The U.S. Small Business Administration (the “SBA”) is requiring lenders to obtain completed “economic need” questionnaires (the “Questionnaire”) from Paycheck Protection Program for-profit and nonprofit borrowers (“PPP Borrowers”) who borrowed $2 million or more in Paycheck Protection Program (“PPP”) loans. While the content of the Questionnaire remains subject to review and final approval by the Office of Management and Budget, PPP Borrowers should be prepared to complete the Questionnaire as part of the PPP forgiveness application submissions.

Economic Need Certification, Generally

As summarized in our prior Alerts regarding PPP loan eligibility and forgiveness[1], all PPP Borrowers were required, at the time of application, to demonstrate economic need for PPP funds, specifically certifying in good faith that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant”. In determining whether a PPP Borrower meets the need threshold, subsequent SBA guidance instructed borrowers to consider the state of its then-current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner not materially detrimental to the business.

Additional SBA guidance issued on May 13, 2020 provided a safe harbor for PPP Borrowers that, together with its affiliates, received PPP funds in an amount less than $2 million. Such PPP Borrowers are deemed to have made the economic need certification in good faith, on the basis that such category of borrowers were less likely to have had access to other sources of liquidity at the time the loan was applied for and obtained. The SBA further clarified that PPP Borrowers who obtained loans in excess of $2 million may still have an adequate basis for making the required certification, but will be subject to SBA review for compliance with program eligibility requirements set forth in prior SBA Interim Final Rules and the Borrower Application Form.

Loan Necessity Questionnaire

The SBA has already begun to distribute the Questionnaire to PPP lenders servicing PPP Borrowers with loans of $2 million or more. Not only does the Questionnaire impose substantial document production and certification requirements on PPP Borrowers, but it also requires PPP Borrowers to respond within only 10 business days from receipt of the Questionnaire. Most notably, the Questionnaire focuses not only on compliance at the time of application (and the veracity of related “economic need” certifications), but also the condition of the business and operations of PPP Borrower following receipt of funds.

The Questionnaire focuses primarily on the assessment of two operational conditions: business activity and liquidity.

  • Business Activity Assessment. With respect to business activity, PPP Borrowers are required to provide details relating to gross revenues in the second quarter of 2019 (or, for businesses not in operation in 2019, the first quarter of 2020) and 2020. In addition, PPP Borrowers are required to provide information relating to cash outlays necessitated in connection with mandatory shutdowns and/or significant operational alterations resulting from government mandates and emergency declarations issued throughout the pandemic. Note that the nonprofit questionnaire requires substantively similar information, with a focus on gross receipts from gifts, grants, contributions and other amounts.
  • Liquidity Assessment. The liquidity assessment contains a series of questions relating to cash flow, capital expenditures and distributions of the applicable PPP Borrower both at the time of application and thereafter. PPP Borrowers are required to disclose, among other things:
    • Cash and cash equivalents as of the last day of the calendar quarter immediately preceding PPP Borrower’s submission of its application;
    • Payment of dividends or distributions to the PPP Borrower’s owners;
    • Prepayment of debt during the Covered Period;
    • Employee compensation in excess of $250,000 on an annualized basis;
    • Ownership of 20% or more of PPP Borrower by any publicly traded company (together with name and market capitalization of any such publicly traded company) or any private equity firm, venture capital firm or hedge fund;
    • Information relating to subsidiaries, parents and affiliates of the PPP Borrower; and
    • Receipt of funds from any CARES Act program or other COVID-19 relief.

Again, the nonprofit questionnaire follows a similar form, with additional questions relating to cash, savings and temporary cash investments, types and values of endowment funds (including donor-restricted endowments, quasi-endowments or similar funds), and questions specific to health care service providers.

Conclusions and Considerations

The Questionnaire raises substantial concerns for PPP Borrowers, as it requires PPP Borrowers to consider current operational and liquidity factors which appear to go well beyond the SBA’s previous guidance with respect to the economic need assessment determined at the time of the application (and through the previous safe harbor periods). It is unclear whether this will be used as a screening mechanism to determine which loans require further review or if there is actually an intent to determine eligibility based upon subsequent events. Unless and until there is further guidance, PPP Borrowers with loans at or above the $2 million threshold should be prepared not only to certify to the information detailed above, but to gather, review and ultimately produce substantial documentation with respect to their responses at the time of submission of their PPP loan forgiveness application. While many PPP Borrowers are hoping for additional guidance prior to submitting their PPP forgiveness application, the SBA has not yet indicated if and when any such  further guidance will be issued.

We are closely monitoring the situation and will provide updated alert(s) as additional information becomes available. Our attorneys are available to guide you and answer any questions regarding the Questionnaire and related PPP considerations.


