Last Updated October 21st, 2020
Under new Small Business Administration (SBA) guidance, certain Paycheck Protection Program (PPP) borrowers might face new requirements. Earlier this month, the SBA released a Procedural Notice (Notice) that provides information concerning changes of ownership transactions for entities that received PPP funding. Notably, the Notice addresses a change in ownership interest of the PPP borrower (borrower) itself. It does not specifically address changes in ownership at the level of the borrower’s possible affiliates.
On October 8th, 2020, the SBA then issued an interim final rule simplifying the forgiveness process for specific PPP borrowers. These borrowers have loans of $50,000 or less (unless, together with affliates, the borrower has received $2 million or more).
Overview of the Procedural Notice
Released on October 2nd, 2020, the Notice establishes categories of transactions, some that may require prior approval of the SBA. The contents of the Notice are effective for transactions that close on or after the date of the Notice’s release.
According to the Notice, “change of ownership” occurs when:
- the borrower sells or transfers at least 20% percent of the common stock or other ownership interest;
- the borrower sells or otherwise transfers at least 50% of its assets; or
- a borrower merges with or into another entity.
Prior to any change of ownership closing, a borrower must notify its PPP lender (lender) of the transaction. The borrower must also provide the lender any proposed agreements or documentation that would affect the transaction.
Borrowers must also provide notice and obtain the SBA’s consent prior to the change of ownership transaction unless:
- the PPP loan has been fully satisfied through repayment;
- the sale or transfer is 50% or less of the common stock or other ownership interest of the borrower; or
- the borrower has completed a forgiveness application reflecting use of the PPP loan (loan) and established an interest-bearing escrow account. The escrow account would include the full amount of the balance of the loan.
Regardless of any change of ownership, the original borrower remains responsible for:
- the performance of all obligations under the loan,
- the accuracy of the certifications made in connection with the PPP loan application, including the certification of economic necessity; and
- compliance with all other applicable PPP requirements.
Additionally, the borrower must obtain, prepare, and retain all required PPP forms and supporting documentation. The borrower must also provide those documents to the lender or the SBA upon request.
Simple Forgiveness Applications for Smaller Loans
After receiving pressure from lenders and Congress, the SBA issued their final rule regarding the forgiveness process for PPP borrowers. As mentioned earlier, this only applies to certain borrowers:
- Borrowers with loans of $50,000 or less; or
- Borrowers with affiliates who have received $2 million or more in loans.
The rule exempts those borrowers from any reductions in forgiveness based on reductions in full-time equivalent employees. It also exempts borrowers who implemented reductions in employee salary or wages.
To implement the rule, the SBA issued an additional application for forgiveness, SBA Form 3508S. The form, which expires 10/31/2020, requires borrowers to certify specific statements that would determine the possibility of loan forgiveness.
Although the guidance clarifies when a change in ownership requires SBA approval, borrowers remain subject to all PPP loan obligations. The guidance states that the SBA reserves all remedies available for fraud, false statements, and unauthorized uses of prior funding. Before moving forward with change of ownership transactions, employers should consult with legal or financial authorities to verify proper compliance. Affected employers should also consult with proper authorities to determine if they are eligible for loan forgiveness. If so, any information or documentation provided needs to be as complete and up-to-date as possible.