CLIENT ALERT
By: Colleen Lyons and Paul Reuland
November 10, 2020
The U.S. Small Business Administration (“SBA”) recently released two forms of loan necessity questionnaires which borrowers who received Paycheck Protection Program (“PPP”) loans in excess $2 million will be required to complete. Form 3509 is the Loan Necessity Questionnaire for use by for-profit borrowers, while Form 3510 is the Loan Necessity Questionnaire for use by non-profit borrowers. The instructions to these forms state that the supplemental information collected will be used by SBA loan reviewers to evaluate the good faith certifications made by borrowers at the time they originally applied for their PPP loans.
In completing a PPP loan application, each borrower was required to certify in good faith that the requested loan was “necessary to support [its] ongoing operations” in light of the “[c]urrent economic uncertainty” resulting from the COVID-19 pandemic. Through subsequent guidance issued in May, after many borrowers had already received their PPP loans, the SBA and US Treasury Department (“US Treasury”) added that, borrowers must take into account their ability to access other sources of liquidity in a manner that is not significantly detrimental to their business, as part of the “necessity certification.” At the same time, this guidance allowed borrowers who may have previously obtained a PPP loan “based on a misunderstanding or misapplication of the required certification standard” to return the PPP loan funds.
As discussed in an earlier post, there were no clear criteria for borrowers to apply in making a determination of necessity under this new standard. In light of this uncertainty, the SBA and US Treasury issued FAQ 46 which provided a safe harbor for borrowers with PPP loans of $2 million or less. Any such borrower will be deemed to have made the required certifications in good faith. Borrowers with PPP loans in excess of $2 million remained subject to review for compliance with the certification requirements. It appears that the information provided in Forms 3509 and 3510 will be used by the SBA in connection with its review process.
Conventional wisdom had been that the SBA would evaluate a borrower’s “necessity certification” as of the date the borrower submitted its PPP loan application. In contrast, as noted below, the questionnaire is not limited to questions about a borrower’s circumstances at the time it submitted its loan application. Instead, several questions ask for information concerning the borrower’s financial condition and activities after disbursement of the loan.
The questionnaire has two major sections, a “Business Activity Assessment” and a “Liquidity Assessment.” The Business Activity Assessment requests information and supporting documentation related to the following:
- the borrower’s gross revenues in Q2 2019 and Q2 2020;
- whether the borrower was ordered to shut down or to significantly alter its operations by a state or local authority since the COVID-19 National Emergency Declaration on March 13, 2020; and
- whether the borrower voluntarily ceased, reduced or altered its operations since the COVID-19 National Emergency Declaration on March 13, 2020.
The Liquidity Assessment requests information and supporting documentation related to the following:
- the amount of the borrower’s cash on-hand and cash equivalents immediately prior to the date of the PPP loan application;
- whether the borrower paid any dividends or made other capital distributions to its owners between March 13, 2020, and the end of its the PPP loan-forgiveness covered period (the “Covered Period”);
- whether the borrower prepaid any outstanding debt between March 13, 2020, and the end of its Covered Period;
- whether any of the borrower’s employees or owners who work at the company were compensated in excess of $250,000 on an annualized basis during the Covered Period;
- whether any of the borrower’s equity securities were listed on a national securities exchange on the date of PPP loan application;
- the market capitalization of the borrower or the book value of the borrower;
- whether the borrower was a subsidiary of another company on the date of the PPP loan application;
- whether 20% or more of any class of borrower’s outstanding equity securities were owned by a private equity firm, venture capital firm or hedge fund on the date of the PPP loan application;
- whether the borrower was an affiliate or a subsidiary of a foreign, state-owned enterprise or of a department, agency or instrumentality of a foreign state on the date of the PPP loan application; and
- whether the borrower directly received funds from any CARES Act program other than the PPP.
It is important to note that a borrower has only ten (10) business days from the receipt of a questionnaire from its lender to complete and return it, along with all supporting documentation. Failure to complete and return the questionnaire could result in a determination by the SBA that the borrower is ineligible for the PPP loan, the full amount of the PPP loan as granted, or forgiveness. Given the volume and detail of information called for by the questionnaire, we recommend that all borrowers who received loans in excess of $2 million begin to complete the appropriate form and gather the supporting documentation, even if their lender has not yet delivered the questionnaire.
The instructions provide that after the questionnaire is submitted, the SBA may require additional information to complete its review, which will be based on the totality of the borrower’s circumstances. If based on its review, the SBA determines that a borrower did not have an adequate basis for its “necessity certification,” it may seek repayment of the outstanding PPP loan balance and the borrower may not be eligible for loan forgiveness.