Under current Small Business Administration (SBA) and U.S. Department of Treasury (Treasury) guidance, recipients of the CARES Act Payroll Protection Program (PPP) loans are advised by the SBA and Treasury to review their loan eligibility and to return the funds by May 14
th if the business concludes that it was not, upon further review, eligible. It is important that PPP loan recipients now go back and document the legal and factual basis of their original application in order to avoid having to return the loan based on an audit (Treasury has stated that it intends to audit all loans over $2 million.) In addition to the risk of being denied loan forgiveness, the recipient should be prepared for heightened scrutiny taking into account the potential risk of civil liability, including treble damages. Especially for loans over $2 million, the borrower should be aware of the potential for even criminal investigation if knowingly providing false information.
The PPP loan application form requires the borrower to certify in good faith that “current economic uncertainty makes this loan request
necessary to support the ongoing operations of the Applicant.” On April 23, 2020, the Treasury Department published on its website an updated FAQ regarding the PPP loans, which was later incorporated in substance into the Interim Rule released on April 28. The Interim Final Rule (IFR) stated that “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.” In order to meet this good faith requirement, borrowers should conduct a due diligence self-audit to establish that the business continues to qualify for the PPP loan it received.
The borrower’s due diligence review should include the following:
1. Documentation that the business meets the CARES Act statutory requirements including: business size; any exceptions such as the NAICS 72 and franchise exemption from affiliation rules; limited nonprofit eligibility.
2. Documentation that the business meets the additional IFRs and FAQs eligibility guidance published by the SBA and Treasury, including hedge fund and private equity ineligibility; hospital eligibility criteria; limitation on eligibility for publicly held companies.
3. Documentation that business has reviewed “necessity” of the loan, including criteria such as revenue versus operating expense; reduction in revenue due to COVID-19; inability to retain employees.
4. Documentation of the inability to access other sources of liquidity sufficient for the business, such as lines of credit and other funding sources; and if there are other sources to show why these sources would not be adequate to continue the ongoing operations of the business.
Our team of attorneys at Greenspoon Marder are available to assist you to quickly develop the due diligence documentation recommended and answer any legal questions you may have. You are also advised to consult with your accountant and / or financial advisor regarding the financial information provided in your loan application along with an evaluation of your liquidity in order to qualify for the loan.
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