[1] For additional information, please see our prior alerts issued on April 24, 2020 (regarding SBA Frequently Asked Questions), May 13, 2020 (regarding SBA guidance with respect to the good faith certification), May 14, 2020 (regarding extension of the safe harbor deadline) and May 18, 2020 (regarding loan forgiveness).

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

 

Earlier this month, the U.S. Small Business Administration (the “SBA”) issued Procedural Notice Control No. 5000-20057 (the “Guidelines”), providing guidance with respect to M&A transactions involving entities with outstanding Paycheck Protection Program (“PPP”) facilities. This Alert summarizes the Guidelines as they relate to change of control and M&A transactions, specifically with respect to diligence review, transaction timing and SBA consent requirements.

Change of Ownership

For purposes of the PPP, a “change of ownership” is deemed to have occurred upon (i) the sale, transfer or other conveyance of (A) at least 20% of the common stock or other equity interests of a PPP borrower (including publicly traded companies), including to any affiliate or existing owner of such PPP borrower, or (B) at least 50% of the assets of a PPP borrower (calculated in terms of fair market value), in each case whether in one or a series of transactions, or (ii) the merger of any PPP borrower with or into another entity. In determining whether a PPP borrower satisfies the foregoing thresholds, the SBA will aggregate all sales and other transfers occurring since the initial date of approval of the PPP facility.

Regardless of the consummation of any change of ownership transaction, the PPP borrower will remain fully responsible for its obligations under its existing PPP facility, including all certifications made in connection with such borrower’s initial loan application. The Guidelines specifically reference compliance with the economic necessity certification as an example. Further, PPP borrowers remain responsible for obtaining, preparing and retaining all PPP documentation relevant to the loan, as required by its applicable PPP lender, and providing the same to the SBA upon request.

Prior to the closing of any change of ownership transaction, a PPP borrower must notify its PPP lender in writing of the proposed transaction, which notice must provide a copy of all proposed documentation contemplated to effect the transaction.

SBA Approval

Negotiations regarding transaction timing and structure must necessarily contemplate required SBA approvals upon a change of ownership. The Guidelines address the following circumstances under which prior SBA consent may or may not be required in addition to the prior written consent of the target company’s PPP lender.

  1. Generally, there are no restrictions on a change of ownership transaction if, prior to closing, (i) the PPP loan has been paid and satisfied in full, or (ii) the PPP borrower has completed the loan forgiveness process and (A) the SBA has remitted funds to PPP lender in full satisfaction of the loan, or (B) the PPP borrower has repaid the outstanding balance of the PPP loan in its entirety.
  2. SBA consent is not required under the following circumstances:
    • In the event that the change of ownership is structured as a sale or transfer of common stock or equity interests or as a merger, the PPP borrower may consummate such transaction without prior approval of the SBA if (i) the sale or transfer is of 50% or less of the common stock or equity interests of the PPP borrower, or (ii) the PPP borrower submits a forgiveness application indicating its use of all PPP proceeds, together with any required supporting documentation, to PPP lender, and a lender-controlled, interest-bearing escrow account is established with funds equal to the outstanding balance of the PPP loan. Upon completion of the forgiveness process, the escrow amount must be disbursed first to satisfy the outstanding PPP loan balance plus interest.
    • In the event that the change of ownership is structured as an asset sale, the PPP borrower may consummate such transaction without prior approval of the SBA if the PPP borrower submits a forgiveness application indicating its use of all PPP proceeds, together with any required supporting documentation, to PPP lender, and a lender-controlled, interest-bearing escrow account is established with funds equal to the outstanding balance of the PPP loan. Upon completion of the forgiveness process, the escrow amount must be disbursed first to satisfy the outstanding PPP loan balance plus interest. In this case, the PPP lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of consummation of the transaction.
  3. In the event that a change of ownership transaction fails to satisfy any of the foregoing conditions, the parties will be required to obtain SBA consent in connection with the same (and the PPP lender may not unilaterally approve the transaction). In such case, the PPP lender is responsible for submission of an approval request to the appropriate SBA Loan Servicing Center, setting forth in detail:
    • The reason that PPP borrower is unable to fully satisfy the PPP loan or escrow funds as described above;
    • Details of the proposed transaction;
    • A copy of the PPP Note;
    • Any letter of intent and the purchase agreement setting forth the obligations of the PPP borrower, seller (if an entity other than the PPP borrower), and buyer;
    • Information regarding any existing PPP loan obtained by buyer (if any); and
    • A list of all owners of 20% or more of the equity of the acquiring entity.

The SBA will review and provide a determination within 60 calendar days of receipt of a complete consent request, which will inevitably factor into the initial determination by the parties of transaction timing and target closing.

