PPP Loan Amnesty: Everything You Need to Know

Many companies are rightly confused by the gyrations of the U.S. Treasury and Small Business Administration (SBA) regarding qualifications and rules for the Paycheck Protection Program (PPP).  Observers have aptly described the government’s process as “building a plane while airborne.”  Small businesses are caught in a perfect storm of unclear guidance, moving goalposts, and a race to secure limited loan funding.

Treasury Secretary Steven Mnuchin recently warned of increasing scrutiny of loans, indicating that all loans over $2 million will be audited and others as appropriate.  The Treasury also upped the anxiety by offering an amnesty (technically, “Safe Harbor”) program – if you received a loan and have second thoughts about whether you truly qualify, you can repay it with no penalties or consequences up through Thursday, May 14th.

The result of all this uncertainty is building fear among small businesses that they might take the loan and later be subject to civil or criminal prosecution or just bad press.  The goal here is to put your mind at ease, with the caveat that we can only tell you what we know, and we can’t prevent the federal government from continuing to change the landscape.

Bottom line:  If you are a private business with fewer than 500 employees and you took a PPP loan based on a good-faith determination that you met the certification requirements at the time of your application, you really shouldn’t worry.  While nobody can guarantee you won’t be audited or even unfairly persecuted by the government, think of the following realities in this environment:

  • Fraudsters runs rampant during crises like this and specifically target programs like PPP.
  • Criminal prosecution comes under false claims and bank fraud statutes, where the bar is high.  The government must prove, beyond a reasonable doubt, that you deliberately deceived the government to obtain something to which you were not entitled.
  • Civil prosecution has a lower bar, where a preponderance of evidence is the threshold and a “reckless disregard for truth” could be cause for civil penalties.  Still requires heavy lifting by the government and needs to be worthwhile to pursue.
  • Because there will be a lot of true frauds, the government is going to go after the low-hanging fruit.  If you were legitimate and made a good-faith determination of your eligibility, you’re not likely to be a target.
  • Much of the concern from government officials and the media has been stimulated by larger companies, in many cases public, that have taken loans despite having clear access to other sources of capital or otherwise not truly needing the loans.

While it is unlikely that the government will be pursuing action against legitimate, above-board businesses who needed the loans to keep their companies afloat and their people engaged, there are wise steps you can take to increase your confidence.  First, don’t go out and buy a boat or that sports car you’ve had your eye on!  I’m only half kidding about this – there are whistleblowers out there who look to cash in on civil actions in partnership with attorneys, so don’t make yourself an easy target.  It’s also important to know that you, the borrower, are responsible for the accuracy of your application and the veracity of your certification.   You won’t be able to hide behind “my bank should have known that!”

Here are some pragmatic steps you can take as a borrower:

  1. Revisit your decision to take the loan and the certification you signed.  Do you still believe it was a good-faith representation of your reality when you applied?  If so, take the time to document your reasoning – what you considered, experts with whom you consulted, board meeting minutes (if applicable) and anything else to shows you made a thoughtful decision.
  2. Use the loan proceeds as they are intended – at least 75% for payroll and the balance for mortgage or rent payments and utilities.  If it helps you keep track, put the proceeds in a separate account and carefully document how you spend them.
  3. Even if you only spend the proceeds as intended, you need to watch your other expenses as well.  Spending your cash on higher-than-usual distributions, dividends, bonuses, raises, expansion of the business, or acquisition of another business all could be viewed as signs you didn’t really need the loan.

It should be clear by now that you shouldn’t take the loan if you didn’t really feel you needed it and just saw it as “free money to fund extra activities”.  If that is the case, pay it back tomorrow under the Safe Harbor.

Another reason for a business owner to consider repayment would be if they are expecting to seek near-term venture capital or private equity financing, or if they may be acquired by another company.  In this situation, investors or buyers will want to be doubly sure that your loan was legitimately obtained and will not be subject to federal scrutiny post-closing.  An owner in such a situation might decide the loan benefits are not worth delayed diligence or an investor/buyer deciding it’s not worth the risk.

On a final note, there is still limited guidance, and therefore risk, on how the SBA will administer loan forgiveness.  We will address this in a subsequent blog, as best we can.  Secretary Mnuchin has said that, while he believes the current rules reflect the intent of Congress, he is open to technical fixes on a bipartisan basis, so more changes could yet come.

As always, if you are in doubt, you should speak with your trusted CPA and/or attorney.  And keep an eye on the U.S. Treasury’s updates for small businesses at https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses.  Best wishes for surviving and thriving!