Accepting a federal loan is among the highest risks a federally illegal business can undertake
By Lloyd Pierre-Louis
As the pandemic continues to impact America’s economy, many business owners – and Capitol Hill lawmakers – are supportive of another round of funding for the Paycheck Protection Program.
But what if your cannabis business has already received a PPP loan? What if yours was one of the more than five million businesses nationwide that shared in the $525 billion of PPP loans that were issued between April and August?
Administered by the Small Business Administration, PPP loans provide a direct incentive for small businesses to keep their workers on the payroll. The PPP’s key feature permits the SBA to forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses.
Because the 2018 Farm Bill legalized hemp nationally, SBA guidelines state that hemp businesses were eligible to apply for federal PPP funding. It is a very different story, however, for state-licensed cannabis businesses, which were essentially ineligible for PPP loans. They now find themselves in a potentially problematic legal situation if they did manage to receive funding.
Different rules for cannabis businesses
Although governors in most states that have legalized the use of cannabis for medical purposes considered industry employees as essential workers, federal rules governing all SBA loans deemed their employers ineligible for the loans. In short, legal cannabis businesses cannot participate in the PPP. Before the PPP closed on August 8, however, several state-licensed cannabis businesses openly announced their loan applications had been approved.
The SBA considers as ineligible for loans all business concerns that are engaged in any illegal activity (13 CFR § 120.110[h]).
As a result, a concern that grows, produces, processes, distributes or sells marijuana or marijuana products, edibles or derivatives – called a “direct marijuana business” – is ineligible. Similarly, a business that derived any of its gross revenue for the previous year from sales to direct marijuana businesses of products or services to support the use, growth, enhancement or other development of marijuana – called an “indirect marijuana business” – is ineligible.
Some cannabis businesses still applied anyway
So how, and under what authority, are these direct or indirect marijuana businesses participating in the PPP?
Perhaps the loan reviewers were not paying close attention. Perhaps some businesses do not consider themselves indirect marijuana businesses because their activities touch on some, but not all, of the characteristics above, or they routinely service businesses outside the legal cannabis industry as well.
Or perhaps because a few federal courts have allowed other categories of businesses, which the traditional SBA rules and interpretations excluded from loan eligibility, to participate in the PPP. By extension, in theory, so can the legal cannabis industry. But applying for and accepting a PPP loan is among the highest risks a direct or indirect marijuana business can undertake within an industry already fraught with the risks inherent in operating a federally illegal business.
What the courts say
The PPP, established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), is intended to increase eligibility for certain small businesses and organizations that were otherwise excluded by the SBA. For example, religious institutions are ineligible under SBA regulations, but the CARES Act specifically provides eligibility for nonprofits (15 USC§636[a][D]). Additionally, a few federal courts upheld an interpretation barring the SBA from prohibiting PPP loans to adult-oriented businesses.
See, for example, Diamond Club of Flint v. SBA, 960F.3d 743, 746-47 (6th Cir. 2020). That court determined the CARES Act’s specification that “any business concern” is eligible so long as it meets the size criteria to be a reasonable interpretation, and that Congress intended the SBA’s longstanding ineligibility rules to be inapplicable given the current circumstances.
But federal courts have disagreed over whether the SBA can impose additional restrictions, especially given that Congress placed the PPP within the Small Business Act (§7[a]), and the CARES Act does not prevent the SBA from imposing additional restrictions (Defy Ventures v. SBA, 2020 WL 3546873, at *8 [D.C. MD June 29, 2020]). Ultimately, no federal court has interpreted “any business concern” to include illegal businesses.
All SBA loan applicants must make a good faith certification that they are not engaged in any federally illegal activity. Therefore, any state legal cannabis business must make a materially false statement to secure federally-backed loan funds if they apply for the PPP. A misinterpretation of federal law will not excuse the conduct, and will expose the legal cannabis business to a myriad of problems, including bank fraud and wire fraud. The only remedy would be a Congressional act that clearly includes legal cannabis businesses as eligible PPP participants.
Some PPP loan recipients have already been audited, so any cannabis-related business owner that has received PPP funding would be well advised to consult with their attorney before the auditors come knocking.
Lloyd Pierre-Louis is an attorney member of Dickinson Wright’s Cannabis Practice Group. Dickinson Wright is one of the only full-service law firms that welcomes cannabis industry clients, providing specialized counsel both to clients operating with state-issued licenses and to businesses providing goods and services to the industry.
Benzinga Related Links:
- Want A PPP loan? Get Moving, Experts Advise
- Massachusetts Considers Providing Financial Aid For Cannabis Businesses
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