In yet another setback for hemp and marijuana-adjacent businesses, the U.S. Small Business Administration (SBA) has quietly reintroduced a policy that effectively disqualifies most of them from critical federal loan programs. The updated policy, effective June 1, has far-reaching consequences for small businesses operating in compliance with state law (and for some, in compliance with federal law) – especially those selling hemp-derived foods, supplements, and cosmetics (collectively, “Consumable Hemp Products”).
In a previous post, America’s Missed Opportunity in the Global Marijuana Market, I outlined the broader systemic issues facing the marijuana industry. This latest shift by the SBA, however, zeroes in on hemp operators, especially those producing or selling Consumable Hemp Products.
(A note on terminology before I get started: Given how U.S. law separates marijuana and hemp, it’s time for both the industry and regulators to stop using ‘cannabis’ as a stand-in for marijuana. Cannabis is the plant species that includes both marijuana and hemp. Using ‘cannabis’ to mean only marijuana creates unnecessary confusion – especially since ‘cannabis’ could just as easily refer to hemp. If you’re referring to both, then ‘cannabis’ is appropriate. Otherwise, be specific.)
SBA policy timeline: A whiplash-inducing history
The SBA’s latest update to its 7(a) and 504 loan programs represents a return to the more restrictive, 2020 policy. This shift may not only severely limit access to these critical funding programs for operators involved with Consumable Hemp Products but also impact ancillary businesses serving both cannabis industries
The SBA’s 7(a) and 504 loan programs have supported small business growth for almost two decades. The 7(a) loan is the SBA’s flagship program for general business financing, while the 504 program offers long-term, fixed-rate funding for major capital investments like real estate and equipment – essential tools for expansion and job creation.
Since the passage of the Agricultural Improvement Act of 2018 (commonly known as the 2018 Farm Bill), which federally legalized hemp, the SBA has updated its policies several times, including how it addresses hemp-derived businesses. These policy changes reflect not only the tension between federal and state law but also shifting political winds and agency interpretation.
The SBA’s first policy following the 2018 Farm Bill briefly acknowledged that hemp businesses complying with federal law were eligible for SBA loans
This marked a more comprehensive approach. Lenders were tasked with verifying compliance with all applicable laws, and the SBA offered detailed guidance on evaluating CBD-related businesses. These rules form the backbone of the current policy.
In a surprising shift, this policy removed all references to hemp. Instead, it simply stated that SBA loans were unavailable to businesses engaged in activities illegal under federal, state, or local law – explicitly using marijuana as an example.
Further removed the marijuana example from the August 2023 policy.
This update reintroduces and expands on the 2020 restrictions, explicitly targeting Consumable Hemp Products. Specifically, it emphasizes that the addition of CBD to any human or animal food, dietary supplement, or certain cosmetics is prohibited under the federal Food, Drug, and Cosmetic Act (FD&C Act), and links to FDA guidance that includes products with THC in this prohibition as well.
The new policy requires hemp businesses to comply with all applicable federal, state, and local laws, but given the FD&C Act’s prohibitions, most are now categorically ineligible.
(Another quick sidebar: The Consumable Hemp Product sector has grown rapidly, and not always responsibly. Many bad actors have pushed products with little regard for compliance or consumer health & safety. These operators should not receive federal support. But compliant, responsible, and well-intentioned businesses are being swept up in the fallout. The SBA’s new policy risks punishing good actors because of bad ones.)
Implications of the new SBA policy for small operators
This new SBA policy disproportionately harms the businesses the SBA is designed to support. Large, well-capitalized companies, backed by millionaire or billionaire investors, can often secure private funding. But for small, independently owned businesses, many of which are still struggling to scale in a competitive market, these loan programs represent a critical source of support.
Similar to what I discussed in Is There a Method to the Mayhem? The Stock Market and a Potential Cannabis Collapse, the hemp market already shows signs of volatility. Denying small, compliant hemp businesses access to SBA capital will only accelerate that trend, pushing out mom-and-pop operators and concentrating industry control in the hands of a few.
The FD&C Act has always made consumable hemp products illegal – most operators just don’t realize it, or don’t care
Let’s be clear: the FDA has not meaningfully enforced the FD&C Act when it comes to Consumable Hemp Products. Instead, it has focused on operators making unsubstantiated medical claims. This non-enforcement created an “illusion of legality” and allowed the market to flourish – despite underlying noncompliance.
But now, the SBA is stepping in where the FDA hasn’t. By shifting the hemp compliance burden to lenders, the SBA has created a new chokepoint. Effectively enforcing federal restrictions without actual enforcement.
