All applicants for Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act were required to certify in good faith that current economic uncertainty made the PPP loan request “necessary…to support…ongoing operations.” As we have previously written, this economic necessity certification has caused much uncertainty and consternation since the PPP was enacted. Further, the Small Business Administration (SBA) has said that it will review all PPP loans in excess of $2 million, following the lender’s submission of the borrower’s forgiveness application.
On October 26, 2020, the SBA published a notice to the Federal Register to seek approval from the Office of Management and Budget to release Form 3509, a loan necessity questionnaire for for-profit borrowers, and Form 3510, a loan necessity questionnaire for non-profit borrowers. In an effort to maximize the PPP’s integrity and protect taxpayer resources, the SBA will send the loan necessity questionnaires to lenders for distribution to borrowers that, together with their affiliates, received PPP loans of $2 million or greater. The questionnaire gives insight into what factors the SBA will be considering when examining whether a borrower’s economic necessity certification was proper.
The questionnaire will need to be completed and returned with supporting documentation to the lender within 10 business days of receipt. Failure to complete the questionnaire and provide the supporting documentation may result in the SBA’s determination that the borrower was ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies. Additionally, if the SBA determines that the borrower was ineligible for the PPP loan, the lender will be ineligible for the processing fee and the processing fee will be subject to clawback by the SBA.
The loan necessity questionnaire consists of two parts: (i) a Business Activity Assessment and (ii) a Liquidity Assessment. Supporting documentation and written responses are required for both parts.
The Business Activity Assessment asks for written responses and supporting documentation regarding:
- the borrower’s gross revenue in the second quarter of 2020 and 2019 (seasonal businesses may use the third quarter of 2020 and 2019, while businesses that did not exist in the second quarter of 2019 may use the first quarter of 2020);
- whether, since March 13, 2020:
- the borrower was required to shut down by a state or local authority due to COVID-19;
- the borrower was required to significantly alter its operations by a state or local authority due to COVID-19; and
- the borrower voluntarily ceased, reduced or otherwise altered its operations due to COVID-19; and
- whether between March 13, 2020 and the end of the loan forgiveness covered period, the borrower began any new capital improvement projects not due to COVID-19.
The Liquidity Assessment asks for written responses and supporting documentation regarding:
- the amount of cash and cash equivalents owned by the borrower, as of the last day of the calendar quarter immediately before the date of the PPP loan application;
- between March 13, 2020 and the end of the loan forgiveness covered period:
- whether the borrower paid any dividends or other capital distributions (other than for pass-through estimated tax payments) to its owners; and
- whether the borrower made any prepayments of debt;
- during the loan forgiveness covered period, whether the borrower paid any compensation to employees or owners in excess of $250,000 on an annualized basis;
- as of the date of the PPP loan application:
- whether the borrower’s equity securities were listed on a national securities exchange;
- the borrower’s market capitalization, or if not listed on an exchange, its book value (shareholders’ equity value), as of the last day of the calendar quarter immediately prior to the date of the PPP loan application;
- whether the borrower was a subsidiary (owned 50% or more) of another company, and if so, information on the parent company;
- whether any publicly traded company, private equity firm, venture capital firm or hedge fund owned 20 percent or more of the borrower’s equity; and
- whether the borrower was an affiliate or subsidiary (owned 50% or more) of a foreign company or of a department, agency or instrumentality of a foreign state; and
- whether the borrower received any funds under any other CARES Act program, excluding tax benefits.