Ancillary Cannabis Businesses Denied SBA Funds

by | Apr 22, 2020

Written by Rachelle Gordon

The COVID-19 pandemic has sent shockwaves through the economy, with millions of businesses at risk of collapse. It was not much of a surprise when cannabis producers, cultivators, and retailers were denied federal relief loans set forth by The Coronavirus Aid, Relief, and Economic Security (CARES) Act due to the plant remaining a Schedule I narcotic in the eyes of the United States government. What was perplexing was the additional guidance that “indirect marijuana businesses,” i.e., companies who provide services or equipment to plant-touching businesses, be exempt as well.

The Small Business Association (SBA) pointed to previous guidance on eligibility, arguing “Businesses Engaged in Any Illegal Activity” would be prohibited from receiving any loans from their agency.

“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity,” the SBA said. “Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”

“Indirect marijuana businesses” were designated by the SBA as “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) 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.”

Examples of such ancillary businesses include testing facilities, hydroponic equipment distributors, grow light manufacturers, packaging providers, consumption accessories makers, cannabis-related law firms and accountants, among others.

Is Every “Indirect Marijuana Business” Exempt From Relief?

There have been mixed reactions to the SBA guidelines across the industry. Leading cannabis attorney Robert Hoban of Hoban Law Group stated some ancillary companies may still be eligible for certain programs and should still apply, explicitly calling out the Economic Injury Disaster Loans and Loan Advance (“EIDL”) program saying it falls outside of the SBA’s guidance.

“We cannot simply assume that ancillary businesses are excluded,” Hoban told Cannabis Tech. “Be smart when filling out an application for funding; do not assume you are ineligible because some or part of your ancillary services relates to the cannabis industry – services are services.  But most importantly, be accurate in responding to questions; do not insert your commentary or feelings about cannabis into those responses.”

Jim Marty, CEO of BridgeWest CPA firm, agreed.

“I have some ancillary clients that have been approved,” he said.

Marty added one of the first things cannabis companies should do if they are seeking COVID-19 relief is to defer some payroll and Social Security taxes to make cash available immediately. He noted several of his clients have already taken advantage of the opportunity. BridgeWest has teamed up with Wurk to offer weekly webinars addressing coronavirus-related business concerns.

Heidi Groshelle, a public relations professional from San Francisco and founder of Groshelle Communications, understands Hoban and Marty’s point but feels it’s too risky to apply for programs she may technically be eligible to receive, pointing to the massive penalties set forth by the government for obtaining the funds under “fraudulent” reasons.

“I am a sole proprietor, and I have provided PR services to the (cannabis) industry for half a decade. Honestly, it is very disconcerting that I am ineligible for any financial relief from the government because I have promoted legal infused products to the media,” Groshelle said. “Furthermore, based on the published guidelines, I am reluctant to 'roll the dice' and apply for the funds anyway, given the draconian punishments for accepting them.” 

The Industry Responds

On April 13th, the International Cannabis Bar Association (INCBA) sent a letter to Senate and Congressional leaders urging them to direct the SBA to reverse their stance on “indirect marijuana businesses.” They argue the term is “untenably broad” and unfairly punishes companies who are not engaged in illegal activities.

“If the goal is to help Americans and to help our economy get up and running again, these businesses should be eligible just like everybody else,” asserted Jason Tarasek, founder of Minnesota Cannabis Law and a member of INCBA. “They may be related to marijuana, but that doesn’t mean they’re not legitimate businesses that are vital to our economy. This isn’t the time to be making moral statements.”

This affirmation comes on the heels of more comprehensive efforts to include cannabis businesses in coronavirus economic relief packages. In March, a coalition of leaders from industry groups including the National Cannabis Industry Association, Cannabis Trade Federation, Global Alliance for Cannabis Commerce, Marijuana Policy Project, Minority Cannabis Business Association, and National Cannabis Roundtable sent a letter to state treasurers and governors imploring them to contact their congressional delegations and push for the inclusion of state-legal cannabis businesses in future COVID-19 legislative relief packages. They also asked officials to consider creating state-based lending or loan guarantee programs to fill the gaps put forth by current SBA guidance.

“The SBA taking these positions is not consistent with the intent of these COVID-19 relief bills, which was to get as much money out on the street as fast as possible,” said Marty.

On April 2nd, a group of eleven U.S. senators sent a letter to the powerful Appropriations Committee requesting a provision allowing cannabis businesses to receive SBA loans be added to the fiscal year 2021 spending bill for Financial Services and General Government and Related Agencies. The provision would enable state-legal marijuana companies to access SBA funds under the Loan Guarantee Program, Disaster Assistance Program, and Microloan Program.

The letter was signed by Senators Jacky Rosen (D-NV), Ron Wyden (D-OR), Tammy Duckworth (D-IL), Michael Bennet (D-CO), Kirsten Gillibrand (D-NY), Bernie Sanders (I-VT), Ed Markey (D-MA), Cory Booker (D-NJ), Bob Menendez (D-NJ), Jeff Merkley (D-OR) and Kamala Harris (D-CA).

Speaker of the House Nancy Pelosi expressed support for cannabis businesses with regards to COVID-19 relief, according to Rep. Ed Perlmutter (D-CO). In a call with constituents, Rep. Perlmutter stated he had brought the issue up directly with Speaker Pelosi during a Democratic caucus meeting.

“I raised this very question to our caucus, to Speaker Nancy Pelosi directly last week, saying, look this is a major employer in Colorado and elsewhere around the country. They have been deemed essential services in many, many states,” Rep. Perlmutter said during the call. “They cannot access the relief we are providing for in any of these three packages that we have passed. She said, as did the other leadership members on the call, said she wanted to see it get passed.”