But some public companies are declining to return the money, saying the program’s initial rules never barred them from applying. And some outside experts agree.
“The post-hoc rulemaking by Treasury seems to have precluded publicly traded companies from these loans, but that was not evident when the program was implemented early on,” said Juleanna Glover, founder of the public-affairs consultancy Ridgely Walsh, who is tracking the Small Business Administration’s loan program.
The lack of clarity reflects the rushed rollout of the loan program, which Congress and the Trump administration created in a hurry last month to try to save businesses and jobs amid the coronavirus crisis. The loans were particularly attractive because the government will forgive them if companies use the money to retain workers.
The broad-brush rules, laid out in the $2 trillion Cares Act and subsequent regulations, prompted a large variety of companies to apply and left Treasury in a standoff with some public companies that say they don’t plan to return the money.
“We don’t intend to return the loan because it’s going to serve its intended purpose, which is to prevent people from being laid off,” said Bruce Davis, chief executive of Digimarc, a 210-person tech company in Beaverton, Ore., that received $5 million. “If we’re eligible for the program and we meet the requirements, why wouldn’t we participate?”
Borrowers had to meet the Small Business Administration’s long-standing rules for what qualifies as a small business. For most sectors, the rule is 500 employees or fewer, but the threshold is 1,000 or more for certain industries, including mining, fossil-fuel extraction, poultry processing and cheese manufacturing.
The Cares Act also stipulated that hotels and restaurants with 500 or fewer employees per physical location could apply, opening the door for some well-known chains such as Shake Shack and Ruth’s Chris Steak House to receive loans. (After a public backlash, both companies said they would return the money.)
Aside from a few other conditions — applicants couldn’t be felons, engaged in any illegal activity, involved in bankruptcy proceedings or delinquent on a previous SBA loan — the main rule was remarkably broad and vague.
The Treasury Department has since suggested that this concept of necessity blocks many public companies from applying because they can theoretically raise money in other ways, such as by selling new shares on a stock exchange.
On April 23, after dozens of public companies reported in securities filings that they had received PPP loans, the Treasury Department changed the regulations to say it was “unlikely that a public company with substantial market value and access to capital markets” qualified for the funding. It advised such borrowers to repay the money or risk audits and penalties. It initially set a deadline of May 7 for returning the funds, but on Tuesday extended it to May 14.
“We said to people, ‘Look, we’ll give you the benefit of the doubt. If you didn’t understand this, you can pay the money back … without liability,’ ” Mnuchin told reporters last week.
Asked to comment for this article, the Treasury Department referred to those remarks by Mnuchin. The Small Business Administration didn’t respond to requests for comment.
Ari Kahn, chief executive of Bridgeline Digital, a publicly traded software company with 50 employees, said he saw nothing in the rules barring public companies. Bridgeline Digital intends to keep its $1 million loan, he said.
“We fit all the requirements as stated, and us receiving it has helped the economy at large,” he said.
With a market value of $3 million on the Nasdaq exchange, Bridgeline Digital is a modestly sized public company and probably faces more obstacles to raising money than a larger, privately owned company would, Kahn said.
Selling shares at the moment is unattractive because share prices have fallen sharply, he said.
Davis, the chief executive of Digimarc, agreed that it is a bad time to sell shares, given that the company’s stock price on the Nasdaq has decreased by half in recent weeks.
The software company, which sells anti-counterfeiting software to central banks and publishers, is operating at a loss as it invests heavily in a new type of software for grocery stores that it hopes will significantly boost sales.
Digimarc had $30 million in cash at the end of the first quarter, raised through past share sales, and added $5 million more to the pot with the PPP loan. Davis said the company will need the cash to cover quarterly shortfalls of $6 million to $7 million over the next year if it continues to invest in its new tech and avoid stark cost-cutting and layoffs.
Many of the public companies that have returned the loans, including Lindblad Expeditions and the Ashford hotel group, have done so after public criticism. Glover, the consultant tracking the loan program, said such scrutiny will be a powerful “antiseptic.”
“If you are known as a public company that is successful, there is significant reputational risk for taking the loans,” she said.
Holly Wade, director of research and policy analysis at the National Federation of Independent Business, said that although there was no prohibition on public companies applying for the money, their applications weren’t “in the spirit of the law.”
“It was certainly meant for those that didn’t have other options for financial assistance,” Wade said, not for companies that “have an army of accountants to help them navigate through other financing options.”
Many of the NFIB’s member companies, which employ an average of five people, didn’t receive PPP loans during the first round of funding despite applying, an NFIB survey showed. A second round of funding is underway after Congress allocated an additional $310 billion to replenish the program, whose initial $349 billion pot was quickly depleted.
Wade said it was understandable that there would be some hiccups with the program, given how quickly it was rolled out. But she said the ambiguity of the regulations is continuing to cause trouble.
The government is supposed to forgive the loans if borrowers spend the money on payroll and other qualified expenses, such as rent and utilities. But federal officials still haven’t clarified what sort of documentation companies need to show to have their loans forgiven, Wade said.
“There are still so many outstanding questions that haven’t been answered,” she said.