On October 2, the Small Business Administration (SBA) released a Procedural Notice regarding PPP borrowers’ change of ownership.
SBA defines a change of ownership as occurring when:
- “… 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,
- 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
- a PPP borrower is merged with or into another entity.”
Borrowers undergoing a change of ownership must notify their lender in writing and provide the proposed agreement or other relevant documents before the change of ownership occurs. There are no restrictions if the loan has been paid in full or the forgiveness process has been completed, meaning SBA has remitted funds to the lender or the borrower has repaid any remaining balance.
Other considerations relating to change of ownership include:
No SBA approval will be required when:
- The sale or transfer is of common stock or other ownership interest or a merger where:
- The sale or transfer of common stock or other ownership transfer is less than 50 percent of the PPP borrower’s interest, where all sales and transfers occurring from the date the PPP loan is approved are considered, or
- The borrower submits a forgiveness application supporting use of all PPP loan proceeds and creates an interest-bearing escrow account controlled by the PPP lender with funds equal to the balance of the PPP loan. The funds may be disbursed to pay any loan balance plus interest after the forgiveness process and any appeals are completed.
- A sale of 50 percent or more of its assets if the borrower submits a forgiveness application supporting use of all PPP loan proceeds and creates an interest-bearing escrow account controlled by the PPP lender with funds equal to the balance of the PPP loan. The funds may be disbursed to pay any loan balance plus interest after the forgiveness process and any appeals are completed.
If the ownership change does not meet these criteria, borrowers will need SBA approval. Borrowers should work with their PPP lenders, who will be required to submit the following information to the SBA:
- The reason the borrower cannot fully satisfy the PPP note or escrow the funds
- Details of the ownership change transaction
- A copy of the PPP loan documents
- Any agreements or letters of intent
- SBA loan number
- A list of all individuals with a 20 percent or greater ownership stake in the purchasing entity
For sales of 50 percent or more of the assets, SBA approval will be based on the buyer assuming all PPP obligations, which must be reflected in the sale documents.
Whether or not SBA approval of the transfer of ownership is required, the PPP borrower will remain subject to all terms of the program. If the buyers or successor has a separate PPP loan, they will be responsible for segregating PPP funds and providing documentation supporting compliance of the use of funds by each borrower.
To read the Procedural Notice, visit https://home.treasury.gov/system/files/136/5000-20057.pdf. For questions or to discuss your PPP loan or its forgiveness, please contact your HBK advisor.