November 24, 2020

SBA to Require PPP Borrowers of $2 Million-Plus to Complete Loan Necessity Questionnaires

Holland & Knight Alert
David Matuszewski | David A. Surbeck | Tim Ryan | David S. Cole | Daniel T. Sylvester


  • There have been numerous questions and guidance released surrounding the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) since its inception and implementation.
  • Now, more than five months after the most recent guidance, borrowers are getting their first real look at what the SBA intends to review.
  • The SBA has published SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and SBA Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers). These new nine-page forms appear to require completion by each borrower that, together with its affiliates, received a PPP loan of $2 million or greater.

When the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) originally unfolded, one of the required certifications made by all borrowers on the application form was that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." What that certification really meant then, and now, frankly remains much of a mystery even months after the inception and implementation of the PPP. No Frequently Asked Question (FAQ) or Interim Final Rule has squarely addressed the topic, and otherwise little guidance has been provided to borrowers, lenders and others as to what was intended by the certification. It remains unclear what constitutes "necessity," and how large of a factor "economic uncertainty" really plays into that phrase.

Background and Concerns

It was not until April 23, 2020, after many borrowers had already applied for and received PPP funds, that the SBA published FAQ 31 which instructed borrowers that they must assess (or impliedly perhaps, reassess) their economic need under the standard established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the applicable regulations. (See Holland & Knight's previous alert, "Key Factors for Companies to Consider When Certifying Their PPP Need," April 25, 2020.) Although borrowers are not required to demonstrate that no credit was available elsewhere, they nevertheless must certify in good faith that their PPP loan was "necessary." Specifically, borrowers were told merely that they "must make this certification in good faith, taking 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."

It was at that time that the SBA, largely in reaction to a few high-profile companies that had become notorious in the media for taking PPP loans, explained that it was unlikely that public companies with substantial market value and access to capital markets would be able to make the certification in good faith, and warned companies that they should be prepared to demonstrate to the SBA "upon request" the basis for their certifications. Rather than grandfather current loan recipients that did not have the benefit of this so-called guidance previously, borrowers were given an opportunity to return their PPP funds by May 7, 2020, in which case they would be deemed to have made the certification in good faith (but would of course not have the PPP funds anymore). The deadline was then extended to May 14, 2020. Meanwhile, the SBA clarified that the standard set forth in FAQ 31 also applied to private companies, and then one day later on April 29, 2020, in FAQ 39 the SBA announced that all loans in excess of $2 million, and other loans that it determines appropriate, would be "reviewed" following the lender's submission of a loan forgiveness application. At the time, the SBA promised that additional guidance would be "forthcoming."

On May 13, 2020, the SBA published additional guidance in the form of FAQ 46, while also extending the no-questions-asked return deadline to May 18, 2020, leaving borrowers still a very short window to process the new guidance before the deadline to return PPP loans without consequences. (See Holland & Knight's previous alert, "SBA Provides Safe Harbor for PPP Borrowers Receiving Less Than $2 Million," May 13, 2020.) Happily for borrowers of less than $2 million (together with their affiliates), all such borrowers will be deemed to have made the necessity certification in good faith. Otherwise, the SBA and U.S. Department of the Treasury failed to provide any real useful guidance for PPP borrowers in excess of such amount. The SBA merely stated that borrowers in excess of the safe harbor may still have an adequate basis for making the certification "based on their individual circumstances in light of the language of the certification and SBA guidance." The reference to SBA guidance brought some to question – what guidance? Other than not being a large public company (or private) with adequate sources of liquidity, it remained unclear to many borrowers whether or not they qualified, but they certainly may well have thought that they did at the time. Importantly, the SBA also stated that if during its review it determines that the borrower lacked an "adequate basis" for the necessity certification, the SBA will seek repayment of the outstanding loan balance, inform the lender that the borrower is not eligible for forgiveness and, if the borrower repays the loan, the SBA will not pursue enforcement or referrals to other agencies on that basis.