Transaction Considerations

In addition to the threshold consideration as to whether a change of ownership transaction requires prior authorization by the SBA, the Guidelines highlight several additional restrictions and obligations to be considered when structuring an M&A transaction and allocating risk under the definitive documents. Below is a high-level summary of those considerations:

  1. SBA may require, in its sole discretion, additional risk mitigation measures as a condition of its approval of any change of ownership transaction.
  2. SBA approval of the sale of 50% or more of the assets of any PPP borrower will be expressly conditioned on the assumption by the acquiring entity of PPP borrower’s obligations under the PPP loan (including responsibility for continued compliance). The purchase agreement drafted in connection with the transaction must address such assignment and assumption, or a separate assumption agreement must be submitted to the SBA.
  3. For all sales of common stock or equity interests or mergers, whether or not SBA approval is required, the PPP borrower or successor by merger, as applicable, will remain subject to all obligations under the PPP loan. In addition, the SBA will have full recourse against the new owners in the event they use the PPP funds for any unauthorized purpose.
  4. In the event that any new owner or successor in interest by merger, as applicable, has obtained its own PPP facility, then, upon consummation of any change of ownership transaction, the PPP borrower and new owner or successor, as applicable, are responsible for segregating and delineating PPP funds and expenses, and providing documentation to demonstrate compliance with PPP requirements under both PPP loans.
  5. The PPP lender must notify the applicable SBA Loan Servicing Center within 5 business days of consummation of the transaction of the identity of the new equity holders, such new holders ownership percentage and the tax ID number for any owner holding 20% or more of the aggregate equity in the business.

As we continue to see an uptick in M&A deal flow, it is critical that potential buyers consider the impact of requirements set forth in target’s PPP loan documentation as well as SBA change of ownership requirements as set forth in the Guidelines. The existence of outstanding PPP loans on both the buy-side and sell-side will have implications on transaction structure and timing, due diligence and the representations, warranties, covenants and indemnities contained in the purchase agreement and transaction documents entered into among the parties. Our attorneys are available to guide you and answer any questions regarding the Guidelines and related M&A transaction considerations.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

Easing of restrictions may be on the way for smaller issuers seeking to rely on “finders” to assist with their capital raising efforts.  On October 7, 2020, the U.S. Securities and Exchange Commission (the “SEC”) proposed a new limited, conditional exemption from broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) for “finders” who assist issuers with raising capital in private markets from accredited investors.  If adopted, the proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering with the SEC as brokers.  This proposed exemption might also allow certain existing registered broker-dealers to possibly withdraw their registration as well. The purpose of the proposed exemption is to help smaller businesses raise capital and provide regulatory clarity to the parties involved in such efforts.

The proposed exemption would create two classes of exempt Finders, Tier I Finders and Tier II Finders, and establish clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration.  Tier I and Tier II Finders would be permitted to accept transaction-based compensation under the terms of the proposed exemption, but each would be subject to certain conditions tailored to the permitted scope of their respective activities.

Tier I Finders would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12-month period.  A Tier I Finder would not be permitted to have any contact with a potential investor about the issuer.

Tier II Finders would be able to solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to:

  • identifying, screening, and contacting potential investors;
  • distributing issuer offering materials to investors;
  • discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and
  • arranging or participating in meetings with the issuer and investor.

Both Tier I and Tier II Finders would be subject to the following conditions in order to take advantage of the proposed exemption:

  •  the issuer is not required to file reports under Section 13 or Section 15(d) of the Exchange Act;
  • the issuer is seeking to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act of 1933 (the “Act”);
  • the Finder does not engage in general solicitation;
  • the potential investor is an “accredited investor” as defined in Rule 501 of Regulation D under the Act or the Finder has a reasonable belief that the potential investor is an “accredited investor”;
  • the Finder provides services pursuant to a written agreement with the issuer that includes a description of the services provided and associated compensation;
  • the Finder is not an associated person of a broker-dealer; and
  • the Finder is not subject to statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation.

Additionally, because Tier II Finders would participate in a wider range of activity and have the potential to engage in more offerings with issuers and investors, the SEC has proposed additional disclosure requirements and conditions.  These disclosure requirements, which include a requirement that the Tier II Finder provide appropriate disclosures of such Tier II Finder’s role and compensation, must be made prior to or at the time of the solicitation.  The Tier II Finder would also need to obtain from investors a dated written acknowledgment of receipt of the required disclosures prior to or at the time of any investment in the issuer’s securities.  The exemption would not apply to a number of activities, including resales of securities, due diligence, and negotiating terms of an investment.

To read the full proposal, click here.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

On August 26th, the Securities and Exchange Commission (“SEC”) adopted amendments to the “accredited investor” definition in Rule 501(a) of Regulation D, a key determinant for eligibility to invest in unregistered securities.

