The U.S. Small Business Administration (“SBA”) recently released additional details relevant to those participating in the Paycheck Protection Program (“PPP”).  In particular, on October 26, 2020, the SBA posted a notice seeking comment regarding drafts or revisions of various forms to be used by the agency in reviewing both loan and forgiveness applications from the PPP.[1]  Although these forms will have an effect on many borrowers, they are particularly relevant – and potentially problematic – for businesses receiving more than $2 million in loan proceeds that certified loan necessity due to “economic uncertainty.”  The draft SBA Form 3509, a Loan Necessity Questionnaire, contains many questions requiring disclosure of significant financial and operational information and could result in disqualification from the PPP or result in denial of forgiveness.

SBA Requests Comments on Important PPP Forms

Pursuant to the recent notice, the SBA is seeking comments regarding the following forms:

1. SBA Form 2483, Paycheck Protection Program Borrower Application Form
2. SBA Form 2484, Paycheck Protection Program Lender’s Application for 7(a) Guaranty
3. SBA Form 3506 – Cares Act Section 1102 Lender Agreement
4. SBA Form 3507 – CARES Act Section 1102 Lender Agreement – Non-Bank and Non-Insured Depository Institution Lender
5. SBA Form 3508 – Paycheck Protection Program – Loan Forgiveness Application
6. SBA Form 3508S, Paycheck Protection Program – PPP Loan Forgiveness Application Form 3508S
7. SBA Form 3508EZ – Paycheck Protection Program – PPP Loan Forgiveness Application Form 3508EZ
8. [Form Number N/A] Lender Reporting Requirements for SBA Loan Reviews
9. SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers)
10. SBA Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers)

While some of these forms have been available for months, the final three (unreleased) forms mentioned in the solicitation – i.e., lender reporting requirements and loan necessity questionnaires – will no doubt draw anxiety from larger participants in the PPP.  Even though the loan necessity questionnaire has not officially been published, this document will likely be used by the SBA to develop testing for whether borrowers accurately certified that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”[2]  This has been a hot topic for months and both borrowers and lenders have been awaiting guidance.

SBA Form 3509: “Loan Necessity” Evaluation

A draft copy of SBA Form 3509 has been circulating among stakeholders in the last few days.[3]  It is not clear whether responses to the Form 3509 will be required disclosures in a loan forgiveness application or whether the responses will  be required without regard to the timing of a loan forgiveness application.  While timing is unknown, some of the takeaways from that form, which is broken into a “Business Activity Assessment” and a “Liquidity Assessment,” are as follows:

Business Activity Assessment

1. Documentation of Gross Revenue. The SBA generally requires information regarding the gross revenues of the borrower in the first quarters of both 2019 and 2020.  Supporting documentation must be included to justify the revenues reported.
2. Explanation of Effect of COVID-19. The SBA requires borrowers to provide information about whether and how COVID-19 has temporarily shut down, affected, altered, caused reduction in operations, or resulted in additional capital outlays of a borrower.  Although no documentation is required, borrowers are required to provide answers to many questions and provide their six-digit NAICS code.

Liquidity Assessment

1. Documentation of Cash on Hand. Borrowers are required to provide documentation regarding the amount of cash and cash equivalents when the PPP loan application was submitted.
2. Documentation of Dividends and Distributions. Borrowers are required to provide documentation regarding the amount of dividends or other distributions paid to owners between March 13, 2020 and the end of the covered period.
3. Documentation of Outstanding Debt. Borrowers are required to provide documentation regarding all debt prepayments made between March 13, 2020 and the end of the covered period.
4. Documentation of Highly Paid Owners and Employees. Borrowers are required to provide documentation regarding the amounts paid to owners and/or employees in excess of $250,000 on an annualized basis during the covered period.
5. Information on Value of Borrower. If publicly traded, a borrower is required to provide its value (based on market capitalization) on the date of the PPP loan application.  If privately held, the borrower is required to provide its book value on the last day of the quarter preceding its loan application.
6. Information on Ownership. Borrowers are required to disclose information regarding whether their equity was owned by a publicly traded company, private equity or venture capital firm or hedge fund, whether it is an affiliate of another entity, and whether they are owned by a foreign or state-owned enterprise.
7. Information on Other CARES Act Benefits. Borrowers are required to disclose whether or not they received any other benefits through the CARES Act, excluding tax benefits.

