On October 26, 2020, the Small Business Administration (SBA) published notice in the federal register that it is seeking approval from the government’s Office of Management and Budget (OMB) to release two new forms (Form 3509 for for-profit businesses and Form 3510 for nonprofit entities) related to the approximately 42,000 loans in excess of $2.0 million that lenders made to businesses as part of the Paycheck Protection Program (PPP). See notice here. These forms are designed to provide information to SBA loan reviewers / auditors to permit them to evaluate and determine whether economic uncertainty made a PPP loan request necessary.  The consequences of this determination may be serious, including that the SBA may declare a borrower ineligible resulting in a lender immediately calling a loan or the SBA denying forgiveness. In certain cases, SBA auditors could refer borrowers to the Department of Justice to investigate potential criminal and/or False Claims Act liability. 

As part of the PPP application, the government required PPP borrowers to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant" (the “Necessity Certification”).  In a series of FAQs in the second quarter of 2020, the SBA issued guidance about certain factors to be considered in the Necessity Certification, including liquidity, and the review process to be expected.  FAQ 39 stated that PPP loans in excess of $2,000,000 will be reviewed to ensure that only eligible borrowers received PPP loans. 

The new loan necessity questionnaire is part of the process to ensure that only borrowers that could make the Necessity Certification got PPP loans. The questionnaire requires the accurate disclosure of basic facts bearing on the Necessity Certification and will be used to evaluate and to screen PPP borrowers for further review before the SBA determines whether the PPP borrower has satisfied the Necessity Certification. Importantly, the questionnaire leaves room for optional comments for the PPP borrower to provide commentary and additional information to be considered in connection with the Necessity Certification. The questionnaire as a whole and the optional narrative sections must be carefully completed.

The Necessity Certification questionnaire requires disclosure of the facts below, amongst others:

1. What was the business’s gross revenue before and during the pandemic (the second quarter 2019 compared to same period in 2020)?

2. How was the business impacted by mandatory and voluntary shutdowns?

3. How did the pandemic cease or alter business operations and what are the related costs?

4. Did the business make capital improvements during the covered period?

5. What was the business’s liquidity during the pandemic? At least as a screening matter, this requires disclosure of: 

• the amount of cash and cash equivalents on the day before the PPP application;

• dividends and distributions;

• debt repayments;

• compensation above $250,000 (annualized); 

• value of publicly traded borrowers:  market capitalization; and 

• value of privately held borrowers:  book value (shareholders’ equity value) on the last day of the calendar quarter before the PPP loan application.

6. Other issues bearing on eligibility, including structure of the ownership of the business, is it owned by private equity, venture capital or hedge funds, and what is the NAICS code?

7. Did the business receive other CARES Act monies (particularly relevant for health care providers)? 

While the required information bears on the Necessity Certification, none of the questionnaire topics was expressly part of the original application, and the questionnaire omits other topics that often were part of a borrowers’ good faith determination for the Necessity Certification.  Months after lenders approved applications, the questionnaire may insert more confusion into the process of determining whether a borrower satisfied Necessity Certification and is eligible for forgiveness.  Applying a standard retroactively is sometimes constitutional, but it also can violate due process and can be grossly unfair. Practically, it leaves the PPP borrowers with more uncertainty and need to proceed carefully.

Even though OMB approval of the Necessity Certification forms is still pending and the comment period is open until November 25, 2020, after which OMB has 30 days to complete the review process, there is some confusion about whether lenders can require borrowers to complete the questionnaire now and then send the responses to the SBA.  Ordinarily, because of the Paperwork Reduction Act, an agency such as the SBA is not permitted to require an answer to a government form if the form has yet to be approved by OMB.  However, Forms 3509 and 3510 are already available on the SBA platform available to PPP lenders. Some lenders already have started sending the forms to borrowers thereby purporting to trigger the 10-day clock for returning the verified information sought by the questionnaires. Businesses that need additional time to respond may have a basis to seek additional time from their lenders because of the Paperwork Reduction Act and should consult with their lenders and advisors in identifying the proper deadline to respond.  

In addition to the uncertainty about when borrowers must submit the completed Necessity Certification questionnaire, and whether the form will be changed as part of the OMB review process, there are other open questions:  Must borrowers that have already paid back the loan, or that are not seeking forgiveness, still fill out questionnaires?  What recourse can be taken if a borrower declines to submit a response to the questionnaire (the form states that a borrower can be declared to be “ineligible” for the PPP loan)?  Can sole proprietors or other closely-held businesses choose to assert their Fifth Amendment rights and decline to answer without penalty?  

Because the Necessity Certification will be reviewed by the SBA for loans over $2.0 million, now is the time for borrowers of these larger sums to review the diligence files that they created last Spring, to finish gathering supporting documentation, provide careful consideration to answering the questions (or not), seek counsel and submit optional language to explain specific and helpful facts. Additionally, borrowers should examine again whether to pay a loan back early, hold a loan for its entire term, seek a modification of the term to five years for any non-forgiven portion, or seek forgiveness from the SBA.  Once a borrower seeks to transform the loan into a forgivable loan, the Department of Justice possesses additional enforcement tools like the False Claims Act that could make such a decision more risky than first imagined. A response to the new questionnaire could impact important legal rights and should be guided by proper professional advice and supported by appropriate documentation. More guidance from the SBA can begin to answer some of these questions and in the interim, we recommend careful consideration and consultation with counsel before responding to a Necessity Certification questionnaire.