SBA Using New PPP Form 3509 and PPP Form 3510 Asking Necessity and Liquidity Questions

Borrowers of PPP loans of $2M or more will be required to complete a new form as part of the SBA review process, which appears to ask key questions about private equity ownership, market capitalization, quarterly revenue and COVID-related business impacts that happened after the PPP loan application and this unhappy question:

(Yes, the form was apparently designed byGeorge Strait as most of the questions have check-the-box answers like this.)

After studying the application, it appears that, as feared, SBA will be looking not only at the facts that existed at the time of PPP loan application, but also looking at how events actually unfolded for PPP borrowers after the fact. Most of you will be reading this on Monday morning, so it’s a good time to look at the Monday morning quarterbacking that SBA seems to be doing.

I should note that SBA has not, as far as we could find, officially released these forms, but we were able to locate the attached forms through online and other resources, which appear genuine and  consistent with publicly-available information.

·        SBA had previously announced that it would review all forgiveness applications for PPP loans with an original principal amount of at least $2M. 

·        As part of its OMB reporting requirements, last Monday SBA published a notice in the Federal Register listing the time requirements to complete the various PPP forms.  That notice referenced two unreleased forms called “Loan Necessity Questionnaires”– 3509 for For-Profit Borrowers and 3510 for Nonprofit Borrowers. 

·        In an interview with S&P Global Market Intelligence, an SBA spokesperson indicated that the forms mentioned in the release would be were for borrowers of loans of “$2M and above”.

o   Interestingly, the SBA notice references that these forms affect approximately 52,000 borrowers, which is 23,000 higher than reflected in the SBA-published loan data that shows only 29,000 borrowers who have loans above $2M.  

o   It’s possible that there are ~23k borrowers with loans of exactly $2M, or that a large portion of that number comes from individual borrowers of under $2M who have affiliated PPP borrowers that aggregate to $2m.  But, that seems somewhat unlikely, and it’s hard to reconcile the numbers.

So, with the caveat that we don’t know for sure that these are accurate or final, here’s what we know about the forms, though for now we will focus on the form 3509, which is for business for-profit borrowers:

·        It appears that lenders are to provide the forms to borrowrs, who then have 10 business days to complete the forms and submit the required but unspecified “supporting documentation”.

·        The form consists of two main parts:

·        A “Business Activity Assessment,” which includes many questions relating to impacts on business activity during the borrower’s covered period, which of course only occurred well after the borrower applied for its PPP loan and thus seem only loosely correlated, at best, to a determination of the borrower’s good faith mindset at the time it applied for its PPP loan.

·        A “Liquidity Assessment,” which asks both whether the borrower (or its parent) had any public securities (and if so, its market cap) and as noted above, whether, the 20% or more of the borrower’s equity was owned by PE, VC or hedge funds or a public company but also then focus on how the borrower used its cash (not just PPP cash) – such as dividends, prepayment of debt, non-COVID cap ex, and (perhaps troublingly) whether the borrower had employees or owners with annualized comp in excess of $250k.

You can see the questions for yourselves in the pdfs (NOTE: I am unable to attach the PDFs, but please contact me if you would like a copy) but here are some observations on each of the two assesments:

·        Business Activity Assessment

·        The first quesiton asks for the borrower’s revenues for Q2 2020 and, for comparison, Q2 2019 or, if they are seasonal, the respective Q3s (or Q1 2020 for newer businesses).  For nonprofit borrowers on form 3510, this is measured in receipts, including grants and donations.

o   While this seems like a reasonable way to measure the actual impact of the pandemic on the borrower, it may bear little relation to what the borrower believed in good faithabout the “eonomic uncertainty” (which is what the CARES Act required) or what it thought was going to happen at the time of its application. 

o   It also may be largely irrelevant for borrowers who (a) were growing rapidly, where a return to Q2 2019 would be a signficiant decrease in actual activity or (b) borrowed in the PPP 2.0 wave, where the Q3 revenues might be a more relevant for the purposes that SBA apparently wants to use here.

o   Ultimately, it remains to be seen whether SBA will deny forgiveness for borrower’s whose revenues were not actually signficiantly reduced. 

