SBA guidelines spell out that any business “engaged in any illegal activity” is ineligible for SBA loans. That includes companies directly touching marijuana plants and any ancillary business “that derived any of its gross revenue for the previous year from sales” to marijuana establishments.
Companies ineligible from receiving federal funds include labs, those producing grow lights or hydroponic equipment and those selling smoking devices, inhalants or other marijuana-adjacent products. Also ineligible? Professional services firms such as law, accounting and consulting firms.
Businesses must certify on the application that they meet the guidelines to qualify, and according to Adam Fine, an attorney with Vicente Sederberg, one of the country’s largest cannabis law firms, taking even a single dollar from a cannabis company disqualifies a business from the program.
The consequences of applying for stimulus funding while deriving revenue from a cannabis company could be severe. Fine said in 2008 there was enhanced enforcement of federal fraud cases associated with money distributed through the bailout. Companies could also be liable under the False Claims Act, in which private actors can sue for misrepresentation on a government loan.
“There is a high degree of risk for businesses to certify something that’s not accurate,” Fine said.
Mitzi Hollenbeck, co-Leader of the Cannabis Advisory Services Practice for law firm Citrin Cooperman, said it’s unclear which ancillary businesses qualify for federal loans. The PPP itself says “any business concern” operating with fewer than 500 employees would qualify — a line that may allow for ancillary cannabis businesses, she said. Hollenbeck pointed out that while nonprofits typically do not qualify for SBA loans, they do under the PPP program.
“This act was thrown together so quickly and didn’t have a chance to be debated, so a lot of these unknown issues will start to emerge, as to where the existing SBA rules, regulations and guidance as compared to the act don’t tie together,” Hollenbeck said.
Many ancillary cannabis companies, seeing a slowdown from both the cannabis sector and elsewhere, may find themselves in a catch-22 — either take the risk of applying for PPP to survive, or go out of business. The scenario could dismantle the infrastructure that helps support the budding cannabis industry in the state.
Steven Hoffman, chairman of the Cannabis Control Commission, said he is actively concerned about the widespread economic distress, and said the commission is writing a letter to state and federal lawmakers urging them to protect both direct and indirect cannabis businesses.
Longer term, Hoffman said he will continue to urge businesses to do work with cannabis companies, even if the stigma of the industry just got etched a bit deeper.
“There’s a lot more important things going on in the world, but the absurdity of the federal and state laws being in conflict has to be addressed,” Hoffman said in an interview. “It’s been a problem from day one, especially in respect to banking, and no one could anticipate what’s going on now, but it highlights the absurdity of the conflict.”