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Hedge Funds and Private Equity Firms May Not Participate in the Paycheck Protection Program (PPP)

In a supplemental interim final rule issued on April 24, 2020, the Small Business Administration (SBA) ruled hedge funds and private equity firms ineligible to receive loans under the Paycheck Protection Program (PPP). According to the guidance, hedge funds and private equity firms are primarily engaged in investment or speculation, and thereby precluded from participating in the program under existing SBA regulations. The supplemental guidance was further held to be consistent with the legislative intent of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Contrary to statements made by congressional leaders at the time of enactment, the supplemental rule also confirmed the existing “affiliation rules” apply to portfolio companies of private equity firms. Accordingly, portfolio companies are advised to review applicability of the affiliation rules in certifying the number of employees, in addition to the certification with respect to the need for financial support due to economic uncertainty related to the ongoing COVID-19 pandemic.

Ineligible hedge funds, private equity firms, and portfolio companies that applied for a PPP loan prior to April 24, 2020, and repay the loan amount in full by May 7, 2020, are provided a safe harbor regarding the certifications made on the PPP loan application. Under the safe harbor provision, ineligible borrowers who certified eligibility and a need to support ongoing operations due to economic uncertainty related to the COVID-19 pandemic will be deemed to have made the certifications in good faith. While not explicit, the ruling implies ineligible borrowers complying with the safe harbor provisions will not be subject to further scrutiny or penalties. 

If you have questions or would like to discuss further, please reach out to a Wolf & Company advisor.