Unpublished Paycheck Protection Program (PPP) Loan Necessity Questionnaires Provide Insights, Raise Questions Regarding “Need Certification” Review for Larger Borrowers
On October 26, 2020, the U.S. Small Business Administration (SBA) announced its intention – via a notice in the Federal Register – to create two new standard form questionnaires relating to “need certifications” made by Paycheck Protection Program (PPP) borrowers that, together with their affiliates, received PPP loans of $2 million or more. These new questionnaires, Form 3509 (for for-profit borrowers) and Form 3510 (for non-profit borrowers), appear to be part of the SBA’s promised review process for larger PPP borrowers.
Although these new forms have not yet been publicly posted or otherwise published to the SBA or U.S. Treasury websites, PPP lenders have reported receiving the form questionnaires from SBA, and the forms have now circulated among borrowers, professional advisors and others. While it may be premature to declare these forms “final” (since nothing ever seems to be truly final when it comes to the PPP), larger borrowers should review the forms and prepare to gather the extensive information SBA seems poised to collect in connection with its review of larger loan forgiveness applications.
Background on PPP “Need Certification”
By way of background, the PPP provisions in the CARES Act required each PPP borrower to certify in good faith that, at the time of their loan application, the “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations” of the borrower. Consistent with the CARES Act, the PPP Loan Application (SBA Form 2483) required applicants to certify that “current economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.” Several weeks after the PPP launched, with uncertainty still surrounding this requirement to certify “need,” SBA began to issue various FAQs in an attempt to clarify its position and provide guidance for loan applicants.
The first of the “need” specific FAQs was issued on April 23, 2020. While FAQ 31 was primarily directed at public companies with the ability to access sources of liquidity, all businesses were reminded to assess their economic need for a PPP loan. According to FAQ 31, borrowers were required to make the need 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.” The FAQ stated that it would be unlikely that a public company with substantial market value and access to capital markets would be able to make the certification in good faith. By contrast, FAQ 31 did not describe any particular or hypothetical circumstances that would make it difficult for a privately-held company, not-for-profit or other PPP borrower to make its need certification in good faith.
Since the publication of FAQ 46 in May, there has been virtually no further guidance or insight from SBA regarding its approach to reviewing and assessing PPP borrower “need certifications” – that is, until the SBA published its intention to create Forms 3509 and 3510 and those forms began to circulate among lenders, borrowers and their advisors. These forms appear to be the first step toward SBA following through on its promise to review the 30,000-50,000 PPP loans impacted by FAQ 46.Then, on April 29, 2020, in FAQ 39, SBA announced that it would review all PPP loans over $2 million, and other loans as appropriate, to ensure legitimate economic need before the loans would be forgiven. FAQ 39 referenced the guidance from FAQ 31 that seemingly set forth a more stringent standard for the need certification than included in the CARES Act itself and early guidance provided by the SBA and Treasury. Then, on May 13, 2020, through FAQ 46, SBA announced that any borrower that, together with its affiliates, received a PPP loan of less than $2 million would be deemed to have made their need certification in good faith. With this, the SBA also promised greater scrutiny for borrowers that, together with their affiliates, received loans of $2 million or more.
Overview of New Forms / Questionnaires
Currently, each of the new PPP forms 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.” Receipt of the form does not necessarily mean that SBA is challenging the borrower’s “need certification.” Rather, SBA states that it is collecting this information from all such borrowers in order to “maximize program integrity and protect taxpayer resources.” SBA may request borrowers to provide additional information after they respond to the form, and an adverse determination for any particular borrower would be based on “the totality of [the borrower’s] circumstances.”
Each form provides that it must be completed and submitted (together with supporting documentation) within ten business days after receipt by the borrower from its PPP lender. Failure to submit the form and required documentation could result in “SBA’s determination that [a borrower was] 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.”