·        The next several questions ask whether the borrower was ordered to, or voluntarily, shut down or “altered its operations” and if so, for how long, why and whether it had any CapEx relating to those alterations.

o   The three types of alterations that borrowers can check are interesting:  (i) number of people in a location was limited, (ii) service was limited to outdoors, (iii) employee workspaces were reconfigured or (iv) other.

o   As are the reasons for why a borrower voluntarily ceased or altered operations:  (i) employee(s) contracted COVID, (ii) supply chain was disrupted or (iii) other.  Interesting that SBA did not provide an option to address the customer demand-side of the equation, though borrowers can add that in the “other” box.

·        The final substatntive question asks whether the borrower began any new capital improvement projects *NOT* related to COVID during the period from March 13 to the end of its forgiveness period.  This is a bit of a puzzling question, and may be based on SBA thinking that a borrower who commenced such a project during such period must have had plenty of cash and thus didn’t “really need” the PPP loan.

·        Liquidity Assessment.

·        The first question is probably the obvious one, how much cash (and equivalents) did the borrower have as of the last day of the calendar quarter before it applied for the PPP loan.  For many borrowers who applied early in the process, this would be measured as of December 31, 2019, which could present a very misleading liquidity picture for a variety of seasonal and other timing reasons.

o   For nonprofit borrowers, form 3510 goes on to ask whether the borrower holds any assets in any “endowment funds” and for the value of its non-cash investmentswhich seems pretty clearly to be aimed at ferreting out some of the institutions with large endowments that President Trump criticized for taking PPP loans. In fact, the next question specifically asks whether the borrower is a “school, college and university” and, if so, what its annual tuition is and whether it offered tuition assistance for 2019-20.

o   Non-profit borrrowers are also asked whether they are a health care provider and, if so, what their program service revenue was for Q2 2020 vs Q2 2019 (or, if they are seasonal, the respective Q3s).

o   All non-profit borrowers (including schools and health care providers) are asked whether they offered discounts on their services due to COVID-19.

·         Next, SBA asks whether a borrower has paid any “dividends or capital distributions” between March 13 and the end of its covered period.

o   The question exempts tax distributions by a “partnership or S-corporation” (don’t worry, this should cover LLCs too, which are tax partnerships; remember that SBA is stuck in the 1950s re capital strucures), in an amount limited to actual tax liaiblity on profits in the first three quarters of 2020, 110% of the pro rata share of last year’s “tax liability on distributions” (too bad if you had phantom income, I guess?), or the pro rata share of tax liaiblity on total distributions in 2020 (which seems somewhat circular, but may be aimed at non-capital distributions of profits or guaranteed paymens?).  It’s also not clear whether we are using the greatest or least of these measures.

o   While the tax exception is oddly phrased, this question is not a surprise as SBA has been focused on ensuring that borrowers are not paying their owners to the detrminent of employees and, as we have predicted, is apparently looking askance at borrowers who were able to make such distributions.

·        Similarly, the next question asks if the borrower prepaid any debt before it was “contractually due” during that same period.  Note that while debt that was accelerated by a lender would likely be deemed to have been “contractually due,” debt that was prepaid as part of a change of control might not neatly fit into this exception for fairly technical reasons (e.g., in most cases buyes of companies with outstanding debt will pay the target debt via the funds flow immediately prior to closing of the sale in order to avoid triggering the default (and to deliver the company debt-free).

·        The next two questions ask whether any of the borrower’s employees or owners were compensated at an annual rate in excess of $250k (annualized), and if so how many of each and how much in total was paid to each such cohort.  This is not supported by the CARES Act and is a strange question that may be be based on some sort of assumption that a borrower who could afford to pay such highly compensated personnel such amounts may not have “needed” the loans.  This question could signal that forgiveness may be especially challenging for law firms and other professional service firms who borrowed PPP loans.

·        The next series of questions ask about the for-profit borrower’s equity captialization and ownership:

o   Whether the borrower or a parent had publicly traded stock, and if so its market cap on the date of the PPP applicaiton.

o   If the borrower was privately owned what was the book value of its shareholder equity as of the last day of the calendar quarter before it applied (again, using 12/31could create some interesting answers here).

o   Is the company a subsidiary (at least 50% owned by) another company, and if so who is the parent and is it incorporated outside the U.S.

o   Is the company an affilate or subsidiary of a foreign state-owned enterprise?  (I’m guessing that under the current administration, borrowers who would need check yes here may want to just not apply for forgiveness.)

