Change-in-ownership guidance from SBA regarding PPP Loans
On Friday, October 2nd, the Small Business Administration (SBA) issued new guidance that explains the required procedures for a change in ownership of an entity that has received Paycheck Protection Program (PPP) funds.
The SBA procedural notice describes when a change of ownership is considered to have occurred and the responsibilities a PPP borrower continues to hold, regardless of any change in ownership.
The guidance explains the requirements and may help businesses that have been trying to go through the forgiveness process quickly because of an impending change of ownership.
According to the notice, a “change of ownership” occurs for a PPPL borrower when at least one of the following is true:
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 (this can occur in more than one transaction);
The PPP borrower sells or otherwise transfers at least 50% of the fair market value of its assets (again, this can occur in more than one transactions); or
The PPP borrower is merged with or into another entity.
All sales or transfers that have occurred since the date of the approval of the PPP loan must be combined for the purposes of determining the above criteria.
Regardless of a change in ownership, the PPP borrower remains responsible for all of the following:
Performance of all obligations under the PPP loan;
Certifications made in connection with the PPP loan application, including the certification of economic necessity;
Compliance with all other applicable PPP requirements;
Obtaining, preparing, and retaining all required PPP forms and supporting documentation; and
Providing the required forms and supporting documentation to the PPP lender or lender servicing the PPP loan, or to the SBA upon request.
Before closing any change-of-ownership transaction, a PPP borrower is required to notify the PPP lender in writing of the contemplated transaction and provide the PPP lender a copy of the documentation underpinning the proposed transaction. Some changes in ownership may require approval from the SBA.
The new guidance provides procedures to be followed, and they differ depending on whether or not the PPP note has been fully satisfied. If a PPP note has not yet been fully forgiven or paid, one of the requirements is that the PPP borrower must establish an escrow account controlled by the PPP lender in the amount of the outstanding PPP loan balance. The escrow funds must first be used to repay any remaining PPP loan balance after forgiveness has been processed.
The notice also addresses situations where the new owners or successors arising from a transaction have a separate PPP loan. Requirements are outlined for segregating and delineating PPP funds and expenses, along with documentation and compliance by PPP borrowers.
If you are contemplating an ownership change in your business, and have an outstanding PPP loan, w are here to help you navigate the required actions you must take. Give us a call, or contact us via our website.