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SBA Reveals Questionnaires Aimed at Auditing Necessity of Large Paycheck Protection Program Loans

    Client Alerts
  • November 09, 2020

In a series of FAQs issued last spring, the Small Business Administration (SBA) made clear that it would review the certification made by Paycheck Protection Program (PPP) borrowers of $2 million or more that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Recently the SBA has provided insight on the likely nature and scope of that review.

On October 26, the SBA requested that the Office of Management and Budget (OMB) approve two new questionnaires related to the PPP loan forgiveness program. The questionnaires include SBA Form 3509, which is for for-profit borrowers, and SBA Form 3510, which is for nonprofit borrowers. The questionnaires state that they are to be completed by each PPP borrower “that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater.” 

The forms provide that they will be sent to each applicable borrower by its lender. The borrower then has only 10 days from receipt to return the completed questionnaire to its lender. The SBA may request additional information. If, within the 10-day period, the borrower fails to submit the questionnaire, or any required supporting documents, the SBA may determine the borrower “was ineligible for either the PPP loan, the PPP loan amount or any forgiveness amount claimed, and the SBA may seek immediate repayment of the PPP loan or pursue other available remedies.”

It has been widely believed that the validity of borrowers’ good faith certifications of economic necessity would be measured based on circumstances as of the time the application was submitted. The questionnaires, however, include multiple questions regarding the borrower’s operations and financial health both before and after the date of the PPP application. It remains to be seen how the SBA will use such information in evaluating the necessity certification and whether such usage will withstand potential legal challenge. The questionnaires’ structure and questions suggest that, at a minimum, they could be used as a screening tool for determining whether further investigation of the borrower’s necessity certification is appropriate.

The questionnaires are divided into two sections: an activity assessment and a liquidity assessment. Each section has a series of questions to be answered, many requiring that they be accompanied by unspecified “supporting documentation.” The questions on the for-profit and nonprofit forms are broadly similar, except that only the nonprofit form requests information on the borrower’s expenses.

The key questions on the for-profit form include: 

Business Activity Assessment:

  • The borrower’s gross revenue for Q2 of 2019 and Q2 of 2020 with supporting documentation.
     
  • Whether the borrower was ordered to shut down by a state or local authority due to COVID-19.
     
  • Whether the borrower was ordered to alter, cease, or reduce business operations by a state or local authority due to COVID-19.
     
  • If, how, and why a borrower voluntarily altered, ceased, or reduced business operations due to COVID-19 without a state or local order.
     
  • Whether the borrower began any new capital improvement projects between March 13, 2020, and the end of the loan forgiveness covered period, that were not a direct result or response to COVID-19.  

Liquidity Assessment:

  • The borrower’s cash and cash equivalents as of the last day of the calendar quarter immediately before the date of the borrower’s PPP loan application.
     
  • Whether the borrower paid any dividends or other capital distributions between March 13, 2020, and the end of its loan forgiveness covered period.
     
  • Whether the borrower prepaid any outstanding debt between March 13, 2020, and the end of its loan forgiveness covered period.
     
  • Whether during the loan forgiveness covered period any borrower, employees (including specifically owner-employees) received compensation in excess of $250,000 on an annualized basis, and if so, the number of such employees and the total amount of such compensation paid.
     
  • Whether the borrower was a publicly traded company or an affiliate of a publicly traded company.
     
  • For non-public borrowers, the book value of the borrower as of the last day of the calendar quarter immediately before the date of the borrower’s PPP loan application.
     
  • Whether the borrower was a subsidiary of another company.
     
  • Whether a private equity firm, venture capital firm, or hedge fund owned 20 percent or more of any class of the borrower’s outstanding securities.

The validity of the borrower’s necessity certification is one consideration in the SBA’s decision to grant or reject forgiveness of the PPP loan, and the questionnaire certainly is linked to that process. As many borrowers will recall, the SBA issued various, and sometimes confusing or even contradictory, guidance with respect to the interpretation of the necessity certification.

It also issued on May 13 guidance that provided some comfort to borrowers with respect to the necessity certification. In FAQ 46 (available here), the SBA stated that if it determines that the borrower with a loan of $2 million or more lacked adequate basis for its necessity certification, the SBA will not pursue administrative remedies or refer the matter to other agencies for action so long as the borrower repays the loan.

However, while the ability to avoid government action by repaying the loan significantly reduces the risk if a borrower’s necessity certification is found to be without adequate basis, it does not eliminate the possibility of legal exposure. For example, non-governmental parties could still bring claims alleging that the certification was false or misleading.

Both the for-profit and nonprofit forms are subject to approval by the OMB, and there is a 30-day comment period on them that ends November 25. It’s unlikely that PPP borrowers will receive the questionnaire before December at the earliest.

We have a team of people at Parker Poe who are tracking all of this constantly. For more information, please contact us or your regular Parker Poe contact. You can also find our other PPP-related alerts here.