Accepting a federal loan is one of the highest risks a federally illegal business can take

By Lloyd Pierre-Louis

As the pandemic continues to impact the U.S. economy, many business owners – and lawmakers on Capitol Hill – are supporting 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 more than five million businesses nationwide sharing the $ 525 billion in P3 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 employees on the payroll. The key feature of PPP allows the SBA to cancel loans if all employee retention criteria are met and funds are used for qualifying expenses.

Since the 2018 Farm Bill legalized hemp nationwide, SBA guidelines state that hemp companies were eligible to apply for federal PPP funding. It’s a very different story, however, for state-licensed cannabis companies, which were essentially ineligible for PPP loans. They now find themselves in a potentially problematic legal situation if they succeed in obtaining funding.

Different rules for cannabis companies

Although the governors of most of the states that legalized the use of cannabis for medical purposes considered employees in the industry to be essential workers, the federal rules governing all SBA loans considered their employers to be ineligible. for loans. In short, legal cannabis companies cannot participate in PPP. However, before the PPP closed on August 8, several state-licensed cannabis companies openly announced that their loan applications had been approved.

The SBA considers ineligible for loans all companies that engage in illegal activity (13 CFR § 120.110[h]).

Therefore, a business that grows, produces, processes, distributes or sells marijuana or marijuana products, edibles or derivatives – called a “direct marijuana business” – is not eligible. Likewise, a business that derived a portion of its gross revenue for the previous year from the sale to direct marijuana businesses of products or services to support the use, growth, improvement, or other development of marijuana – referred to as an “indirect marijuana business” – is not eligible.

Some cannabis companies still applied

So how, and under what authority, do these direct or indirect marijuana companies participate in PPP?

Maybe the loan reviewers weren’t very careful. Some companies may not see themselves as indirect marijuana businesses because their operations touch some of the above characteristics, but not all, or they also regularly serve businesses outside of the legal cannabis industry.

Or perhaps because a few federal courts have allowed other categories of businesses, which traditional SBA rules and interpretations excluded from loan eligibility, to participate in 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 take in an industry that is already fraught with risks inherent in operating an illegal business at the federal level.

What the courts say

The PPP, established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), aims to increase the eligibility of certain small businesses and organizations that were otherwise excluded by the SBA. For example, religious institutions are not eligible under SBA regulations, but the CARES Act specifically provides for the eligibility of nonprofit organizations (15 USC§636[a][36][D]). In addition, a few federal courts have upheld an interpretation prohibiting the SBA from prohibiting PPP business loans aimed at adults.

See, for example, Diamond Club of Flint v. SBA, 960F.3d 743, 746-47 (6th Cir. 2020). This court determined that the CARES Act’s specification that “any business enterprise” is eligible as long as it meets the size criteria to be a reasonable interpretation, and that Congress intended the long-standing ineligibility rules of the SBA are inapplicable in view of the present circumstances.

But federal courts disagree on whether the SBA can impose additional restrictions, especially since Congress has placed the PPP in 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 commercial concern” to include illegal businesses.

Take-out

All SBA loan applicants must certify in good faith that they are not engaged in any illegal activity at the federal level. Therefore, any legal cannabis business in a state must make a false declaration to obtain federally backed loan funds if they apply for the PPP. Misinterpreting federal law will not excuse conduct and expose the legal cannabis trade to a myriad of issues, including bank fraud and wire fraud. The only remedy would be a law of Congress that clearly includes legal cannabis companies as eligible participants in the PPP.

Some PPP loan recipients have already been audited, so any cannabis business owner who has received PPP funding would be well advised to consult their lawyer before auditors come knocking on the door.

Lloyd Pierre-Louis is a member of the Cannabis Practice Group of Dickinson Wright. Dickinson Wright is one of the only full-service law firms serving clients in the cannabis industry, providing expert advice to both clients operating with state licenses and companies supplying goods. and services to industry.

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The previous article is from one of our external contributors. It does not represent Benzinga’s opinion and has not been edited.


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