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SBA Issues Guidance on PPP Loans and Changes of Ownership

On October 2, 2020, the U.S. Small Business Administration (“SBA”) issued Procedural Notice No. 5000-20057 to provide information concerning the required procedures related to changes of ownership of an entity that has received Paycheck Protection Program (“PPP”) funds. This is one of a number of Procedural Notices issued by SBA to provide additional guidance to its employees and lenders on PPP loan-related issues. Prior notices can be found under the heading “Lender Forms and Guidance” on SBA’s PPP webpage. This Procedural Notice provides the following information of which PPP borrowers should be aware if they are considering or actively engaged in selling their business and their PPP loan is not fully satisfied:

Change of Ownership

For purposes of the PPP, a “change of ownership” will be considered to have occurred when:

At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
A PPP borrower is merged with or into another entity.

For purposes of determining a change of ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.

Borrower Responsibilities

Regardless of any change of ownership, the PPP borrower remains responsible for:

Performance of all obligations under the PPP loan;
The certifications made in connection with the PPP loan application, including the certification of economic necessity; and
Compliance with all other applicable PPP requirements.

Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender” in this Notice) or to SBA upon request. SBA reserves all rights and remedies available under the law in the event of fraud, false statements, and/or unauthorized uses of PPP loan proceeds.

Post-Sale Obligations:

In the event of a sale or a merger of the PPP borrower with or into another entity, the PPP borrower (and, in the event of a merger of the PPP borrower into another entity, the successor to the PPP borrower) will remain subject to all obligations under the PPP loan. In addition, if the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the owner(s) for such unauthorized use.

SBA approval of any change of ownership involving the sale of 50% or more of the assets (measured by fair market value) of a PPP borrower will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. In such cases, the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity; or a separate assumption agreement must be submitted to SBA.

Lender Notification

Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. The PPP Lender must notify SBA within five business days of the completion of the transaction and provide certain documentation (see Notice) regarding the transaction.

SBA Approval

SBA approval or consent to the transaction may be necessary, depending on the circumstances of the change of ownership.

SBA Approval Not Needed:

There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has (a) repaid the PPP Note in full or (b) completed the loan forgiveness process and SBA has remitted funds to the PPP Lender in full satisfaction of the PPP Note, or the PPP borrower has repaid any remaining balance on the PPP loan.

If the change of ownership is structured as a sale or other transfer of common stock, or other ownership interest or as a merger, prior SBA consent is not needed if:
- - The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
  - The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender; and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

In determining whether a sale or other transfer exceeds this 50% threshold, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated.

If the ownership change is structured as an asset sale, and the PPP borrower sells 50% or more of its assets (measured by fair market value), prior SBA consent is not needed if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender; and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

Please note that after the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

SBA Approval Needed:

If a change of ownership of a PPP borrower does not meet the conditions previously indicated, prior SBA approval of the change of ownership is required; and the PPP Lender may not unilaterally approve the change of ownership. To obtain SBA’s prior approval of requests for changes of ownership, the PPP Lender must submit the request to SBA (Loan Servicing Center) and provide certain documentation (see Notice) regarding the transaction and information about the buyer and their ownership interest.

If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction.

SBA will review and provide a determination within 60 calendar days of receipt of a complete request.

New Owner’s Obligations

If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction:

In the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower; and
In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.

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Based on this guidance, many PPP borrowers that are contemplating selling their business or are actively engaged in the transaction process may find it difficult to meet the prerequisite conditions for moving forward without having to obtain the approval or consent of the SBA prior to closing their transaction, especially if they are not at a point where they are ready to submit a loan forgiveness application to their lender or they are not willing to establish an escrow account for equal to the outstanding balance of the PPP loan. Both parties to the sale should note the documentation requirements and time frame for SBA to review the transaction and make a determination regarding the change of ownership.

This Procedural Notice does not indicate any potential negative consequences for the PPP borrower if they fail to follow these procedures and do not obtain prior SBA approval or consent to the sale of their business. It also does not reference what a PPP borrower should do in the event that they previously closed a transaction for the sale of their business or what steps can be taken if their lender is not accepting loan forgiveness applications at the time of the sale, as many financial institutions are waiting to see if there is any new loan forgiveness guidance forthcoming as part of a potential new stimulus deal being negotiated in Washington.

We will continue to monitor new guidance issued by SBA and provide updates on these issues as more information becomes available.

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For additional information on the Paycheck Protection Program, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com