Disclaimer: The information in the below article should not be taken as legal advice. Always consult an attorney on these matters before taking any action.
On March 25, 2020 the Senate, in partnership with the Small Business Administration (SBA), unanimously passed the Coronavirus Aid, Relief, and Economic Security act, commonly referred to as the CARES Act. The bill, which was officially signed into law on March 27th, was designed to provide relief to small businesses and individuals in the face of economic fall-out related to COVID-19.
However, with all the legal language, the CARES Act has been slightly difficult for small businesses to navigate – let alone federally illegal businesses, like almost all operating in the cannabis industry. To help small cannabis businesses navigate, we spoke with Josh Kappel of Vicente Sederberg, the largest cannabis focused law firm. Here we’ve summarized that conversation to give you an idea of what the industry has been facing.
The first thing to understand about the CARES Act are the three major components of the law:
1) A small business disaster relief fund, paycheck protection, and a $10,000 grant
2) Tax relief involving net operating losses and deferral of payment tax credits
3) Individual relief via increased unemployment and checks for average Americans.
For many of the small businesses we work with, the Payment Protection Plan (PPP) was the most immediate concern to keep operations afloat and employees paid. [As of the writing of this blog, this program had exhausted all funds, but the US House of Representatives have passed a bill to add an additional $40B, much of it to PPP.
The PPP loan was provided to small business based on certain qualifications – namely number of employees and their access to outside capital. The size of the loan was capped at $10M or 2.5x total payroll, meaning the size of the loan largely depends on the size of the company. These loans are eligible to be forgiven provided the company continues to pay employees at their initial salary.
While the PPP seemed to be the most immediate action for small businesses, different types of cannabis businesses – plant-touching, ancillary and CBD/Hemp –interact with all of the CARES Act components in different ways.
Plant-touching business have had the most difficult time receiving relief from the CARES act. Given that plant touching business are already ineligible for small business loans, they are automatically disqualified from the Paycheck Protection Program and Disaster Relief Program. The SBA also expressly excluded plant-touching companies from these programs because cannabis is still illegal under federal law; however, there is still a debate as to whether these companies will qualify for payroll tax credit from wages paid to employees. This is an important debate as many companies in this category have already taken advantage of the tax credit recognizing that they may be challenged later. Fortunately, all employees, regardless of the type of business they work for, qualify for the increased unemployment and stimulus check.
The waters are less clear for ancillary companies, many of which spent precious time navigating the two major roadblocks for ancillary companies intending to apply for the Paycheck Protection Program. First was that the SBA states in their standard operating procedures that “indirect marijuana businesses” are not eligible. Attorney’s across the board have strongly recommended that ancillary companies study the exact language of this section to determine whether or not they are an “indirect marijuana business”. The other major roadblock for these types of companies is that the liability of the loan was placed on the lender, not the borrower – something that is a little different from usual loans. What this means is that if the borrower is found to be ineligible, the liability of that falls to the lender, discouraging many lenders from loaning to ancillary cannabis companies for fear of violating regulations and punitive action.
CBD and Hemp companies followed a similar trend to ancillary companies. The major difference is that the SBA clearly states that CBD and Hemp companies do qualify for loans, meaning they qualify for the small business component of the CARES act. Fortunately for this sector of the industry, many CBD and Hemp companies can take advantage of various agriculture and farming loans available in addition to CARES support.
However, those hurdles were not the end for cannabis businesses. That’s because there is still some uncertainty about how venture capital and institutional capital-backed companies fit into this. The SBA defines a small business as having under 500 employees. However, the SBA also seems to count the number of employees at any “affiliated” business into the total number. This means that if Company A has 100 employees but has an investor that has shares in other companies with a cumulative 401 or more employees, Company A may not be eligible. This is still one of the less clear portions of this program and continues to be clarified. Unfortunately, clarification didn’t come before the PPP money ran out. Many businesses who were approved for loans now face this obstacle before actually accepting the money. (Note: as with all of this, we recommend speaking with your attorney if this applies to your business.)
So, what should you and your business do if you’re in the cannabis industry and need support?
First, think about other resources to get support. If you do not qualify for the Paycheck Protection Program, or don’t want to take the risk, then you may qualify for other options, such as state loans. Many states, such as Colorado, have put together a fund for small business that are not eligible for the CARES act.
Second, think hard about your eligibility for these loans before actually accepting the cash. Many ancillary companies continued to apply – and be approved - for support, despite the risk. For these companies, it’s recommended to have clear reasoning on why they’re not a direct or indirect marijuana company. However, even with clear reasoning, these companies still face considerable risk as these applications are subject to the False Claims act, which makes it illegal to make false claims on loan applications, of which the statute of limitations is 6 years. This can be punishable by fines or jail time.
Third, keep an eye out on additional funds allocated for the PPP and move quickly if/when that goes through. Companies need to apply for these loans through local lenders and banks. Keep in mind that businesses who already bank with an institution usually get priority with that institution.
This time of uncertainty hits small business hard. When you add in the federal illegality of the cannabis industry, the situation becomes even more dire. But there is hope. We’ve seen small cannabis businesses shift their business models and drastically reduce expenses. The companies that can get lean and scrappy through this time will inevitably come out the other side stronger.
Good luck out there and we’re wishing you safety and good health.