The U.S. Small Business Administration (SBA) issued additional guidance on Paycheck Protection Program (PPP) Loan forgiveness through issuing of an SBA Procedural Notice on October 2, 2020 regarding ‘PPP Loans and Changes of Ownership’.
The key takeaways to highlight are:
The SBA released the Procedural Notice on 10/2/2020 concerning the required procedures for changes in ownership of an entity that has received PPP funds.
What constitutes a “change of ownership”
At least 20% of common stock or other ownership interest of a PPP borrower is sold or transferred, whether in one or more transactions, including to an affiliate or existing owner of the entity;
PPP borrower sells or transfers at least 50% of its assets (measured by fair market value); or
PPP borrower is merged with or into another entity.
There are different procedures depending on the circumstances of the change of ownership, as set forth below:
PPP note is fully satisfied – there are no restrictions on a change of ownership if, prior to closing the sale or transfer, the borrower has:
Repaid the PPP note in full; or
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.
PPP note is not fully satisfied – if the note is not fully satisfied prior to closing the sale or transfer, the following applies:
Cases in which SBA prior approval is not required and the PPP lender alone may approve the change of ownership:
For a change in ownership structured as a sale or transfer of common stock, or as a merger:
Sale or transfer of common stock or other ownership interest is 50% or less of the PPP borrower
PPP borrower completes a forgiveness application and submits it, along with all 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. After the forgiveness process is completed, the escrow funds must be disbursed first to pay any remaining PPP loan balance plus accrued interest. The PPP lender must notify the appropriate SBA Loan Servicing Center of the location and amount of funds in escrow within 5 business days of completion of the transaction.
For a change in ownership structured as an asset sale:
PPP borrower may sell 50% or more of its assets without the prior approval of SBA only if the borrower completes a forgiveness application and submits it, along with all 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. After the forgiveness process is completed, the escrow funds must be disbursed first to pay any remaining PPP loan balance plus accrued interest. The PPP lender must notify the appropriate SBA Loan Servicing Center of the location and amount of funds in escrow within 5 business days of completion of the transaction.
Cases in which SBA prior approval is required:
If a change of ownership does not meet the conditions above, prior SBA approval is required and the PPP lender may not unilaterally approve the change of ownership.
To obtain the SBA’s prior approval, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center along with the required documentation:
Details of the requested transaction
Copy of the executed PPP note
Reason the borrower cannot fully satisfy the PPP note or escrow funds
Letter of intent and the purchase or sale agreement setting forth the responsibilities of the borrower, seller (if different than borrower), and buyer
List of all owners of 20% of more of the purchasing entity
Disclosure of whether the buyer has an existing PPP loan, and if so, the SBA loan number
blum has been on the forefront of interpreting PPP guidance and providing trusted resources for clients to keep them apprised of constant changes and providing the most up-to-date information to assist in calculating loan forgiveness. Our team is working with clients to assist them with navigating through compliance requirements of the loan forgiveness program, to ensure forgiveness is received, help expedite the loan forgiveness process and provide a reliable and trusted source of information.
Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.