Small businesses should be aware of the legal and regulatory risks regarding eligibility for Paycheck Protection Program loans
The recently enacted Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act) legislation infuses $310 billion into the Paycheck Protection Program (PPP) with more than $250 billion in unrestricted funds for the program and an additional $60 billion allocated specifically for smaller lending institutions.
Given the additional funding for the program, as a small business owner, you may wish to consider applying. However, it is important to be aware of the potential legal and regulatory risks associated with applying for, and receiving, funds under the program.
As initially publicized, the PPP was designed specifically to provide immediate relief to eligible small businesses that believe the “current economic uncertainty” of the COVID-19 pandemic makes such a loan for their business necessary to support their ongoing operations, and they certify these representations to the lender. Although it is recognized that most small businesses face some level of uncertainty in light of the COVID-19 pandemic, greater clarity from the regulators was needed to refine the program qualifications as the impact on some small businesses does not rise to the level of “uncertainty” to meet the spirit and intent of the program.
May 7 repayment deadline of unnecessary PPP loan funds
The Small Business Administration (SBA) recently updated its Frequently Asked Questions Document to provide clarity regarding program qualifications specific to businesses with access to other sources of liquidity to support their ongoing operations. The SBA now notes that any business that received a PPP loan prior to the issuance of this new guidance and who now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full by May 7, 2020. Any business that does so, will be deemed by the SBA to have made the required good faith certification on their PPP loan application.
Heightened government scrutiny will be forthcoming to investigate potential fraud and abuse, as demand for these PPP loans, even with the additional funding, is expected to exceed loan availability. Businesses who have received PPP loans and are later found not to have qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences.
Take Immediate Action Now
It is important that small business owners understand the potential legal and regulatory risks associated with applying for, and receiving, funds under the program.
Potential Risks of Receiving PPP Funds
As expected, there has been a rush for eligible small businesses to expedite processing of these loans and you may be primed to submit your PPP application, but we do caution you as to the potential risks of receiving these funds as these loans will be subject to regulatory and public scrutiny. Loan recipients will not remain anonymous as EINs will be made public. We anticipate heightened government scrutiny will be forthcoming to investigate potential fraud and abuse.
Businesses who have received PPP loans and are later found to have not qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences and may experience reputational damage for having pursued these loans.
Carefully review your business finances
Given the revised guidance issued by the SBA and the pending May 7, 2020 deadline for returning loan proceeds, we strongly encourage you, your organization’s management, and board of directors to carefully and immediately review your company’s financial situation and reconsider the relief you may have already received with a PPP loan. Specifically, consider whether your circumstances fall within the spirit and intent of this economic relief program. If you do receive and keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. This documentation will be crucial were your business to be audited and/or investigated. This defensive documentation will greatly minimize your potential exposure to fraud and abuse allegations related to your participation in this loan program.
Consult with legal counsel if necessary
Many of the factors influencing whether you qualify or should apply for these loans are organization specific. We encourage you to consult with legal counsel if you have questions regarding your organization’s eligibility to receive funds.