PPP Loan Recipients Must Be Careful to Avoid Liability for Fraud

On April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule (the Initial Rule),  for administration of the Paycheck Protection Program(PPP) created under the CARES Act.

While many business owners considering a PPP loan have focused on the requirements for loan forgiveness, many may be unaware that the Initial Rule may subject them to liability for fraud if they knowingly spend more than 25% of PPP proceeds on non-payroll costs.

75% of PPP Proceeds “Shall” be Used for Payroll

Within the explanation of how PPP loan proceeds can be used, under Section III(2)(r) of the Initial Rule, we find that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” By way of explanation the Initial Rule further provides “[t]his limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later for given.” In other words, regardless of forgiveness, 75% off PPP proceeds must go towards payroll costs. 

The language at Section III(2)(s) further explain “[i]f you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.” This presumably means that a PPP recipient who knowingly spends more than 25% of proceeds on non-payroll costs, could be liable for charges of fraud.

Business owners who are applying for or have received a PPP loan should ensure they understand the guidance from the SBA, especially because it continues to be updated. Moreover, it is very important to read the fine print to ensure compliance.

This information is provided for informational purposes only and should not be construed as legal advice.