BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

COVID-19

Main Content

PPP Loan Recipients: And Now Liability Risks under the False Claims Act?

Borrowers under the Paycheck Protection Program (“PPP”), particularly those public companies who received more than $2 million, are juggling a lot these days.  Watching the ever shifting positions of the SBA with respect to eligibility, carefully applying loan proceeds, properly applying for loan forgiveness, preparing for SBA loan reviews, coordinating with existing lenders and other stakeholders, making required current and quarterly disclosures, and attending to liquidity and business continuation risks would seem too much for most mortals.  Now, those who monitor and advise with respect to fraud risk warn that an emerging significant risk to PPP loan recipients is the False Claims Act (FCA) – and more particularly, being the target of a private whistleblower who initiates a qui tam suit alleging fraud in connection with a PPP loan.

In a recent two-part series, we explored issues related to PPP loans and the FCA and provided guidance on mitigating fraud allegation risks.  The FCA imposes civil liability on individuals and companies that defraud the federal government.  In addition, many states also have their own FCA laws.  The FCA provides for the recovery of the funds fraudulently obtained, damages up to triple the amount of those funds, and potentially high monetary penalties for each false claim submitted.  The aggregate potential liability far exceeds the amount initially received from the government.  And because this is a civil liability, the standard for proving fraud under the FCA is significantly less than under a criminal statute.  The standard under the FCA is

New PPP Loan Forgiveness and Loan Review Interim Final Rules: SBA May Review Any PPP Loan, Regardless of Size, Concerning Forgiveness, Use of Proceeds and Eligibility

The SBA released a set of interim final rules to provide additional guidance and clarity to borrowers and lenders both for loan forgiveness and for SBA loan review procedures under the Paycheck Protection Program (“PPP”).  The loan forgiveness interim final rule supplements the guidance provided by the actual PPP loan forgiveness application previously published by the SBA, providing timing information and allocating responsibilities as between the lender and the borrower.  The SBA loan review procedures interim final rule sheds little additional light on what borrowers should expect, but does provide additional guidance for lenders with respect to their role in the review process.

With respect to the SBA review process, the interim final rule makes clear that the SBA may choose to review any PPP loan, regardless of size, concerning not only forgiveness amounts and use of proceeds, but also eligibility in the first instance.  The SBA previously announced a safe harbor of sorts for any borrower of less than $2 million regarding the “necessity” certification.  The SBA included in its Frequently Asked Questions FAQ #46 that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”  No mention was made of this safe harbor, or the related statement in FAQ #46 that if a borrower repays a PPP loan after a determination by the SBA that

SBA Releases PPP Loan Forgiveness Application – Still Awaiting Promised Guidance and Regulations

The SBA and Treasury published the much anticipated PPP loan forgiveness application late last Friday evening.  The application itself provides more guidance than contained in the existing FAQs and regulations relating to use of PPP loan proceeds and eligibility for forgiveness and includes new certifications.  Absent from the form is any requirement to address the necessity of the loan or to report revenue levels, profitability or other evidence of the impact of the economic uncertainty brought on by the COVID-19 pandemic.

In its press release announcing release of the form, Treasury and the SBA stated that the form and its instructions reflected measures designed to reduce compliance burdens and simplify the process for borrowers.  Those measures relate primarily to calculation of payroll costs and step-by-step instructions to calculate eligibility for loan forgiveness.  In addition, the form provides that eligible non-payroll costs (so long as not in excess of 25% of the total forgiveness amount) can include payments of interest on any business mortgage obligation (real or personal property) incurred before February 15, 2020; business rent or lease payments on leases in effect prior to February 15, 2020; and covered utility payments so long as for services that began before February 15, 2020.  For a more thorough discussion of the guidance provided by the application form, see our analysis here.

Interestingly, if the borrower and its affiliates received PPP loans in excess of $2 million, the borrower must “check the box”.  We assume this is to flag those

Registered U.S. Securities Offerings in the COVID-19 Pandemic

Despite the ongoing COVID-19 pandemic, companies continue to access the capital markets.  In fact, liquidity concerns have put even greater emphasis on securities offerings for some companies.  But there can be no question that COVID-19 has affected capital market transactions and companies should be mindful of the new environment.

Companies should consider a variety of offering issues that have been affected by the ongoing health crisis.  These include:

Access to the market.  Companies should consult with financial advisors as to the feasibility of offerings during this turbulent time.  Companies may need to be much more flexible in timing and pricing their offerings.

Disclosure.  As always, companies must evaluate the sufficiency of their disclosures.  The difference now is that there may be a higher risk than usual as to whether all material nonpublic information has been disclosed.  The SEC staff has encouraged disclosure to be as timely, accurate and as robust as practicable under the circumstances created by the COVID-19 pandemic.  The Chairman of the SEC and the Director of the Division of Corporation Finance have pressed publicly for these robust disclosures to include management’s expectations about the effects of the pandemic going forward as well as the effects thus far.  They suggested that detailed discussions of current liquidity positions and expected financial resource needs, as well as company actions to protect worker health and well-being and customer safety, could all be material to investors and encouraged disclosure.  As we have previously discussed, companies need to give special

Temporary SEC rules ease Regulation Crowdfunding to address urgent COVID-19 capital needs

The Securities and Exchange Commission (the “SEC”) recently adopted temporary final rules to Regulation Crowdfunding to address companies’ urgent COVID-19 capital needs.  The temporary rules provide tailored, conditional relief to established smaller companies from certain Regulation Crowdfunding requirements relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials.  For example, the temporary rules provide an exemption from certain financial statement review requirements for issuers offering $250,000 or less in securities in reliance on Regulation Crowdfunding within a 12-month period.

