Did You Really Need That PPP Loan? The SBA Wants to Know

COVID-19 Update

Without much fanfare, the Small Business Administration (SBA) has started investigating borrowers of larger Paycheck Protection Program (PPP) loans to obtain information about their business activities. The SBA has asked lenders to send “loan necessity” questionnaires to borrowers that have PPP loans of $2 million or more. It is requesting that borrowers provide information that will be used to inform SBA’s review of the borrower’s good faith certification that economic uncertainty made its loan request necessary to support its ongoing operations. This signals that the SBA is applying heightened scrutiny to the “necessity” representation—and raises the risk that the representation, which was supposed to be made in good faith at a time when the impact of COVID-19 was very uncertain, will now be judged in retrospect and found wanting.

The SBA has created two new forms—SBA Form 3509, applicable to for-profit borrowers, and SBA Form 3510 for nonprofit organizations—that it is using to collect information. The forms have not been published on the SBA website, and the effective period stated on the forms ended on October 31. Since the forms are now out of date, it is not clear whether it is valid for the SBA to use them. However, the forms are being distributed to borrowers, and copies have found their way onto the Internet. The SBA has filed a notice in the Federal Register regarding its information-gathering activities for PPP loans generally (which would include its authority to require borrowers to answer the questionnaires), but that notice does not include drafts of the forms.

The “Necessity” Representation

As part of their PPP loan applications, borrowers had to certify in good faith that “Current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” This is the “necessity” representation. The risks for borrowers related to the “necessity” representation were widely identified at the time that the PPP was rolled out. The representation itself is vague, there is no guidance provided for determining “necessity,” and the requirement that the representation be made in “good faith” is subjective. The SBA seems to have recognized that there may be problems in determining whether the “necessity” representation was made in good faith. Since the commencement of the program, the SBA has twice set out “safe harbors” with respect to the representation. In April, it updated the Paycheck Protection Program Frequently Asked Questions to state that companies with access to other sources of liquidity, and particularly public companies with substantial market value, may not be able to show “economic necessity” for purposes of the representation.1 At the same time, it provided a safe harbor for borrowers who repaid their loans by May 18, saying that such borrowers would not be subject to administrative enforcement actions by the SBA for making a bad faith “necessity” representation. Based on the safe harbor, some borrowers repaid their loans. The SBA later issued further guidance that “necessity” representations made with respect to loans of less than $2 million will be deemed to have been made in good faith.2

Now, the new SBA initiative is seeking information about actual operational developments that occurred after the time that the representation was made as well as information about the borrower’s shareholders, and is planning to use the information to make judgments about whether the representation was made in good faith at the time of the application. However, there is no specific guidance about how the information will be interpreted, other than that the SBA’s determination will be based on “the totality of [the borrower’s] circumstances.”

One possible implication of the request is that the SBA plans to use subsequent business developments to retroactively evaluate whether a borrower’s “necessity” representation was given in good faith at the time it was made, possibly months before the economic developments themselves occurred. Another possibility is that the SBA will assume that a borrower with venture capital or private equity shareholders would have access to additional funding. This is problematic because the mere fact that an entity has that type of shareholder would not mean that a borrower would be able to coax additional investments from the shareholder. These kinds of assumptions and retroactive evaluations are arguably inconsistent with the nature of the representation, which was to have been made on a good faith basis under the circumstances existing at the time of the application, and could possibly be argued to be contrary to the intent of Congress under the CARES Act. Nonetheless, failure to provide the requested information can, at a minimum, lead to a dispute with the SBA and possible denial of forgiveness for the PPP loan. In the worst case, a determination that the “necessity” representation was not given in good faith could result in an enforcement action, with the potential for fines or even imprisonment if the loan is not repaid.

The Questionnaires

The SBA has created two forms—one applicable to for-profit borrowers and the other for nonprofits. Each form indicates that it needs to be completed by any borrower that, together with its affiliates, received PPP loans with an aggregate original principal amount of $2 million or greater. The forms must be completed within ten business days of receipt from the borrower’s lender and failure to complete the forms and provide supporting documentation may result in the SBA’s determination that the borrower was ineligible for the loan or loan forgiveness, and the SBA may seek remedies including repayment of the loan. The forms also include requirements that the authorized representative of the borrower make certain certifications, which, notably, require the representative to have made “reasonable inquiry of people, systems, and other information available” to the borrower to complete the questionnaire. The certifications also include an acknowledgment that a false statement can result in fines or imprisonment.

Both forms divide questions into two categories—activity assessment and liquidity assessment—and require supporting documentation or additional explanation for certain questions.

