So you decided to keep the PPP loan: Now what?

So you decided to keep the PPP loan: Now what?

CARES Act, PPP, Paycheck Protection Program

United States Publication May 18, 2020

Updated June 3, 2020.

To address the economic impact of the COVID-19 pandemic the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) made funding available to small businesses through the new Paycheck Protection Program (“PPP”) making forgivable loans available to aid small businesses designed to cover employee salaries, other payroll costs, mortgage interest, rent, utilities and interest on other debt obligations. Under the PPP local lenders provided the funds guaranteed by the Small Business Administration (“SBA”). As long as the funds were used for authorized purposes over an eight-week period starting on the date of the loan origination, the borrower could apply to have the full amount of the PPP loan forgiven. 

Almost immediately it became apparent that basic rules on the program left open many questions, which led to evolving guidance on a number of key eligibility issues. Most notably, new guidance emerged on the requirement that the borrower certify that the loan funds are necessary to support the borrower’s ongoing operations due to the current economic uncertainty.

Along with the new guidance, the government announced its intention to carefully scrutinize the eligibility certifications of all substantial PPP loan recipients. Any PPP loan recipient, together with its affiliates, that received over $2 million in PPP funds and seeks loan forgiveness would automatically be subject to an audit to determine compliance with program eligibility requirements at the time it applies for forgiveness.1 The SBA has recently made clear, though, that it may review a PPP loan of any size, at any time, in its discretion.2 If the SBA determines that the borrower lacks an adequate basis for its necessity certification, the SBA will seek repayment of the outstanding loan balance and deny forgiveness.3 If the borrower does not repay the funds, the SBA will pursue administrative enforcement and/or refer the matter to law enforcement agencies.

Given the initial uncertainty surrounding the PPP loan eligibility requirements and the subsequent guidance, the SBA created a safe harbor deadline for businesses to return their PPP funds. Companies that returned their PPP funds prior to May 18, 2020, would be deemed to have made their application certifications in good faith and would not face further review or enforcement. Now that that date has passed, those borrowers that sought, received and kept the loan funds must prepare for the levels of review and oversight that come next.

The necessity certification

While the PPP eliminated the normal SBA requirement that a borrower first try to obtain the needed funds from other sources, borrowers were still required to certify that funds were necessary to support the borrower’s ongoing operations due to the current economic uncertainty.4 Public and private companies applying for PPP loans were required to make this certification in good faith – and on pain of criminal prosecution—taking into account their current business activity and ability to access other sources of liquidity “sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”5 Public companies with substantial market value and access to capital markets were deemed presumptively “unlikely” to be able to make this certification, and all companies with “adequate sources of liquidity” to support ongoing operations were similarly presumptively ineligible.6

The oversight – SBA, DOJ, Congress and more

The SBA guidance suggests that the eligibility review/audits will be triggered by a borrower’s submission of its forgiveness application.7 If the SBA has a concern that the existing documentation does not support eligibility, it will require the lender to contact the borrower in writing to request additional information.8 SBA may also contact the borrower directly to request information. Failure to respond may result in a determination that the borrower was ineligible for the loan or for forgiveness of the loan.9

If the SBA determines that a borrower does not meet the necessity requirement, the SBA will demand repayment and may refer the matter to law enforcement if the borrower fails to repay. But even if the borrower does repay, the regulations do not prevent the SBA from referring the matter for further enforcement action if the audits reveal evidence of potential fraud or evidence that the borrower was otherwise not eligible for the loan.

The potential civil and criminal penalties are considerable. The PPP application itself warns of potential penalties such as (1) five years’ imprisonment and/or a $250,000 fine for making a false statement in a federal agency proceeding;10 (2) two years’ imprisonment and/or a $5,000 fine for making false statements to the SBA11 and (3) 30 years’ imprisonment and/or a $1 million fine for false applications submitted to a federally insured institution.12 Violators may also be subject to 30 years’ imprisonment and a $250,000 fine for bank fraud.13 Public companies accepting PPP funds may also be subject to other penalties in connection with their related securities filings.

