At the end of last week, the Small Business Administration (SBA) quietly released two new documents that we expect Paycheck Protection Program (PPP) borrowers with loan amounts in excess of $2,000,000 (either alone or when combined with loan amounts received by affiliates) will be requested to complete and submit as part of the SBA’s PPP loan forgiveness audit. These forms are titled as Loan Necessity Questionnaires and come in two versions, SBA form 3510 for non-profit borrowers and SBA form 3509 for for-profit borrowers. Until a formal announcement is made by the SBA and/or the Department of Treasury (Treasury), the forms may change and should not be considered final at this point. These questionnaires are being used as a tool to confirm the “good-faith certification that economic uncertainty made [its] loan request necessary to support [its] ongoing operations” for each PPP borrower that received $2 million or more in PPP loan funds during the SBA’s audit. The total loan amount takes into consideration a borrower’s affiliates’ PPP loans.

Background:

The release of these new documentary requirements brings into focus once more the SBA and Treasury’s FAQ #31, originally released on April 23, 2020, for publically held companies that stated:

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 Coronavirus Aid, Relief, and Economic Security Act (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.

This was followed by FAQ #37 for privately held companies on April 28, 2020, that stated the same good faith certification of necessity requirements applied. As part of this process, on April 29, 2020, the SBA and Treasury stated in FAQ #39 that all PPP loans totaling $2 million or more would be reviewed by the agency. This review process will now include the loan necessity questionnaires.

Many lenders began accepting loan forgiveness applications in mid-August of 2020. PPP borrowers have until the maturity date of their respective PPP loan to apply for loan forgiveness, but if a borrower wants to avoid making payments on its loan it has only 10 months from the end of its loan forgiveness covered period to apply for loan forgiveness. The SBA’s process for implementing these forms is unknown at this point and will not likely be known until the SBA makes a formal announcement. However, if a lender already submitted a PPP borrower’s loan forgiveness application to the SBA, it can expect to receive a request via the SBA Forgiveness Platform requesting submission of a completed questionnaire. The SBA has again noted lenders are not required to verify or validate borrowers’ responses or any supporting documents related to the questionnaire. Borrowers must provide their responses to the questionnaire within 10 days of receiving it. Lenders are required to enter and submit the completed questionnaire to the SBA within five days of receipt through the SBA’s Forgiveness Platform. Failure to complete the form and provide the required supporting documentation may result in SBA’s determination that the borrower was ineligible for a PPP loan and may seek immediate repayment or other available remedies.

Questionnaire Specifics:

There are three primary focus areas of the questionnaires: (1) the Business Activity Assessment, (2) the Liquidity Assessment, and (3) Certifications.

The Business Activity Assessment section contains eight questions with subparts, which include a comparison of second quarter 2020 gross revenue relative to second quarter of 2019, and requests details surrounding government mandated orders after March 13, 2020, related to shut down or the involuntary or voluntary requirement of significant operation alterations effecting the PPP borrower due to COVID-19. PPP borrowers that were not affected by COVID-19 should complete a review of their individual circumstances because it appears that the SBA will be looking at revenue and COVID-19 specific disruptors.

The Liquidity Assessment, contains 13 additional questions with subparts concerning how much cash the PPP borrower had prior to applying for the PPP loan. Questions within this section target the PPP borrower’s equity and debt transactions and asks if the PPP borrower paid any dividends or other capital distributions, other than for estimated tax purposes, to its owners during the loan forgiveness covered period.

Finally, the questionnaire asks the PPP borrower to certify: the veracity of its statements, a person with authority is signing on behalf of the PPP borrower, and acknowledgement that making false statements is punishable by law.

Non-Profit Questionnaire Items to Note:

Form 3510 is similar in setup to the questionnaire specifics outlined above. However, it focuses on the quantity of contributions, gifts, and grants a non-profit received in its second quarter comparison between 2020 and 2019. Thankfully, the questionnaire takes into consideration any restrictions the non-profit has on its net assets. Schools, colleges, and universities must also answer whether or not they’ve offered additional financial assistance to their students during the 2019 – 2020 academic year due to COVID-19 and if they’ve experienced a decrease in tuition revenue due to COVID 19 relative to the 2018 – 2019 academic year.

For-Profit Questionnaire Issues:

These questionnaires have been released passed the eleventh hour. Many businesses took this money and used it appropriately. Some of these same businesses may have had cash on hand, but would not have used cash or access to debt to keep its workforce in place if not for the PPP loan. Many businesses may take advantage of the optional space under question 13 of the Liquidity Section to express this rationale. Additionally, many small businesses are pass-through entities, such as S corporations or partnerships, and make regularly scheduled tax estimate payments that fell during the loan forgiveness covered periods for those PPP borrowers. Form 3509 addresses distributions designed for owners’ estimated quarterly tax payments are excepted, with some additional stipulations. However, it does not address any 2019 taxes that distributions were made for and possibly paid during the loan forgiveness covered period.

Furthermore, it seems additional scrutiny will be applied to PPP borrowers that had any employees or owners earning more than $250,000 on an annualized basis during the loan forgiveness covered period. Other questions focus on: borrowers who have equity securities listed on a national securities exchange or are owned 20% or more by a publicly traded company; borrowers who are owned by other companies, private equity funds, or foreign corporations (more information is required for each, if applicable); and if the PPP borrower received any additional CARES Act funding other than the PPP.

Additionally, because of SBA’s decision to release borrower information and a loan amount range earlier this summer, many businesses are concerned that their responses to these questionnaires will become public information. Responses and any supporting documentation should therefore be clearly marked on every page as business confidential and not subject to release under FOIA. Taft attorneys can assist with developing a response and litigation strategy to protect your information from disclosure.

For further information, please contact any member of Taft’s SBA Task Force.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.