The world-wide outbreak of COVID-19 has been unprecedented in many ways, including the manners in which governments have responded. In the United States, as in much of the world, virtually all but essential businesses have been ordered to close, causing the economy to come to a grinding halt. As a result, a record number of American workers have filed for unemployment during March and April, spiking the unemployment rate to levels not seen for decades.
In response, Congress has passed a series of legislative acts containing massive economic aid packages designed to help businesses and individuals survive this unprecedented economic shutdown.
Overview of Federal Aid Programs
The Small Business Administration’s disaster assistance program provides working capital loans of up to $2 million to small businesses, including sole proprietors, independent contractors and self-employed people, located in regions affected by a federally declared disaster. The SBA disaster assistance program is not new, but Congress provided additional funding and expanded eligibility for SBA disaster loans in the Coronavirus Preparedness and Response Supplemental Appropriations Act (CPRSAA), enacted on March 6. The CPRSAA, among other things, provides an additional $20 million in funding for SBA disaster loans and expanded their availability to small businesses across the nation that have been financially impacted as a result of the coronavirus. With a few exceptions (such as agricultural enterprises and lobbying firms), any business with fewer than 500 employees is considered by the federal government to be a “small business” and eligible for an SBA disaster loan.
For small businesses, however, the more significant Congressional action came a few weeks later, when, on March 27, the president signed into law Congress’s Coronavirus Aid, Relief and Economic Security Act (the CARES Act). Among other things, the CARES Act provides $350 billion for the establishment of a Paycheck Protection Program, under which small businesses can obtain loans of up to $10 million to cover certain operating expenses. As with SBA disaster loans, CARES Act loans are available to businesses with fewer than 500 employees, including sole proprietorships, independent contractors and self-employed people.
Unlike SBA disaster loans, which can have varying interest rates and repayment terms of up to 30 years, CARES Act loans mature in two years and bear an interest rate of only 1%. In addition, CARES Act loan borrowers will not have to make any payments for six months following the date the loan is disbursed. Perhaps the most significant feature of CARES Act loans is that they will be forgiven up to the full principal amount of the loan plus any accrued interest if the borrower uses the loan proceeds to pay for approved expenses and the business’s employee and compensation levels are maintained during the term of the loan. Approved expenses include payroll, benefits, insurance premiums, rent or mortgage payments and utilities. Businesses interested in a CARES Act loan must act quickly — for now, this program is available only until June 30, 2020.
Eligibility of Marijuana and Marijuana-Related Businesses
Unfortunately, even though most states with approved medical and/or recreational marijuana programs have declared cannabis retailers and related businesses to be “essential” businesses that are allowed to remain open during the pandemic, many of these businesses are ineligible for either of the aforementioned federal relief programs.
According to formal guidance published by the SBA and effective as of August 2, 2019, because federal law prohibits the distribution and sale of marijuana, businesses that are classified by the SBA as either “direct marijuana businesses” or “indirect marijuana businesses” are ineligible for SBA-funded assistance, including SBA disaster loans.
The SBA defines a direct marijuana business as a business that grows, produces, processes, distributes or sells marijuana and/or marijuana products, including edibles and/or derivatives. This applies to both recreational use and medical use, and notwithstanding that the business may be legal under state law.
An indirect marijuana business is one that derived any of its gross revenue for the previous business year from sales to direct marijuana businesses of products and/or services that could reasonably be determined by the SBA to aid in the use, growth, distribution, enhancement and/or other development of marijuana (as well as startups that project gross revenue for the next business year to come from direct marijuana businesses).
Notably included in the SBA’s definition of indirect marijuana businesses are law firms, accounting firms and other professionals that advise or counsel direct marijuana businesses “on the specific legal, financial/accounting, policy, regulatory or other operational issues specifically associated with establishing, promoting, or operating a Direct Marijuana Business.”
In contrast, small businesses that merely provide general goods or services to direct marijuana businesses but do not provide the types of goods or services that specifically aid in the use, growth, enhancement or other development of marijuana are not considered indirect marijuana businesses. For example, a plumber who fixes a sink for a direct marijuana business would not be considered an indirect marijuana business.
Whether a business is classified as a direct marijuana business or an indirect marijuana business is determined by the SBA on a case-by-case basis.
The CARES Act does not expressly prohibit businesses engaged in federally illegal activity from obtaining a CARES Act loan under the Paycheck Protection Program. On April 2, however, the SBA issued an interim final rule in which the agency specifically clarified that businesses engaged in any activity that is illegal under federal, state or local laws are ineligible to receive a CARES Act loan. Significantly, that rule did not specifically reference marijuana businesses or the SBA’s marijuana guidance. Thus, it is unclear whether the SBA would take the position that the SBA’s marijuana guidance applies to CARES Act Loans. In any event, businesses must apply for CARES Act loans directly with participating financial institutions, and it is those financial institutions that will be evaluating applications. Accordingly, whether marijuana businesses, including those that provide ancillary goods or services to such businesses, will get approved for a CARES Act loan may depend on each individual financial institution and its established policies regarding offering traditional banking services to marijuana and ancillary businesses.
What About Hemp and CBD?
Because the Agriculture Improvement Act of 2018 (the Farm Bill) removed industrial hemp from the list of Schedule I controlled substances under the Controlled Substances Act, the SBA has specifically made clear that businesses that produce and/or sell hemp and hemp-derived products are eligible for SBA disaster relief loans (assuming the business and its products are legal under state law and comply with all applicable federal, state and local laws and regulations). For the same reason, a hemp business operating in compliance with applicable federal, state and local laws and regulations are eligible for a CARES Act loan.
CBD derived exclusively from industrial hemp is not a controlled substance and, therefore, according to the SBA’s marijuana guidance, businesses that develop or market CBD and CBD products derived from hemp are not considered direct marijuana businesses. Such businesses are eligible to participate in SBA assistance programs, including disaster loans. When CBD is derived from marijuana, however, it is a Schedule I controlled substance, meaning businesses that develop or market CBD and CBD products derived from marijuana are ineligible for SBA disaster loans.
While there is no specific guidance regarding a CBD business’s eligibility for a CARES Act loan, it can be assumed that businesses producing or selling CBD derived solely from marijuana would be ineligible for a CARES Act loan in light of the interim final rule excluding businesses engaged in federally illegal activity. Conversely, businesses producing and selling CBD and CBD products derived solely from hemp should be eligible.
Again, however, because CARES Act loans are provided by participating financial institutions, the availability of CARES Act loans to CBD businesses may be subject to each individual financial institution’s policies regarding providing traditional banking services to marijuana or marijuana-related businesses.
The fact that most states consider their legal marijuana businesses as essential businesses during the COVID-19 pandemic, yet these businesses may be excluded from desperately needed federal aid demonstrates the ongoing tension between the states and the federal government regarding the legal status of marijuana.
While we hope this tension will be resolved with the eventual descheduling of marijuana under the Controlled Substances Act, for the time being, marijuana and related businesses financially impacted by the COVID-19 pandemic should certainly apply for aid from all available sources, including for a CARES Act loan from local participating lenders — especially if a bank where they already do business is approved to issue such loans. The SBA has created a convenient online tool to help borrowers find eligible lenders in their area, which can be found at https://www.sba.gov/paycheckprotection/find.
Scott Woller is a business and tax attorney who regularly represents small businesses, startups and individuals in corporate and financing transactions, corporate structuring and complex business and financial litigation, with a particular focus on the cannabis, real estate, hospitality and sports industries. His law firm, Hiller, PC (www.hillerpc.com), is a white-shoe boutique firm with a track record for success and handling sophisticated legal matters that include business and corporate law.