News

SBA Issues Procedural Notice Regarding Change of Ownership of PPP Loan Borrowers

October 12, 2020

By Robert J. Waine, Esquire

On October 2, 2020, the SBA issued a notice regarding the required procedures to follow when a PPP borrower has a change of ownership.  For purposes of PPP loans, a change of ownership occurs when: (1) at least 20% of the ownership interest of a PPP borrower is transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity; (2) the PPP borrower transfers at least 50% of its assets, measured by fair market value, in one or more transactions; or (3) the PPP borrower is merged into another entity.

Pursuant to the Notice, the SBA is requiring the PPP borrower, prior to the closing of any change of ownership transaction, to notify its PPP lender in writing of the contemplated transaction and provide the lender with a copy of the proposed agreement or other documents that would effectuate the proposed transaction. Then, there are different procedures to be followed depending on the circumstance surrounding the change of ownership.

If the PPP loan is fully satisfied prior to the closing of the change of ownership transaction, there are no restrictions on a change of ownership.  If the PPP borrower is seeking forgiveness of all, or a portion of the PPP loan, the SBA must have remitted the funds to the PPP lender and the PPP lender must have repaid any outstanding balance for the PPP loan to be fully satisfied.

If the PPP loan is not fully satisfied prior to the change of ownership, the SBA has imposed several requirements on the PPP borrower, and the transaction may require the SBA’s prior approval. Prior approval of the SBA is not required for the transfer of an ownership interest or a merger only if: (a) the transfer is of 50% or less of the ownership interest of the PPP borrower; or (b) the PPP borrower completes a PPP loan forgiveness application and submits it to the PPP lender, together with any required supporting documentation, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan. To determine whether a transfer is of 50% or less of the ownership interest in the PPP borrower, all transfers occurring since the date of approval of the PPP loan must be aggregated. Prior approval of the SBA is required if the change of ownership transaction does not meet the conditions above.

A PPP borrower may sell 50% or more of its assets without prior approval of the SBA only if the PPP borrower completes a PPP loan forgiveness application and submits it to the PPP lender, together with any required supporting documentation, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

If the change of ownership transaction is the sale of an ownership interest or a merger, the PPP borrower, and the successor to the PPP borrower in the event of a merger, will remain subject to all obligations under the PPP loan. If the new owner(s) use PPP funds for unauthorized purposes, the SBA will have recourse against the owner(s) for unauthorized use.  In addition, if new owner(s), or a successor arising from a transaction, has a separate PPP loan, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation demonstrating compliance with PPP requirements by each PPP borrower for each PPP loan.

The SBA is regularly issuing new requirements and guidance regarding the PPP program.  If you are a PPP borrower and you are considering a change of ownership transaction, or if you are considering acquiring an interest in a PPP borrower, or its assets, the attorneys at Rothman Gordon P.C. are ready to assist.  Please contact us online or call (412) 338-1169.