The SEC included the following table summarizing the existing Regulation Crowdfunding and changes resulting from the temporary rules:

  Regulation Crowdfunding Temporary Rule Amendments Eligibility The offering exemption is not available to:

·       Non-U.S. issuers;

·       Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

·       Investment companies;

·       Blank check companies;

·       Issuers that are disqualified under Regulation Crowdfunding’s

disqualification rules;

·       Issuers that have failed to

file the annual reports

required under Regulation Crowdfunding during the

two years immediately

preceding the filing of the offering statement In addition to the existing eligibility criteria, issuers wishing to rely on the temporary rule amendments must also meeting the following criteria:

·       The issuer cannot have been organized and cannot have been operating less than six  months prior to the

commencement of the offering; and

·       An issuer that has sold

securities in a Regulation

Crowdfunding offering in the past,

SEC reportedly investigating public disclosures by PPP loan recipients

We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.

This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests. There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice  Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.  While existing allegations appear focused on extreme behavior, as

Paycheck Protection Program: Analyzing Borrower Certification Risks

The shifting narratives around the government’s interpretations regarding eligibility for participation in the Paycheck Protection Program (PPP) has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

As part of the PPP loan application process, each borrower must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  This certification is one of seven certifications that borrowers must certify in good faith as part of the PPP loan application.  Neither the PPP loan application nor the text of the certification has been changed since implementation of the PPP on April 3, 2020.

With the backdrop of increasing criticism with regard to a small number of PPP borrowers, in a series of informal guidance releases, the Treasury and SBA have provided further guidance on what the Treasury and SBA appear to believe is required by this certification.

On April 23, 2020, the Treasury published FAQ 31 providing “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.  For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be

Virtual annual meeting glitches impact shareholder participation

Because of the rapid shift from in-person to virtual annual meetings mandated by COVID-19 health and safety concerns, many companies held first-time virtual-only meetings, with both management and shareholders exploring the process in real time.  Not surprising, reports of virtual meeting glitches soon began to emerge.

Twenty minutes into the virtual-only annual meeting of Goodyear Tire & Rubber Company, shareholder John Chevedden was presenting his shareholder proposal (to allow shareholders to vote on bylaw and charter amendments) when the microphone cut out.  Chevedden filed a shareholder alert with the SEC requesting that the polls be reopened so Goodyear shareholders can vote based on the full text of his proposal presentation.  So far, no word from Goodyear on Chevedden’s allegation that management cut off the microphone.

Earlier this week, the Council of Institutional Investors (CII) sent to a letter to the SEC Investor Advisory Committee expressing concern about some virtual-only annual meetings early in the 2020 proxy season, citing anecdotal reports of problems including:

  • Shareholders struggling to log into meetings, in part due to control number snafus;
  • Inability to ask questions in some cases if the shareholder voted in advance by proxy;
  • Shareholders unable to ask questions during the meeting;
  • Possible cherry-picking of questions asked by shareholders and lack of transparency on questions asked by shareholders; and
  • Confusion on channels for shareholder participation, with shareholder proposal proponents required to use a different line than that used for general shareholders.

The CII urged public companies to mitigate the

U.S. SEC staff issues FAQs relating to extension of filing deadlines due to COVID-19

May 5, 2020

Categories

Late Monday, the SEC Staff published FAQs addressing several questions relating to the SEC’s March 25th Order extending filing relief for public companies unable to meet a filing deadline because of circumstances related to COVID-19 and previously discussed in our April 1 blog post.

  • Disclosure Required to Utilize Filing Extension (FAQ 1). To utilize the filing extension, a reporting company must disclose in the Form 8-K (or 6-K):
    • that it is relying on the Order;
    • a brief description of the reasons why the company could not make the filing on a timely basis;
    • the estimated filing date;
    • a company-specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
    • if the reason the report cannot be timely filed relates to the inability of a third party to provide any required opinion, report or certification, the filing should include as an exhibit a statement signed by the third party specifying the reasons they were unable to provide the document by the original due date.

When the delayed report is eventually filed, the company must disclose that it is relying on the Order and state the reasons why it could not file the report on a timely basis.

  • Shelf-Takedowns Permitted If Required Information Included in Prospectus (FAQ 2). A company that has utilized the Order to delay filing current or periodic reports can continue to complete shelf-takedowns from an effective shelf registration statement if it determines

U.S. Board oversight of “culture shock” as employees return to radically different workplaces

As states slowly move to reopen their economies, many returning employees will be shocked by the radical changes in their workplaces.  Collaborative spaces, ping pong tables and community break rooms, among other areas, will be transformed or closed for social distancing.  Employers will monitor and collect employee health information as never before.  Some employers already have announced they are exploring contact tracing and testing apps and wearable wristbands to alert employees if they are within six feet of each other or have come into close proximity with someone who has tested positive for COVID-19.

Directors will play a crucial role in overseeing these pandemic-related corporate culture and privacy challenges, far beyond typical oversight of operations and finance.  Directors have duties of care and loyalty to make well-informed decisions and act in the best interest of company stockholders.  To fulfill those duties and protect themselves under the business judgement rule, directors should require management to provide appropriate and timely reports  so they can monitor and consider up-to-date information in order to provide strategic direction and oversight in the rapidly-changing COVID-19 environment.

While there is always tension and management sensitivity about possible board over-reach into day-to-day operations, management and directors may need to work together more closely than in the past so that directors are fully informed in order to monitor management’s real-time decisions to re-open while fulfilling their oversight duties.

Conflicts in workplace protocols are likely, as management and directors grapple to balance risks and uncertainties with employee and customer privacy

The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.