Congratulations–you have successfully received an SBA PPP loan! While you are likely thinking that the hard work is over, you are, unfortunately, wrong. The responsibilities of a PPP loan recipient extend beyond the four corners of the application, do not end upon receipt of the funds, and, likely, only lapse upon repayment of the loan in full.
We acknowledge that most who read that last sentence are thinking, “My loan will be forgiven!” (see our latest guidance on forgiveness here). But as the latest guidance from the SBA has demonstrated, PPP compliance requires vigilance by companies. Guidance is still coming out almost daily that could significantly impact forgiveness calculations or even eligibility for PPP funds.
In this article, we will discuss best practices to ensure that a company that received a PPP loan, and its board of directors, are best positioned to avoid scrutiny and potential liability. We’ve discussed the potential for good-faith applications to be swept up in allegations of fraud and bad faith in previous articles (for example, here). Good recordkeeping will support a director’s efforts to stay above water during these tumultuous times and may help avoid a claim of fraud or bad faith by a regulator or private party in the months and years to come. As a director, you want to leave no room for anyone to invent narratives about your company’s key decisions and compliance.
Here are 5 tips for good recordkeeping:
- Keep board documents together. Now is no time to stop keeping detailed meeting minutes and board consents–and now is as good a time as ever to start keeping great records if you have previously been lax. Directors should also make sure to keep a record of all of the board members’ general analysis and decisions concerning your PPP loans. As we have discussed in a prior alert, consider reconvening your board in light of the latest SBA guidance to evaluate if the application should be withdrawn or the funds returned. While it can feel counterintuitive to compile tough calls and disappointing financials for later review, this step goes a long way toward protecting the company and the board later.
- Compile dated employee records. Make sure you keep employee records together, as well. This includes both pay receipts and records of who is engaged in active work at your company. This will likely prove important when it comes time to prove employment and/or use of funds in order to obtain loan forgiveness.
- Consider placing PPP monies in a segregated account. Make sure you track how your company uses the PPP funds. Where the cash goes, and when it was spent, will be key information to (1) establish use of funds in compliance with the statute and (2) obtain loan forgiveness. This is crucial and deserves repeating: make sure you know where the money is going.
- Create and document internal briefings. Federal, state, and local regulators have churned out many laws and rules to keep track of during the COVID-19 crisis, and many companies have had a divide-and-conquer approach internally to be able to digest all of the information. Ensure that there is a strategy in place to disseminate the information to the board of directors and those in key management positions.
- Plan for loan forgiveness or deferral of the PPP loan from the start. As we have previously discussed in our client alerts, the perks of this loan come with pitfalls. Directors and management should consider PPP rules for deferment and forgiveness in everything from planning the next budget to creating employee schedules. Make sure that, as soon as the money hits your account, you have a method to stay in compliance. And at the same time, ensure that there are strategic and frequent check-ins. This is not as simple as set-it and forget-it.
- Think ahead to what investors–or regulators–will want to see. Whether it is an adverse action, due diligence during a lucrative financing, or just curious shareholders, months from now, every company could get questions about its PPP loan and the forgiveness process. The decisions you make now need to be properly papered for the future. For instance, we will likely see new representations and warranties in both venture financings and M&A transactions.
COVID-19 has created a clear sense of urgency in almost every company. Keeping the business moving is the goal, and business leaders are looking forward and jumping to the next step. However, keeping track of what you are doing now is an essential element of crisis management. How you obtain, monitor, and use the loan will inherently be subject to scrutiny, potentially sooner than you think.
To see our prior alerts and other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.