COVID-19 Exacerbates Problems With Federal Treatment Of Cannabis

On Thursday, Congress passed the Paycheck Protection Program and Health Care Enhancement Act, a $484 billion COVID-19 stimulus package that includes an additional $310 billion for small business forgivable loans.  And just as we saw with the CARES Act, the cannabis industry continues to be entirely excluded from access to federal financial assistance amid the pandemic.  This article lays out these exclusions in detail, describes why many argue this treatment doesn’t make sense, and presents a vision for how the future holds better news.

SBA Rules Exclude Cannabis Businesses From CARES Act Relief

Under the Small Business Administration’s (SBA) current policies, cannabis businesses are deemed ineligible for coronavirus relief programs, including the Paycheck Protection Program (PPP), Emergency Economic Injury Disaster Loans (EIDLs), EIDL Grants, and SBA loan forgiveness.  This exclusion applies to both “plant touching” cannabis businesses, as well as ancillary businesses that provide products and services to the industry.

The exclusion of cannabis businesses from federal financial assistance is not a new position for the SBA.  In 2018, the SBA released a Policy Notice to provide guidance regarding the eligibility of marijuana-related businesses (MRBs) for SBA-administered loans.  The Policy Notice defines both “Direct Marijuana Business” and “Indirect Marijuana Business,” and clarifies that both types of businesses are ineligible.  The SBA’s stated position is that because financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may therefore be ineligible.  This SBA policy appears to be derived from 13 CFR § 120.110, a regulation prohibiting “businesses engaged in illegal activity” from receiving SBA loans.

Subsequently, in April 2019, the SBA adopted Standard Operating Procedure (SOP) 50 10 5(K), which sets forth requirements for lenders seeking to participate in SBA lending programs.  Importantly, SOP 50 10 5(K) includes a section establishing “ineligible types of businesses,” which incorporates the SBA’s 2018 Policy Notice guidelines deeming both “direct” and “indirect” MRBs ineligible for financial assistance.

SOP 50 10 5(K) defines a “Direct Marijuana Business” as a business that “grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity.”   This definition applies to both recreational and medical use, and covers businesses operating legally under local or state law.

The document then goes on to define an “Indirect Marijuana Business” as a business that derives any of its gross revenue from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana.  It provides examples of Indirect Marijuana Businesses, which include businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business.

SBA Incorporates Marijuana Exclusion Into CARES Act Rules

On April 2, 2020, SBA released its Interim Final Rule for the CARES Act, which includes a section on eligibility requirements for the PPP.  This section explicitly incorporates SOP 50 10 5(K) by reference into the PPP eligibility rules.  This means that the SBA has determined that the CARES Act specifically excludes cannabis businesses from PPP access.

In addition, the PPP application requires a prospective borrower to make a number of certifications on the signature page.  These certifications include, among others, that (1) the applicant “is eligible to receive a loan under the rules in effect at the time . . . that have been issued by the Small Business Administration,” and (2) that the applicant “is not engaged in any activity that is illegal under federal, state or local law.”

Because the SBA has incorporated SOP 50 10 5(K) into its rules for the PPP, direct and indirect MRBs will not be able to truthfully certify that they are eligible.  Further, the federal illegality of marijuana under the Controlled Substances Act means that direct MRBs will not be able to truthfully certify that they are not engaged in any illegal activity under federal law.

The penalties for submitting an application with false information are heavy.  Depending on how the application was made, and who it was submitted to, the penalties could be as high as 30 years in prison and up to a $1 million fine.  See 18 U.S.C. § 1014.

Why The Cannabis Industry Deserves Equal Access To Coronavirus Relief

The legal cannabis industry provides a myriad of benefits to the U.S. economy.  It generates billions of dollars in state, local, and federal tax revenues, employs hundreds of thousands of workers across the country, and provides crucial medicine for medical patients.  A recent poll shows that a majority of adults agree that dispensaries should be kept open as essential services. Many states have done so, including California, Colorado, Illinois, Nevada, Washington, Minnesota, and Washington D.C.

Given the robust industry, and the significant impact that COVID-19 is having on it, it is clearly wrong to exclude MRBs from CARES Act relief.  The purpose of the relief packages is to ensure that companies can weather the storm, and the cannabis industry is no different.

By excluding MRBs, the government is also encouraging the black market to flourish.  There are already significant financial and regulatory hurdles to entering the legal cannabis market.  By telling state-legal companies that they are ineligible for relief, the federal government is effectively saying that these companies have no protection in a time of need.  Why would operators want to get compliant if it means paying more taxes and expenses without enjoying the typical business protections that a lawful company enjoys?

Perhaps the most troublesome aspect of the SBA’s policy is its overly broad definition of “indirect marijuana business,” which covers professionals such as accountants and lawyers that provide services to cannabis clients.  This phrase is defined so expansively that it could be interpreted to include an accountant who performed as little as 15 minutes of work for a direct marijuana business, or a lawyer who drafted a non-cannabis-related contract for a company that happens to be a direct marijuana business.  Further, law firms that derive even a tiny fraction of their overall revenue from a cannabis client may be deemed ineligible.  This broad definition deprives a massive portion of the U.S. economy from accessing crucial financial assistance.

