As most business owners are well aware, the CARES Act authorized ~$660 billion in forgivable loans for businesses to keep up with payroll during the pandemic. Predictably, funds from the first round ran out quickly, as every business under the sun quickly applied for relief. According to the SBA, limited funding from the second round is still available. Now that business owners have secured proceeds, they can now consider their next steps with the help of recent government guidance. This PPP Update highlights some key clarifications found in SBA guidance since the CARES Act was signed to help business owners continue to develop a prudent plan for the future.
Loan Auditing. To start, unlawful recipients of PPP loans face up to $1 million in criminal fines and 30 years in prison. Recipients should be aware that the Treasury announced that applications will be audited to ensure proceeds were appropriately distributed. While the general mentality among business owners was to apply for relief and ask questions later, they should reconsider that mantra in light of this PPP Update and recent guidance on several issues including the following:
- “Necessary to Support On-Going Activity”: Although the CARES Act suspended ordinary requirements regarding access to capital, recent SBA guidance reminded recipients of their good faith certification that “[c]urrent economic uncertainty” made their loan request “necessary to support the ongoing operations”. It is not always easy to determine whether a loan was legally “necessary” the SBA clarified its determination will depend on “business activity” and “ability to access other sources of liquidity”. While this is is far from a bright line rule, public companies with substantial market value and access to capital markets will probably not meet that requirement.
- Affiliation Rules: Recipients must also consider affiliation rules applicable to businesses with power to control others through ownership, management, relationships, or otherwise. The SBA issued business friendly clarification that the $10 million cap applies to each franchisee for those listed in its directory, and that restaurants and hotels not bound to certain requirements. Still, other commonly owned or managed businesses must look closely at the clarified affiliation rules as applied to their situation.
- Other Clarification. The SBA clarified additional rules on how it will treat relationships with independent contractors, effects of employee layoffs and rehires, as well as promissory notes and eligibility of businesses. Accordingly, recipients should retrace their steps to ensure compliance with these rules and updated guidance.
Safe Harbor Protection. Thankfully, the government anticipated discrepancies of interpretation and provided a safe harbor, allowing recipients to take corrective action by May 14, 2020. Several major businesses either plan to, or have already taken corrective action, including familiar names like the Los Angeles Lakers, Shake Shack, and Ruth’s Chris Steakhouse. If your business took out a loan and had significant access to capital or other sources of liquidity, you should consult with a professional and consider taking advantage of this safe harbor before it is too late.
Applying for Forgiveness. Other than avoiding criminal liability, the most important part of the PPP for most business owners will be ensuring forgiveness. Businesses must be meticulous about documenting how they used their proceeds to put themselves in the best position and those that use a payroll provider should at least request reports showing funds were used for payroll. Many expect lenders to begin processing forgiveness applications and certified documentation around seven weeks from disbursement. As that time approaches, recipients who have not done so already, should reach out to their banker to confirm necessary documentation. The SBA’s promise to audit any loan over $2 million, underscores the importance a thorough paper trail.
How Else Do I Protect My Business? Ignorance is almost never an excuse when it comes to the law, and while PPP funding is in the forefront of the conversations in the business world, decision makers need to educate themselves on other changes in the legal landscape, including the Families First Coronavirus Response Act (FFCRA), changes to the Family Medical Leave Act (FMLA), and updated government guidance on the Americans with Disabilities Act (ADA), and the Occupational Safety and Health Act (OSHA).
Consult with an Experienced Business Attorney. The most simple, sure-fire way to stay on top of important developments, like those discussed in this PPP Update is to remain in contact with an experienced business attorney. By doing so, you can make sure your business is in a position to thrive as we move on from this pandemic. If you are interested in obtaining legal advice for your business, please reach out to one of our business attorneys at Surovell Isaacs & Levy PLC by calling us at (703) 277-9708 or email to TBlaser@SurovellFirm.com.
Tagged with: Business Law, CARES Act, Coronavirus, corporate law, COVID-19, pandemic, PPP, quarantine, SBA, Small Business
Posted in: Business Law, Employment Law