Fraud prosecutions relating to such government aid and disaster relief programs are nothing new. The SBA Office of Inspector General (“SBA-OIG”) has been investigating fraud cases arising out of its loan programs for years. In fiscal year 2019, for example, SBA-OIG investigations resulted in 49 indictments, and the agency collected over $72 million in investigation recoveries along with over $33 million in agreed-upon disallowed costs.14. In one case, for example, the majority owner of a Virginia company paid $20 million to settle claims that the owner and others caused the company to falsely represent that the company qualified as a “small business concern” eligible for certain contracts, when the business did not qualify due to affiliation with other companies.15 A Massachusetts company similarly paid $1.3 million to settle allegations that it had falsely represented that it was eligible for certain contracts set aside for eligible businesses.16

The SBA-OIG is not the only entity that may investigate or audit PPP loan recipients. The new Special Inspector General for Pandemic Recovery (“SIGPR”) and Department of Justice (“DOJ”) will separately conduct criminal investigations into alleged fraudulent applications. The DOJ is using data analytics and other strategies to look for red flags in loan applications, and has already brought a number of cases alleging blatantly fraudulent applications independent of the SBA audit process.17 The number of those cases will only increase once the forgiveness application reviews begin. 

Congressional oversight is also on the horizon, as at least one Senate committee has already announced its intention to issue subpoenas related to the PPP loans.18 This type of congressional oversight is not unprecedented. In 2011-2012, for example, the House Oversight and Government Reform Committee conducted an extensive inquiry into recipients of $14.5 billion in loan guarantees as part of a Department of Energy program to incentivize renewable energy products expanded by Congress following the 2008 recession. The committee staff served detailed document requests on recipient companies, and the chief executives of a number of these companies were required to appear and testify at public hearings. This level of scrutiny was certainly politically charged, as a Republican-led committee was scrutinizing an Obama administration program in the run up to the 2012 election. Analogous circumstances exist now, and recipients of larger value loans in particular must be prepared for the likelihood of scrutiny by the political branches as well as the executive agencies.

It is critical to keep in mind that in any of these circumstances, the reviewing agency will not be limited to looking solely at the facts surrounding the necessity certification. Investigations into potential PPP ineligibility may uncover other unrelated conduct that investigators find suspicious, and those facts can be referred out for further review. Applicants need to be aware that investigations and audits related to PPP loans may extend into other areas of the business and raise unrelated issues.

Preparing for oversight

Successfully navigating the review and oversight process requires careful advance preparation. Borrowers need to be able to clearly demonstrate the basis for the certifications in their loan applications, particularly the necessity certification. The new PPP forgiveness application instructions require borrowers to retain all the documentation supporting their eligibility certifications, and make those materials available on request by the SBA. Lenders will be expected to perform a good-faith review of the forgiveness documentation in the first instance, and may ask for supplemental documentation.  If an SBA review begins, the SBA will notify the lender – who must in turn notify the borrower and request certain information.19

Waiting for SBA to initiate its review process to begin compiling these materials creates a risk of error that could lead to denial of the forgiveness application or worse. While each situation will be different, that preparation can typically be guided by the following.

