Treasury Ramp Up Enforcement
On May 5, 2020, the Small Business Administration (“SBA”) issued additional guidance on the Paycheck Protection Program (the “PPP”) by updating its PPP “Frequently Asked Questions” (the “FAQs”), which can be found here. The guidance extends the safe harbor deadline from May 7 to May 14, 2020 for borrowers to return their PPP loan if they determine that they cannot certify in good faith that the loan was “necessary” to support ongoing operations. The Treasury Department created the PPP in late March, as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
FAQ 31 and the Original “May 7” Safe Harbor
As noted in a previous Baker Botts client alert here, the PPP requires borrowers to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (the “Certification”). On April 23, weeks after the PPP was created, and after widespread criticism that money was being accessed by companies who were not the intended beneficiaries of the program, the SBA issued additional guidance in FAQ #31.
FAQ #31 stated that, although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, “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.” (emphasis added)
In addition, the SBA expressed skepticism in this FAQ that certain public companies would be eligible for the PPP, stating that “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 the SBA, upon request, the basis for its certification.”
In addition to the focus on requirements for publicly traded companies, the SBA later stated in FAQ #37 that private companies should carefully review the Certification and refer to FAQ #31, thereby clarifying that private companies with access to capital would be subject to the enhanced certification as well. In its Interim Final Rule on the Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility, which can be found here, the SBA went even further, to specifically provide that hedge funds and private equity firms are ineligible to receive a PPP loan,1 and reaffirm that that the affiliation rules apply to portfolio companies of a private equity fund just like other applicants under the PPP. Therefore, certain portfolio companies continue to risk falling outside the employee caps for PPP loan eligibility.
FAQ #31, however, also announced a safe harbor for companies that had already obtained a PPP loan, stating that any borrower that applied for a PPP loan prior to the issuance of FAQ #31 and “repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
Treasury and DOJ Publicly State Borrowers Should Expect Scrutiny
On April 28, 2020, Treasury Secretary Steven Mnuchin publicly stated that borrowers who received more than $2 million in PPP loan proceeds will face full audits prior to their loans being forgiven and other PPP borrowers would be spot-checked.2
Two days later, on April 30, 2020, Brian Benczkowski, the Assistant Attorney General who oversees the Department of Justice’s Criminal Division, told reporters that prosecutors had contacted 15 to 20 of the largest loan processors and the SBA and had found evidence of “red flags” in both approved and rejected loan applications.3
On May 5, 2020, DOJ announced the first criminal charges relating to the PPP, charging two New England men with filing fraudulent loan applications.4
SBA Extends the Safe Harbor to May 14
On May 5, in FAQ #43, the SBA announced the safe harbor discussed above would be extended by a week, from May 7 to May 14:
“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.”
The extension of the safe harbor provides borrowers with another week to repay a PPP loan and receive the presumption that the certification of “necessity” in a borrower’s loan application was made in “good faith.” This presumption is significant, as “good faith” is a defense to many of the civil and criminal theories of liability that could be used against individuals or businesses alleged to have submitting a false or misleading application, including a false or misleading Certification discussed above.
That said, many companies may decide, in light of the current economic climate, that the Certification was accurate, and that it was the best interests of the company to apply for the PPP loan in the first place and to retain PPP funds after May 14.
Applicants should engage their advisors, management and boards of directors in reviewing the factors relevant to the applicant to determine whether to retain the PPP loan proceeds, including ensuring that they have made good faith determination of necessity, even in light of the after-the-fact guidance by Treasury, discussed above. Those factors can include, for example: cash on the balance sheet, cash flows and cash runway, access to additional capital and the terms of such capital, an analysis of the business as a going concern, financial forecasts, budget and business plan, planned headcount, and the economic need for the loan and its impact to the business and its operations. Applicants should document their board of directors’ review, determination and approval and be prepared to provide supporting documentation for their determination of necessity in obtaining the loan and to show the funds were used for permitted uses when requesting forgiveness. While this course of action may not forestall a government investigation, audit or a private lawsuit completely, it provides a strong defense should any such action take place.
Our cross-disciplinary team has been closely following these issues, including the government guidance regarding the PPP and the landscape of potential private and government enforcement. Both Treasury and the Department of Justice have indicated they are serious about investigating potential PPP fraud, and public sentiment is also likely to favor such investigations. In addition, the plaintiffs’ bar is likely to file qui tam False Claims Act actions based on allegedly false Certifications. We would be happy to discuss any of these issues and assist you in addressing them.
1While criticism has been levied against private equity efforts to access the PPP, the reason given in the Interim Final Rule for not permitting hedge funds and private equity was not specifically because of their access to capital, but because their business involved investment or speculation.
2Lauren Hirsch, Small business loans above $2 million will get full audit to make sure they’re valid, Mnuchin says, CNBC.com, Apr. 28, 2020, available at https://www.cnbc.com/2020/04/28/small-business-loans-above-2-million-will-get-full-audit-to-make-sure-theyre-valid-mnuchin-says.html.
3Tom Schoenberg and Christian Berthelsen, Justice Department Sees Early Fraud Signs in SBA Loan Flurry, Bloomberg.com, Apr. 30, 2020, available at https://www.bloomberg.com/news/articles/2020-04-30/justice-department-sees-early-fraud-signs-in-sba-loan-flurry
4Press Release, Two Charged in Rhode Island with Stimulus Fraud, available at https://www.justice.gov/opa/pr/two-charged-rhode-island-stimulus-fraud
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