Most folks could agree that the CARES Act, including the Paycheck Protection Program (PPP), is a healthy if unwieldy federal response to the current economic crisis. It was big, for the most part logical, on point and (in terms of how the government works) timely. Two cheers for the folks in DC.
At the same time, as our law firm (and perhaps one or two others) has eloquently pointed out, the PPP looks better at a distance than close up. Check out our CARES Act Relief Resource Center. Upon closer inspection, there are lots of rough and ill-defined edges. It’s bad enough to find yourself excluded from a good deal by the fine print. It’s worse when the fine print obscures what the deal is, whether you qualify for it, and the potential costs of getting those questions wrong.
In terms of uncertainties in the fine print of the PPP, questions about who qualifies for PPP programs, what qualifies as a PPP eligible expense, and how to report and document all that are legion. Ask your lawyer or accountant about your own circumstances, and you’re apt to get answers that are hedged or frankly uncertain. The kind of answers that make clients frustrated and angry at their advisors, to whom they pay big bucks for answers, not obfuscations.
That frustration and anger is understandable. It shortchanges the complexity, however, of the world those advisors live in: the real world, which is very messy. Particularly (and unfortunately) when government, with its vast powers over the populace, individual and corporate, makes a big new intervention.
So, herewith a bit of a defense of your advisors, and even the politicians and their powerful regulatory minions.
The first thing to know about PPP law – and law generally, the bigger the more so (and the PPP is huge) – is that while most of what comes out of Congress and is signed by the President is more or less clear in terms of the “big picture,” it tends to fall well short of a bill of particulars. That’s unfortunate, but largely baked into the system.
Take, for example, the question of what businesses qualify for a PPP loan. “Small businesses” is the ready answer. Small businesses where the loan is “necessary.” So says the CARES Act. What could be clearer?
A good start, but woefully inadequate in a very messy real world. Sure, we all know what a “small business” is when we see one that obviously qualifies – let’s say a local restaurant John Doe owns that employs fifty people (let’s call it SmallCo, and not that for purposes of the PPP program a “small” business is one that employs less than 500 people). And we all know what “necessary” means when we see it. In this case, SmallCo will run out of cash to maintain the business in say 45 days. SmallCo, surely, can get a PPP loan.
Well, that depends. What if John Doe owns ten other restaurants – or say ten other businesses in various sectors (SmallCo 1, 2, 3, etc.) – each of which employs less than 200 people but together employ 1,000 people. Or say one of those businesses employs 750 people, and the rest employ an aggregate of 250 people. Or that two of the SmallCos are sitting on cash hoards that could keep them alive with no revenue for a year or more. And that, say, one of the other SmallCos has a signed term sheet for an investment of two years’ worth of expected cash needs from a well-established venture capital firm? Or that two of the SmallCos are franchises of an iconic fast food empire.
You get the idea. The permutations of our John Doe/SmallCo example are for practical purposes endless in an economy as large and diverse as America’s. It is just plain unrealistic to expect Congress to either anticipate – or even agree – on how to handle all of them.
So ... Congress passes the PPP figuring that we all know what we mean (no, we don’t), and that in the event some poor individual at SBA, coordinating (or not) with other poor individuals at other federal agencies, will figure that out, and incorporate the answer in clear, complete, and timely regulations. Good luck with that.
Which isn’t to say the poor individuals writing the regulations are bad people. Just that they are, as a group, no less certain about the gaps in the PPP law than the people who wrote it. Did they really mean to include publicly-traded companies that employ less than 500 people and “have access” (what exactly does that mean) to the public (or private?) markets for additional capital? Access on what terms? Did they really mean to include an owner of a name-brand franchised burger joint? Does your answer to that question apply to venture-backed company where a single investor that employs 600 people has three of five seats on the Board of directors – but only owns 15 percent of the equity?
Hopefully, you are beginning to understand. First, the law itself, the bigger, more complex and more impactful the more so – PPP is the mother of such things – has lots of built-in ambiguities. Second, the bureaucrats who write the regulations that are supposed to impose order on all of those ambiguities are diverse and legion and themselves uncertain what Congress meant. Not to mention what their kind-of/sort-of bosses in the Executive Branch think they meant.
And then there are the courts to consider. Because, ultimately, there is a good chance that some folks along the way from Congress through the regulators to the small (or not) businesses will make mistakes that some judges (at various levels, in various places) will find objectionable.
And then there is the court of public opinion, mediated by the media which, with the benefit of hindsight the more so, is fickle about judging the behavior of the John Does and SmallCos of the world. Particularly when there is close to a trillion dollars involved, and we know two things for certain: (i) there will be abuses (real and perceived), and (ii) there will be unfortunates who should have been helped but for whatever reasons were left behind.
So far, we’ve scratched the surface of what a small business is, for purposes of PPP. We haven’t more than cast a sideways glance at what makes a PPP loan “necessary” and how to establish that. We haven’t looked at what John/SmallCo have to disclose to the SBA to get a PPP loan, and what, of that information, SBA must, or can, make available to the public.
None of this is to say that as the John Does of the world start looking for answers about PPP eligibility and such they won't understandably find themselves getting more than a little angry and frustrated. But while some of that frustration and anger might be properly directed at Congress, or the regulators or John’s advisors, John should try and at least consider that those folks are themselves likely frustrated and angry.
So, as John Doe works his way through this mess, and wonders what he qualifies for and whether he should apply even if he does, consider this: in getting the CARES Act through Congress and the President, and in getting a fast if still evolving regulatory structure in place, and getting so much money out so fast, the “system” has performed much better than most of us likely expected. The very real problems with what we have so far are, all things considered, of a higher quality than we’d have if Congress was still debating, the President still tweeting and the regulators still sitting on their hands.
Which is all to say, cut yourself, and maybe even your advisors, some slack. As for the folks in DC, well, I’ll leave that for your discretion.
Meanwhile, check out our COVID-19 Resource Center and additional resources on our website.