  1. Compile the backup documentation and data that demonstrates the company’s financial necessity. The data needs to reflect the economic challenges that made the application necessary. Recall that the necessity must have arisen as a result of the economic circumstances caused by the COVID-19 pandemic. If the company was already in financial distress before the pandemic, it needs to be able to document how the current circumstances made things worse. Remember also that the essential purpose of the PPP was to help small businesses maintain employee headcount and pay rent, utilities, and other essentials. The data should explain how those expenditures were in jeopardy in the short term without receipt of the loan funds.
  2. Be prepared to explain why liquidity was not available from elsewhere. While the borrower does not have to show that there were no other sources of funding, it should be prepared to demonstrate that there were no other reasonably available funds. A company, for example, that has substantial cash reserves or the ability to draw down on an existing line of credit will need to be prepared to explain why those sources were insufficient. Applicants should be able to demonstrate the inability to reasonably obtain capital from other sources such as equity investors, inter-company loans, conventional debt, etc.
  3. Public companies have faced increasing scrutiny in the media for accepting PPP loans. The SBA has responded to this scrutiny, and there is a presumption that public companies with a substantial market value and access to capital markets will not be able to meet the “necessity” requirement. To overcome this presumption, public companies must be able to demonstrate that the business (i) does not have substantial market value, and (ii) did not have reasonable access to capital markets to obtain necessary funds; or (iii) can otherwise demonstrate a case for economic need to overcome this presumption.
  4. Meticulous documentation showing how the PPP funds were applied is critical. Bank statements, payroll documentation, and records of payments for other approved uses of funds should be maintained and compiled for audit purposes. Simply put, there should be no question whether the funds were used for the intended purpose. Any suggestion that the funds were misused will ensure a lengthy review. 
  5. For borrowers with more complex ownership/affiliate structures, documents supporting the affiliate analysis for determining satisfaction of the company eligible size limitations should also be compiled. This may include information requests concerning the relationship between the borrower and its parent/sister companies, and the control exercised by minority shareholders or members. 
  6. Consider other business expenditures made during the loan period and whether they could appear inconsistent with the certification of need for the government funds. Decisions regarding changes to executive compensation, payment of bonuses or dividends, payment of management fees, new capital projects, inter-company transfers, acquisitions of other businesses, and management of credit lines need to be considered carefully. The company’s conduct before, during, and after receipt of the PPP loan needs to be consistent with its economic need case. The CARES Act places restrictions on executive compensation, dividend payments, and stock buy-backs for participants in other loan programs created by the Act. While those restrictions do not directly apply to the PPP, borrowers should consider them as minimum guidance to what the government believes is inappropriate for recipients of taxpayer funds.
  7. Carefully review information that the company is releasing into the public domain—such as securities filings, investor presentations, website pages, and social media posts. Investigators will routinely do internet searches to see if statements made by the company under review about the state of its business match the need case being asserted to the SBA. Other recent loan applications or regulatory filings that are being made should also be reviewed carefully.
  8. Ensure proper document retention policies are in place. The new PPP forgiveness application instructions require borrowers to retain all records relating to the loan, including all documentation necessary to support the borrower’s certifications on necessity, for six years after the date that the loan is forgiven or repaid in full.

In the end, the most severe risk of enforcement actions will fall on those borrowers who have engaged in actual fraud, not those who made good faith errors based on mistaken interpretation of the guidance. But the oversight environment will likely touch all borrowers with loans larger than $2 million. If the preparation process reveals mistakes in the application process or a lack of sufficient documentation, addressing those issues quickly is critical to avoid any appearance of intentional fraud.

The notion that the forgivable loans offered through the PPP are somehow “free money” has been dispelled. While highly advantageous to eligible borrowers and released under a streamlined application process, the risk of audit and enforcement actions over the coming months requires borrowers to carefully consider the evolving eligibility guidance and prepare for inevitable oversight. With careful diligence, this process can be managed and the risk of reputational and economic consequences minimized.



1    PPP FAQ No. 46

2   Small Business Administration, Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, 13 CFR Part 120 (May 28, 2020) at III.1.c.

3   Id

4   Paycheck Protection Program (PPP) Frequently Asked Questions (FAQs) No. 31 (see here); 

5   Id.

6   PPP FAQ No. 31 and PPP FAQ No. 37

7   It is worth noting, though, that the SBA retains general discretion to audit PPP loan applications at other times. See PPP FAQ No. 31 and PPP FAQ No. 47.

8   May 28, 2020, Interim Final Rule at III.1.d.

9   Id.

10   18 U.S.C. §1001 and 18 U.S.C. §3571

11   15 U.S.C. §645

12   18 U.S.C. §1014

13   18 U.S.C. §1344

14   See U.S. Small Business Administration Office of Inspector General Semiannual Report to Congress at 28 (Oct. 30, 2019).

15   Id. at 17.

16   Id. at 18.

17   See, e.g., United States v. Fayne (N.D. Ga. 2020); United States v. Rai (E.D. Tx. 2020). 

18   Senate Press Release, “Rubio: Small Business Committee Will Use Subpoena Power to Review Paycheck Protection Program Compliance” (Apr. 20, 2020), available here.

19   May 28, 2020, Interim Final Rule at III.2.c.

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