Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”
That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “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 prepared to demonstrate to SBA, upon request, the basis for its certification.”
As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:
As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?
The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.
PPP Loans: Beware False Claims Act Whistleblowers
Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date. The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:
In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.
Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.
Public Offerings: Doing a Deal in a Blackout Period
Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now. That means its essential for companies that need capital to be able to quickly access the market when a financing window opens. Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results. This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:
– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;
– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;
– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and
– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.
The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.
The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”
– John Jenkins