Material developments have recently taken place in relation to PPP loans. The first is the issuance of questionnaires relevant to PPP borrowers with loans in excess of $2 million. The second is a decision from the district court for the District of Columbia ordering that the names of “all” PPP borrowers be released—not just those borrowers with loans over $150,000.
1. SBA Loan Necessity Questionnaires
On October 26, 2020, the SBA posted a notice in the federal register that includes two borrower questionnaires (Form 3509 and Form 3510). The questionnaires are directed to profit and non-profit borrowers who obtained loans in excess of $2 million. As of this writing, the forms have not appeared on the SBA’s website. However, Sarah Helton, a partner at Michael Best Strategies, confirmed with an official at the SBA that copies of the questionnaires have been circulated to banks who will process the forms for the purposes of the forgiveness phase of the PPP program.
Given the $2 million threshold, only a small number of borrowers are required to complete the questionnaires at this time. Nevertheless, the questionnaires request information of large PPP borrows that imply that the SBA may intend to use the more stringent modified necessity standard (which we first reported here) rather than the text of the CARES Act regarding necessity generally. This implies there may be an attempt on the part of the SBA to apply a standard of review not included in the CARES Act and, for many borrowers, requirements not present at the time of the their application. That is not only Monday morning quarterbacking, but doing so using different rules of the game. As with prior submissions to the SBA, the forms must be certified by the applicant under threat of monetary and criminal penalties.
The questionnaires require information from borrowers on a variety of topics including: (1) second quarter revenue for 2019 and 2020, (2) information about voluntary or mandatory cessation of or alteration of operations, including expenditures on capital projects, (3) a requirement to disclose cash and cash equivalents on hand on the date of the application, (4) the number of employees paid salaries above $250k, (5) the amount of distributions to owners, and (6) a disclosure of private equity and venture capital ownership. Such answers bear on the good faith compliance with the necessity requirement of borrowers and the forgiveness phase of the PPP program—the form stating, “the information collected will be used to inform SBA’s review of your good-faith certification that economic uncertainty made your loan request necessary to support your ongoing operations.” Further, the questionnaires state:
Receipt of this form does not mean that SBA is challenging that certification . . . [But] failure to complete the form and provide the required supporting documents may result in SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.
As has unfortunately become de rigueur with PPP guidance, there is some ambiguity—some of which we see readily apparent from the form and other aspects of which we know will become clear as borrowers attempt to comply. For example, what is a capital improvement project? What does it mean to begin a capital improvement project? Over what period does an expenditure on a capital improvement project need to be disclosed, much less calculated?
Fortunately, the form does include space for longer explanations to each of the categories of questions. As we have suggested previously, we think carefully addressing the modified necessity standard—even though we do not believe that to be the applicable law—is the best procedural response. Answers to the questionnaires can (and should) be marked as confidential. Since part of the information requested—how much cash a business has on hand, expectations on capital expenditures, total revenue as compared to prior periods—is likely not public information, borrowers should designate the responses as confidential, as we have previously warned (here). If you wish to keep the information confidential, the response should be ‘yes’ for the column marked 'confidential.’
We think it possible there will be litigation resulting from loan denials and, particularly for borrowers, whose facts would be more likely to be criticized, we—unfortunately—think it is appropriate to prepare as though that were the case. We hope there is additional guidance forthcoming regarding the ambiguities in the forms and the SBA’s approach to audits of loans in excess of $2 million. To the extent possible, it may be worth waiting to apply for forgiveness in order to let others bear the brunt of any disputes over these post-hoc determinations.
Nevertheless, borrowers with loans in excess of $2 million should begin thinking about how and if to respond to the form and to gather the information requested and carefully prepare responses, each step with counsel involved.
2. D.C. District Court Case Expands Information Sharable about PPP loans
On May 12, 2020, the Wall Street Journal, among others, sued the SBA to release information regarding PPP borrowers. See, WP Co. LLC et al v. U.S. Small Bus. Admin., No. 1:20cv1240 (D.D.C. filed May 12, 2020). Late last week, the Court issued its decision ordering that the SBA “release the names, addresses, and precise loan amounts of all individuals and entities that obtained PPP and EIDL COVID-related loans by November 19, 2020.” Id. at 40. Previously, the SBA had relied on several exemptions, for example, 5 U.S.C. § 552(b)(4) (Exemption 4), to withhold the names and addresses of borrowers of PPP loans of less than $150,000. Id. Core to the Court’s reasoning was that the SBA did “not explain how the loan data could remain confidential for purposes of Exemption 4 when the Government not only provided no assurance of privacy, but also told borrowers explicitly that the information would be disclosed.” Id. at 20.
Takeaways—and How to Protect Confidential Information Other than that Described in the WP Decision
The SBA questionnaires suggest not only the compulsory nature of the forms, but their importance to the SBA in evaluating forgiveness of the loans beyond the current forgiveness information required. Protecting this ‘additional’ confidential information relevant to these questionnaires will be critical to many PPP borrowers as they proceed through the forgiveness phase (and beyond). Concerns exist relating to Freedom of Information (FOIA) requests by third parties (competitors or frivolous law suits). To mitigate such concerns, appropriate measures can be employed consistent with past alerts published by Michael Best. See How much of My Business’s Information Will Become Public as a Result of My Use of the Paycheck Protection Program? (Part I and Part II).
 The period to submit comments to the SBA on questionnaires Form 3509 and Form 3510 ends on November 25, 2020.