Summary of PPP Forgiveness Guidance released in October 2020 (as of October 10, 2020)

October 13th, 2020, 3:34 PM

Within the first weeks of October, three updates were released related to PPP forgiveness.

1) A simplified forgiveness application for PPP Borrowers with a PPP Loan of $50K or less,

2) Clarification of the definition of a "Change in Ownership" and when a "Change in Ownership" requires SBA approval, and

3) Explanation that the PPP Note of a PPP Loan does not need to be modified by the bank to honor the extended payment deferral granted by the Flexibility Act. 

 

These three key updates are further described below.

1.     Simplified Forgiveness Application for PPP Loans under $50K

 

The SBA released a new Interim Final Rule  (Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Revisions to Loan Forgiveness and Loan Review Interim Final Rules), a new forgiveness application form (Form 3508S), and supporting application instructions for the new form  on October 7th.  

 

The new application:

  • Is available for use for all PPP Loans under $50K UNLESS the PPP Borrower with a PPP Loan under $50K is affiliated with other PPP Borrowers who together received PPP Loans of $2 million or greater in the aggregate.
  • Most importantly, the new application exempts the PPP Borrower from any reduction in FTE or reduction in salary/wages.
  • The forgiveness application is so simplified that only very general information is requested (Business Legal Name, DBA/Trade Name (if applicable), Business Address, Business TIN, Business Phone, Primary Contact, and Email Address) and an authorized representative only must make 7 certifications that the forgiveness requirements were followed. See the new form at this link to review the certifications:  https://www.sba.gov/sites/default/files/2020-10/PPP%20Loan%20Forgiveness%20Application%20Form%203508S.pdf
  • Documentation should still be maintained to support forgiveness certifications and assertions, and possible audit.

 

2.     New Change in Ownership Guidance

 

The SBA released guidance defining the concept of "Change in Ownership" and criteria for determining when SBA approval is needed before effectuating a change in ownership transaction.

Definition of "Change in Ownership"Previously undefined with regards to PPP guidelines, the SBA has defined "Change in Ownership" as having occurred when:

  • 20% or more of common stock ownership or other ownership interest in the PPP borrower (even if a publicly traded entity) is sold or transferred, in one or multiple transactions (even if to an affiliate or existing owner of the entity).
  • 50% or more of the PPP borrower's assets (when measured at FMV) are transferred in one or multiple transaction.
  • PPP borrower merges with or into another entity.

SBA Approval in Event of Change in Ownership:  When a change in ownership transaction is anticipated to occur,  the approval from the SBA must be sought before the transaction may occur unless the loan has been satisfied under the methods below:

  • The PPP loan has already been paid in full.
  • The SBA has already forgiven the loan and remitted the forgiveness amount to the lender.

 Additional Exemptions from SBA Approval:  When the PPP loan has not been satisfied, the following transactions are exempt from SBA Approval:

  • In a stock sale or merger in which less than 50% of the ownership interests of the PPP borrower (considering all transactions that occurred since PPP loan approval) is sold or transferred; or
  • Stock sale or merger when PPP borrower completes and submits a loan forgiveness application reflecting its use of all PPP loan proceeds to the PPP lender and puts the outstanding balance of the PPP loan into an interest-bearing escrow account with the PPP lender.
  • Asset sale in which 50% or more of PPP borrower assets are being sold and PPP Borrower completes and submits a loan forgiveness application reflecting its use of all PPP loan proceeds to the PPP lender and puts the outstanding balance of the PPP loan into an interest-bearing escrow account with the PPP lender.

 

In circumstances where the loan has NOT been satisfied and the above exceptions have not been met, SBA approval will be required.  Approval of the PPP lender will not suffice.  The implication is that it may be easier to request PPP forgiveness than to request the SBA's approval of a Change in Ownership.

 

Obtaining SBA Approval:  In circumstances where the loan has NOT been satisfied and the above exceptions have not been met, SBA approval will be required.  Approval of the PPP lender will not suffice.  SBA Approval requires coordination with the PPP lender.  PPP borrower will need to provide documentation[1] to the PPP lender for submission to the SBA Loan Servicing Center.  The SBA will have 60 calendar days to review and provide its determination. Approval may be conditioned by the SBA.  Conditions, especially in the event of an asset sale, will likely need to be reflected in transaction documents.  Communication of the completion of the transaction must be made to the SBA within 5 days.

Pre-Guidance TransactionsThe SBA has not provided guidance related to Change in Ownership transactions with PPP borrowers that have already occurred.  If you are a PPP Borrower who has undergone a Change in Ownership, the loan has not been satisfied, and you would not be exempt from SBA Approval as defined above, we recommend that you work with your PPP lender to escrow the amount of the outstanding balance of the loan and follow any of their recommendations (or talk to a lawyer who is well-versed in these matters). 

Multiple PPP LoansFor Change in Ownership transactions in which both the purchasing entity and the purchased entity have PPP loans, the SBA emphasizes the importance of clear segregation and delineation when using and tracking the use of the PPP funds for purposes of applying for forgiveness.  Despite the Change in Ownership, demonstration of compliance with the PPP requirements for each PPP loan will need to be separate and distinct from the other PPP loan held by the now combined entity.

     

3.     Extended Payment Deferral Period Clarification

The new FAQ released on October 7, 2020 added Question 52. This Question clarified that the borrower payment deferral period for the loan extended under the Flexibility Act applies to all PPP loans, but the original PPP Note does not need to be modified by the PPP lender to reflect this change.  Instead, the PPP lender is responsible to inform the PPP Borrower of the new deferral period and grant it to them. 

[1] Documentation includes: 1) the reason PPP borrower cannot satisfy the PPP Note or escrow the funds fully; 2) the details of the transaction for which approval is being requested; 3) a copy of the signed PPP Note;  4) letter of intent and/or sales agreement for which approval is being requested; 5) SBA loan number of purchasing entity's PPP loan, if applicable; and 6) a list of all owners of the purchasing entity (20% or more ownership).

[1] The Flexibility Act extended the deferral period to the date that the SBA remits the borrower's loan forgiveness to the lender or (if the borrower does not apply for forgiveness) 10 months after the PPP Borrower's loan forgiveness covered period.

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