SBA’s new Marijuana Business Policy – Is SBA-backed lending to the budding indirect marijuana industry up in smoke?

On April 3rd, the US Small Business Administration issued a benignly-titled policy notice that could have a profound impact on the “budding” marijuana industry. Title “Revised Guidance on Credit Elsewhere and Other Provisions”, the policy notice essentially extends the prohibition on banks using SBA-backed loans from just direct marijuana businesses to indirect marijuana businesses.  The notice notes that the prohibition “currently provides that businesses engaged in any activity that is illegal under federal, state or local law are ineligible for SBA financial assistance. SBA is issuing additional guidance to specifically address businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana.”

What is meant be “businesses … that support the end-use of marijuana”? These are defined as “Indirect Marijuana Businesses”, which is “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 support the use, growth, enhancement or other development of marijuana. Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.”

So what small businesses could derive any of their gross revenue from products or services sold to direct marijuana businesses? The list is long and varied: garden supply companies (you need to read about Hawthorne Gardening Company’s marijuana-related business … and Hawthorne is a subsidiary of Scott’s Miracle-Gro, SMG on NYSE), lawyers, architects, engineers, web designers, etc.

And the Notice forges on, specifically calling out commercial property owners that have the temerity to have tenants such as lawyers, architects, engineers, web designers, etc.,  …

“Leasing Part of a Building Acquired with Loan Proceeds (13 CFR § 120.131). Chapter 2, Paragraph V.F.1.g) (page 131). Currently, this SOP paragraph provides that, during the life of an SBA-guaranteed loan, the borrower may not lease space to a business that is engaged in any activity that is illegal under federal, state or local law. For consistency with the changes identified above regarding marijuana-related businesses, Lenders are advised that, during the life of the SBA-guaranteed loan, a borrower may not lease space to the ineligible businesses described above because the collateral could be subject to seizure and because payments on the SBA loan would be derived from illegal activity. If a borrower does lease to an ineligible marijuana-related business, SBA District Counsel should be consulted to determine what action should be taken.”

So it looks like SBA-backed lending to the budding indirect marijuana business industry may be up in smoke! But as indicated above, whether and how this policy could be enforceable, other than on an after-the-fact basis, is doubtful. At best, hedge funds, private equity lenders, and as always lawyers, stand to do well.

The policy is available at: