The Small Business Administration recently announced new questionnaires for purposes of gathering information from borrowers related to the economic necessity certification under the Paycheck Protection Program.
The Small Business Administration (SBA) published two new form questionnaires, SBA Form 3509 (for for-profit borrowers) and SBA Form 3510 (for nonprofit borrowers) in the federal register on October 26, 2020. SBA signaled an intent to use these forms for the purposes of collecting certain information from borrowers under the Paycheck Protection Program (PPP). The questionnaires would be issued to borrowers that, together with affiliates, received loans in the aggregate with an original principal amount of at least $2 million in order to “inform SBA’s review” of the necessity certification made by these borrowers in the PPP loan application.
Although the nonprofit form deviates in certain respects in order to take into account the unique characteristics of nonprofit entities, the forms are largely consistent with one another. References to “the form” are intended to refer to each form, as applicable for a particular borrower.
The PPP loan application contained a certification that “the uncertainty of current economic conditions makes necessary the loan request to support [such borrower’s] ongoing operations.” In guidance released on April 23, the SBA clarified that borrowers must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Such guidance further provided that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification. On April 28, 2020, the SBA indicated that the same consideration with respect to access to capital applies to private companies as well.
On May 13, 2020, the SBA advised PPP borrowers of its intent to review each loan greater than or equal to $2 million to determine whether the borrower had an adequate basis for making the required necessity certification:
The instructions for the new forms note they are required from each borrower that, together with its affiliates, received loans in the aggregate equal to at least $2 million. Accordingly, our working assumption is that each such borrower, and not merely those borrowers with respect to which the SBA is conducting a heightened review, will receive the form from their PPP lender regardless of whether they elect to submit a forgiveness application. The borrower must complete the form within 10 business days of receipt of the form from the lender. Although the form indicates that the information will be used to “inform SBA’s review” of the necessity certification, it further provides both that the SBA may request additional information and that the necessity determination will be based on the “totality of [the borrower’s] circumstances.”
As noted above, the April 23 guidance articulated two first-order factors PPP borrowers should take into account in making the necessity certification: the current “business activity” of the borrower and its access to “liquidity.” The SBA has utilized the framework articulated in its FAQs in the forms and has categorized the questions into a “Business Activity Assessment” and a “Liquidity Assessment.”
The Business Activity Assessment in the for-profit form is composed of a series of questions related to the operations of the borrower’s business, including:
The Business Activity Assessment in the nonprofit form is generally consistent with the questions in the for-profit form, with distinctions to account for the nature of a nonprofit (e.g., references to gross receipts, and the portion of gross receipts derived from charitable contributions, etc., rather than gross revenues).
The Liquidity Assessment in the for-profit form is composed of a series of questions related to the borrower’s cash management, its deployment of cash, and its treatment of existing non-PPP debt, including:
The Liquidity Assessment in the nonprofit form is tailored to the unique attributes of nonprofit entities, and, in addition to the same questions in the for-profit form with respect to initial cash position, debt repayment, employee compensation, other CARES Act programs and the supplementary field outlined above, includes questions with respect to the following matters:
The key takeaway from the content of these forms is that some of the information requests relate to periods that occur after the PPP loan application date both for purposes of the Business Activity Assessment and the Liquidity Assessment. The questions posed in the Business Activity Assessment appear to be designed to identify the ways in which, and the magnitude by which, COVID-19 impacted various aspects of the business that flow through its income statement (e.g., revenues, costs, etc.) during the period following loan disbursement. Similarly, the Liquidity Assessment provides a roadmap to track the borrower’s cash flows during the same period, and determine, even if PPP funds were applied for permitted uses, whether access to such funds allowed the borrower to pay excess cash to employees, owners and/or creditors.
The SBA has not provided any guidance as to how it intends to use these forms. Although nothing in the existing guidance or in the content of the forms suggests that the necessity certification, which by its own terms references to the “current economic uncertainty” of the borrower as of the time of the loan application, will be “brought down” on a date subsequent to the loan application, such as the date of the forgiveness application, the content of the new forms suggests that the SBA intends to use information regarding entity performance in the period following application for the loan to assess whether a borrower made the necessity certification in good faith as viewed through the lens of the bifurcated “business activity” and “liquidity” framework.
Put differently, it is more likely that a business that realized increased revenues during Q2 2020, had cash on hand (even with off-setting liabilities not identified in the questionnaire) and/or that had meaningful access to public or private markets for capital will present the appearance of not having the requisite economic necessity as compared with a business that struggled in Q2 2020 and is nearing insolvency. Accordingly, it may be that SBA will use the forms as a filtering mechanism to identify PPP borrowers for which it will apply a greater degree of scrutiny in the course of its overall review process.
Borrowers that have not previously assessed the strength of their necessity certifications against the type of information requested by the questionnaires should do so now. Further, borrowers completing the questionnaire that can substantiate a good faith certification based on information available at the time the loan application was submitted, but whose post-application circumstances have improved, should carefully consider whether to offer additional contextual information in the optional Liquidity Assessment field permitting provision of supplemental information.
As we have previously noted, these forms and all other aspects of a PPP application carry significant fraud risk (for a more detailed exposition as to this fraud risk, read our LawFlash, CARES Act’s Substantial Relief Funds Create Fraud Risk). In addition to a certification as to false statements and acknowledgment of potential criminal and civil penalties and imprisonment as a result thereof, the form contains a certification that the information provided in the questionnaire and supporting documentation is “true and correct in all material respects” and was made after “reasonable inquiry of people, systems and other information available to Borrower.”
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