Paycheck Protection Program Loans and Changes in Ownership

On Friday, October 2, 2020, the Small Business Administration (SBA) issued a notice providing information on the required procedures for when a change in ownership occurs for entities holding a Paycheck Protection Program (PPP) loan. This guidance will help PPP borrowers who are contemplating or currently executing a transfer of ownership.

What is Considered a Change in Ownership?

A change in ownership occurs when:

At least 20% of the common stock or other ownership of the PPP borrower (including a public entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity. All sales or transfers occurring since the date of the approval of the PPP loan must be aggregate; or
The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair value) in one or more transactions; or
the PPP borrower is merged with or into another entity.

Borrower’s Responsibilities

Regardless of a change in ownership, the borrower remains responsible for:

Performance of obligations under the PPP loan; and
The certifications made in connection with the PPP loan application, including the certificate of economic necessity and compliance with all other applicable PPP requirements. This means obtaining, preparing, and retaining all PPP forms and supporting documents. The paperwork must then be provided to the PPP lender or lender serving the PPP loan or to the SBA upon request.

Prior to the closing of any change in ownership, the PPP borrower must notify the PPP lender in writing of the completed transaction and provide the PPP lender with a copy of the proposed agreement or other documents that would affect the proposed transactions.

PPP lenders are required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

SBA Consent and Approval

If the PPP borrower satisfies one of the following criteria, SBA consent is not required:

1. The PPP loan is fully satisfied prior to the closing of the sale or transaction of ownership.

The PPP loan is paid in full; or
The loan forgiveness process has been contemplated; i.e., the SBA has remitted funds to the PPP lender and any unforgiven amounts are to be paid in full.

2. If the PPP loan has not been fully satisfied, and there has been a sale of stock or a merger, then SBA consent is still not required if:

There is a sale or transfer of less than 50% of the PPP borrowers’ stock or ownership; or
The PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP lender, and it funds an interest-bearing escrow account controlled by the lender. The funds should equal the outstanding balance of the PPP loan. After the forgiveness process is completed, the escrow funds must be distributed first to repay any remaining PPP loan balance plus interest.

3. If there is a sale of 50% or more of the PPP borrower assets (measured by fair value):

The PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP lender, and it funds an interest-bearing escrow account controlled by the lender. The funds should equal the outstanding balance of the PPP loan. After the forgiveness process is completed, the escrow funds must be distributed first to repay any remaining loan balance plus interest.

In other changes of ownership, prior SBA approval may be required. This review and determination will be completed within 60 days of the receipt of complete request.

For More Information

The notice also discusses the successor’s obligations under the PPP loan and requirements of both parties who have PPP loans. This includes separating and documenting PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements.

If you have questions regarding the transfer of ownership and PPP loans, contact a Clark Nuber professional. See our PPP Loan Forgiveness series for more information on loan forgiveness.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.