Hedge Funds and Private Equity Firms Deemed Ineligible for PPP Loans by SBA

The same day that legislation (April 24th) increasing funding by $310 billion for the Paycheck Protection Program (“PPP”) was signed into law, the Treasury Department issued a new Interim Final Rule.  This Final Rule clarified certain types of businesses that are eligible for PPP loans. Specifically, the Treasury has determined that hedge funds and private equity firms are ineligible businesses for purposes of PPP.

The Final Rule states that hedge funds and private equity firms are primarily engaged in investment for speculation, and such businesses are therefore ineligible to receive a PPP loan.  The rule goes on to state that the Small Business Administration (“SBA”) along with the Treasury Secretary do not believe Congress intended for these types of businesses to be eligible. This determination is based on the existing SBA rules, which generally prohibit hedge funds and private equity firms from applying for SBA loans under Section 7(a) of the SBA Loan Program.

Anchin Observation: Although not specifically identified, this newly issued Interim Final Rule leads one to believe that other investment vehicles such as funds of funds, venture capital funds and real estate funds may not be eligible for PPP loans.

The Final Rule also addressed whether a portfolio company of a private equity firm would be eligible for a PPP loan. Portfolio companies would be considered eligible for a PPP loan only if they satisfied the affiliation rules with respect to ownership and control. The rule went on to state that portfolio companies should carefully review the certification on the PPP borrower application stating that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”  It is possible that, upon review of the loan, the SBA may look to the private equity firm’s balance sheet to determine if the loan was necessary.

Hedge funds and private equity firms that have applied for a PPP loan prior to April 24th, or have already received a PPP loan, have until May 7th to repay the loan in full.  For borrowers who repay the PPP loan in full by that date, it will be deemed that their original application was submitted in good faith based on a misunderstanding or a misapplication of the rules.

We suggest that hedge funds and private equity firms carefully consider this additional guidance and review it with their legal counsel in determining whether to apply for PPP loans as well as whether to repay any PPP loans already received or approved. For additional information, please contact your Anchin Relationship Partner or our COVID-19 Resource Team at [email protected].

Disclaimer: Please note this is based on the information that is currently available and is subject to change.