The instructions to the form also indicate that the information requested – responses to the questionnaire along with supporting documentation – must be provided within ten business days of a request for such information from a lender.  The SBA indicates that more information may be required of a borrower in order to grant forgiveness and that failure to complete the form may result in a “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.”  SBA Form 3509 also includes further certifications regarding the accuracy of responses and warns that false statements may result in criminal penalties under several federal statutes.

Takeaways

Given the sheer volume of applicants for the PPP – even those receiving more than $2 million in funding – it was necessary for the SBA to streamline the process to capture data and effectively administer the PPP.  It is not yet clear how that data collected through responses to the Form 3509 will be used by the SBA.

At its most basic, responses to the Form 3509 will provide grounds to deny loan forgiveness or seek further remedies against borrowers who were not eligible for the PPP.  For instance, those borrowers disclosing an NAICS code related to an ineligible category of business (e.g., certain passive businesses), disclosing ownership by a large publicly-traded company with many employees and access to capital, or disclosing ownership by a government or foreign entity should be denied forgiveness based upon these follow-up questions.  It is not clear what further action the SBA may take against such borrowers (or lenders) where they never should have qualified for the PPP in the first place.  For those clearly not qualifying for the PPP and providing false responses on the Form 3509 (or responses not reconciling with their initial loan application), this is one more piece of information that can be used in future enforcement actions.

But for those larger borrowers that were clearly eligible for the PPP – at least but for the vague certification on “loan necessity” – the Form 3509 offers more questions than answers.  Many will complain that there was no possible way to determine the effect that COVID-19 would have on the business at the time of the loan application.  Even if there were no required closures, no losses in revenue, and no effects on employees, making that determination in March was impossible.  Borrowers will also complain that no formal guidance was available at the date of application, government officials were urging the importance of participation in the PPP, and that it would have been contrary to their fiduciary duties to the company to not seek funds in the PPP.  And still others will complain that the answers requested in the Form 3509 are unnecessarily cumbersome and require further professional advice, do not accurately the subjective considerations made at the time of loan application, potentially expose proprietary information to competitors, and incorrectly focus on objective criteria that are backward-looking in nature.  All of these are valid concerns with little governmental guidance.

Given the uncertainty in how this process will be administered and how these responses will be used, any borrowers potentially affected by the SBA Form 3509 should consult with counsel immediately and, at the very least, prior to submission of a loan forgiveness application.  It may be a borrower’s best interest to wait as long as possible before providing this information.  Whatever the scenario, responses and disclosures should be carefully considered to limit follow-up and exposure to other issues.  For instance, if the form is only required in the loan forgiveness process, it may even be in some borrowers’ best interest to not apply for loan forgiveness at all.

Additional time may allow for substantive guidance to be published, for litigation on issues relating to this necessity certification and loan forgiveness to occur (and produce guidance), and may allow for anecdotal evidence on how the SBA and lenders are using the information contained within the Form 3509.  Finally, borrowers should be very protective of any information provided with the Form 3509.  Although the form allows for designation of “confidential” information, it is not clear what, if any, of this borrower information could potentially be obtained through a Freedom of Information Act request.  Borrowers should continue to monitor the situation and any developments with their advisors.

[1] A copy of the notice can be found here: https://www.federalregister.gov/documents/2020/10/26/2020-23594/reporting-and-recordkeeping-requirements-under-omb-review.

[2] See Paycheck Protection Program Loans, Frequently Asked Questions (FAQs) at FAQ 31, available at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.

[3] A copy of the draft SBA Form 3509 can be found here.