Now that the deadline for new Paycheck Protection Program (“PPP”) originations has passed, lenders and borrowers need to be aware that the prior Small Business Administration (“SBA”) guidance governing PPP borrower changes of ownership remains in effect until the PPP loan is fully forgiven and the lender receives payment from the SBA.

Effective Oct. 2, 2020, SBA issued a Procedural Notice, Control No. 5000-20057 (“SBA Notice”), regarding PPP loans and changes of ownership. The SBA Notice outlines the required procedures for changes of ownership involving an entity that has received PPP funds (“PPP Borrower”).

Pursuant to the SBA Notice, SBA defines change of ownership as:

• at least 20% of the ownership interest of a PPP Borrower is sold or transferred, whether in one or multiple transactions, including to an affiliate or to an existing owner of the PPP Borrower;
• at least 50% of the PPP Borrower’s assets are sold or transferred, as measured by the fair market value; or
• the PPP Borrower merges with or into another entity.

The PPP Borrower must notify the lender that originated the PPP loan or is currently servicing the PPP loan (“PPP Lender”) of the contemplated change of ownership transaction and provide the PPP Lender with a copy of the proposed agreements and other documents related to the sale or transfer transaction.

There are no restrictions on changes of ownership if, prior to closing of the proposed transaction, the PPP Borrower has either:

• repaid the PPP loan in full; or
• completed the forgiveness process and the SBA has paid the PPP Lender the full PPP loan forgiveness amount or the PPP Borrower has fully paid any remaining balance owed on the PPP loan.

When SBA’s Prior Approval Is Not Required

SBA’s prior approval is not required if the change of ownership sale or transfer is:

• less than 20% of the ownership interest of a PPP Borrower is sold or transferred to an affiliate or to an existing owner of the PPP Borrower; or
• sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP Borrower; or
• PPP Borrower completes a PPP loan forgiveness application and submits the application with any required supporting documentation to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to at least the outstanding balance of the PPP loan.

If there is SBA 7(a) loan financing involved with the proposed transaction, the 7(a) loan proceeds that finance the change of ownership are to be used for the business acquisition and cannot be used to finance the escrow account. Thus, an SBA lender may not increase the 7(a) loan amount for the purpose of financing the escrow account. However, the seller may choose to use the proceeds it receives from the sale to fund the escrow account.

Notice to SBA

PPP Lenders are required to notify the appropriate SBA Servicing Center within five business days of completion of the transaction. For stock/ownership sales or transfers, the PPP lender must also provide (i) identity of the new owner(s) of the ownership interest, including individual ownership interests; (ii) tax identification numbers for any 20% or more owners; and (iii) location and amount of funds in required escrow.

When SBA’s Prior Approval Is Required

If the change of ownership does not meet the conditions outlined above, SBA’s prior approval is required. In order to obtain the SBA’s prior approval for the proposed transaction, the PPP Lender must submit the following information and documentation to the appropriate SBA Loan Servicing Center:

• The reason that the PPP Borrower cannot full repay the PPP Note or escrow the required funds;
• Details of the proposed transaction;
• Copy of the executed PPP Note;
• Letter of Intent and Purchase Agreement detailing the responsibilities of the PPP Borrower, seller and buyer;
• Whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
• List of all 20% or more owners of the buying entity.

SBA may require additional measures as a condition of its approval of the proposed transaction. Additionally, for any change of ownerships involving the sale of 50% or more of the PPP Borrower’s assets, SBA’s approval will be conditioned on the buyer assuming all of the PPP Borrower’s obligations under the PPP Note, including compliance with the note terms. The purchase agreement or a separate assumption agreement must include language regarding such assumption.

SBA has 60 calendar days upon receipt of a complete request to issue a determination.

Regardless of whether SBA’s prior approval is required, for all changes of ownership involving the sale or transfer of the ownership interest in the PPP Borrower, including merger, the PPP Borrower remains subject to the obligations under the PPP loan. If the buyer(s) uses PPP loan proceeds for unauthorized purposes, SBA will also have recourse against the buyer(s) for unauthorized use.

PPP Borrowers remain responsible for their obligations under the PPP note, the certifications attested to in connection with the PPP loan application and compliance with the PPP requirements.

Lenders are encouraged to review the SBA Notice regarding the requirements related to changes of ownership of PPP Borrowers in its entirety. If PPP Lenders do not follow the procedures required by the SBA, the PPP Lender risks the PPP 100% loan guaranty and ability to collect any remaining balances owed on the PPP Note.

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About Anastasi Jellum, P.A.

Anastasi Jellum, P.A. is a law firm that focuses its practice in banking law, commercial lending and related litigation. Recognized as a national leader for representing financial institutions in government guaranteed lending transactions with extensive experience as related to U.S. Small Business Administration (“SBA”) and U.S. Department of Agriculture (“USDA”) loans. Since the inception of the Paycheck Protection Program, the team at Anastasi Jellum has been assisting lender clients throughout the country in all areas of PPP lending. If you would like to connect with the team or sign up to receive newsletters, you may contact the firm’s Marketing Coordinator, Lisa Hellem, at Lisa.Hellem@AJ-Law.com or visit www.AJ-Law.com.