Analysis

Cannabis Companies Reaped Millions In PPP Loans

By Diana Novak Jones
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Law360 (July 7, 2020, 10:28 PM EDT) -- Companies within the cannabis industry collected millions of dollars through the Small Business Administration's Paycheck Protection Program this year, including companies that provide ancillary services, even though the agency's rules technically preclude businesses that derive revenue from "marijuana-related activities."

The companies that received the loans do everything from covering cannabis news to facilitating regulatory oversight of states' legal marijuana industries, according to data released Monday by the U.S. Department of the Treasury on all PPP loans over $150,000.

The SBA has been clear that hemp companies are eligible for the loans and that companies that deal directly with the marijuana plant are not. But the question of whether ancillary businesses that provide services and support to the pot industry can access the money remains open, even as some of those companies have received the loans.

Cannabis Companies Receiving PPP Cash
Some cannabis companies got Paycheck Protection Program loans, according to U.S. Treasury Department data.

Nature of business Amount
Cannabis Industry Businesses
» Anne Holland Ventures Inc. Publisher of Marijuana Business Daily $1M - $2M
» Akerna Corp. Cannabis compliance technology company $2M - $5M
» Canna LLC Cannabis consulting as Canna Advisors $150,000 - $350,000
» The Arcview Group Investment research firm focused on cannabis industry $150,000 - $350,000
» Hemp Temps Hemp and marijuana staffing agency in Colorado $350,000 - $1M
CBD Businesses
» Whole Hemp Company (Folium Biosciences) CBD cosmetic products $2M - $5M
» cbdMD CBD products for humans and animals $1M - $2M
» CV Sciences CBD consumer products and pharmaceuticals $2M - $5M
» Medterra CBD LLC CBD consumer products $1M - $2M

Josh Kappel, a founding partner at Vicente Sederberg LLP, has been looking into the availability of PPP loans to the cannabis industry.

"Overall, who qualifies for a Paycheck Protection Program loan is unclear," Kappel said.

Congress funded the program as part of the Coronavirus Aid, Relief and Economic Security, or CARES, Act, a massive coronavirus relief package passed earlier this year. The program began with an initial infusion of nearly $350 billion, which was offered as forgivable loans to businesses that agreed to use the funds to pay workers.

On Monday, after complaints from lawmakers and advocates about a lack of transparency in the loan awards, the Trump administration released a flood of data on where the money went. The information revealed company names and the banks that awarded the funds, but gave ranges rather than exact dollar figures for the amount of the loans.

Law360 reviewed the data and identified several cannabis companies that received the loans. None of them were plant-touching, but several ancillary businesses were able to get the loans, the data shows.

Akerna Corp., a cannabis compliance technology company, got one of the largest loans of those Law360 reviewed, picking up more than $2.2 million through the program, according to U.S. Securities and Exchange Commission filings.

Akerna did not respond to a request for comment.

Metrc, which runs regulatory track-and-trace and other compliance programs for legal marijuana in more than a dozen states, got a loan of between $350,000 and $1 million. Metrc CEO Jeff Wells said in a statement to Law360 that the company applied for and received a PPP loan, but ultimately chose to return the funds in May. A company spokeswoman said Metrc reevaluated its need for the loan and decided it wasn't necessary.

Another company, Hypur Inc., which provides cannabis companies with banking and payment services, is listed as receiving a loan of between $350,000 and $1 million. But Hypur's chief financial officer, David Querciagrossa, said the company has not received a PPP loan or any funding from the CARES Act. He said the company discussed applying for the funds with its bank, but did not go through with the request.

According to guidance the SBA released on marijuana, the agency's official rules on cannabis bar loans to what it calls "direct marijuana businesses" — plant-touching, whether it's medical or recreational. But the agency also bans loans to "indirect marijuana businesses," which derive any "gross revenue from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, distribution, enhancement or other development of marijuana."

That includes everything from companies selling grow lights to businesses that advise dispensaries on regulations and policy governing the industry, according to the SBA. But in an example, the agency suggests the ban doesn't apply to a plumber who fixes a sink for a direct marijuana business.

Cannabis media companies like Anne Holland Ventures Inc., publisher of Marijuana Business Daily and planner for cannabis conferences like MJBizCon, also received PPP funds.

Cassandra Farrington, co-founder of Marijuana Business Daily, told Law360 that her company has no contact with the marijuana plant and does not allow any form of marijuana at its trade shows. Access to banking and financial services is often predicated on how much contact a business has with the actual marijuana plant, Farrington said.

Banks in areas like Colorado, where Marijuana Business Daily is headquartered, may be more willing to work with the cannabis industry than banks in areas where the industry is less well-developed, she said.

"There is some discretion that is being applied by banks in different parts of the country," Farrington said. "I've watched it as a participant in [the PPP] program. There is a ton of inconsistency in terms of how the banks are dealing with it."

It's not just the banks' discretion that makes it hard to answer whether ancillary businesses can get PPP loans.

Kappel of Vicente Sederberg said a combination of how the rules were approved and when they were implemented opens the door to questions about whether the SBA can restrict loans to ancillary businesses.

The loan program was open for a few weeks in April before the SBA officially issued its rules on ancillary cannabis companies' access to the funds, Kappel said. So businesses that applied before then were operating on what was in place at the time.

And there are ongoing arguments about whether the SBA's rules were enacted properly, he said.

"There's a lot of ambiguity here," Kappel said. "You also have to certify that you're not violating any federal law when you apply. Things get more ambiguous based on the type of ancillary company."

There are also questions about whether there is a certain threshold of revenue from cannabis that would disqualify an ancillary company.

Law360 previously reported that MassRoots, which says it is a social media company focused on marijuana, received $50,000 through the program earlier this year. Isaac Dietrich, MassRoots' CEO, told Law360 that the company has no contact with marijuana plants or products and derived just 3% of its revenue from cannabis businesses.

The dividing line between eligible and ineligible companies gets even fuzzier when hemp, the legal form of cannabis, is thrown into the mix.

For hemp, which became federally legal following the passage of the 2018 Farm Bill, the SBA is clear that the industry is eligible for the PPP loans. Hemp comes from the same plant as marijuana — which is federally illegal — but has a THC level below .3%.

The data shows that many hemp companies accessed the loan funds. Law360 identified 11 companies that farm hemp, and the majority of them received between $150,000 and $350,000 in loans, according to the data.

CBD-focused companies also sought the funds, and some of them received far larger loans, the data shows.

The SBA guidance draws a distinction between hemp-derived CBD, which is legal, and marijuana-derived CBD. Companies selling the hemp version are eligible, but marijuana companies are not, the agency said.

Whole Hemp Co., which operates as Folium Biosciences, is a CBD product wholesaler. It received between $2 million and $5 million through the PPP program, according to the data.

Well-known brands cbdMD, Medterra CBD and CV Sciences also received millions in loans. Folium and the other CBD businesses did not respond to requests for comment.

The SBA reopened applications for the PPP loans on Monday morning. But ancillary cannabis companies that are considering applying have to examine their businesses, Kappel said.

"I think companies that can certify that they are not violating federal law are companies that should evaluate whether or not they otherwise qualify," Kappel said.

"It's a detailed analysis of whether or not a company in the ancillary space violates federal law or not," he added.

--Additional reporting by Andrew Kragie. Editing by Jill Coffey and Emily Kokoll.

For a reprint of this article, please contact reprints@law360.com.

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