Managing Risk in Accepting and Using the PPP Loan

The latest Circle|Call was for CFOs and other finance leaders that have received PPP loans and need to make a decision by May 14th (update as of May 5th, Question #43) on using or returning loan proceeds. The purpose of the call was to help CFOs separate fact from FUD, assess the manageability of risk, and make a recommendation to their CEO and BOD on how to proceed.

The Circle was joined by Kevin Grumberg + Grant Fondo + Derek Cohen of Goodwin and Courtney Dorman + Amy Koch of Brunswick who offered a framework for assessing and managing risk with respect to audits, lawsuits and unwanted publicity around the PPP loan.

Here’s the run-down on what was discussed:

A Risk Assessment Framework for PPP Loans & Forgiveness

There are 3 primary risks associated with taking these loans:

#1 – Legal Risk

The most severe risk is criminal liability, though not a real concern for the upstanding members of our Circle community.

The relevant litigation risk is in the civil context, in conjunction with the False Claims Act. In this scenario, a case can be initiated not just by a federal prosecutor but by a whistleblower. There will be an active plaintiff’s bar for former employees – likely those recently laid off – which will be looking for former employees willing to file a claim regarding the company’s misuse of PPP funds.

It is important to understand how the False Claims Act opens up civil liability to the masses. Our friends at Goodwin have seen this in the extremes, having worked on a case where a family member sued another for accepting Katrina Relief aid. A claim can come from anywhere. 

#2 – PR Risk

Need to look at i) your customer base ii) your partner network and iii) your reliance on legal permits and consider how negative PR might affect those stakeholder relationships.

Operate under the assumption that all information will be released. Most will receive subpoenas, especially in cases where the company later raises a large funding round.

Journalists are already finding information through Freedom of Information requests.

 #3 – Collateral Business Risk (M&A / Investment Risk)

Investors and acquirers are likely to add questions about PPP loans and forgiveness to their diligence processes. Some could be risk-averse and avoid investing in companies that have taken on these loans.

Mitigating Loan Risk and Preparing for Negative Scrutiny

Necessary Risk Mitigation Initiatives:

•         Forecast cash over the next 3-6 months at a minimum
•         Exhaust all other capital sources –> cut executive pay, contacted investors, etc.
•         Prepare all the documentation relating to where loan proceeds were spent
•         Speak to legal counsel
•         Consider the loan size; risk increases with the size of the loan

Things to Avoid:

•         Should not use funds for acquisitions, NY times already outed companies for this
•         Dividends to investors, bonuses, and pay-raises are risky as well

Key Questions Related to Risk Mitigation:

If we have 12 months of runway, but the business is a bit shaky and we need 18 to feel comfortable?

There’s nothing in the statute saying there’s a problem with this. In this situation, it’s just important to understand there’s more risk, and so it is crucial that you make sure all the right preparations have been made and are well documented (executive compensation cut, alternative capital pursued, etc.)

What if during the 8-week loan period alternative capital does become available?

The answer here is very similar to the previous one. The underlying point being:

“If you made a good faith determination that you had a necessity, and the facts changed between then and when you apply for forgiveness, if you simply opt not to apply for forgiveness at that time and instead repay the loan, that will likely insulate yourself from scrutiny.”

A Guide to Communication Regarding PPP Loans & Forgiveness

How to prepare for potential negative press and considerations for communicating with other key internal and external audiences:

1. Have a clear business rationale and narrative for why the loan was necessary
2. Think through obvious questions that will arise about executive comp, subsequent rounds, etc.
3. Have a unified message; consistent communication across the organization is essential for mitigating both PR and legal risk
4. Have quantifiable data to assesses the presence of negative PR and impacts on the business, calibrate response from there

Consider whether to proactively communicate to employees, customers, and partners about your company’s PPP status, as  Sweetgreen in its most recent Medium post.

Internal communications are important as well. Making sure you’re upfront with your employees will reduce risk down the road.

Remember: Accepting a PPP loan is not something to be defensive about. Taking action to try and secure your company’s future is admirable, the key is to do this meticulously.

[Additional Resources]

By Brunswick: