The Treasury appears poised to engage in aggressive review of forgiveness claims under the Paycheck Protection Program (“PPP”). Recent regulatory guidance indicates that publicly traded companies, private equity-backed companies, companies that have profited from Coronavirus, and companies that received large loans (over $2 million), are likely to be scrutinized by the Government if they apply for forgiveness of PPP loans. Businesses with demonstrable misstatements on their applications for loans or forgiveness, such as inflated payrolls or headcounts, or misrepresentations regarding eligibility or the use of the funds, will be obvious targets as well.
The treasury previously set an amnesty period, or a deadline for companies to repay their PPP loans in full without any penalty if they are ineligible for the program. This deadline for amnesty was extended several times before it expired because the Government has been continuously updating its guidance on loan eligibility. Although the PPP was passed with very broad eligibility standards, the guidance issued by the Government has substantially narrowed the field of eligible borrowers. As such, the Government has now indicated that loans to particular types of businesses will be heavily scrutinized.
The Government has indicated that it will review “all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” Frequently Asked Questions (FAQ) #39. The Government further explains the rationale for scrutinizing loans over $2 million:
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
FAQ #46. Further, the Government explains the consequences of failing to meet its (apparently subjective) eligibility requirements:
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
FAQ #46. This guidance provides an additional amnesty¹ from administrative enforcement or referrals “[i]f the borrower repays the loan after receiving notification from the SBA.” FAQ #46. However, this guidance also suggests that the SBA intends to pursue civil and criminal penalties to companies based upon the highly subjective good faith certification if they do not repay the loan.
Businesses dealing with the Government in relation to their PPP loans and forgiveness are urged to obtain legal advice before proceeding. Companies concerned about their compliance are particularly urged to consult counsel promptly. Any company that has not consulted counsel before seeking forgiveness is urged to do so at that point, before submitting final documentation. Even companies that have missed the previously extended amnesty period are urged to consult counsel and determine whether addressing any problems sooner rather than later, or limiting any forgiveness claim, might mitigate exposure.
¹This amnesty being in addition to the amnesty for borrowers who returned their loans after promulgation of eligibility criteria under the CARES Act.