In its most recent round of guidance, the SBA stated succinctly that private equity funds and hedge funds are not eligible for relief under the Paycheck Protection Program. The guidance is brief and lacks most important details, leaving those who have already applied (or had hoped to apply for this most recent round of funding) with more questions than answers.

On April 24, 2020, the SBA issued another Interim Final Rule regarding the PPP, titled broadly “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility.” Item 2a states succinctly:

• Is a hedge fund or private equity fund 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.

Let’s be clear – this is a new rule and not additional clarification of previous rules or regulations of the CARES Act. Arguably it is directly contrary to the CARES Act, which was explicit that all businesses would be eligible so long as they had 500 or fewer employees. § 1102(a)(2)(D)(i).

Putting aside whether this rule promotes or hinders the goals of the CARES Act to support small businesses, or whether the drafter understands the investment management industry or the fact that just because you manage money does not mean that you have unlimited resources, the limited nature of the rule is beyond question. For example, what is considered a “hedge fund or private equity fund”? Does it include venture capital, private credit funds, long only funds, non-fund investment managers? Presumably it does not, but should employers in those industries anticipate that they could be the next target? And what should private equity and hedge funds that have already applied for or received PPP funds do now? They applied in good faith under the laws and rules in place at the time – do they now need to return the funds? We will keep an eye out for the additional guidance that will undoubtedly be released.