VIEWPOINT

The U.S. Small Business Association (SBA) recently issued compre-

 ensive guidance and procedures for borrowers with Paycheck Protection Program (PPP) loans regarding changes in the borrower’s ownership or sales of their assets. The guidance went into effect on Oct. 2, 2020 and is available here: https://home.treasury.gov/system/files/136/PPP–Procedural-Notice–PPP-Loans-and-Changes-of-Ownership.pdf.

Importantly, prior to the closing of any change-of-ownership transaction (as defined below), a borrower is required to notify its lender in writing of the contemplated transaction and provide the lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. In some situations, as further summarized below, SBA notice and approval are also required.

Further, regardless of any change in ownership, the borrower remains responsible for all performance obligations under the PPP, all certifications made in its application (including the certification for economic necessity), and compliance with all other PPP requirements. The borrower also remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing these documents to its lender or to the SBA upon request.

The remainder of this article provides details for lenders and borrowers when a borrower is entering into a change-of-ownership transaction.

What constitutes a change of ownership?

The SBA defines a “change of ownership” as:

1. At least 20 percent 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;

2. The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or 

3.  A PPP borrower is merged with or into another entity.

What are the procedures when there is a change in ownership?

The SBA describes procedures for borrowers and lenders to follow depending on the circumstances detailed below.

1. If the PPP note is fully satisfied, there are no restrictions on a change of ownership if, prior to closing the sale or transfer, the borrower has:

a) Repaid the PPP note in full; or

b) Fully completed and submitted the PPP forgiveness application, and:

• The SBA has remitted funds to the lender in full satisfaction of the PPP note; or

• The borrower has repaid any remaining balance on the loan.

2. If the PPP note is not fully satisfied, the SBA has developed rules for two circumstances. The first circumstance is where SBA prior approval is not required and the second is where prior approval is required.

a) SBA approval is not required in the following situations:

1. For a stock sale or a merger, if the sale or other transfer is of 50 percent or less of the stock or other ownership interest of the borrowers; or the borrower completes a PPP forgiveness application, and the lender establishes an interest-bearing escrow account with funds equal to the outstanding balance of the PPP loan.

2. For an asset sale, only if the borrower completes a PPP forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

b) SBA approval is required if the PPP borrower cannot satisfy the foregoing conditions. In these cases, the lender may not unilaterally approve the change of ownership. Borrowers must supply, and lenders must submit to the SBA, the following information for SBA approval:

1. The reason that the PPP borrower cannot fully satisfy the PPP note;

2. The details of the requested transaction;

3.  A copy of the executed PPP note;

4. Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the borrower, seller (if different from the borrower) and buyer;

5. Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

6. A  list of all owners of 20 percent or more of the purchasing entity.

For an asset sale of 50 percent or more of the assets, SBA approval will be conditioned on the purchasing entity assuming all of the borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The SBA states that, in such cases, the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.

For all transactions, regardless of whether SBA prior approval is needed, the borrower (and, in the event of a merger of the borrower into another entity, the successor to the borrower) will remain subject to all obligations under the PPP loan. In addition, if the new owner(s) use PPP funds for unauthorized purposes, the SBA will have recourse against the owner(s) for the unauthorized use.

Lenders must also notify the SBA within five days of completion of the transaction.

What if I am the buyer, and I already have a PPP loan?

The SBA explains that if any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction: (1) in the case of a purchase or other transfer of common stock or other ownership interest, the borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each borrower, and (2) in the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements regarding both PPP loans.

What if I already closed an asset sale or change-of-ownership transaction prior to this guidance?

The guidance does not address how transactions completed prior to Oct. 2, 2020 will be handled by the SBA. Regardless, borrowers should contact their lenders to apprise them of closed or pending transactions, if such transactions were not previously disclosed to the lender.  

