Best Practices: Understanding Complete Divestiture under SOP 50 10 8 and Subsequent Notices

With the issuance of SOP 50 10 8 and subsequent notices on citizenship, Lenders are increasingly evaluating complete divestiture by an owner of an Applicant.  Under the current citizenship rules, the Applicant is ineligible if any Associate (as defined in 13 CFR § 120.10 and SOP 50 10 8 at p. 403) is an Ineligible Person (defined in SOP 50 10 8 and revised by SBA Procedural Notice 5000-876626, effective March 1, 2026 and SBA Procedural Notice 5000-876777, effective March 1, 2026), unless that Ineligible Person completely divests their ownership interest prior to the issuance of the SBA loan number.  The original language is contained in SOP 50 10 8 at page 28 and set forth below (emphasis added):

Six-month lookback: The Applicant business is ineligible if any Associate of the business commencing 6 months prior to the date of issuance of the SBA loan number is an Ineligible Person, unless the Ineligible Person completely divests their ownership interest prior to the date of issuance of the SBA loan number and severs any relationship with the Applicant (and any associated Eligible Passive Company and/or Operating Company) in any capacity, including being an employee (paid or unpaid), for the life of the 7(a) or 504 loan.

SBA Procedural Notice 5000-876626, effective March 1, 2026, specifically revised the six-month lookback rule to remove the requirement that the Ineligible Person sever all relationships with the Applicant, allowing the Ineligible Person to be involved with the business going forward, including managing and working in the business.  Based upon the aforesaid notice, it appears that the only requirement is for the Ineligible Person to completely divest their ownership interest prior to the issuance of the SBA loan number.

Neither SOP 50 10 8 nor subsequent notices provide guidance on how the Lender should document that the Ineligible Person has completely divested their ownership interest.  Although not all inclusive, below are steps that the Lender can take to document its file.

Discussion with the Applicant and Ineligible Person

The Lender should start with a discussion with the remaining owner(s) of the Applicant and the Ineligible Person to review the SOP requirements with them and to confirm that the Applicant and the Ineligible Person understand that the Ineligible Person must give up all ownership interest in the Applicant and that the Ineligible Person cannot be an owner for the life of the SBA loan.  The Lender should confirm this understanding before proceeding with the SBA loan.

Entity Documents

When an Ineligible Person divests their ownership interest, the Lender must obtain the revised entity documents confirming that the Ineligible Person is no longer an owner/ stock holder/ member of the Applicant.  For a corporation, the Lender should obtain the updated stock certificates, stock ledger and corporate minutes detailing the ownership change.  For a limited liability company, the Lender should obtain the amended operating agreement and updated membership interest certificates (if the LLC is certificated) showing that the Ineligible Person no longer has any ownership interest.  The Lender should review the formation document (articles of incorporation/ certificate of organization) to see if any changes need to be made and check the Secretary of State website to confirm that the Ineligible Person has officially been removed.  An amendment to the formation document would be needed if the Ineligible Person is still listed as an owner.

Franchise Documents

When an Ineligible Person divests their ownership interest and the Applicant is a franchisee, the Lender should review the franchise agreement to ensure that the ownership of the franchisee has been updated to remove the Ineligible Person from the franchise agreement.  If the Ineligible Person is still listed as an owner in the franchise agreement, then the Applicant should provide the new ownership structure to the franchisor and request an amendment to the franchise agreement.  Notably, the Ineligible Person may remain a key employee or manager of the Franchise. Lenders should review the franchise documents as early in the process as possible as it could take several weeks to amend a franchise agreement.

Lease Documents

Often times, lease agreements require notice to the landlord if the tenant has a change of ownership.  When an Ineligible Person completely divests their ownership interest in the Applicant, the Applicant/ tenant may be required to notify their landlord of this change of ownership.  When discussing the divestiture with the Applicant and the Ineligible Person, the Lender could remind them to notify their landlord of the ownership change in order to avoid any unnecessary lease complications.

A Lender should not rush to obtain the issuance of the SBA loan number if they know that an Ineligible Person is in the process of divesting their ownership interest.  SOP 50 10 8 is very clear that the Ineligible Person must divest all ownership interest in the Applicant prior to the issuance of the SBA loan number.  The Lender should take care to discuss the complete divestiture with the Applicant and the Ineligible Person, to review all entity, franchise and lease documents and to document these efforts in the Lender’s file.

For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.