Hedge Funds Ruled Ineligible for U.S. Small Business Rescue
Hedge Funds Aren’t Eligible for U.S. Small Business Rescue Loans
(Bloomberg) -- Hedge funds aren’t eligible for a signature U.S. rescue loan program, the government made clear Friday, potentially quelling a barrage of outrage over the possibility that well-heeled traders might beat out struggling small businesses for emergency funding.
The Small Business Administration, in consultation with the Treasury Department, determined that because hedge funds are primarily engaged in speculative investments, the firms shouldn’t be entitled to Paycheck Protection Program loans. The prohibition also applies to private equity firms, according to guidance posted on Treasury’s website.
The Trump administration does not believe that Congress intended those types of businesses, which are generally ineligible for SBA loans under existing regulations, to qualify, according to the guidance. Concern that hedge funds might tap the PPP program amid the coronavirus crisis has triggered a backlash on Capitol Hill and around the country. Big hedge fund investors -- including state pension funds -- have issued stern warnings to the industry about seeking financing.
Congress this week passed a relief bill that President Donald Trump signed Friday that includes an additional $320 billion for the program, which provides loans of as much as $10 million for payroll costs and other expenses to keep workers on company payrolls amid state stay-at-home orders.
Returning Loans
The initial $349 billion appropriated for the program when it launched on April 3 ran out in just 13 days, after loans were approved for more than 1.6 million small businesses, according to the SBA.
Some public companies that reported receiving PPP loans, including Ruth’s Chris Steak House’s parent Ruth’s Hospitality Group Inc. and Shake Shack Inc., decided to return funds this week after facing criticism. It’s not clear whether hedge funds might have obtained loans because most aren’t publicly traded, meaning they don’t face the same disclosure obligations.
In early April, law firms began hosting Webinars and sending out alerts to explain to hedge funds how they might be able to access SBA loans. Accounting firms also reached out to funds to provide similar advice.
Fund Applications
Some hedge funds did apply, filling out forms attesting that they have fewer than 500 employees and certifying that the “current economic uncertainty makes this loan request necessary to support the ongoing operations,” Bloomberg reported earlier this month.
Hedge funds are designed to employ as few people as possible so star traders don’t have to share the millions of dollars in fees they make off of their best market bets and for managing clients’ money.
In earlier guidance issued Thursday, Treasury and SBA responded to complaints that large, publicly traded companies and big chains were getting loans at the expense of smaller mom-and-pop shops. Those guidelines said companies seeking aid and those that have already gotten loans could be asked to prove they needed it because of the coronavirus outbreak. Companies were given until May 7 to return money without penalty.
Substantial Value
“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 Thursday guidance said.
The guidance issued Friday also clarified other issues, including whether hospitals owned by governmental entities are eligible for a loan and what closing documents banks that are disbursing the funding should use. Confusion and uncertainty among lenders delayed the processing of some loans in the initial round of funding.
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