·        And of course, the borrower is asked whether 20% or more of its equity is owned by a public company, or a PE “firm”, VC “firm” or hedge fund (SBA tries to eliminate any ambigutity from its use of this phraase in its FAQs by adding “or any fund managed by any such firm”).  This is not a surprise and likely signfiies enhanced scrutiny of these borrowers, as we all expected.

o   Remember that the former head of DOJ’s Civil Division—the unit with primary responsibility for CARES-related False Claims Act lawsuits—tipped his hat to this during a laundry-list speech of DOJ’s COVID/FCA priorities back in June (our Investigations team notes that DOJ is definitely looking for some “exemplary” cases in this area):

Our enforcement efforts may also include, in appropriate cases, private equity firms that sometimes invest in companies receiving CARES Act funds.  When a private equity firm invests in a company in a highly-regulated space like health care or the life sciences, the firm should be aware of laws and regulations designed to prevent fraud.  Where a private equity firm takes an active role in illegal conduct by the acquired company, it can expose itself to False Claims Act liability.  A pre-pandemic example is our recent case against the private equity firm Riordan, Lewis, and Haden, where we alleged that the defendants violated the False Claims Act through their involvement in a kickback scheme to generate referrals of prescriptions for expensive treatments, regardless of patient need.  Where a private equity firm knowingly engages in fraud related to the CARES Act, we will hold it accountable.

·        Finally, the forms ask whether the borrower has received any other CARES Act benefits and, if so, what and how much.  I had originally assumed this was designed to ferret out prohibited use of the ERTC. But the question specifically “exclude[es] tax benefits.”

Remember that we can’t be sure that these are the official or final forms, but those of you with companies who have $2M+ PPP loans should start receiving something like this from your banks soon. We’d love to see copies of them if they look different, and of course, please let us know if we can help with them.

Using an SBIC to De-Affiliate Portfolio Companies

Potential PPP loan Relief

Available to Private Equity Portfolio Companies


This note will explain how private equity sponsors, SBICs, BDCs and their portfolio companies may benefit from the new unsecured and potentially fully forgivable SBA Paycheck Protection Program (PPP) loans under the pending Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act.”[1]  Some initial commentary from leading industry commentators noted that such loans would not be generally available to PE portfolio companies.  While generally true, that analysis omits an important exception that should allow PE sponsors to obtain PPP loans for some of their portfolio companies.

Under the size standards applicable to the traditional SBA 7(a) loan program, controlled portfolio companies of PE funds are treated as affiliates and thus aggregated to determine eligibility under the SBA size standards.  Two controlled portfolio companies of the same PE sponsor that each have 300 employees would thus be aggregated and each would fail a size standard set at 500 employees, assuming the sponsor “controls” both companies.  Thus, neither one could get a traditional SBA 7(a) loan.

While that same concept generally applies to the new PPP loans, the act exempts from all of those affiliation rules, any business that receives “financial assistance” from an SBIC. This means that either of the sponsor-controlled companies above who would NOT have qualified for SBA loans due to the current affiliation rules now would qualify for a new PPP loan if that portfolio company currently has a loan[2] from an SBIC or obtains an SBIC loan prior to the time that it applies for the PPP loan.

In short, PE portfolio companies that are each individually small businesses may qualify for unsecured, forgivable loans, if they are able to first obtain an SBIC loan or possibly have an SBIC purchase all or part of an existing loan.

As drafted, it appears that even portfolio companies that do not currently have SBIC loans outstanding can go get such a loan, and thus qualify for a PPP loan, if they meet the SBA size standards on a stand-alone basis.  We expect that this will create significant demand for new SBIC loan origination (and possibly secondary loan transfers), especially for BDCs who have affiliated SBICs. 