Activity Assessment

The forms include questions regarding the borrower’s revenues (for-profit) or receipts (nonprofit) for specified time periods; the impact of national, state and local COVID-19 orders on the borrower’s activity levels (e.g., shutdown orders); whether the borrower voluntarily ceased, reduced or altered its operations due to COVID-19; and new capital improvement projects not due to COVID-19.

The nonprofit Form 3510 additionally asks questions about the borrower’s receipts attributable to gifts, grants and contributions and about expenses during specified time periods.

Liquidity Assessment

Both forms include questions with specified time periods on the borrower’s available cash (along with cash equivalents for for-profits and savings and cash investments for nonprofits), prepayments of debt, compensation of employees in excess of $250,000 on an annualized basis and the borrower’s receipt of CARES Act program funds (other than PPP loans or tax benefits).

The for-profit Form 3509 includes additional questions with specified time periods on dividends or capital distributions made, compensation to owners in excess of $250,000 on an annualized basis, whether the borrower’s equity was listed on a national securities exchange (and if not, the book value of the borrower), ownership of the borrower (including whether the borrower was the subsidiary of another company or owned in an amount greater than 20% of outstanding equity by a public company or private equity firm, venture capital firm or hedge fund), and whether the borrower was an affiliate or subsidiary of a foreign state-related entity.

The nonprofit Form 3510 contains questions regarding restrictions on the borrower’s use of available cash for payroll and other costs; assets held in endowment funds; the value of the borrower’s noncash investments; the borrower’s status as a school, college or university; whether the borrower provided healthcare services; and whether the borrower provided discounts on services provided due to COVID-19.

Process Problems

The questionnaires set out a data collection process that is problematic. First, borrowers are provided very little time to respond to the questionnaire and assemble supporting documentation. The forms are due back within ten business days from the time that they are received from the lender. Once the lender receives the completed forms, it has an additional five days to manually enter all the information and supporting documentation into the SBA’s loan forgiveness platform. It is unclear whether lenders will actually be able to implement this manual process in the time period required. Moreover, because it is a manual process, there are opportunities for mistakes, such as incorrect data entry or failure to upload a supporting document.

What to Do?

Although there may be arguments about the appropriateness of the SBA’s information request, as well as the feasibility of the SBA’s data collection process, any borrower receiving a questionnaire from its lender will need to carefully consider the implications that its responses may have. Failure to respond could result in disallowance of a loan forgiveness request, and could lead the SBA to find that the borrower was ineligible for the loan and to seek repayment. Responses that fail to put information and documentation in the proper context—the context of how the borrower made a good faith determination of necessity at the time of the loan application—run the risk of misinterpretation by the SBA, and again the possibility of disallowance of a loan forgiveness request. The forms themselves contain a number of “free form” entry blocks where some of this context can be provided, although the space available is limited. Borrowers may also want to consider whether to submit additional documentation in order to provide further clarity. For example, the “Liquidity Assessment” portion of the for-profit borrower questionnaire asks whether the borrower is a public company or a subsidiary of a public company; whether it has private equity, venture capital or hedge fund investors; and other questions regarding ownership of the borrower. Borrowers will need to explain why, at the time that the representation was made, there was substantial uncertainty as to whether liquidity would be available from those sources. Similarly, if a business had substantial liquid assets at the time of the loan application, it should explain how it was planning to manage its liquidity, provide financial projections that it relied on to determine that the loan would be needed, and provide other information to show that the amount of liquidity was not sufficient to provide certainty that the ongoing operations of the business could be supported. This type of analysis should be done for every item in the questionnaire. Borrowers should also keep in mind that any information provided in the questionnaire may be subject to disclosure to third parties through a Freedom of Information Act (FOIA) request and should state that responses are highly confidential and subject to FOIA Exemption 4, which protects trade secrets and confidential or financial information from disclosure, or other applicable exemptions.

Unfortunately, this latest chapter in the history of the PPP is consistent with much that has come before. It is chaotic, poorly planned, and it introduces new risks for companies when the clear intent of Congress was to assist. As we have advised in the past in connection with PPP loan applications, to protect themselves, borrowers should assemble as much documentation as possible, think carefully about how to present their information, and consult with their attorneys, accountants and other advisors. In particular, documentation that can support the analysis that was made at the time of the loan application, including the uncertainties that the borrower was facing, will be important for substantiating the good faith nature of the representation. While it is too soon to understand exactly how the SBA will interpret the information that it receives through the questionnaires, advance planning is vital in navigating to a successful outcome.


1 Paycheck Protection Program Loans Frequently Asked Questions (PPP FAQs), Question 31, available on the SBA’s website (www.sba.gov).

2 PPP FAQs, Question 46.

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