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Law360 (April 1, 2020, 4:34 PM EDT) --
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| Zachary Kobrin |
However, the creation of $360 billion in U.S. Small Business Administration loans — $10 billion through the Economic Injury Disaster Loan, or EIDL, program and $350 billion being made available as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security, or CARES, Act passed by Congress on March 27 — has left one of the fastest growing industries in the weeds.
What has emerged in the midst of the global pandemic is the gaping disconnect between state governments and communities at large on one side and the federal government on the other. In addition to doctors, nurses, pharmacists and grocery stores, the legal cannabis industry in many states has been deemed an essential business that should remain open to the public while nonessential businesses and residents have been ordered to stay at home or shelter in place.
The definition of an "essential business" varies by location (each state or local government can implement its own executive orders deeming certain businesses as "essential"), however most governments follow the federal government's guidance in determining essential versus nonessential.
Specifically, as referenced in California Gov. Gavin Newsom's March 19 shelter-in-place executive order, "[t]he federal government has identified 16 critical infrastructure sectors whose assets, systems, and networks, whether physical or virtual, are considered so vital to the United States that their incapacitation or destruction would have a debilitating effect on security, economic security, public health or safety, or any combination thereof."[1]
In New York state, Gov. Andrew Cuomo has deemed certain types of businesses operating in health care, infrastructure, manufacturing, retail, services, news media, finance, providing basic necessities and services, construction, and defense as essential businesses permitted to continue operating, while ordering all nonessential businesses to temporarily close.
The inclusion of marijuana companies as "essential businesses" is not a political issue and is not distinguished by "red" or "blue" states. For example, Ohio Gov. Mike DeWine has deemed its licensed medical marijuana companies to be essential health care and public health operations.
States with stay-at-home or shelter-in-place orders that have deemed marijuana companies essential or that have permitted legal cannabis companies to continue operating in some regard include: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Massachusetts, Michigan, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Vermont and Washington.
The "essential business" designation has not been limited to states with stay-at-home orders. For example, prior to the statewide stay-at-home order announced on April 1, Florida had at least eight counties under stay-at-home orders executed by local officials where its medical marijuana companies have been considered essential health care providers that have been permitted to remain open in their respective "closed" counties.
The legal cannabis industry employs over 240,000 full-time equivalent people across 33 states and has maintained faster job growth compared to many other industries, established or emerging. To put this in perspective, more people are being hired for jobs in the cannabis and cannabis-related industries than teachers, the medical industry (doctors, nurses, pharmacy positions, etc.), technology or the public sector.
According to Leafly.com's cannabis jobs report for 2019,[2] the cannabis industry's employment figures are even more staggering when you look at those states that have deemed their marijuana companies to be "essential businesses."
The following states, which currently have stay-at-home orders in place but allow these marijuana companies to remain open, are responsible for 156,617 jobs in the United States: California (39,804), Colorado (34,705), Washington (23,756), Oregon (18,274), Massachusetts (13,255), Oklahoma (9,412), Illinois (9,176) and Michigan (8,235).
The fact that not one of these companies will be eligible to tap into the $360 billion in small business loans that the federal government will allocate on an expedited basis only serves to amplify (like a giant neon-lit billboard) the disconnect between the federal government's treatment of cannabis and the overwhelming support for it by a majority of Americans and state governments.
Prior to passage of the CARES Act, representatives from the SBA informed marijuana business owners that "marijuana-related businesses are not eligible for SBA-funded services" such as the EIDL program.
The EIDL program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are expecting. The EIDL program requires a disaster declaration like the ones in California, New York, Illinois and other states to be eligible.
This exclusion was further clarified by SBA spokesperson Carol Chastang, who stated that "[b]ecause federal law prohibits the sale and distribution of [marijuana], the SBA does not provide financial assistance to businesses that are illegal under federal law." Chastang went on to say that "[b]usinesses that aren't eligible include marijuana growers and dispensers, businesses that sell cannabis products, etc., even if the business is legal under local or state law."
Adding insult to the economic injury that these essential businesses are dealing with is the passage by Congress of the CARES Act. Within the $2 trillion aid package passed by Congress and signed into law by the president on March 27, Congress authorized $350 billion in government-backed loans modeled after the SBA's 7(a) loan program. Similar to the EIDL program, ineligible businesses would include those engaged in activities deemed illegal by the federal government.
How to Fix the Problem
Something can, and should, be done to remedy this disconnect. How can companies be deemed essential to the health, safety and welfare of their communities — a determination based on federal guidelines — yet not be essential enough to receive the same economic relief as similarly situated small businesses?
Congress established the SBA through the Small Business Act of 1953 to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." It is widely understood that the cultivation, manufacture and distribution of marijuana (whether or not conducted under a state-approved license) is illegal under U.S. federal law. However, it is not clear whether the ineligibility of marijuana companies to receive these SBA loans is codified in the U.S. Code or in federal regulation.
Stated differently, if the SBA Act expressly states that businesses engaged in activities deemed illegal under U.S. federal law are otherwise ineligible for SBA loans, then it is incumbent and necessary for Congress to act in order to authorize SBA loans to marijuana companies. However, if, as the SBA has cited, this restriction is codified in the Code of Federal Regulations, then the SBA administrator could remedy this inconsistency by administrative action.
Responding to an inquiry by a cannabis business owner on March 22, the SBA's Northwest branch confirmed that marijuana-related businesses were not eligible for SBA-funded services. However, in doing so, the SBA official cited to the Code of Federal Regulation[3] as the basis for ineligibility. If, as the SBA's Northwest branch official has indicated, the eligibility restriction is a function of regulatory policy and not statutory policy, then congressional action would not be required to permit marijuana companies operating pursuant to a state-authorized license to be eligible for SBA loans.
This is a unique situation that, in theory, shouldn't require opening the debate over the rescheduling of marijuana under the Controlled Substances Act to remedy the disconnect. This is an issue specific to those marijuana companies operating under a state-authorized license seeking relief in the form of SBA loans. These are companies that typically operate in one of the most highly regulated industries requiring extreme transparency with state and local government officials, insurance companies, and those financial institutions offering services to them.
How many recipients of these SBA loans are required to disclose most or all of their ownership to a government agency? How many are required to verify all transactions above a certain size and all investments to ensure they don't otherwise violate the Bank Secrecy Act or the Patriot Act?
How many recipients of these SBA loans are subject to announced and unannounced inspections by state or local officials for any reason? How many recipients of these SBA loans are also essential businesses putting their employees at jeopardy in order to keep their companies operational during this crisis? Without access to these SBA loans, many of the legal marijuana companies operating as essential businesses during this crisis couldn't afford to close.
The federal government is going to allocate $360 billion in SBA loans in record pace, but because of the federal government's inconsistent treatment of the marijuana industry, these essential businesses will be left in the weeds.
Update: This article has been updated to reflect Florida's issuance of a statewide stay-at-home order.
Zachary Kobrin is special counsel at Akerman LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] On March 19, the U.S. Cybersecurity and Infrastructure Agency issued a memorandum on identification of essential critical infrastructure workers during COVID-19 response, where the federal government categorizes types of critical infrastructure workers (i.e. essential business), including: health care and public health; law enforcement, public safety and public responders; food and agriculture; energy; water and wastewater; transportation and logistics, including post and shipping; public works, including media and IT; other community-based government operations and essential functions, including state, tribal and local governments; critical manufacturing; hazardous material; financial services; chemical; and defense industrial base.
[2] https://www.leafly.com/news/industry/243700-marijuana-jobs-how-many-in-america
[3] 2 C.F.R. § 200.300
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