Regulatory Update: PPP Loans

Last month, the U.S. Treasury Department released a rule clarifying that PPP loans are not intended for hedge fund or private equity firms. The rule states in relevant part:

“2. Clarification Regarding Eligible Businesses

  1. Is a hedge fund or private equity firm eligible for a PPP loan?

No. Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.”

The rule goes on to say that loans to private equity portfolio companies are subject to the Small Business Association’s (SBA) “affiliation rule.”

Borrowers must certify in good faith that their PPP loan request is necessary to support their ongoing operations, taking into consideration their current business activity and their ability to access other sources of liquidity.

According to the rule (in relevant part), “the affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. However, in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483) stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Ineligible firms who received loans have been granted “safe harbor” if funds are returned by May 14, 2020 – an extended deadline.

“SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.”

Separately, the Securities and Exchange Commission (SEC) has issued a FAQ for advisers related to COVID-19, which includes a compendium of regulatory relief. Without reference to the ineligibility guidance for PPP loans above, it also states that adviser recipients of PPP loans may have to disclose the loan to their clients, especially if used to pay salaries of employees in the advisory function.