Since 2018, most hemp operators have focused almost exclusively on the Controlled Substances Act (CSA). They assume that since “hemp” was removed from the definition of “marihuana,” their products were legal. But that’s a dangerously narrow reading. They completely ignore the FD&C Act and state hemp laws (remember, you must comply with laws in both the originating state and destination state).
Section 301(II) of the FD&C Act, and related policies, expressly prohibit introducing or delivering for introduction into interstate commerce any food (including animal food or feed) to which THC or CBD has been added. This isn’t new. It has been around for a while. So yes, the THC/CBD hemp seltzers at Total Wine and gummies at your local convenience store are illegal under federal law.
Let me be absolutely clear: Consumable Hemp Products sold across state lines are illegal under federal law. Full stop.
Key factors SBA lenders must now evaluate
Lenders must assess a hemp business’s eligibility based on several factors that “include, but are not limited to, the following:” (emphasis added)
- Source of CBD – Whether the product is derived from hemp or marijuana.
[This distinction reinforces the irrationality of current federal policy. If the final product meets the 0.3% THC limit, why should the source matter?]
- Product Type – Specifically, whether the products are topical or intended for topical application or ingestion.
[This is where the FD&C Act comes into play. Products, like beverages, gummies, and supplements, are generally prohibited.]
- Health Claims – Are any therapeutic or medical claims being made about the product(s).
[While this is already monitored to some degree, the SBA policy makes clear this is a key area of focus.]
- Compliance with All Applicable Laws – Including FDA, federal, state, and local regulations.
[This is the biggest barrier for almost all operators. Due to the FD&C Act’s express restrictions, nearly all Consumable Hemp Product businesses will fail this requirement.]
Some businesses operating legally under state and federal law may not be safe
The SBA’s policy includes language that expressly prohibits some fully legal and compliant businesses from receiving loans. It also prohibits “businesses that derive revenue from marijuana-related activities” from eligibility – a phrase vague enough to allow for near-unlimited discretion by lenders. Many of which will understandably adopt an overly cautious interpretation, resulting in de facto disqualification even where the law doesn’t expressly prohibit funding.
What about purely intrastate hemp operators?
The FD&C Act primarily governs interstate commerce. So, hemp businesses operating entirely within a single state – and compliant with that state’s laws – may still qualify for SBA loans. But this is a narrow window, and even these businesses should expect intense lender scrutiny.
Paraphernalia businesses operating in states where sales are expressly legal
The SBA policy also disqualifies businesses selling items “primarily intended or designed for marijuana use,” like bongs, pipes, and vaporizers. But under 21 U.S.C. § 863(f)(1), these items are not illegal federally if authorized by state or local law.
In around 15 states, marijuana-related paraphernalia is explicitly legal. Yet the SBA’s blanket prohibition ignores that reality – inviting a legal challenge. For example, a head shop in Washington State selling glass marijuana pipes and vaporizers operates completely legally under state law (and thus, federal law), would be categorically denied SBA funding under this policy.
If any such paraphernalia business is interested in challenging this policy, I would encourage them to do so – particularly in light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which curtailed agency deference and emphasized the judiciary’s role in reviewing whether agencies have overstepped their statutory authority. This may be an ideal test case since the agency policy directly contradicts a explicit federal statute.
Ancillary businesses with indirect revenue ties
Perhaps most troubling is the SBA’s vague application of the term “derive revenue from marijuana-related activities.” This could encompass a wide range of ancillary businesses that do not handle the plant, do not sell to consumers, and do not engage in any activity illegal under state or federal law (yes, arguments can be made for aiding and abetting and conspiracy, but that discussion is for another day). It will all depend entirely on how conservatively a lender interprets “revenue derived from marijuana-related activities.”
This could lead to an odd situation where small business competitors of some NASDAQ listed companies might not qualify for these SBA loans, despite their larger contemporaries being listed on a public exchange (subject to what I discuss below about potential delisting).
For example, some businesses that could now be denied by SBA lenders are:
- Online platforms and software providers that serve marijuana operators (e.g., think Agrify Corp. – listed on NASDAQ)
- Hydroponic equipment suppliers that market to marijuana growers or knowing sell to marijuana grower (e.g., GrowGeneration Corp. – listed on NASDAQ)
- Packaging or compliance companies witch service marijuana operators
- Other hemp operators not working with Consumable Hemp Products, but have traceable amounts of THC or CBD in their biomass/product
- Attorneys, law firms, accountants, financial advisors, etc. that represent or work with marijuana operators.
