Jay-Z-Backed Pot Business Got Millions In PPP Money

By Diana Novak Jones
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Law360 (July 10, 2020, 9:15 PM EDT) -- A cannabis company backed by music mogul Jay-Z and football legend Joe Montana received millions of dollars in Paycheck Protection Program loan money, U.S. Treasury data shows.

Caliva, which operates two dispensaries in California and says it sells its brands of prerolled joints, gummies and other products in more than 200 stores nationwide, received between $2 million and $5 million from the program, according to data released Monday.

The loan went to CMG Partners Inc., which operates out of an office building in San Jose, California, according to the data. Caliva lists CMG Partners Inc. and the same address on its website, under its legal disclosures, and a California Secretary of State search shows CMG Partners' CEO is Dennis O'Malley, the chief executive of Caliva.

The business boasts Jay-Z as its chief brand strategist and took an investment from Montana last year.

Cannabis companies that have direct contact with the plant have viewed PPP loans as off-limits because the loan application requires a certification that the applicant is not engaged in activity that is illegal under federal, state or local law.

That certification keeps attorneys like Alex Malyshev, co-chair of Carter Ledyard & Milburn LLP's hemp and CBD industry group, from telling clients to apply.

"Running a dispensary is still not legal under federal law," Malyshev said.

A representative for Caliva declined to comment.

Congress funded the loans as part of the Coronavirus Aid, Relief and Economic Security Act, a coronavirus relief package passed in March. The $660 billion program offers loans of up to $10 million to small businesses, which typically mean workplaces with fewer than 500 employees. The loans are forgivable if they are spent on employee wages and other specific business expenses.

The U.S. Small Business Administration, which administers the program, has been explicit that businesses engaged in activities that are illegal under federal, state or local law are ineligible for financial assistance. With marijuana legalized in certain states but still banned by the federal Controlled Substances Act, most dispensaries, cultivators and product manufacturers have counted themselves out when it comes to receiving the loans.

Hemp companies are eligible, given the federal legalization of hemp in 2018.

What's less clear is the eligibility of businesses that serve the cannabis industry, or provide services to it without actually touching the plant. Businesses that "derive revenue from marijuana-related activities or that support the end-use of marijuana" are ineligible, according to the SBA. But questions remain about which ancillary cannabis businesses cross those thresholds — and to what extent.

In response to pressure about the transparency of the PPP loan awards, the U.S. Treasury released data on all PPP loans over $150,000. In reviewing the data, Law360 identified several ancillary cannabis businesses that received the loans, highlighting inconsistencies in the way the SBA's rules are applied by the banks that award the cash.

Some cannabis-affiliated companies have said they never took PPP money, despite appearing in the government's data. One cannabis compliance company, Metrc, appeared in the data but told Law360 it had returned the money it received. And cannabis banking and payment services company Hypur showed up in the data, even though the company's chief financial officer said Hypur only discussed a loan with its bank and never actually applied.

At the same time, the SBA said the data only includes active loans, so loans that were canceled for any reason would not appear. The listed loans only reflect that a lender approved the application, not that the SBA has reviewed the eligibility of the recipient — although all loans over $2 million will be reviewed, the agency said.

Caliva stands out because it is a plant-touching business. The company holds 14 marijuana licenses in California, covering retail, cultivation, manufacturing and delivery. It produces more than 11,500 pounds of marijuana each year, and "tens of thousands" of products, according to the company.

In a $75 million funding round last year, Caliva recruited NFL Hall of Famer Montana as an investor, as well as former Yahoo CEO Carol Bartz, according to the company.

The data only reveals a range for the size of the loan Caliva received, but with an average PPP loan size of around $100,000, Caliva's award is in the upper tier.

--Editing by Aaron Pelc.

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

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