Highlights
Please note: On , the safe harbor deadline for repayment of PPP loans was extended from May 7 to May 14. Read our follow-up alert here.
- Authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) was set up to provide small businesses access to emergency capital in the form of low-interest private loans guaranteed by the U.S. Small Business Administration (SBA).
- PPP loans are going to be audited and borrowers may face enforcement scrutiny. Main areas of risk include: 1) necessity for the loan, 2) size eligibility, 3) amount of loan requested and 4) use of loan proceeds.
- SBA wants borrowers to seriously consider their certification that the loan was “necessary” to support ongoing operations.
Companies with alternative access to capital need to justify their determination that the loan was in fact necessary. - Borrowers can return funds, which in retrospect may not have been “needed” per the PPP rules, by , without penalty. Past and future borrowers must also consider the impending wave of potential criminal investigations and civil proceedings under the False Claims Act.
The U.S. Small Business Administration (SBA) has issued a supplemental interim final rule regarding the Paycheck Protection Program (PPP) to buttress its supplemental guidance issued on . In these, SBA warned unqualified borrowers who do not “need” the loan: You get a pass if you return the funds by .
Authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP was set up to provide small businesses access to emergency capital in the form of low-interest private loans guaranteed by SBA. The keystone feature of PPP is the ability to obtain repayment forgiveness of the amounts used by the recipient for qualifying expenses such as payroll costs to retain or rehire employees. The U.S. Department of the Treasury (Treasury) issued informal guidance and the SBA issued an interim final rule in early April.
The program, which authorized up to $349 billion in loans, ran out of funding a mere two weeks after initiation. While Congress just approved another $310 billion in funding for the program, SBA did not wait for the injection of new funding to amend its FAQs to address concerns that the original round of PPP funding went to large, financially secure businesses. This Holland & Knight alert addresses SBA’s recent FAQs and enforcement considerations for PPP loans.
Key Takeaways
- PPP loans are going to be audited and borrowers may face enforcement scrutiny. Main areas of risk include: 1) necessity for the loan, 2) size eligibility, 3) amount of loan requested and 4) use of loan proceeds.
- SBA wants borrowers to seriously consider their certification that the loan was “necessary” to support ongoing operations. Companies with alternative access to capital need to justify their determination that the loan was in fact necessary.
- Borrowers can return funds, which in retrospect may not have been “needed” per the PPP rules, by , without penalty.
- Past and future borrowers must also consider the impending wave of potential criminal investigations and civil proceedings under the False Claims Act, which carries the potential for treble damages and per-claim penalties, and contains a “reverse” provision that requires the return of funds to which the holder is not entitled.
Areas of Enforcement
As intimated by the SBA in its supplemental guidance, PPP borrowers will undoubtedly be subject to audits and enforcement scrutiny. Aside from the obvious offenders who provided false or misleading information in the application itself, enforcement will also focus on the need for the loan, amount of loan requested and use of loan proceeds.
