PPP Loan Insights: Forgiveness Does Not Mean Forgotten – Part II
With SEC Form 10-Qs for the second quarter ended June 30, 2021, due shortly, and SEC Form 10‑Ks for companies with June 30 year ends due in the next few weeks, publicly traded companies that received PPP loans, even those that have had those loans forgiven, need to review and update their SEC disclosures regarding their PPP loan. That is because, even though from an accounting perspective forgiveness of your PPP loan eliminates the liability, from a legal perspective forgiveness is not necessarily the end of the process. Indeed, especially for publicly traded PPP borrowers with loans of $2 million or more, PPP loan-related disclosures are still likely required, even after the PPP loan has been forgiven.
Most publicly traded companies that obtained PPP loans have been including disclosures regarding their PPP loan in their SEC filings under “Risk Factors,” “Management Discussion and Analysis of Financial Condition and Results of Operations” (MDA), and the footnotes to Financial Statements. Disclosures by PPP borrowers who have not yet had their PPP loan forgiven need to be updated in their periodic SEC filings to reflect the current status of their loan forgiveness process, such as not yet applied for forgiveness, date forgiveness application filed, status and nature of SBA requests for additional information, etc. Otherwise, their disclosures will likely not change very much, or at all, because their liability has not changed from an accounting or legal perspective.
PPP borrowers who have had their forgiveness application denied by the SBA likely have already filed Form 8-Ks with the SEC disclosing the denial, particularly if their loan amount is material. In addition, their next Form 10-Q or Form 10-K after denial should disclose the denial, the reasons for the denial, the status of any appeal process underway and related risks.
Publicly traded PPP loan borrowers who have decided not to apply for forgiveness will need to disclose that fact and the reasons for that decision in their next Form 10-Q or 10-K, and potentially earlier in a Form 8-K.
Even publicly traded PPP borrowers that have been lucky enough to have had their loans forgiven, however, still will need to decide how to revise their disclosures to address the ongoing contingent legal liability. In particular, issuers will need to continue disclosures regarding the risk that their PPP loan can be audited by the SBA for up to six years from the date of forgiveness or repayment, including an audit of the borrower’s economic necessity certification. Also, continued risks faced by public companies for audit in this area based upon prior SBA statements, particularly if they had substantial market value and access to capital markets to fund their liquidity needs during the COVID‑19 pandemic, will need to be included in SEC filings.
In the financial statements, continued disclosure of the PPP loan audit risk as a contingent legal liability and the scope of that disclosure will depend on an assessment of the probability of the audit occurring coupled with a determination as to whether the amount of the potential liability can be reasonably estimated. Especially because the timing, scope, nature, and extent of those audits are currently unknown, the probability and potential amount is extremely hard to estimate.
We expect to see continued disclosures regarding PPP loan audit risks in public company SEC filings for the foreseeable future, and certainly at least until the SBA’s audit process, timing, and scope become clearer.
Recommendation: Whether or not your PPP loan has been forgiven at this point, if you are a publicly traded company that received a PPP loan, we recommend that you (i) review the PPP loan disclosures in your public filings and update them for your current situation, (ii) consult with your accountant to determine if the reporting of your PPP loan in your financial statements needs to be revised, and (iii), to the extent you have not done so, prepare a “PPP loan white paper” setting forth the reasons why, at the time of your PPP loan application, current economic conditions made obtaining the loan necessary to support your ongoing operations. You also may want to include a discussion of actual performance and need. While the focus of the discussion should be on the facts and circumstances, including actual performance leading up to applying for the loan through May 18, 2020, (i.e., the Safe Harbor Date, or, if the loan was applied for after that date, then the date the loan proceeds were received), if your actual performance was better than expected, include an analysis of the reasons why the events leading to positive actual performance were not certain or known at the time of your PPP loan application. This analysis will help you to evaluate the level of risk that an audit of your PPP loan by the SBA presents and the required level of disclosures in your public filings.
In preparing your PPP loan white paper, consider the following:
- Attorney-Client Privilege Protection. In order to have your PPP loan white paper subject to the protection of the attorney-client privilege, it should be prepared to provide your attorney with information required by them to provide you with legal advice. Dykema has developed a list of questions to help guide borrowers in the preparation of the PPP loan white paper.
- Assistance of Advisors. The PPP loan white paper will include a significant amount of financial and legal analysis. Your accounting, financial and legal advisors can assist you in putting together the analysis and in reviewing and commenting on the analysis. Your advisors can assist you in a variety of other ways.
Stout has professionals that developed a list of more than 60 factors that they believe the SBA, and/or any other government entity, will likely analyze in making their own determination as to whether a borrower had a need for the PPP loan at the time of its loan application. Stout’s team then uses its independent analysis of those 60+ factors to identify any potential issues or red flags, and/or develop a comprehensive independent report analyzing your economic need for the loan at the time of the application that can be provided to the SBA or other government agency if the loan necessity is ever challenged.
Both Dykema and Stout have professionals on staff who have handled similar government reviews, both for the government in areas outside of PPP and against the government, and are able to apply that experience and knowledge to help you assess your position under the PPP. We also are able to provide otherad hocassistance to meet the needs of our clients based on each client’s specific facts and circumstances, including cases where the SBA or other agencies challenge loan eligibility.
Watch for our PPP Loan Insights:
- Forgiveness Does Not Mean Forgotten – Part I
- Forgiveness Does Not Mean Forgotten – Part IIOngoing SEC Disclosure Obligations, August 3, 2021
- Forgiveness Does Not Mean Forgotten – Part IIIPreparing for Your SBA Audit, Release Pending
- Forgiveness Does Not Mean Forgotten – Part IVPreparing for M&A/Financing Due Diligence Examinations, Release Pending
- Forgiveness Does Not Mean Forgotten – Part VPreparing for Government Contract Reimbursement Audits, Release Pending
Please contact Tom Vaughn, Dykema, (313-568-6524); Jonathan Feld, Dykema, (312-627-5680); Robert C. Shrosbree, Dykema, (313-568-6641); Steve Sahara, Stout, (312-763-6229); Jesse R. Morton, Stout, (678-573-2686); Steve Lovoy, Jr., Stout, (678-573-2685); or your regular Dykema attorney or Stout advisor.