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SBA Seeks Approval of New PPP Loan Necessity Questionnaire for Borrowers of $2 Million or More

On October 26, 2020, the Small Business Administration (“SBA”) sought approval from the Office of Management and Budget to require Paycheck Protection Program (“PPP”) borrowers who, together with their affiliates, received loans of $2 million or more to complete a loan necessity questionnaire (SBA Form 3509) (“Loan Necessity Questionnaire” or “Questionnaire”).[1]  The Loan Necessity Questionnaire is subject to a 30 days public comment period, which expires November 25, 2020.

Previously Little Guidance on Necessity Certification

The PPP Borrower Application required applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On April 23, 2020, after many borrowers had already received loan proceeds or submitted applications, the SBA issued FAQ 31, which clarified that applicants must consider their current business activity and other sources of liquidity in determining whether the loan would be “necessary” for purposes of the certification, which FAQ 31 said a borrower must make “in good faith.” Then, on May 13, 2020, the SBA issued FAQ 46, which stated that PPP recipients of less than $2 million in the aggregate would be deemed to have made the certification in good faith. Loans of $2 million (in the aggregate, with affiliates or more), however, would be subject to SBA review for compliance with program requirements.

As highlighted in our May 6 and May 14 alerts, other than the vague information set forth in the above referenced FAQs, borrowers had no guidance and no objective measures to determine whether or not they could make the “necessity of the loan” certification.

New Business Activity and Liquidity Factors

The new Loan Necessity Questionnaire asks questions about business activity and liquidity that borrowers were not previously aware would be factors in determining whether a PPP loan was “necessary” and in some cases, asks for financial information that was impossible for borrowers to have known at the time they were required to make the certification. The required information, which borrowers may mark as “confidential,” includes:

Business Activity Assessment

  1. A comparison of Q2 2020 revenue to Q2 2019 revenue.
  2. Whether the business was ordered to shut down by state or local authorities.
  3. Whether the business was ordered to significantly alter its operations (e.g. the number of people in a location at a time, whether service was restricted to outdoors, reconfiguration of employee workspaces), and cash outlays in connection with the mandatory alterations.
  4. Whether the business voluntarily ceased or reduced operations and the reason for doing so.
  5. Whether the business voluntarily altered operations (other than ceasing or reducing operations), the COVID-related reasons for doing so, and the cash outlays in connection with the voluntary alterations.
  6. Whether there have been any new capital improvement projects (unrelated to COVID) started between March 13, 2020 and the end of the borrower’s covered period, and the approximate cash outlays for such projects.

Liquidity Assessment

  1. The business’s balance of cash or cash equivalents as of the last day of the calendar quarter before receipt of the PPP loan application.
  2. Whether there have been any dividends or other capital distributions to owners between March 13, 2020 and the end of the borrower’s covered period (and if so, the relevant amounts).[2]
  3. Whether there has been any prepayment of debt between March 13, 2020 and the end of the borrower’s covered period.
  4. Whether any employees were compensated during the covered period in excess of $250,000 on an annualized basis (and if so, the number of employees and the amount of such compensation).
  5. Whether any owner-employees were compensated during the covered period in excess of $250, 000 on an annualized basis (and if so, the number of owner-employees and the amount of such compensation).
  6. Whether the borrower’s equity securities were listed on a national exchange as of the date of the borrower’s PPP loan application (and if so, the borrower’s market capitalization on such date).
  7. Whether any publicly traded company owned 20% or more of the borrower as of the date of the borrower’s PPP loan application (and if so, the name and market capitalization of such companies on such date).
  8. The book value (shareholders’ equity value) of the borrower as of the last day of the calendar quarter before the borrower’s PPP loan application was submitted.
  9. On the date of the borrower’s PPP loan application, whether the borrower was a subsidiary of another company (and if so, (a) whether the parent was a U.S. or foreign company, (b) whether the parent’s securities were listed on an exchange in a non-U.S. jurisdiction, and (c) the parent’s market capitalization).
  10. On the date of the borrower’s PPP loan application, whether more than 20% of any class of the borrower’s securities were owned by a private equity firm, venture capital firm, or hedge fund (including a fund managed by any such firm).
  11. On the date of the borrower’s PPP loan application, whether the borrower was a subsidiary or affiliate of a foreign, state-owned enterprise or of a department, agency or instrumentality of a foreign state.
  12. Whether the borrower received any funds from any CARES Act program other than the PPP (excluding tax benefits).

The Questionnaire states that the SBA’s determination will be based on the totality of the borrower’s circumstances. However, it is unclear how the SBA will weigh these factors and the Questionnaire seems to apply eligibility criteria that did not exist at the time borrowers were required to make their necessity certification. The information requested by the Questionnaire goes far beyond any guidance that the SBA previously issued with respect to necessity certification. Indeed, the Questionnaire would come into effect at a time when many borrowers have spent their loan proceeds by keeping employees on payroll that they would have otherwise laid off or furloughed. Notably, the Questionnaire does not inquire as to whether borrowers used the loan proceeds to avoid or restore headcount reductions, thereby “protecting paychecks” as intended by the program. Not only does it ask for information borrowers could not have known would be considered, but the Questionnaire asks for 2nd Quarter 2020 financial information that borrowers quite simply could not have known in April or early-May. And, it completely ignores the financial uncertainty that existed in the spring and the “first come, first serve” basis of the PPP loans, which required borrowers to make decisions “in good faith” as best they could at that time.

SBA Review of the Loan Necessity Questionnaire

Lenders will send the Loan Necessity Questionnaire to the PPP borrower, who must submit the completed Questionnaire, along with any required supporting documentation, to its lender within 10 business days. Lenders then have five business days to upload the Questionnaire and supporting documentation to the SBA PPP Forgiveness Platform. The SBA may request additional information as necessary.

If a borrower does not complete the Questionnaire or provide any necessary supporting documentation, the SBA may determine that the borrower was ineligible (a) to receive a PPP loan, (b) to receive the amount of PPP loan proceeds, or (c) to receive the forgiveness amount claimed. The SBA may then seek repayment of the loan or other remedies.

SBA Comment Period

The SBA notice issued on October 26, 2020 indicates that comments on the proposed Questionnaire may be submitted with respect to the following: (a) whether the collection of information is necessary for the agency to properly perform its functions; (b) whether the burden estimates are accurate; (c) whether there are ways to minimize the burden, including through the use of automated techniques or other forms of information technology; and (d) whether there are ways to enhance the quality, utility, and clarity of the information. Comments should be submitted to the recipients set forth in the notice.

[1] SBA Form 3509 is for for-profit borrowers. There is a separate form for non-profit borrowers (SBA Form 3510).

[2] This does not include distributions made by a partnership or S-corporation for owners’ estimated quarterly tax payments, if they do not exceed (a) the tax liability on profits earned in the first three quarters of 2020, (b) 110% of the pro-rata share of last year’s tax liability on distributions, and/or (c) 100% of the pro-rata share of tax liability on total distributions in 2020.


This summary does not include or address every provision of Paycheck Protection Program under the CARES Act, which should be read in its entirety. Furthermore, pursuant to the CARES Act, the SBA continues to promulgate regulations for the implementation of the Paycheck Protection Program and, as such, there is still uncertainty relating to details of implementation.

We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.

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