CAN MY VENTURE-BACKED STARTUP BENEFIT FROM A PAYROLL PROTECTION PROGRAM LOAN?

With so many companies’ runways depleting in these unprecedented times, many companies are seeking relief through the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). One attractive program falling within the U.S. Small Business Administration’s (SBA’s) Section 7(a) loan program is called the Paycheck Protection Program (the “PPP”), where a business can receive a forgivable loan in amount up to 2.5 X its average monthly payroll for the prior year.

To be eligible for an SBA loan a business must meet the size
qualifications
for a “small business concern”, or
alternatively, in the case of PPP, employ fewer than 500 employees. A
businesses qualification as a “small business concern”, however, can be
frustrated by a business’s association with other companies or investors as
provided under 13 CFR §121.301.

These
affiliation rules consider the amount of control or power a third party has to
control the applicant. While the rules are somewhat nuanced and consider the
totality of circumstances, businesses can conduct a simple back-of-the-envelope
exercise to help determine eligibility:

  • Do
    any of our investors own 50% or more of the outstanding shares of our company?
  • Do
    any of our investors have the right to purchase (through options, warrants, or
    other means) 50% or more of the outstanding shares of our company?
  • Do
    any of our investors control a majority of our board of directors?
  • Do
    any investors have the right to prevent a quorum or otherwise block action by
    the board of directors or shareholders?

Where your
company has to answer any of these questions in the affirmative, you will
likely need to add in the number of employees and annual receipts of your
investor (and the investors affiliates) to determine your eligibility as a
“small business concern”. A notable exception to this rule applies where a
company is classified under NAICS Sector 72 (food services, etc.). Additionally,
there is some speculation that the Treasury will release guidance simplifying
the guidelines for PPP eligibility, and potentially loosening the affiliation
rules for these extraordinary circumstances such that a small business that is
not controlled by a single outside shareholder will be eligible. Accordingly,
if you fall into this camp, please stay posted.

Where your
company can answer all of these questions in the negative, and where your
company meets the prior referenced size qualifications, you company will
qualify as a “small business concern” eligible for the PPP and other SBA
Section 7(a) loans. In this case, we implore you to reach out to your SBA
approved lender as soon as possible to submit your loan application.

Please
acknowledge that this write-up is meant for informational purposes only and is
not intended as legal advice.

By David
H. Pierce

Protecting Your Hemp and CBD Brand Through Trademarks

The 2018 Farm Bill was passed on December 20, 2018, and, among other things, removed hemp from the definition of marijuana under the Controlled Substances Act (“CSA”). Prior to the passage of this Farm Bill, the U.S. Patent and Trademark Office (“USPTO”) could refuse any cannabis or cannabis-related trademark application, on its face, because the identified goods and/or services were unlawful under the CSA. In other words, because the good or service for which the trademark was being sought was not in lawful use in interstate commerce, the USPTO would not grant federal trademark protection. With the passage of the Farm Bill, the USPTO is having to change its review practices to handle the confusion that the Bill created as to the trademark rights of cannabis or cannabis-related businesses.

On May 2, 2019, the USPTO issued new guidance addressed to its trademark examiners on how to handle trademark applications for cannabis-related products. The guidance reiterates that a product ‘must first be in lawful use’ to receive a federal trademark. As it relates to cannabis or cannabis-related trademarks filed on or after December 20, 2018, a lawful use determination “requires consultation of several different federal laws” including the CSA and the Federal Food Drug and Cosmetic Act (“FDCA”). The FDCA, which is overseen by the Food and Drug Administration (“FDA”), makes it unlawful to introduce hemp-derived foods, beverages, dietary supplements, or pet treats unless approved by the FDA. Additionally, under the FDCA, “any product intended to have a therapeutic or medical use intended to affect the structure or function of the body” is a drug. Drugs cannot be distributed or sold in interstate commerce unless approved by the FDA. At present, other than Epidiolex, a plant-derived CBD product used to treat two pediatric epilepsy disorders, no cannabis-derived drug products have been approved by the FDA. The FDA recently restated its viewpoint on the market for CBD products in a revised consumer update and is carefully monitoring the space, having issued 15 warning letters to cannabis-related companies selling products in violation of the FDCA.

For trademark applications filed before December 20, 2018, the examiners may allow applicants to amend their applications to claim a December 20, 2018 filing date to overcome a refusal based on the CSA. As the trademark can still be denied for the other reasons as discussed above, examiners may also allow applicants to amend the original filing basis to an “intent-to-use” basis. With the date change and the “intent to use” change, the examiner will conduct a new search of conflicting trademarks in the USPTO’s records. If applicants choose not to amend their application, they can abandon the application and re-file or respond to the examiner’s office action with evidence to oppose the examiner’s determination. As it relates to hemp cultivation or production services, the examiners will investigate the applicant’s legal ability to cultivate and produce hemp. Per the 2018 Farm Bill, hemp must be produced “under license or authorization by a state, territory, or tribal government in accordance with a plan approved by the U.S. Department of Agriculture (USDA) for the commercial production of hemp.” However, the USDA has not approved any state, territory, or tribal government hemp production plan. Therefore, hemp cultivation or production services trademark applications could still be denied despite the 2018 Farm Bill.

While there is still uncertainty about the future for granting federal cannabis or cannabis-related trademarks, applicants can seek state trademark registration or protect their rights against copiers at common law. Each trademark strategy must be tailored to the applicant’s business and products.

Written by: Stan Sater and David H. Pierce

 

 


Commentary by Stan Sater & David H. Pierce.  David is a corporate and IP lawyer at Founders Legal. He can be reached at [email protected]