The Industry Speaks Out

On April 13, 2020, the International Cannabis Bar Association’s (INCBA) Executive Director Christopher J. Davis sent a letter to Congress urging lawmakers to pass legislation granting professionals who service state-legal cannabis businesses access to CARES Act relief, and requesting that Congress direct the SBA to remove any reference in SOP 50 10 5(K) to so-called “Indirect Marijuana Businesses.”

In his letter, Davis points out that the SBA has engaged in an “administrative overreach” because the agency, without any legislative directive, apparently decided that any business that has derived any income from a “Direct Cannabis Business” should be excluded from CARES Act support.  Davis also points out that the SBA’s “Indirect Cannabis Business” exclusion is “untenably broad” because the SBA has unilaterally deprived countless professionals who would otherwise qualify for the EIDL and PPP assistance from accessing much-needed federal assistance that Congress intended for them to have.

Separately, in a “call to action,” the political director of the National Organization for the Reform of Marijuana Laws published a letter to the organization’s supporters, urging them to contact their representatives and demand that Congress allow state-licensed cannabis companies to access the SBA.  In his letter, Justin Strekal points out that small and medium businesses in the cannabis industry are particularly at risk, as they continue to operate without access to the support systems and resources that may help them in this time of crisis.

Another letter written by a coalition of industry associations was sent to state treasurers and governors, urging them to (1) speak to their congressional delegations about including a provision in the next COVID-19 legislative relief package that would make state-legal cannabis businesses eligible for SBA assistance, and (2) create state-based lending or loan guarantee programs for cannabis businesses to provide the relief that the federal government is refusing to provide.  The letter also points out that many cannabis companies have been going above and beyond the call of duty, donating large amounts of personal protective equipment (PPE) to first responders and medical workers, hiring laid off workers in other industries, and adapting manufacturing facilities to produce thousands of gallons of hand sanitizer.

Congressional Efforts To Include The Cannabis Industry

Meanwhile, members of Congress in both the House and Senate have not been silent about the issues facing the cannabis industry during this difficult time.

Yesterday, a coalition of 10 Senators sent a letter to Senate leadership asking that they include language in the next stimulus package that would allow state-legal marijuana businesses to have the same access to federal relief dollars as businesses in other industries.  The letter, spearheaded by Sens. Jacky Rosen (D-NV) and Ron Wyden (D-OR), explained that state-legal cannabis small businesses are sources of economic growth and financial stability for thousands of workers and families, and that the cannabis industry’s lack of access to federal loans will lead to unnecessary layoffs, pay cuts and furloughs.

Their letter comes shortly after a similar letter last Friday spearheaded by the Congressional Cannabis Caucus and that was signed by a bipartisan group of 34 House representatives.  That letter urged House leadership to include state-legal cannabis businesses in the next coronavirus relief bill.

Then, on Thursday, Representatives Earl Blumenauer (D-OR) and Ed Perlmutter (D-CO) introduced legislation that would fix these issues. The Emergency Cannabis Small Business Health and Safety Act proposes that any state-legal cannabis company is eligible for relief under any of the COVID-19 relief bills recently enacted, including the PPP, EIDL, and EIDL grants.  It also provides protections for officers, directors and employees of the SBA, ensuring that they will not incur liability for providing a loan or loan guarantee to a cannabis business. We will be monitoring the bill to see if it passes, but there is clearly bipartisan support.

What The Future Holds

No one can predict the future, but we can use common sense to predict where things are going. The coronavirus pandemic has certainly caused tremendous grief and sorrow, but it is not without a silver lining.  Especially in the cannabis industry, the crisis is providing a new opportunity for growth and positive change.  The designation of cannabis businesses as essential marks a clear shift from the days of prohibition and reefer madness.  This alone is noteworthy.

However, the systemic problems that continue because of the federal government’s treatment of cannabis are becoming untenable.  From taxes to clinical trials, and from the criminal arena to stimulus packages, cannabis continues to be miscategorized to the detriment of many.  The problems created by federal treatment of the industry are getting significantly more attention now than ever before.

The cannabis industry will continue to undergo change.  The country is still moving in the right direction, with more and more states joining the ranks by creating legal cannabis regimes every year.  Last year saw the historic SAFE Banking Act pass the House of Representatives and the MORE Act pass out of committee.  Polling indicates that upwards of two-thirds of Americans support full legalization at the federal level, and that number could exceed 70% by now.

In addition to stopping the prohibition of what has been deemed an essential industry, legalization could provide significant tax revenues at a time when budget shortfalls and insurmountable debt are the norm.  As a nation, we will be recalibrating our priorities in the months and years to come.  Being deemed essential means that cannabis will see more mainstream acceptance and steadier economic growth.  These two things, combined with discoveries of additional medicinal benefits and public education, will lead to the political change we all know is on the horizon.  At this point, it isn’t a question of if, but when.

Disclaimer: This article has been prepared and published for informational and educational purposes only and is not offered or intended, nor should it be construed, to be legal advice.

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