SBA Digest: New Regulations Impacting EPC Partner Buyouts

The Small Business Administration ("SBA") is currently working on the next version of Standard Operating Procedures ("SOP") 50 10, which will include information related to the most recent regulatory changes for SBA 7(a) program participants. The SBA intends for the new SOP to take effect on January 1, 2018. However, several regulatory changes will take effect on September 20, 2017, including the highly anticipated changes related to the Eligible Passive Company ("EPC") Rule. A full version of the rules and regulations can be found at https://goo.gl/VmqPsK.

The new regulations allow SBA 7(a) loan proceeds to be used to finance a change of ownership between existing owners of an Eligible Passive Company ("EPC"). See 13 CFR 120.111. However, the regulations do not intend for this change to be used to finance a change of ownership when the EPC has only been in existence for a brief period of time. Instead, the regulations serve to assist businesses that might otherwise cease operations due to the withdrawal of an owner. This change expands options for borrowers and clarifies eligibility factors for banks and lenders. For more information on the current EPC rule, see https://goo.gl/bqizpz and stay tuned for further guidance in the new SOP on when loan proceeds may be used to finance a change of ownership between existing owners of an EPC.

The regulations also clarify a former rule change by stating that when an Operating Company ("OC") is a co-borrower on a loan, it can use loan proceeds for working capital and/or to accomplish an asset purchase. Finally, the regulations reinforce two SOP requirements: (1) that lease payments made to the EPC by the OC cannot exceed the loan payments to the lender, although the lease may additionally require the OC to cover the EPC's expenses of holding the property, such as insurance, maintenance, and taxes; and (2) that a lender may require an individual/entity with less than 20% ownership to serve as a guarantor of the loan.

The EPC rule is an exception to the general prohibition of loan being made to passive companies that do not actively use, occupy, or improve the assets acquired with loan proceeds. The new regulations, effective on September 20, 2017, will allow SBA 7(a) loan proceeds to be used to finance a change of ownership between existing owners of an EPC.

For more information on the EPC rule, the new regulatory changes, or other commercial lending matters, please contact:

Chris Poling: cpoling@lewis-kappes.com

Kevin Morrissey: kmorrissey@lewis-kappes.com

Scott Oliver: soliver@lewis-kappes.com

Disclaimer: This article is made available for educational purposes only and is not intended as legal advice.