Scalia is Scary and Criminals are Dummies.

Originally Published : May 5, 2020

Restaurants In The Crosshairs!

Did you know that the Secretary of Labor, Eugene Scalia is the son of the late Supreme Court Justice Antonin Scalia? And did you know that Justice Scalia was a  wicked smart, staunchly conservative, hard-liner not to be trifled with?  I tell you this because his son Eugene (poor kid) said today that small businesses should not expect to be given more flexibility in how they can spend the PPP loans. Eugene is just not having it and, if he’s anything like his father, who said, ” A man who has made no enemies is probably not a very good man”  I would take him at his word.

Anyway, 75% it is. Other than 65% for the obvious reasons, I have never had a negative feeling about a percentage before.  That’s changed and I now hate 75% with all my heart.  Oh, and to make matters worse for the maligned restaurant industry, two men were arrested and charged today with conspiracy and bank fraud for making false statements on their PPP applications.  And, of course, these guys owned ……RESTAURANTS!  We knew there would be fraud but did the first one have to be a damn restaurant?  It couldn’t have been some sketchy mail order business or a Brighton Beach Chiropractor office?  Do we really need this kind of shitty publicity?  These dummies claimed they had lots of employees at their restaurant, On The Trax, when in fact, they had none. That was the scam. 

(segue alert) People who should never feel scammed are your investors. Here’s our good friend and “of Counsel” Mitchell Littman to share some tips on raising money and dealing with your investors:

Investors and Fundraising by Mitchell Littman, Esq.; Of Counsel, Helbraun & Levey LLP
My Investors are calling; do I have to respond; and if so, what should I tell them?

First things first; of all the things a restaurant owner needs to worry about during this pandemic, investor relations, while not at the bottom of the list, should not be at the top of your list either. With that being said, I would not suggest that playing possum is the right path either.  Rather, it is important that you are being both transparent and forthright with your investors.

Now may be a good time to dust off your operating agreement to determine if you are in fact obligated to provide periodic reports to your investors; whether or not you are contractually required to do so, it would be good practice to provide investors with updates when you can.

My operating agreement requires mandatory quarterly distributions; what should I do now?

While many operating agreements require mandatory distributions, typically the determination of how much cash to distribute takes into consideration factors such as sufficient reserves or working capital.  First things first; you have to preserve the business and it would unreasonable for any investor to expect a cash distribution during a period in which no revenues are being generated. 

Ultimately you have to check the specific language in your own operating agreement, but perhaps as part of the investor communication described above, you should inform investors on the need to suspend any cash distributions unless and until you are once again open for business and generating sufficient profits and cash flow.

In addition, a reminder to speak to your accountants about timely preparation and delivery of K-1s to your investors; that tax obligation remains in place regardless of the shutdown of your business.

I do plan to reopen, but need new investments; how can I raise capital in this environment?

As always, the first stop on the capital raising train is to review the contents of your own operating agreement; among other provisions you should review:

  • Capital Calls – a capital call is a request by your company to ‘call’ upon current investors to provide additional capital above and beyond their initial investment in the company.
  • Right of First Offer/Preemptive Rights – before seeking new capital on new terms from new investors, many operating agreements require that your first offer that opportunity to your current investors. 

In addition to PPP and other recently announced governmental programs, it is important to explore other governmental financing sources that have been around for some time; for example, various programs established to invest in minority/women owned businesses.

Important to note that many loan documents – including some of the PPP promissory notes that we have seen –require lender approval prior to modification of your ownership (i.e., ‘cap’) table.  Thus if you are contemplating an equity raise, it is important to review your loan agreements to determine if bank consent will be required for that undertaking.  The last thing you want in today’s world is an inadvertent event of default under your loan.

To those who have previously tapped or are looking to tap into ‘crowdfunding platforms’, the SEC recently approved a temporary rule allowing companies to file crowdfunded offerings without immediately submitting financial statements (so long as such documents are provided by the time that company secures firm commitments from investors), a move intended to jump-start capital raising amid the coronavirus pandemic.  In addition, the SEC has proposed a rule to increase the size of crowdfunding in any 12 month period from $1.07 million to $5 million.

Joey Regs says:

Are you PPP prepared?
I hope that all of you out there who applied for PPP loans actually got them by now.  Are these loans perfect solutions for those in the hospitality industry? God no.  But the truth is, they sure do help.  What we want to focus on now, is how you can go about maximizing the value of the PPP for YOUR business. 

Every business has different needs and each of you will spend your money in ways specifically tailored to your business.  There’s important strategizing and planning to be done here and once your goals are clear, we can put those PPP funds to work (or not).
Applying for the loan was the easy part.  Understanding how to spend the money correctly is the really challenging bit.  Do you spend it all as soon as possible?  Do you not spend a dime and keep is socked away for when you can really reopen? Do you hold onto it and do nothing, waiting for the SBA to finally release their overdue guidance? I could, theoretically, advocate for any of the above to be considered the “smartest” move.  But it’s all dependent on the other variables, and there are many.
For those of you who called on us to file your PPP loan applications for you, please be sure to utilize the service that you paid for.  You didn’t JUST hire us to file your loan application.  You hired us to advise you along the way, and to ultimately shepherd you to forgiveness as well.  And for those of you who did not hire us to do your PPP applications, but could really use some assistance right now, we’re going to continue taking “P5” clients for another few days.  So, if you find yourself asking “What the F do I do with this money now?” or “Am I allowed to do this with this money?” or “Does anyone actually know how this whole thing works?”  please call us and let us assist.
As a reminder, the “P5” program is our ongoing advice, assistance and support program that begins post-funding of your PPP loan.  It includes useful tools, resources and access to our team that can help you navigate this process.  You get lawyers, accountants, and other professionals in your corner through this package.  Ultimately, it’s peace of mind for you.
Some interesting stats from our personal PPP application experience…
We obtained approvals for 100% of the PPP loan applications that we filed for HL Clients!!!
36% approved in Round 1; 64% approved in Round 2;
28% of our applicants received approvals from “Big Banks;” while 72% received approvals from the smaller, neighborhood banks.
Joey Regs out

Congratulations to our clients and friends, Missy Robbins, Sean Gray and Daniela Sotto-Innes for making it to the James Beard Award finals.  It’s so good to have something to look forward to and lovely people to root for.  Good luck to all of you!

Good night,