SBA Releases PPP Guidance for Small Borrowers and Post-Loan Business Transactions
By: Kevan Lee Deckelmann, and Tara Walker
On October 8, 2020, the Small Business Administration (“SBA”) released a new loan forgiveness application, along with a new Interim Final Rule, directed to Paycheck Protection Program (“PPP”) borrowers whose loan was $50,000 or less. Borrowers who, together with their affiliates, received loans totaling $2 million are ineligible. The new rule, effective immediately, exempts these small borrowers from any reductions to loan forgiveness based on reductions in full-time equivalent employees or employee wages—a major change to the implementation of PPP, and one that followed months of speculation regarding loosening of rules. It is unclear whether PPP borrowers who already have submitted loan forgiveness applications may access the benefits of the new rule.
PPP Borrowers of $50,000 or Less
The rule change is reflected on a new application form, SBA Form 3508S. Eligible borrowers need not demonstrate the calculations used to determine their loan forgiveness amount on that form (which no longer need include reductions based on FTE or wage reductions), although the SBA may request this information at a later date. As with SBA Forms 3508 and 3508EZ, borrowers are still required to make a series of certifications related to the authorized use of PPP funds, including the requirement that at least 60% of the forgivable amount was used on payroll costs. As of now, the new SBA Form 3508S has an expiration date of October 31, 2020, the date through which SBA obtained “emergency” approval for the change to the form, although it is unclear whether the rule itself will last past October 31. The Administrator of the SBA and Treasury Secretary “have concluded that this form strikes an appropriate balance between the need for simplification in the forgiveness process with the responsibility to protect the integrity of the program and safeguard taxpayer funds,” the Rule states. As always, potentially eligible PPP borrowers should carefully review with counsel whether to utilize the new rule.
Post-Loan Business Transactions
On October 2, 2020, the SBA released long-awaited guidance for businesses considering whether to enter into a merger, acquisition, or other business transaction before receiving forgiveness for an outstanding PPP loan. The Procedural Notice sets forth “required procedures” for borrowers who effect a “change of control,” meaning they (1) merge with or into another entity, (2) transfer or sell at least 20% of their common stock or other ownership interest, and/or (3) transfer or sell at least 50% of their assets. For purposes of determining a change of ownership, the SBA will consider all stock and asset transfers in the aggregate, beginning with the approval date for the PPP loan (for publicly traded companies, only transfers resulting in one person or entity owning 20% or more of the company’s stock are aggregated). The rule takes place immediately (as of October 2, 2020), although the Notice makes no reference to whether this would be retroactive and apply to “changes of control” by PPP borrowers that occurred before October 2.
First, the Notice clarifies that there are “no restrictions on a change of ownership” if, prior to closing the sale or transfer, the original PPP borrower has repaid the PPP loan in full or has completed the loan forgiveness application and has been remitted and/or repaid all funds in full.
Second, the Notice states that, “regardless of any change of ownership,” the original PPP borrower remains responsible for (1) performing all obligations under the loan, (2) complying with the certifications on the loan (including specifically the “economic necessity” certification, (3) and complying with all other PPP requirements (including providing all documentation). The Notice clarifies that these obligations extend to successor borrowers in the case of a merger. (See below for an exception in the case of asset sales submitted to the SBA for preapproval.)
Third, the Notice divides covered transactions occurring before the PPP loan is fully satisfied into two broad categories: those that need pre-approval from the SBA, and those that do not.
- Borrowers can proceed with the transaction without SBA preapproval only if:
(1) the transaction is structured as a sale or transfer of common stock or other ownership interest, or as a merger, the PPP lender notifies the SBA of the transaction within 5 business days, and either of the following applies:
(a) 50% or less of common stock or other ownership interest (in the aggregate, since the date of PPP loan approval) is transferred; or
(b) the PPP borrower sets up an escrow account, controlled by its PPP lender, with funds equal to the outstanding balance of the PPP loan. Upon the completion of the loan forgiveness process (including any appeals), the funds must be distributed first to repay any PPP loan balance due plus interest.
(2) the transaction is structured as an asset sale (of up to 100% of the assets), provided that the PPP borrower sets up an escrow account as described above.
- All other covered transactions (mergers, 20% or more stock transfers, and 50% or more asset sales) may not be completed without SBA’s prior approval. So, for example, stock transfers or asset sales involving over 50% of stock or assets, respectively, require preapproval by SBA unless an escrow account is established as described above. According to the Notice, the SBA will take up to 60 calendar days to review the deal.
Critically, the Notice provides that SBA approval of an asset sale of 50% or more of the assets (submitted for preapproval without an escrow account) will be “conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan.” In particular, the SBA will require that the purchase and sales agreement, or separate assumption agreement, include this language. Companies considering whether to enter into asset sales after October 2, 2020 should consider whether they will need to adjust the terms of negotiated agreements to date, accordingly.
If, following a transaction structured either as a stock transfer or merger (regardless of SBA preapproval), multiple PPP loans exist at the new entity and/or new owner, the PPP borrower and new owner (or, in the case of a merger, the successor to the PPP borrower) are responsible for segregating and delineating PPP funds and expenses in accordance with program rules.
PPP borrowers who are considering any of these transactions should carefully review with counsel whether any of the new obligations under the Notice are triggered and whether their agreements accord with the rules in the Notice.
We will continue to keep you posted on additional updates to the PPP program, including guidance regarding loan forgiveness and post-loan business transactions, in the weeks and months ahead.