Jeffrey B. Scheer and Roderick C. McDonald are members (partners) in the Syracuse–based law firm of Bond, Schoeneck & King PLLC. Contact them at jscheer@bsk.com and rmcdonald@bsk.com, respectively. Kate Chmielowiec and Elizabeth L. Lehmann are associate attorneys in the firm’s Syracuse office. Contact them at kchmielowiec@bsk.com and elehmann@bsk.com, respectively.

VIEWPOINT:

With the fast-paced evolution of Technology and continuously shifting business landscape, it’s always been a challenge for business leaders to identify and manage the various risk factors that threaten their business, employees, and customers. The methods of fraud and cyberattack have now changed again as businesses quickly pivot to withstand the impacts of COVID-19, seek new forms of financial aid, and transition between remote work and offices. 

A survey by the Association of Certified Fraud Examiners conducted following the 2008 recession, found that 80 percent of anti-fraud professionals said they believe fraud levels increase in times of economic distress. A more recent survey by the same organization found that 92 percent of fraud examiners expect to see a further increase in the overall level of fraud during the next year. 

The current environment is ripe with the common factors that align to cause a person to commit fraud: pressure/motive (such as financial hardship), perceived opportunity (less oversight and distracted leadership), and rationalization (the ability to justify the crime to themselves). As these risks continue to increase, there are several emerging types of fraud business leaders should be looking out for, including the following.

Occupational employee fraud: With employees working from home, working in high-pressure environments with less internal controls, increased segregation of duties, and decreased oversight, as well as possible financial pressure on individual employees, instances of occupational fraud are on the rise. This can include fraudulent reporting of standard time and overtime; inappropriate access to business bank accounts, check stock and business credit cards; and skimming of cash receipts/payments, AR write-offs, and bad debt. 

Financial-institution fraud: Under the circumstances created by COVID-19, many businesses have been forced to utilize different channels to obtain necessary funds. As such, these businesses have become more susceptible to new account fraud, identity theft, imposter schemes, and money mule schemes — moving money on behalf of another entity/person due to COVID-19 limitations.

Small Business Administration (SBA) loan fraud: The SBA estimates that, as of July 2020, more than 70 percent of U.S. small businesses have been supported by the Paycheck Protection Program (PPP). With so many businesses working through the program, there are many types of fraud that can occur, including PPP applications with manipulated or fraudulent supporting documentation; PPP applications in different names that contain nearly identical application information and supporting documentation; fake businesses established during the pandemic applying for PPP funds; and loan advances or proceeds deposited into an account, and then immediately withdrawn in cash, wired out, transferred to an investment account or used to purchase luxury assets.

COVID-19-related fraud: There are also types of fraud directly related to the health and safety challenges of COVID-19, including virus and antibody-testing fraud schemes, PPE and hand-sanitizer fraud schemes, and price gouging on standard supplies and inventory.

Cyber fraud: Since COVID-19 took hold in the U.S., the FBI has fielded about 4,000 complaints of cybercrime per day — an increase of 400 percent. These incidents constitute any fraudulent crime which is conducted via a computer or computer data. Criminals use the cyber world to gain access to victims’ personal identity, their online accounts, and their bank accounts.

One way to start the prevention process for all types of fraud is through an assessment asking leadership the following questions: 

• Is ongoing anti-fraud training provided to all employees of the organization? 

• Is an effective fraud reporting mechanism in place? 

• Are fraud-risk assessments performed to proactively identify and mitigate vulnerabilities to internal and external fraud? 

• Are strong anti-fraud controls in place and operating effectively? 

• Does the internal audit department have adequate resources and authority?

In understanding the different types of possible fraud and gaps in current security measures, business leaders can learn to efficiently reduce known risks through both planning and implementation of tools and resources. Fraud prevention starts at the top. Leaders must set the appropriate tone, create a positive work environment, and effectively distribute and communicate a written code of ethics to all employees. Businesses should not underestimate the importance of simple steps like checking employee references, consistently examining bank statements, and having an active fraud hotline.

