We are still waiting for the “official” SBA FAQ announcing the withdrawal of the Forms 3509/3510 Loan Necessity Questionnaire (“Questionnaire”) that, according to the SBA, will include additional information about its review process. In the meantime, PPP lenders have been told by the SBA that they no longer are required to request that borrowers who obtained loans of $2 million or more complete the Questionnaire.

Seemingly coinciding with the withdrawal of the Questionnaire, however, the SBA has instead been requesting from many of these same borrowers additional information and documentation that typically includes some or all of the following:

  • Payrolls report for 2019, itemized with a line for each employee’s gross wages during the year. Reduction in excess wages above $100,000 annualized must either be included in the report as a column or, alternatively, the report can be in spreadsheet format so that the SBA can compute it.
  • Addendum A to the Borrower Application Form—a list of all businesses owned by or having common management with the Applicant or any owner of the Applicant, and a description of the relationship.
  • 2019 Form 1120-S.
  • Executed, final Form 941s for all quarters 2020.
  • Last three years of Federal Tax Income Returns.
  • Last three years of Income Statements.
  • Last three years of Balance Sheets.

This is a significantly broader information request than what was required by the Questionnaire and enables the SBA to extract from those documents much of the same type of information as was sought by Form 3509, although without an opportunity for the borrower to provide accompanying explanations. Of particular concern is the request for financial information for periods following the date of the borrower’s PPP loan application. As always feared, it appears that the SBA is viewing loan necessity in hindsight, based upon post-application events, rather than the uncertainties present at the time of application.

Recommendation: Whether or not your PPP loan has been forgiven at this point, if you are a “higher-risk” PPP borrower,[1] we recommend that you (i) assemble the information listed above, (ii) fill out a Questionnaire, including comprehensive explanations and context where applicable (i.e., where the response on its own may be perceived as raising a “red flag” without additional information), although do not file it, and (iii), to the extent you have not done so, prepare a “PPP loan white paper” setting forth the reasons why, at the time of your PPP loan application, current economic conditions made obtaining the loan necessary to support your ongoing operations. You also may want to include a discussion of actual performance and need. While the focus of the discussion should be on the facts and circumstances, including actual performance leading up to applying for the loan through May 18, 2020 (i.e., the Safe Harbor Date), or, if the loan was applied for after that date, then the date the loan proceeds were received, if your actual performance was better than expected, include an analysis of the reasons why the events leading to positive actual performance were not certain or known at the time of your PPP loan application.

In preparing your PPP loan white paper, consider the following:

  • Attorney-Client Privilege Protection. In order to have your PPP loan white paper subject to the protection of the attorney-client privilege, it should be prepared to provide your attorney with information required by them to provide you with legal advice. Dykema has developed a list of questions to help guide borrowers in the preparation of the PPP loan white paper.
  • Assistance of Advisors. The PPP loan white paper will include a significant amount of financial and legal analysis. Your accounting, financial and legal advisors can assist you in putting together the analysis and in reviewing and commenting on the analysis. Your advisors can assist you in a variety of other ways. Stout has developed a list of more than 60 factors that we believe the SBA, and/or any other government entity, will likely analyze in making their own determination as to whether a borrower had a need for the PPP loan at the time of its loan application. Stout then uses the analysis of those 60+ factors to develop a comprehensive independent report analyzing your economic need for the loan at the time of the application that can be provided to the SBA or other government agency if the loan necessity is ever challenged. Both Dykema and Stout have professionals on staff who have handled similar government reviews, both for the government in areas outside of PPP and against the government, and are able to apply that experience and knowledge to help you assess your position under the PPP. We also are able to provide other ad hoc assistance to meet the needs of our clients based on each client’s specific facts and circumstances, including cases where the SBA or other agencies challenge loan eligibility.

Watch for future PPP Loan Insights:

  • Forgiveness Does Not Mean Forgotten – Part II Ongoing SEC Disclosure Obligations
  • Forgiveness Does Not Mean Forgotten – Part III Preparing for Your SBA Audit
  • Forgiveness Does Not Mean Forgotten – Part IV Preparing for M&A/Financing Due Diligence Examinations
  • Forgiveness Does Not Mean Forgotten – Part V Preparing for Government Contract Reimbursement Audits