On October 2, 2020, the SBA issued guidance relating to changes of ownership for an entity that received Paycheck Protection Program (PPP) funds.
The guidance is applicable if there is a “change of ownership,” defined as follows:
“For purposes of the PPP, a ‘change of ownership’ will be considered to have occurred when (1) at least 20 percent 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, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.”
The guidance clarifies situations in which PPP lenders and the SBA must approve a change of ownership if the PPP note is not fully satisfied at the time of closing; meaning the note has not been repaid in full by the borrower or by the SBA as part of the loan forgiveness process.
Prior approval by the SBA is not required for sales or other transfers of ownership interest or mergers under these conditions:
- If the transfer is 50% or less of the ownership interest of the PPP borrower; or
- The borrower submits a forgiveness application for full use of the loan proceeds and provides supporting documentation to the lender.
An interest-bearing, lender-controlled escrow account must also be established with funds equal to the outstanding loan balance. Following the forgiveness process, the escrow funds must first be used to repay any remaining PPP loan balance plus interest.
Similarly, transactions involving 50% or more of the borrower’s assets do not require prior approval by the SBA if the borrower completes the forgiveness application. The application must reflect full use of the loan proceeds and establish the required escrow account.
The guidance also indicates PPP funds and expenses must remain segregated and delineated by PPP loan and borrower after a change in ownership.
Lastly, the guidance reminds borrowers that “Regardless of any change of ownership, the PPP borrower remains responsible for (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) 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.”
Please click here to access the SBA Procedural Notice 5000-20057 for complete details of the guidance. As always, contact us with any questions.