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SBA Guidance Re: Changes of Ownership and PPP Loans

Written by: Kimberly A. Kramer

10/15/2020

The SBA issued a procedural notice on October 2, 2020 issuing guidance regarding the consent and other requirement associated with a change of control transaction where one of the parties is a PPP borrower. 

The SBA defines a “change of control” as follows:

  1. 20% or more of the ownership interest of a PPP borrower is sold or transferred, including to an affiliate or existing owner of the entity;
  2. A PPP borrower sells or transfers 50% or more of its assets (measured by fair market value); or
  3. A PPP borrower merges with or into another entity.

Regardless of whether SBA consent is required, the PPP borrower will remain responsible for all obligations under the PPP loan, the loan application certifications, compliance with all PPP requirements.

The following transactions require PPP lender consent[1] but NOT SBA consent to the following change of control transactions:

  1. Sale of 50% or less of the PPP borrower’s common stock or ownership interest.
  2. Sale of 50% or more of the PPP borrower’s common stock or ownership interest, if PPP borrower completes a forgiveness application and submits it to the PPP lender and an interest-bearing escrow account controlled by the PPP lender is established and is funded in an amount equal to the outstanding balance of the PPP loan.
  3. Sale of 50% or more of its assets, if the PPP borrower completes a forgiveness application and submits it to the PPP lender and an interest-bearing escrow account controlled by the PPP lender is established and is funded in an amount equal to the outstanding balance of the PPP loan.

Once forgiveness is determined, the escrow funds must be disbursed first to pay the PPP loan balance plus interest.

The PPP lender is required to notify the SBA Loan Servicing Center of the location and amount of funds being held in the escrow account within five (5) days of the closing of the transaction.

All change of control transactions other than those not requiring consent of the SBA above, DO require SBA consent.  The PPP lender bears the burden of submitting the request to the SBA.  The required information and documents include (a) the reason the PPP borrower cannot satisfy the PPP note or escrow funds; the details of the transaction; the executed PPP note; the letter of intent of purchase agreement detailing the PPP borrower, seller (if different), and buyer; whether or not the buyer has an existing PPP loan; and a list of all owners of 20% or more of the purchasing entity. 

The SBA will respond to a consent request within sixty (60) days. 

In addition, SBA approval of a sale of 50% or more of a PPP borrower’s assets will be conditioned on the purchasing entity assuming the PPP borrower’s obligations under the PPP loan, including compliance.  Language in the purchase agreement or a separate assumption agreement must be provided to the SBA.

Regardless of the requirement or non-requirement for SBA consent of a stock/ownership sale or transfer, the PPP borrower will remain subject to all obligations under the PPP loan.  In addition, if the purchasers use the funds for unauthorized purposes, the SBA will have recourse against the owners.  

If the purchasers have a separate PPP loan then, the PPP borrower and the new owners must separate and delineate PPP funds and expenses and compile documentation demonstrating the separation and delineation. 

Within five business days of completion of the transaction, the PPP lender must notify the SBA Loan Servicing Center of the identity of the new owners, the new owner(s) ownership percentage(s), the tax id number for any owner of 20% or more of the business, and the location and amount of funds in escrow. 

 


[1] This requirements depends on the terms of the PPP borrower’s loan documents however it is likely that lender consent will be affirmatively required. 

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