Paycheck Protection Program: Considerations for Investment Advisors
About two weeks ago, the $349 billion that Congress appropriated for the Paycheck Protection Program (“PPP”) was depleted, as a deluge of businesses applied for those loans. It became readily apparent that the initial PPP appropriation was insufficient. To address that problem, on April 24, 2020 the President signed the Paycheck Protection Program and Health Care Enhancement Act, which provides an additional $310 billion for continued PPP loan funding. Like the initial round, this additional funding will be allocated on a first-come first-served basis. Thus, the second round may be depleted even more quickly than the initial round, because thousands of applications have already been submitted to lenders, but had not been funded by the time the initial $349 billion appropriation ran out.
In addition, the U.S. Small Business Administration (“SBA”) issued a new Interim Final Rule (the “Rule”) on April 24, 2020, and updated its Frequently Asked Questions as of April 26, 2020 (the “FAQ”).
Of particular note to investment advisors, the Rule states that hedge funds and private equity firms are ineligible to receive a PPP loan because they are primarily engaged in investment or speculation. The entire text of this portion of the Rule is below:
The Rule does not explicitly define the terms “hedge fund” and “private equity firm,” so it is not clear whether this Rule also applies to investment funds’ affiliated investment management entities. However based upon policy considerations and the recent clarifications made by the SBA and the Treasury, we believe that this Rule could apply to all investment funds and the management entities of these funds. To the extent these affiliated entities are not “primarily engaged in investment or speculation,” they may have a colorable argument that they are eligible for PPP loans. However, it is also quite possible that the SBA will deem these entities to be ineligible “hedge funds” or “private equity funds.” Future rulemaking could clarify this issue.
The Rule also clarifies that the SBA’s affiliation rules, which appear in 13 CFR 121.301(f), apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. Accordingly, portfolio companies are not per se ineligible to apply for a PPP loan, just because they are portfolio companies.
The FAQs that were issued on April 23, 2020 provide that businesses “owned by large companies with adequate sources of liquidity to support the business’s ongoing operations” can be eligible for PPP loans. However, applicants must also be able to certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In determining whether to submit a PPP application, these businesses should consider their ability to access other sources of liquidity to support their ongoing operations in a manner that is not significantly detrimental to the business. In a similar vein, the FAQs also state that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
The Rule contains a “safe harbor” for ineligible businesses that received a PPP loan before the April 24, 2020 issuance of the Rule and repay the loan in full by May 7, 2020. These businesses will be deemed by SBA to have made the “economic uncertainty” certification in good faith. In other words, if a business that became ineligible for a PPP loan because of the April 24 Rule returns its PPP loan in full by May 7, the SBA will not take any action against that business.
Businesses that have received any loan funds should review their current business activity and ability to access other sources of liquidity to determine whether they have made the required certifications “in good faith” given the Rule and the updated FAQs. For businesses that plan to apply for a PPP loan, the same considerations must be made before applying and accepting any funds. Loan recipients should (1) consider reconvening prior to May 7, 2020, to determine whether they still consider their certification of need to be accurate and (2) gather appropriate documentation that supports how the borrower meets that standard.
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