The program, with all of its good intentions, has come under intense public scrutiny as companies who appear to have access to other means of liquidity resources, including more than 70 public companies, have received PPP loans ahead of companies generally recognized as small businesses. In response, the U.S. Small Business Administration released FAQ 31 on April 23, 2020, alerting that “before submitting a PPP application, all borrowers should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ 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.”
It is important to note that the CARES Act suspended the requirement that borrowers must be unable to obtain credit elsewhere (as defined by section 3(h) of the Small business Act) although borrowers still must certify that their PPP loan request is necessary. Thus, a safe harbor provision has now been put in place allowing companies who received funding (and certified in good faith before additional guidelines provided by the FAQ) the opportunity to reconsider their certification and return the proceeds by May 7, 2020—with no consequences.
Now that the SBA is stressing the certification process (which is not new), companies are focused on what it really means to certify or have certified. The pressure to have submitted applications (under a notion of first-come, first-served) or submit now for phase 2 before allocated funds are exhausted is not an excuse for not performing a “necessity analysis.” The potential for False Claims Act violations is high and many applicants have no prior familiarity with SBA or its affiliation rules.
Necessity Analysis 101
A “necessity analysis” involves documenting, based on the facts and circumstances known as of the application/certification date, the criteria and key factors considered for management to conclude that the PPP loan request is necessary to support the ongoing operations of the Applicant. MorganFranklin Consulting recommends companies perform and document necessity analysis to have “in hand” even if loans have already been received. Key factors include:
- Ability to access liquidity
- Current business activity, revenue streams/sources, cyclical operations
- Revenue and EBITDA projections
- Unrestricted cash reserves
- Client locations and state plans to re-open
- Employee locations and state plans to re-open
- Employee attrition, replacement and training costs
- The impact of the loan amount and its ability to support on-going operations
The False Claims Act
Consequences of a violation under the False Claims Act are severe. Chairman of the Senate Committee on Small Business and Entrepreneurship publicly stated that aggressive oversight of the PPP would be conducted including whether companies made false certifications to the federal government to receive PPP loans. “Any business, regardless of size, must certify it has been harmed by the coronavirus crisis and that PPP is necessary to maintain operations,” Chairman Rubio continued. “This fall, the Senate Committee on Small Business and Entrepreneurship will conduct aggressive oversight into the use of the PPP. If companies are not forthcoming, the Committee will use its subpoena power to compel cooperation.”
The False Claims Act (31 U.S.C. §§ 3729-33) prohibits any person or entity from knowingly presenting to the federal government a false or fraudulent claim for payment of government funds, or knowingly making a false or fraudulent statement material to a false claim. “Knowledge” can be exhibited if a person or entity acts in reckless disregard or purposeful obliviousness to the statement being made. And remember the media attention and public scrunity? The False Claims Act allows private citizens (i.e., whistleblowers), to file complaints on behalf of the U.S. government which are investigated by the Department of Justice to determine how to proceed or dismiss such action.
Potential penalties are clear. PPP applicants are required to certify “that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I [applicant] understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
This blog is for educational purposes only and does not constitute tax or legal advice. Organizations and individuals should consult their tax preparers or legal counsel for such advice.