By Cary Zimmerman & Demetrius Robinson

The Small Business Administration’s (SBA) Paycheck Protection Program (PPP) – which provides low-interest, forgivable loans to small businesses – has received considerable attention for its unprecedented size and for the flaws in the hastily structured relief program that have become painfully apparent. The central policy of the PPP program is to help small businesses support their payroll burdens for a temporary period so that individual employees remain employed and compensated as the U.S. economy bears the impact of COVID-19.

PPP Loans Must Be “Necessary”

Despite this laudable objective, many of the PPP program particulars were unclear or contradictory at program launch, leaving lenders and borrowers to navigate the process without good guidance. This certainly was the case for PPP program eligibility. The CARES Act and PPP borrower application form require applicants to certify in good faith that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.” However, when the PPP program opened up on April 3, 2020, no detail was provided regarding what “necessary” means in practice. With the subsequent release of FAQs from the SBA (several times over, including as recently as April 29, 2020) and a statement from Treasury Secretary Steve Mnuchin and SBA Administrator Jovita Carranza, we’re learning that program eligibility is not as broad as some may have initially believed. Specifically, the FAQs clarify that:

  • Each borrower must assess its unique economic need for a PPP loan, taking into account its “current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.”
  • However, the “credit elsewhere” requirement that ordinarily would require a borrower to first exhaust other sources of credit before seeking the PPP loan does not apply.
  • Public companies with substantial market value and access to capital markets “should be prepared to demonstrate to SBA, upon request, the basis for its certification” and likely will not be able to make this certification in good faith. The same analysis applies to businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations.
  • Recipients of PPP funds prior to the issuance of this guidance that do not satisfy this certification upon reflection can repay the loan in full by May 7, 2020, and “will be deemed by SBA to have made the required certification in good faith.” 5/13/2020 UPDATE: The SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46.

Should Venture-Backed Companies Reject or Return PPP Money?

Whether a company’s PPP loan is necessary under the current guidance (which is likely to be updated again) is an important question to be considered by each borrower, since it has become clear that the company’s justification for the loan will be put under the microscope. The scrutiny will be even greater for larger loans, since the Treasury Department and SBA have announced that they will be reviewing all PPP loans over $2 million for compliance. In the case of a venture capital-funded company, this is an interesting analysis because the company has owners and other stakeholders (such as those with securities issued by the company that are convertible into equity in the company) in the business of investing in alternative assets like start-ups. So, should a venture-backed start-up reject or return PPP money? Does having venture funding mean such a company does not need the additional capital from a PPP loan?

The answers to these questions are nuanced and must take into account the facts and circumstances of each company. However, we note the following important considerations for any VC-backed company that may take, or that has already taken, PPP loan funds:

  • Threat of Business Closure and Layoffs Are Compelling Reasons: If, without the PPP loan, the company would be faced with implementing layoffs, furloughs or pay cuts, the company’s justification for the loan is stronger, since keeping employees on payroll is the whole point of the program. Take a look at the company’s cash reserves, burn rate and runway, cut expenses where possible and determine whether the company can survive without laying people off or reducing their pay.
  • Consider Alternative Sources of Capital: Although the “credit elsewhere” requirement was waived, if a company can access funds from another source at a reasonable cost, it will be harder for it to justify the loan. As one example, media outlet Axios recently returned its $4.8 million PPP loan in part because it learned it had access to funds through another source (although it did not indicate the terms attached to such capital; it also cited increased political polarization regarding the PPP program as a factor). That said, having any other access to capital may not be enough, since the other capital could be too expensive or may have a dilutive effect on the company’s ownership. And while dilution was not addressed in the FAQs, it seems reasonable to consider it, although it’s hard to know how much weight to give to it.   
  • VCs May Not Be a Viable Capital Source: In what Axios describes as the “deep pocket fallacy,” VCs may not be well-suited to make a follow-on investment in a portfolio company to save it, due to financial pressures on LPs that could delay or inhibit capital calls, fiduciary duty issues and competing requests from other portfolio companies that, if all simultaneously satisfied, would not be feasible for the fund to satisfy. This may not be the case, however, for a megafund with significant amounts of “dry powder.” Add to this the fact that additional VC investment likely would result in some dilution, and the existence of a VC on the company’s cap table may not be fatal to its “necessity” analysis.
  • Freedom of Information (FOIA) Disclosure: Certain information from the loan application may be subject to disclosure under FOIA, a federal law that allows requests of information from federal agencies unless an exemption applies (for national security, privileged, trade secrets, etc.). The application provides that in certain circumstances information may automatically be released, including statistics on the PPP program, names of borrowers (including officers, directors, stockholders or partners), collateral pledged, amount of loan, purpose of the loan and loan maturity. An increase in FOIA requests related to PPP loans is anticipated. Venture-backed companies who receive or request a PPP loan should ensure that the information they provide in the application can withstand public scrutiny.
  • Criminal Liability and Whistleblower Actions: Some statutes, such as the federal False Claims Act (FCA), give rise to potential legal exposure for PPP applicants. For example, the FCA creates liability for any person who knowingly makes a false claim to the government, including a false record or statement with the intent of getting paid by the government. FCA violations carry triple damages and penalties of roughly $22,000 per false claim, and intentional violations can bring criminal prosecution. In addition, U.S. Attorneys have been directed to appoint a coronavirus fraud coordinator in each federal district. The FCA applies to information provided in PPP applications, including the certification about “necessity” as described above. The FCA also includes a whistleblower provision that allows an individual to report wrong-doing. Whistleblowers who bring a successful FCA lawsuit may get a percentage of the total award (usually between 15% and 30%). Companies should keep this in mind as they work through the PPP process and ensure that their justification for pursuing the loan is thorough and well-documented.
  • Keep Thorough Records of the Analysis: All companies, including those backed by VCs, should document their careful analyses supporting their PPP loans, which should comply with the company’s corporate governance procedures (including board oversight and approval, if applicable). The following are some of the questions for such companies to consider:
  1. Did I consider other sources of capital (such as a VC investor in the company) and, if so, what limitations did those carry with them? Were they “significantly detrimental” to the business?
  2. Without the PPP loan funds, was the business in danger of closing or would employees have been laid off or sustained pay cuts?
  3. Did I seek advice from outside professionals (accountant, legal counsel, banker, etc.) and, if so, what was their advice?
  4. Even if my company can justify taking PPP money, is it worth the brand risk considering the heat that many start-ups have taken recently in connection with the PPP program?


By thoroughly considering and documenting the PPP economic necessity analysis while keeping in mind the potential negative consequences of getting the analysis wrong, venture-backed start-ups can reduce their exposure to issues down the road. Our general guidance to all clients with respect to the PPP program is to tread lightly, and please feel free to give us a call if you need assistance working through these thorny issues. Finally, if your company already has received PPP money and subsequently determined that the loan was not “necessary,” note that you have a de facto safe harbor under the FAQs to return that money to the SBA by May 18, 2020.

If you have questions or would like to discuss further, please reach out to Cary Zimmerman (; 216.736.7275) or Demetrius Robinson (; 614.427.5749).