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Paycheck Protection Program Update: New SBA Questionnaires Ask Borrowers of $2 million or More to Justify Economic Necessity of PPP Loans

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By Alexander B. GinsbergJohn E. JensenJenny Y. LiuCecilia Wang

The Small Business Administration’s questionnaires request information related not only to the economic condition of the borrower at the time it received the PPP loan, but also about its economic experience after receiving the loan.

TAKEAWAYS

  • On April 23, 2020, Paycheck Protection Program (PPP) Frequently Asked Question (FAQ) No. 31 informed borrowers that they were required to consider “their ability to access other sources of liquidity” before certifying in their loan applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • Several days later, FAQ No. 46 stated that borrowers whose affiliate group received less than $2 million in total PPP loans would be “deemed” to have made the certification of necessity in good faith, but that borrowers of amounts greater than $2 million would be subject to review by SBA.
  • SBA’s new questionnaires reflect the first indication from SBA of the form that its review of these larger loans will take.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed on March 27, 2020, provided forgivable loans of up to $10 million to qualifying small businesses under the PPP. We have provided client alerts over the last several months on numerous aspects of the program, including: loan eligibility and “affiliation” concerns; the certification of loan “necessity”; changes to the program brought about by the PPP Flexibility Act; and the mechanics of loan forgiveness, here and here.

April and May Guidance on the Certification of Economic Necessity
As we discussed in our earlier alerts, PPP applicants were required to make a number of certifications in connection with their applications, for example concerning their eligibility and the purposes for which they will use the loans. One such certification that has drawn particular scrutiny is the certification that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

On April 23, 2020, SBA added the following new FAQ concerning this certification:

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

On May 5, 2020, SBA extended the safe harbor date to May 14, 2020, and promised to provide “provide additional guidance” on how SBA will review the certification.

SBA issued this additional guidance on May 13, 2020, as follows:

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

New SBA Form Questions Economic Considerations from Both Before and After Receipt of the PPP Loan
Since issuing the foregoing guidance back in May, SBA has provided no further indication to borrowers of how it will review their certifications of economic necessity—until now. During the week of October 26, 2020, SBA announced its intent to release two new standard form questionnaires relating to the issue of loan necessity: SBA Form 3509 (for for-profit borrowers) and SBA Form 3510 (for nonprofit borrowers). These forms are not yet available on SBA’s website.

Each form specifies that it must be completed by any borrower that “together with its affiliates, received PPP loans with an original principal amount of $2 million or greater.” Moreover, each form provides that it must be completed and submitted “within ten business days of receipt from your Lender” and that a failure to submit the form and associated documentation could result in “SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.”

Importantly, the questionnaires are not limited to questions about a borrower’s circumstances at the time it applied for its PPP loan. Rather, several of SBA’s questions request information concerning the borrower’s experience after receiving its loan, including but not limited to: (1) the “Borrower’s approximate additional cash outlays” to react to state and local COVID-19-related orders; (2) similar additional cash outlays related to other changes in business operations caused by COVID-19; (3) whether, between March 13, 2020, and the end of the PPP loan forgiveness period, the “Borrower paid any dividends or other capital distributions (other than for pass-through estimated tax payments) to its owners;” (4) whether, during the same period, the borrower “prepaid any outstanding debt;” and (5) whether, during the same period, any of the borrower’s employees were “compensated in an amount that exceeds $250,000 on an annualized basis.”

Form 3509 also asks borrowers to represent whether they or their parent companies are publicly-traded, and whether any publicly traded company or private equity firm, venture capital firm or hedge fund owns 20 percent or more of any class of their securities. The questionnaire also asks borrowers to represent the value of their shareholders’ equity.

SBA has not disclosed how it will review and evaluate this information in determining whether the borrowers properly certified regarding the necessity of their PPP loans. To many PPP borrowers, however, SBA’s inquiry into their economic experience after receiving PPP loans comes as a surprise. Indeed, the relevant certification attested only to the necessity of the PPP loan based on “current economic uncertainty” at the time of the loan application. SBA’s impending issuance and subsequent review of Forms 3509 and 3510 will require close monitoring going forward.

Additional Resources
Pillsbury attorneys can help clients interpret the foregoing requirements. We will continue to monitor guidance regarding the Paycheck Protection Program and other programs under the CARES Act.


Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm’s capabilities in supply chain management, insurance law, cybersecurity, employment law, corporate law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.

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