The new forms consist of two primary substantive sections: a “Business Activity Assessment” and a “Liquidity Assessment.” The “Business Activity Assessment” includes numerous questions relating to impacts on the borrower’s business activity during its covered loan period. The “Liquidity Assessment” focuses largely on the borrower’s ownership structure, borrowings and use of cash (including employee/owner compensation, capital expenditures and dividends or distributions).
The forms are not limited to questions about a borrower’s circumstances at the time it applied for its PPP loan. Instead, many (perhaps most) of the questions and information requests concern the borrower’s activities and circumstances after applying for and receiving its PPP loan. The for-profit and non-profit forms each include 21 questions, many of which have multiple parts. The forms are nine pages each, and supporting documents are required for six questions. Some of the key topics include:
- the borrower’s 2020 second quarter gross revenue (or, for non-profits, gross receipts) compared to its 2019 second quarter gross revenue (or, for-non-profits, gross receipts);
- the extent to which the borrower was required to “shut down” or “significantly alter” operations due to state or local COVID-19-related orders (or did so on a voluntary basis);
- the borrower’s “approximate additional cash outlays” to react to state and local COVID-19-related orders;
- similar additional cash outlays related to other changes in business operations caused by COVID-19;
- the borrower’s cash on hand as of the last day of the calendar quarter preceding its PPP loan application;
- for non-profit borrowers, the amount of endowment funds (including types of funds and any relevant use restrictions on those funds);
- whether, between March 13, 2020 (note this predates adoption of the CARES Act) 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;”
- whether, during the same period, the borrower prepaid any outstanding debt; and
- 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 requires applicable PPP borrowers to disclose 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 more than 20% of any class of their securities. Borrowers must also state the value of their shareholders’ equity.
Importantly, in addition to the fact that these forms are not yet publicly posted, SBA has not yet issued any guidance or rules about how it will review and evaluate responsive information and documentation in determining whether a borrower made their initial PPP “need certification” in good faith. The new forms also do not provide much guidance on what “supporting documentation” will suffice for responses to various questions in each section of the questionnaire.
Key Takeaways and Next Steps
Although we do not yet know whether these new forms are “final,” larger PPP borrowers will want to begin the process of collecting the information and supporting documentation required to be submitted by the versions of the questionnaires currently circulating and linked to above. Given that this information may be relatively substantial, substantive and potentially sensitive, borrowers will want to get a head start on the process and consult with their counsel and accountants about any supplemental disclosures or information they may wish to provide to SBA in connection with their responses to the forms. Counsel should be engaged early in the process, especially with respect to inquiries regarding sensitive topics where attorney-client privilege may be important.
In particular, those PPP borrowers that have not yet experienced as significant a decline in business activity as they believed would materialize when first applying for their PPP loans should work with counsel to identify what contemporaneous information and supporting documentation from the time of the borrower’s original PPP loan application best supports their “good faith” need certifications. The SBA appears ready to collect much “after the fact” information that was inherently unknowable to borrowers due to the significant uncertainties and harsh economic realities prevailing at the time of their loan applications.
The current forms also suggest that SBA will be particularly focused on borrowers:
- that are publicly-traded companies;
- whose ownership consists of private equity firms, venture capital firms and/or publicly-traded companies;
- that had significant cash on their balance sheet prior to obtaining their PPP loan or that made significant dividends or distributions to owners after March 13, 2020; and/or
- that had a meaningful number of employees (including owner-employees) whose annualized compensation exceeded $250,000.
Miller Johnson Cross-Functional PPP Team
Miller Johnson’s cross-functional PPP team will continue to track guidance from SBA as well as legislative developments related to the PPP. Over the last six months, Miller Johnson has been working with PPP borrower clients through our PPP Audit and Compliance Preparedness Program in preparation for potential information requests, reviews and audits by SBA. As a result, we are well positioned to work with larger PPP borrowers to respond to SBA’s “need certification” questionnaires, once they are finalized by SBA and distributed by PPP lenders.