While the above businesses/industries, are not expressly disqualified by the plain text of the SBA policy, the broadness of the language could lead to such an outcome. Because the burden of compliance and risk lies with lenders, many lenders will likely take an overly cautious approach and deny applications – creating de facto ineligibility for businesses that should otherwise qualify.
The SBA’s revised policy marks yet another instance where cannabis-related businesses, even those operating entirely within the bounds of state and sometimes federal law, are punished not for illegality, but for proximity and uncertainty.
Could other agencies follow SBA’s lead?
What makes this policy shift so dangerous is not just what it says, but what it signals. As stated above, what makes the SBA’s current policy especially significant is that 7(a) and 504 loans place the burden of legal compliance for issuing these loans on SBA lenders, not the SBA itself. When lenders are tasked with interpreting vague legality standards, they’ll usually err on the side of risk aversion. We’ve seen this movie before in cannabis banking.
Could we see other agencies implement similar language into their regulations and policies? It wouldn’t be surprising given some of the “Refer Madness” proponents being placed in agencies throughout our federal government. Below are just a few example of what we could see, applying the same or similar language to the current SBA policy:
- The Attorney General or Treasury Department could issues a memo clarifying that banks are not permitted to work with Consumable Hemp Product operators or marijuana-adjacent businesses.
- The Department of Homeland Security could bar foreigners from entering the U.S., or terminate Visas of those already here, if they work with Consumable Hemp Products or marijuana-adjacent businesses.
- The SEC could place pressure on the NASDAQ to delist certain businesses (two of which I list above).
- USPS could update its current hemp policies policies to prohibit the shipment any hemp products.
- The IRS could issue guidance claiming that IRC 280E applies to Consumable Hemp Products because they fall “within the meaning of [a] schedule I . . . controlled substance” (this, like the paraphernalia discussion above, would be subject to legal challenge – especially in the 4th and 9th Circuits – but could cause major headaches within the industry).
- While not a federal agency, some right-leaning federal bankruptcy courts could determine that Consumable Hemp Product operators are not subject to bankruptcy protections due to violations of federal law.
Conclusion: the days of Consumable Hemp Product operators skirting federal illegality may be ending
For years, hemp businesses relied on a combination of loopholes, non-enforcement, and regulatory ambiguity to build billion-dollar markets. But the SBA’s June 1 policy shows how fragile that foundation was. Even without an active enforcement regime, federal agencies can still erect walls by forcing third parties – like lenders – to interpret the law.
For small businesses, this is especially dangerous. Unlike well-funded operators with access to private capital, they depend on SBA programs to survive and grow. With this new policy, compliance confusion becomes a death sentence.
Further, other federal agencies may see that neither DEA nor FDA need to enforce federal law to shut down the Consumable Hemp Product industry. All that may be required is well placed federal policies that demand compliance with the FD&C Act.
Call to Action
If you’re a hemp operator or ancillary marijuana business affected by this policy:
- Conduct a compliance audit of your business, including FDA and FD&C Act exposure.
- Evaluate whether you operate solely intrastate, which may provide a defense.
- Engage legal counsel to assess your specific eligibility and navigate these complex federal guidelines.
- Consider challenging the policy, especially if you’re excluded despite clear legal compliance.
This is a pivotal moment. The SBA policy could either be a temporary roadblock or the beginning of a coordinated regulatory crackdown on Consumable Hemp Products. What happens next depends on how the industry responds.
Navigating the Legal Minefield of Hemp Businesses
The hemp industry has come a long way since the 2018 Farm Bill, but its legal landscape remains anything but straightforward. At Harris Sliwoski, we’ve taken a steady, realistic approach to the risks and opportunities in this sector, because when the law is unsettled, good advice matters more than ever.
Yes, hemp with less than 0.3% THC is federally legal. But that doesn’t mean every hemp product is legal, or that every agency, state, or local authority agrees on what “legal” even means. Between shifting FDA guidance, banking headaches, inconsistent state rules, and sudden enforcement swings, hemp businesses operate in a thicket of legal uncertainty.
We’ve seen too many businesses get burned by legal advice that was overly confident or willfully blind to regulatory gray areas. That’s not how we work. Our focus is on helping clients move forward without getting blindsided. We do this by staying current, digging deep, and telling our clients the truth about the risks they face – even when it’s not what they want to hear.
Our clients include farmers, processors, retailers, and investors who want to build sustainable hemp businesses that can stand up to scrutiny. We help them do that with strategies grounded in law, not wishful thinking.
For hemp businesses, staying ahead means recognizing that today’s legal gray area could be tomorrow’s red line.
from Canna Law Blog – Harris Sliwoski LLP https://ift.tt/gqsC5d4
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