On October 26, 2020, the Small Business Administration (SBA) released note in the Federal Register that it requests the approval of the Office of Management and Budget (OMB) of the government to publish two new forms (Form 3509 for for-profit companies and Form 3510 for non-profit entities) related to the approximately 42,000 loans over $ 2.0 million that lenders have provided to businesses under the Paycheck Protection Program (P3). See reviews here. These forms are designed to provide information to SBA loan reviewers / auditors to enable them to assess and determine if economic uncertainty made a PPP loan application necessary. The consequences of this decision can be serious, including the fact that the SBA may declare a borrower ineligible, forcing the lender to immediately call for a loan or the SBA to deny the remission. In some cases, SBA auditors might refer borrowers to the Department of Justice to investigate possible criminal liability and / or False Claims Act.

As part of the PPP application, the government asked PPP borrowers to certify that “the current economic uncertainty makes this loan request necessary to support the applicant’s ongoing operations” (the “Certification of Necessity”). In a series of FAQs in the second quarter of 2020, the SBA published guidelines on certain factors to consider in certification of necessity, including liquidity, and the review process to be expected. FAQ 39 stated that PPP loans greater than $ 2,000,000 will be reviewed to ensure that only eligible borrowers receive PPP loans.

The new Loan Necessity Questionnaire is part of the process to ensure that only borrowers who could obtain Necessity Certification get PPP loans. The questionnaire requires the accurate disclosure of basic facts relating to the necessity certification and will be used to assess and select PPP borrowers for further consideration before the SBA determines whether the PPP borrower has satisfied the necessity certification. It is important to note that the questionnaire leaves room for optional comments for the PPP borrower to provide additional comments and information to be considered as part of the certification of necessity. The entire questionnaire and optional narrative sections should be carefully completed.

The Certification of Necessity Questionnaire requires disclosure of the facts below, including:

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

2. How has the business been affected by the mandatory and voluntary closures?

3. How did the pandemic stop or change business operations and what are the associated costs?

4. Has the company made any capital improvements during the period covered?

5. What was the company’s liquidity during the pandemic? At least as a filtering question, this requires disclosure of:

• the amount of cash and cash equivalents the day before the PPP request;

• dividends and distributions;

• debt repayments;

• compensation greater than $ 250,000 (annualized);

• value of listed borrowers: market capitalization; and

• value of private borrowers: book value (equity value) on the last day of the calendar quarter preceding the PPP loan application.

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

7. Has the company received other funds from the CARES Act (particularly relevant to healthcare providers)?

Although the information requested relates to certification of necessity, none of the subjects in the questionnaire were expressly part of the original application, and the questionnaire omits other subjects that were often part of borrowers’ bona fide determination for the loan. certification of necessity. Months after lenders approve applications, the questionnaire can introduce more confusion into the process of determining whether a borrower has met the certification of necessity and is eligible for a rebate. Retroactive application of a standard is sometimes constitutional, but it can also violate due process and can be manifestly unfair. In practice, this leaves PPP borrowers with more uncertainty and should proceed with caution.

Although 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 as to whether lenders can require borrowers to complete the questionnaire. occasionally send responses to the SBA. Normally, due to the Paperwork Reduction Act, an agency such as the SBA is not allowed to require a response to a government form if the form has not yet been approved by the OMB. However, the 3509 and 3510 forms are already available on the SBA platform available to PPP lenders. Some lenders have already started sending the forms to borrowers, claiming to trigger the 10-day deadline to return the verified information the questionnaires are looking for. Businesses that need more time to respond may have a reason to request additional time from their lenders due to the Paperwork Reduction Act and should consult with their lenders and advisors to determine the appropriate time frame to respond.

In addition to the uncertainty as to when borrowers should submit the completed Certification of Necessity Questionnaire and whether the form will be changed as part of the OMB review process, other questions remain open: borrowers who have already repaid the loan or who are not trying to be forgiven, does he still fill out questionnaires? What recourse can be exercised if a borrower refuses to answer the questionnaire (the form specifies that a borrower can be declared “ineligible” for the PPP loan)? Can sole proprietors or other private businesses choose to assert their Fifth Amendment rights and decline to respond without penalty?

Since 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 due diligence files they created in the spring. last, to complete the collection of supporting documents, to think carefully about the answers to the questions. (or not), seek advice and submit optional language to explain specific and useful facts. Additionally, borrowers should reconsider whether to prepay a loan, hold on to a loan for its entire term, request a change in the term to five years for any unsatisfied portion, or seek a pardon from the SBA. Once a borrower seeks to turn the loan into a forgivable loan, the Justice Department has additional enforcement tools like the False Claims Act that could make such a decision riskier than imagined. at the beginning. A response to the new questionnaire could affect important legal rights and should be guided by appropriate professional advice and supported by appropriate documentation. More SBA advice can begin to answer some of these questions and in the meantime, we recommend careful consideration and consultation with an attorney before responding to a Necessity Certification Questionnaire.