As the Small Business Administration began accepting applications on Monday for loans under the second round of financing for the Paycheck Protection Program, private equity firms and hedge funds will not be eligible.
The SBA released additional guidance for the program on April 24, settling the questions of some private equity and hedge fund managers who believed that they might be eligible.
Guidance calls out speculators
In the SBA’s commentary, businesses that are primarily engaged in investment or speculation are ineligible to receive a PPP loan. The SBA goes on to say that Congress intended for these types of businesses not to be eligible to apply for this loan program. Congress approved $349 billion for the program on April 3, but that original amount was exhausted in less than two weeks. It has since been increased by $310 billion, and applications started on Monday.
Portfolio companies can still apply but…
Portfolio companies can still apply for the PPP loans, but need to consider the affiliation rules. These affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. If affiliation does apply and the controlled group has 500 employees or fewer, they are eligible to apply for these loans.
Affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership.
In a prior article, we wrote that the alternative-size standard might be applicable to some portfolio companies but that this question needs further analysis and consultation with legal counsel and a third party lender. The affiliation rules would still need to be considered.
Applicants to the PPP loan program will not be subject to the affiliation rules if they have received funding from an SBA-licensed Small Business Investment Company, or SBIC.
The guidance goes on to reaffirm that in addition to any applicable affiliation rules, eligible borrowers must be able to make the required certification on the loan application that the current economic uncertainty makes this loan necessary to support ongoing operations. The SBA is warning applicants that they should review and document the factors that would support the current economic uncertainty if ever audited by the SBA.
Looking ahead
A safe harbor is available to managers who received funding before April 24 and find themselves now ineligible for the Paycheck Protection Program. The guidance states that ineligible businesses that received a PPP loan must return the money or face further examination by the SBA.
As long as the loan is repaid in full by May 7, the borrower will be deemed by the SBA to have made the required certification in good faith. Meeting this date will result in no future enforcement action by the SBA.
Portfolio companies that received PPP loans will need to take a hard look to determine if they meet the standards of the good faith certification. If not faithful to the parameters of the program, they will have an opportunity to return any funding by May 7 to avoid further scrutiny. Legal consultation is crucial during this process.
The takeaway
Recent guidance by the SBA regarding the application of the Paycheck Protection Program to private equity firms and hedge funds provided clarification to managers about their eligibility. We are now certain these managers are ineligible, but underlying portfolio companies still have a chance to apply during this second round of funding by the federal government.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
