SEC Reportedly Conducting Enforcement Sweeps of Public Companies That Obtained PPP Loans

The SEC has made clear that it will be vigilant in investigating and policing potential disclosure fraud stemming from financial stresses of the current downturn.¹ Over the past few days, it has been reported that the SEC Division of Enforcement is issuing voluntary information requests to public companies that obtained PPP loans, as part of an enforcement sweep. The inquiry is apparently captioned In the Matter of Certain Paycheck Protection Program Loan Recipients. Based on anecdotal reports, the inquiries appear to be focused on whether the companies’ claimed eligibility and need for PPP funds is consistent with their public disclosures concerning their financial condition. In prior alerts, we have explained that the SBA safe harbors will not necessarily immunize borrowers from criminal or civil enforcement by prosecutors or regulators relating to their need certificates. The reported SEC sweeps are one example of the risks that public company borrowers may still face, notwithstanding the SBA safe harbors.

As we have discussed in prior alerts, the evolving SBA guidance has created a minefield for public companies in particular. To obtain a PPP loan, all borrowers must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the [a]pplicant.”² After the initial backlash directed at certain high-profile public company borrowers, the SBA clarified 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.”³ The reported enforcement sweep indicates that the SEC is now focusing its attention on public companies that obtained PPP funds, likely looking for inconsistencies between what a company represented in its loan application and what it has elsewhere communicated to investors about its current financial health and/or future prospects.

In a statement issued on April 8, 2020, the SEC addressed, among other things, disclosure by public companies that have received “financial assistance under the CARES Act or other similar COVID-19 related federal and state programs.”⁴ The SEC advised: “If these or other types of financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance.”⁵ Even if a borrower does not make that recommended disclosure, the identity of PPP borrowers can generally be obtained through a FOIA request or other specific request to the SBA. In addition, the PPP loan application states that the SBA may disclose a borrower’s information to an agency “involved in investigation, prosecution, enforcement or prevention of” violations of the CARES Act. Borrowers should therefore assume that, one way or another, their receipt of a PPP loan may come to the attention of the SEC.

When a company applies for and obtains a PPP loan, it effectively states that it has a good faith need for the funds. From an SEC enforcement perspective, that may give rise to a host of related questions. For example: Does the claimed need for a PPP loan suggest other problems or trends that should have been disclosed? Is the need certification consistent with the company’s public statements to the market about its financial health and the impact of COVID-19 on its short-term or future prospects? If the company presents a rosy picture to investors, can that disclosure be reconciled with its certified need for a PPP loan? The PPP need certification is not necessarily inconsistent with a company’s confidence in its future prospects. The certification should be reasonably read in light of its stated purpose to avoid headcount reductions and to maintain the company’s operations (including its workforce) through the covered period (up to June 30, 2020, or perhaps through the pendency of the pandemic). Such actions would not necessarily lead to going-concern issues or liquidity concerns or undercut management’s overall confidence in the future of the business.

The reported SEC enforcement sweeps, while still preliminary, signal to public company borrowers that the SEC will scrutinize their public financial disclosures for inconsistencies with their need certifications. It therefore remains especially important for public company borrowers to follow the guidelines we previously outlined for all borrowers that elect to retain their PPP loans. Those guidelines, set forth here, include documenting the decision-making process that led to submitting the loan application; documenting the need for funds; and tracking and documenting how the funds are used. Companies will similarly want to document the good faith process underlying their public disclosures as to the effects of the pandemic on their current and future financial results.

Like all PPP loan recipients, public company borrowers must ensure that their need certifications are accurate and consistent with internal financial forecasts. If their certifications are inaccurate, they may face criminal or civil actions by the Department of Justice and/or (subject to the applicable safe harbors) administrative actions by the SBA. At the same time, public company borrowers should also be cognizant that their need certifications should be consistent with their SEC filings, press releases, investor call statements and any other information they publicly disseminate to the market.

^{1 See Steven Peikin, Co-Director, SEC Division of Enforcement, Keynote Address: Securities Enforcement Forum West 2020 (May 12, 2020), available here.}

^{2 Paycheck Protection Program Borrower Application Form, p. 2.}

^{3 Paycheck Protection Program Loans, Frequently Asked Questions, FAQ No. 31.}

^{4 Jay Clayton, SEC Chairman, Public Statement: The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19 (April 8, 2020), available here.}

^5 Id.