As it relates to cyber fraud specifically, businesses have a number of administrative and technical control steps they can take to reduce their risk, including conducting employee security-awareness training, ensuring vendors and third-parties are secure through vendor risk management, incident-response planning, updated policies and procedures, internal and external penetration testing, security patching every month, and implementing anti-malware, firewalls, and intrusion prevention on all endpoints to name a few. 

It’s not a matter of if an incident of fraud will occur but when. In that event, business leaders must have a plan in place to react quickly but without panic. Businesses should establish — and consistently re-evaluate and update — an incident-response plan that will allow them to efficiently prepare, detect, contain, investigate, remediate, and debrief in any instance of fraud or cyberattack.

There will always be new ways for fraudsters and cyber-criminals to commit crimes. Businesses should stay alert and aware of existing and emerging threats, implementing all the prevention measures they can and preparing for the worst, so a fraud incident doesn’t cause irreparable damage to the organization.      

Tim Ball is an executive VP in The Bonadio Group’s government compliance and labor division and a certified fraud examiner (or CFE). He provides a wide range of consulting, forensic, and auditing services. John Roman is a practice lead at The Bonadio Group and president and COO of Bonadio’s information risk management and cybersecurity division, FoxPointe Solutions. In his role at FoxPointe, Roman is responsible for all aspects of the operations of a national cybersecurity consultancy.

A healthy ego can be a good thing, allowing people to take pride in who they are and what they do.

But when business leaders allow an unhealthy ego to drive them, enormous problems are certain to follow.

A big ego can be toxic. Your ego should not feed on the thought, “I’m bigger and more important than you.” Instead, your ego should thrive on the thought, “I’m big because I’ve made the best of myself and I know you can do the same.” It’s the difference between the ego of a big head and the ego of a big heart. And frankly, we need more leaders who lead from the heart.

Here are a few tips to help leaders get started on the road to accomplishing that:

• Cultivate resourceful mindsets in yourself and others. There are no unresourceful people, but there are unresourceful states of mind. They include fear, doubt, and stress. People are often unresourceful when they feel overwhelmed, or when they become judgmental. Resourceful states are the positive ones: You are confident, empathetic, playful, energetic, enthusiastic, curious, joyful, loving, engaged, and grateful.

• Play to your strengths. People too often focus on weaknesses. We’re always trying to fix what’s wrong, We feel deficient, so we try to close the gap, but when people focus on their weaknesses, they end up acting defensively — pointing fingers and blaming others. By contrast, when people focus on strengths, they’re celebrating what is right. We feel engaged, we collaborate, and we find job satisfaction. We feel a sense of joy, flow, energy, and fulfillment. Each of us has strengths that are unique and enduring, and it is in our strengths that we have the greatest room for growth.

• Don’t let challenges overwhelm you. Business leaders — and people in general — have a choice when difficulties emerge. We can look at our challenges as insurmountable, and that’s what they will become. Or, we can assume there are solutions out there for us to find — and they will come to us. Yes, work takes effort, but it doesn’t have to be onerous. The effort can be so much fun that it seems to be no work at all.

Can we control everything? Absolutely not. Life can happen at any moment, good, bad, or ugly. But do we want to go through life in a cautious, negative state, always looking out for something bad that’s going to happen and perhaps even bringing it on? 

Or do we rewire ourselves so that we see it all as part of the ride? What we can control is how we respond. We can choose the mindset and the mood that we wake up with every morning.      

Kimberly Roush is founder of All-Star Executive Coaching (www.allstarexecutivecoaching.com), which specializes in coaching C-level and VP-level executives from Fortune 100 companies to solo entrepreneurs. She also is co-author of “Who Are You… When You Are Big?” Roush is a former national partner with a “Big 4” public accounting firm, bringing more than 30 years of business experience to her coaching including extensive work with C-suite executives, boards of directors, and audit committees.