New guidance issued by the U.S. Small Business Administration (SBA) describes the procedures required for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds.
Addressed to SBA employees and PPP lenders, the SBA procedural notice describes when a change of ownership is considered to have occurred and the responsibilities a PPP borrower continues to hold regardless of any change in ownership.
The guidance clarifies requirements and may help businesses that have been trying to go through the forgiveness process quickly because of an impending transfer of ownership. Lenders that have been assisting these businesses also may benefit from this guidance.
According to the notice, a “change of ownership” occurs for PPP purposes when at least one of the following is true:
- At least 20% 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% 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.
Note that all sales or transfers that have occurred since the date of the approval of the PPP loan must be aggregated. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.
Regardless of a change in ownership, the PPP borrower remains responsible for all of the following:
- Performance of all obligations under the PPP loan;
- The certifications made in connection with the PPP loan application, including the certification of economic necessity;
- Compliance with all other applicable PPP requirements;
- Obtaining, preparing, and retaining all required PPP forms and supporting documentation; and
- Providing the required forms and supporting documentation to the PPP lender or lender servicing the PPP loan, or to the SBA upon request.
Before closing any change-of-ownership transaction, a PPP borrower is required to notify the PPP lender in writing of the contemplated transaction and provide the PPP lender a copy of the documentation underpinning the proposed transaction. Additionally, some changes in ownership may require SBA approval, with the SBA having 60 calendar days to review and provide a determination of its approval.
The PPP lender must notify the SBA within five business days of the completion of a transaction and is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.
The SBA notice provides different procedures to be followed depending on whether or not the PPP note has been fully satisfied. If a PPP note has not yet been fully forgiven or paid, one of the requirements is that the PPP borrower establish an escrow account controlled by the PPP lender in the amount of the outstanding PPP loan balance. The escrow funds must first be used to repay any remaining PPP loan balance after forgiveness has been processed plus interest.
The procedural notice also addresses situations where the new owners or successors arising from a transaction have a separate PPP loan. Requirements are outlined for segregating and delineating PPP funds and expenses, along with documentation and compliance by PPP borrowers.
AICPA experts discuss the latest on the PPP and other small business aid programs during a biweekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.
The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
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— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.