The amended definition expands access to private capital markets to a broader swath of potential investors, such as “knowledgeable employees” (with respect to investments in a private fund), those holding certain professional credentials or licenses (Series 7, 65 and 82, Chartered Financial Analysts and others that the SEC may designate from time to time), SEC and state registered investment advisers, exempt reporting advisers, as well as any entity, including limited liability companies, Native American tribes, funds and entities organized under foreign law, that own investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered, and family offices (and their “family clients”) with investments of at least $5 million, among others.  The amended definition also adds the term “spousal equivalent” for purposes of clarifying who can pool their finances to qualify as an accredited investor.

Notably, the net worth and income standards for individuals and entities under the definition were not updated – which is interesting given the focus in recent years over updating such amounts to take into account inflation – consistent with the thrust of the current amendments to expand access to investors not only based on their personal wealth, but also based on their level of financial sophistication.

These changes follow decades of growth in private capital markets and are expected to facilitate capital raising for early stage companies and private funds.

These amendments become effective 60 days after publication in the Federal Register.

See this link to the SEC’s press release for more information regarding the amended “accredited investor” definition.

As Delaware operates in Phase 2 of its economic reopening, the following are general guidelines applicable to offices which are not otherwise subject to industry-specific guidance.  The following applies as of June 15, 2020, the date that Delaware began Phase 2 of its economic reopening, as more fully set forth in the Twenty-First Modification of the Declaration of a State of Emergency for the State of Delaware:

  • Employers must enforce strict social distancing protocols.
  • Employers must exclude employees who (a) have been diagnosed with COVID-19, (b) are reasonably suspected to have COVID-19, or (c) have symptoms of COVID-19, such as fever, cough, shortness of breath, new loss of taste or smell, sore throat, aches or muscle pain, chills or repeated shaking with chills. Such employees shall stay home and not come to work until they are until they are free of fever (100.4 °F or greater using an oral thermometer), signs of a fever, and any other symptoms of COVID-19 for at least 24 hours, without the use of fever-reducing or other symptom-altering medicines (e.g., cough suppressants). These employees should notify their supervisor and stay home if they are sick.  Daily health screenings of employees are strongly recommended before work (and mandated for high risk businesses).  Symptomatic employees must not physically return to work until cleared by a medical professional.
  • Employers must prohibit employees who have been told they must be isolated or quarantined from on-premises work until isolation or quarantine status is discontinued by the DPH.
  • Employers are encouraged to continue teleworking. Employees who have been working from home should continue working from home unless there is a substantive change to business operations in Phase 2 (e.g. a business was closed, but now it is open).
  • All surfaces touched by visitors, including doors, seating restrooms, and elevators must be disinfected using an EPA-approved disinfectant every 15 minutes to 2 hours.
  • Hand sanitizer must be used by employees at frequent intervals during any service, appointment or scheduled event, including at a minimum after contact with surfaces touched by others, after incidental contact with a visitor, and before preparing or distributing food or drink.
  • Employees must social distance from each other while working. This can be accomplished through spacing or moving workstations, staggering shifts or other means.
  • Businesses must make hand sanitizer or handwashing stations readily available for all employees, patrons, and visitors throughout the business’ location, including at each entry and exit at a minimum. Hand sanitizer must be composed of at least 60% ethanol or 70% isopropanol.
  • Businesses must stagger appointments or other scheduled gatherings and events to allow for a thorough cleaning and disinfecting according to CDC guidelines of any public spaces before the next appointment or other scheduled gathering or event begins.
  • Employers must post signs on stopping the spread of COVID-19, hand hygiene and wearing cloth face covering.

Additionally, owners of buildings used for commercial offices must adopt policies that, at a minimum, implement the following cleaning protocols:

  • Clean and disinfect high-touch areas routinely in accordance with CDC guidelines, particularly in spaces that are accessible to staff, customers, tenants, or other individuals, and ensure cleaning procedures following a known or potential exposure in a facility are in compliance with CDC recommendations.
  • Maintain cleaning procedures in all other areas of the facility.
  • Ensure that the facility has a sufficient number of workers to perform the above protocols effectively and in a manner that ensures the safety of occupants, visitors, and workers.

As offices reopen, they are required to be compliant with Federal, State and local safeguards for its employees, visitors and operations, and should be guided by requirements and recommendations, as applicable, specified by Delaware Executive Orders, Occupational Safety and Health Administration, Centers for Disease Control and Prevention, and Equal Employment Opportunity Commission.

The above relate exclusively to professional and commercial offices operating in Delaware. As noted, there may be additional and different restrictions and requirements with respect to other industries permitted to be open at this time. While Governor Carney announced on June 25, 2020 that Phase 3 would be delayed in light of concerns about instances of noncompliance in Delaware and surging COVID-19 cases in other parts of the country, it is expected that when Delaware enters Phase 3, restrictions on businesses will be further relaxed. Requirements continue to evolve and we will continue to monitor Delaware’s economic reopening.


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.