The CARES Act amends the Small Business Act (“SBA”) to add a “Paycheck Protection Program” under which some small businesses and other eligible recipients may qualify for unsecured and forgivable SBA loans as they fight the potential consequences of the COVID-19 pandemic.  These loans generally contain borrower-favorable terms, including:

  • Principal Amount: Up to the lesser of $10 million or 2.5x average monthly payroll expenses (excluding certain compensation for employees making more than $100,000 per year).
  • Interest:  PIK only for 6-12 months at a rate not to exceed 4% per annum.
  • Maturity: Up to 10 years for any amounts not forgiven.
  • Collateral:  Unsecured; guaranteed by the SBA.
  • Forgiveness:  The principal amount of loans (but not interest) will be forgiven to the extent of the borrower’s documented expenses for payroll, interest on certain preexisting (as of Feb. 15, 2020) mortgage debt, rent and utilities payments, in each case incurred during the 8-week period from the loan origination.
  • Details:  A number of other terms and conditions apply.  For further information, see our Q&A on the PPP loans here and a more detailed description here.


The PPP loans are an outgrowth of the SBA 7(a) loan program, so in order to qualify for a PPP loan, the borrower has to either qualify under the traditional SBA 7(a) size standards or meet certain relaxed standards created by the CARES Act to expand the pool of “eligible recipients.”  Thus, the PPP loans are available to borrowers who:

  • Would otherwise qualify as a small business concern and thus be eligible for an SBA 7(a) loan, under the applicable SBA size standard[3] based on the borrower’s industry NAICS code, as listed here, which are based either on:
    • annual receipts (averaged over 3-5 years) or
    • number of employees;
  • Fail to meet the above industry-based size standard, but employ fewer than 500 employees (i.e., for industries subject to an employee size test, the limit is the greater of 500 or the applicable industry standard); or
  • Operate in NAICS Code 72 and employ not more than 500 employees per physical location of the business.


A key impediment for private equity sponsors, however is that the SBA 7(a) size standards apply a fairly broad affiliation concept to potential borrowers, which requires aggregation of employees or annual receipts of all of the sponsor’s “controlled” portfolio companies, thus keeping most sponsors from looking to the SBA loan program generally.  Note that, solely for purposes of the Small Business Investment Company (“SBIC”) investment program, portfolio companies of most PE and VC funds are exempt from these affiliation rules, which has allowed SBICs to support the private equity industry. 

The SBA considers a broad range of factors to determine control and affiliation, of which the following may be most applicable to PE and VC portfolio companies:

  • If a PE sponsor owns a majority of a company’s voting equity or has a right to control the board, that company is deemed an affiliate, and the SBA has the ability to look through to indirect ownership and voting arrangements. 
  • Even if one or more funds do not own a majority of the equity, but their holdings are large compared to others, the large investors may be deemed to control the company.  (The SBA gives the example of an investor owning 40% of the equity, with rest of the ownership being widely dispersed such that the next largest investor owns 2%).
  • Certain equity-linked negative covenants that give an investor an ability to prevent a board quorum or prevent a portfolio company from taking actions could result in the investor controlling the portfolio company and thus affiliation. VC funds should pay particular attention to how typical preferred stock “protective provisions” could trigger a finding of what the SBA refers to as “negative control”.
  • Companies that share common investors, management or directors may be deemed affiliates, even if there is no one controlling owner, which could impact some unfunded sponsors and other fund structures.

While these are the main factors likely to apply to PE, and some VC, portfolio companies, there are a number of other factors that the SBA can use to determine affiliation and which are further explained here.  PE sponsors that use multiple fund entities to invest in their portfolio companies or otherwise have complex investment and capital structures may want to review the affiliation guidelines closely to determine whether the SBA would deem the sponsor to be an affiliate of some or all of those portfolio companies.


Even for sponsors who do control their portfolio companies under the traditional SBA affiliation rules, the CARES Act says that none of those affiliation rules apply to portfolio companies of SBICs or companies that receive “financial assistance” from an SBIC.[4]  This means that PE sponsors seeking PPP loans for their controlled portfolio companies may apply the SBA 7(a) size standards on an individual company-by-company basis for any portfolio company that has a loan from an SBIC.  Thus, SBIC-funded portfolio companies of a sponsor need not aggregate employees or annual receipts with other portfolio companies of the sponsor, which should greatly expand the number of PE portfolio companies that may be eligible for a PPP loan.