Loan Necessity Questionnaires

More than five months after FAQ 46, borrowers are getting their first real look at what the SBA intends to review. The SBA has published SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and SBA Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers). These new nine-page forms require completion by each borrower (or each non-profit borrower, as the case may be) that, together with its affiliates (applying the SBA's affiliation rules applicable to the PPP), received a PPP loan of $2 million or greater. 

It is expected that it may come as a surprise to PPP borrowers and lenders that the forms must then be completed by the PPP borrowers and returned, together with the required supporting documentation, to the PPP lender within 10 business days. The PPP lender then must upload the information to the SBA within another five business days. These are new requirements imposed on lenders and borrowers long after the program began and, for that matter, ended. Although the number of loans in the $2 million magnitude is estimated to be 29,000, which represents a relatively small percentage of the total number of PPP loans, it is still a sizeable number of loans to review. 

The For-Profit Borrower Questionnaire, the form is broken into two main components – the Business Activity Assessment and the Liquidity Assessment. The Business Activity segment generally requests Second Quarter (Q2) gross revenue, and presumably for comparison purposes, Q2 2019 revenue, and if that is unavailable, First Quarter (Q1) 2020. (Seasonal business have a variation thereof for comparisons). The Non-Profit form is structured similarly, but focuses on receipts and expenses rather than revenues, among other things. The form then requests various information on state and local shutdown orders (including their start and stop dates) that have affected the borrower, orders to significantly alter operations and how were they altered (i.e., reduced numbers of permitted people being capped, outdoor service, reconfigurations of workspaces, and the like, including the costs of implementation). The questionnaire has a similar line of inquiry, but all on a voluntary basis in lieu of pursuant to orders. The form also asks whether any new capital improvement projects were made between March 13, 3020, and the end of the forgiveness period, as well as a business' primary North American Industry Classification System (NAICS) code. The Business Activity Assessment portion of the form does permit providing additional comments, limited to 1,000 characters.

The Liquidity Assessment section of the questionnaire requires the disclosure of various factors relevant to liquidity, including information regarding:

  • cash and cash equivalents (as of the last day of the quarter preceding the borrower's PPP application)
  • dividends and capital distributions
  • prepayments of other debt
  • compensation in excess of $250,000
  • whether the borrower's equity securities are listed on a national securities exchange, and if so, its market capitalization
  • whether any publicly traded company owned 20 percent or more of any class of the borrower's securities (and if so, their names and market cap), and
  • for non-listed companies, the book value of shareholders' equity

The liquidity portion of the questionnaire also focuses on affiliation and organizational structure, requiring disclosure of any parent company, whether the parent is organized outside of the United States (and if so, whether listed and its market cap), whether 20 percent or more of any class of the borrower's equity securities are owned by a private equity firm, venture capital firm or hedge fund, and whether the borrower is an affiliate or subsidiary of a foreign, state-owned enterprise (and if so, their identity). The form also requires disclosing the receipt of any other CARES Act program (other than tax benefits). Finally, the borrower is given another 1,000-character opportunity to provide any additional comments in the liquidity section.

Conclusion and Takeaways

It's worth noting that the forms have appeared in the Federal Register seeking their approval, but the forms had already previously been approved on an emergency basis and appear to have been already been received by some borrowers.

Obviously, it is too early to ascertain how this information will be used, but it certainly provides a preview as to what SBA is viewing as relevant to necessity and perhaps as red flags. The only real surprise here might be the evaluation of financial metrics after the date of the PPP loan. If a business managed to maintain its employees, their wages and be successful – should its "necessity" certification be viewed as suspect? At this point, it was long ago that businesses altered their behavior on the basis of receiving the PPP funds, retaining employees and maintaining wages, perhaps regardless of their productivity  and whether or not able to physically report to their normal working environment on account of stay-at-home orders – it was after all the "Paycheck Protection Program." It is challenging to review the necessity certification with the benefit of perfect hindsight, especially when many commentators would say that today's current economic uncertainty is just as uncertain, if not more so, than when the certification was originally made. Holland & Knight will continue to monitor guidance and actions from SBA, and will provide further updates as the forgiveness and enforcement processes develop.

For more information or questions, contact the authors.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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