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Law360 (April 24, 2020, 8:08 PM EDT) -- Hedge funds and private equity firms are not eligible for a federal program intended to help small businesses weather the COVID-19 pandemic, the U.S. Small Business Administration said in interim final rules issued Friday.
Hedge funds and private equity shops are primarily investors and therefore don't qualify for the Coronavirus Aid, Relief, and Economic Security, or CARES, Act's loan program known as the Paycheck Protection Program, the agency said. The rule aims to clarify a running debate over who should receive such loans.
"Hedge funds and private equity firms are primarily engaged in investment or speculation," the SBA said. The agency "does not believe that Congress intended for these types of businesses … to obtain PPP financing," the rule said.
But private equity portfolio companies could be eligible for the program under certain circumstances, the SBA said. The agency emphasized the affiliation criteria it outlined in previous guidance, which considers how much control an investor has over the company.
"The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control," the rule said.
But if a portfolio company also counts a Small Business Investment Company among its backers, then the affiliation rule does not apply, even if it has other investors that aren't SBICs, the rule said.
Would-be borrowers should also "carefully review" the PPP application form, in which a business must certify that it needs the loan to support ongoing operations, the SBA said.
The U.S. Department of the Treasury issued a similar guidance on Thursday, cautioning deep-pocketed companies about borrowing money through the program after several national chains sparked controversy by obtaining PPP loans. President Donald Trump on Friday signed a new bill to inject $310 billion into the PPP program after the first $350 billion was exhausted in less than two weeks.
But Friday's rules loosened restrictions on gambling businesses, which will likely be a welcome move for small tribal casinos. The Flandreau Santee Sioux Tribe of South Dakota sued the SBA on Thursday, accusing the agency of violating the Administrative Procedure Act by initially excluding tribal casinos and lenders from PPP. Two more tribes joined the suit in an amended complaint Friday.
Representatives for the SBA did not immediately respond to requests for comment on Friday.
--Additional reporting by Jon Hill, Emma Whitford, Andrew Kragie and Tom Zanki. Editing by Alanna Weissman.
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