We are receiving questions about whether this only applies to portfolio companies with existing SBIC loans. We believe that the CARES Act is not so limited.  While there are other provisions in the CARES Act tied to debt existing as of February 15, 2020, the CARES Act in the affiliation exemption refers only to a business “that receives financial assistance” from an SBIC, without requiring that such assistance (i.e., loan or investment) currently be in place.  Thus, under a plain reading of the CARES Act, it appears that a portfolio company that otherwise would individually be an eligible recipient of a PPP loan, could now borrow from an SBIC and thus qualify for the PPP loan.  We thus expect that many sponsors will look to SBICs to obtain loans to qualify otherwise eligible portfolio companies for PPP loans.  This may be especially beneficial for Business Development Companies (BDCs) and their borrowers, because many BDCs have affiliated SBICs.  Even if its affiliated SBIC does not hold part of a current BDC loan, that BDC may be able to quickly arrange for financing from such SBIC.

We are also receiving many questions about whether an SBIC can simply purchase all or part of an existing loan from an incumbent non-SBIC lender. The answer here is less clear.  The SBA Regulations allow SBICs to purchase securities from such an incumbent lender if such purchase is:

  • “a reasonably necessary part of the overall sound” financing of the business, or
  • “to finance a change of ownership” of a borrower (which would likely be less relevant in the current context, except perhaps as part of an overall restructuring of a borrower).

While it seems tempting to say that a PPP loan is a logical part of a sound financing package for a small business, it is not clear that the SBA would agree that a third party purchase of outstanding debt is “reasonably necessary” in order to allow the borrower to obtain such package.  Because of the short time period during which the PPP loans are available, there is an argument that such a secondary purchase would be “reasonably necessary” to avoid the need for a full negotiation of a new set of loan (and potentially intercreditor and equity) documents with the SBIC. However, there is no assurance that the SBA would agree.  We are continuing to review that aspect on behalf of our clients.

If you have questions or would like further information, please contact Rick Giovannelli, Christine Hoke, Liz Evans any member of our private funds team.

[1] This note refers to the version of the CARES Act passed by the Senate and House, which we understand may be passed by signed by the President as soon as Friday, March 26.

[2] Although we refer to SBIC loans throughout this article, note that the same concept would apply to an equity investment made by an SBIC.  SBICs generally tend to make equity investments in connection with providing a loan rather than on a standalone basis, so we refer only to loans for the sake of simplicity.

[3] For those familiar with the SBIC program, the traditional SBA 7(a) standards are the industry-based standards that can be used for SBIC eligibility if a borrower fails the primary $6.5M and $19.5M SBIC tests.

[4] The affiliation rules are also waived for companies that (a) are franchisees or (b) operate in NAICS code 72, which generally covers food service and hospitality companies, and having no more than 500 employees.  This further expands the universe of PE portfolio companies that may be eligible for PPP loans.

CARES Act – SBA Interim Final Rule and Updated Application

All, Thursday evening (April 2, 2020) SBA released an Interim Final Rule (IFR) implementing the PPP Loan program, and later released a new form of PPP Application.  These effect significant changes to the prior Treasury guidance and prior form of application, both released on March 31.  Note that some changes fundamentally alter availability, so a careful review is required. 

Here is a summary of the more material changes:

  • Application; Timing
    • The new application helpfully removes the requirement that 20% owners sign the application. 
    • Based on our discussions with leading SBA lenders, we understand that:
      • Many of the larger lenders will not be ready to accept applications on Friday  and are hoping to go live early next week;  and
      • At least initially, many lenders of all sizes intend only to provide PPP loans to existing customers of such bank, and in some cases only to existing “borrower” clients.  Prospective borrowers should contact their preferred lenders early on Friday morning to inquire as to that lender’s application process and timing.
  • Ineligible Businesses.  The IFR expressly states that certain businesses are ineligible to receive a PPP, by referencing CFR § 120.110  (What businesses are ineligible for SBA business loans?), which includes the following ineligible businesses:
    • Lenders, factors, life insurance companies;
    • Certain “sin” businesses (but alcohol-related companies are generally eligible);
    • Passive businesses (including developers, etc.);
    • Businesses teaching or indoctrinating religious beliefs;
    • Political or lobbying business; and
    • Speculative businesses (such as “oil wildcatting”).
  • Eligibility Size Test:
    • The IFR revises the 500 employee test to count only employees whose principal place of residence is the US and appears to measure such employee count as of the time of application for or funding of a PPP loan.
  • The IFR appears to clarify that a borrower may not qualify for a PPP under an industry size standard tied to its “annual receipts”.  Instead, the applies only the “employee-based size standards for [the applicable] industry.”  It appears that this industry-based size standard (and not the 500=employee test) is to be calculated in accordance with 13 CFR 121.106, which counts all employees foreign and domestic and uses the average number of employees on each payroll period for the most recent TTM.   
  • Interest Rate:  has been raised to 1.00% and is now forgivable.
  • Payroll Costs
    • The IFR clarifies that borrowers should not include payments to 1099 independent contractors in the calculating either the loan amount or forgiveness amount (because such contractors can apply for their own PPPs).
    • In an ongoing inconsistency, the IFR refers to the loan amount being calculated based on TTM payroll costs, while the revised application still says that “most Applicants will use the average … for 2019.”  It is not clear if this inconsistency is intentional, but applicants may be able to choose either period in their application.  (And are advised to check with their preferred PPP lender, if possible).
    • The IFR excludes both the employee and employer FICA contributions only for the period from Feb 15, 2020 to June 30, 2020.  Thus, such amounts incurred prior to Feb 15, 2020 could be included in calculating the loan mount, but later FICA payments cannot be counted toward forgiveness.
    • The IFR clarifies that for employees making more than $100k per year, the loan (and forgiveness calculation) only exclude “compensation paid to” such employee in excess of $100k.  Thus for an employee making $105k, a borrower could include $100k of compensation, plus benefit and other permissible costs.
  • Affiliation.   Unfortunately, the IFR punts on this for now and simply says “SBA intends to promptly issue additional guidance” re affiliation (and that it will also issue (no mention of promptly) additional guidance on loan forgiveness).  Some are optimistically inferring that the reference to further guidance on affiliation indicates a likely loosening of the affiliation  standards applicable to portfolio companies of PE and venture-backed companies, but we will need to such additional guidance before commenting.   We are continuing to monitor for such guidance and will provide updates when possible. 

Thank you and please let any member of our CARES Act loan team know if you have any questions.

SBA PPP Initial Fact Sheets

SBA just provided more information and fact sheets on the SBA Paycheck Protection Program forgivable loans.  These are NOT full implementing regulations, but are helpful and clarify many terms (thankfully, including providing the “right answer” to the $100k question).  We are still studying these in detail and still need the final regs, but in the meantime, we have attached:

  • A high-level PPL loan summary term sheet, updated to reflect information in the SBA fact sheets (new information is noted in bold in the term sheet); and
  • The just-released loan application, which requires:
    • Signatures by all holders of 20% or more of the borrower’s equity (plus GPs, etc.) (we are reviewing the impact of this requirement);
    • A listing  of affiliates and description of the nature of the relationship, which will likely require legal analysis and assistance;
    • Copies of 2019 “payroll documentation” (we expect that lenders will also require corporate/entity org docs and tax returns); and
    • The expected certifications as to the necessity of the loan due to economic uncertainty and use of proceeds, etc.

Note that applications may be submitted beginning this Friday April 3, so we (and they) have some time, but borrowers can begin completing these and gathering the required info.

NOTE: that the application clarifies the $100K comp question in the hoped-for manner by saying that the measure is “average monthly payroll for 2019 , excluding costs over $100,000 on an annualized basis for each employee.”  This is doubly good news because it:

  • Means borrowers only exclude $5k for an employee making $100k (and can thus borrow against the first $100k); and
  • Uses calendar year 2019 payroll amounts, which should be easier for most borrowers to calculate.

Here are direct links to the SBA resources:

  • For a top-line overview of the program CLICK HERE
  • If you’re a lender, more information can be found HERE
  • If you’re a borrower, more information can be found HERE
  • The application for borrowers can be found HERE

We will be in touch with more information, as and when we receive it.  Thank you.