WASHINGTON — Attorney Derek Adams, an expert on Small Business Administration (SBA) Loans, has penned an op-ed arguing that the SBA “can and should refrain from applying its ineligibility rules” — including the so-called “prurient clause” that discriminates against sexually oriented businesses — at the time of loan forgiveness.

Adams anticipates that the SBA will attempt “to apply its ineligibility rules at the time of loan forgiveness requests.”

Currently a partner in the DC litigation practice of Potomac Law Group, Adams is a former trial attorney at the U.S. Department of Justice, where he led matters under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

According to his Potomac Law Group bio, Adams has also “counseled businesses and nonprofits to help them reduce risk of a Small Business Administration or Department of Justice investigation related to loans obtained under the Paycheck Protection Program (PPP).”

A Controversial Aspect

In his op-ed “Leave Ineligibility Rules Out of PPP Forgiveness Decisions,” published today by the Washington Business Journal, Adams calls the PPP “the $659 billion crown jewel of Congress’ efforts to help small businesses through the Covid-19 pandemic.”

“One controversial aspect of the SBA’s administration of the program,” Adam writes, “has been its application of traditional SBA ineligibility rules to PPP borrowers. These rules, found within SBA’s regulations and standard operating procedures, prohibit various types of businesses from obtaining loans, such as certain financial, gambling, private club or lobbying businesses; passive businesses; pyramid sale businesses; businesses of a prurient sexual nature; speculative businesses; business owners with criminal histories; businesses with prior federal loan defaults; and others.”

As XBIZ has been covering since the loans were announced, the “prurient” clause on the SBA loan application form replicates mid-1990s language designed to discriminate against sexually oriented businesses.

The form compels applicants to declare that they do not “present live performances of a prurient sexual nature or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.”

The word “prurient” is an imprecise, obscure word that means “appealing to unhealthy sexual interests” and was used by the U.S. Supreme Court in a landmark 1973 ruling. Several members of the adult entertainment community and First Amendment lawyers have pointed out that people who do not consider their sexual expression “unhealthy” are exempt from application of the “prurient” clause.

But, as Adams’ op-ed correctly points, PPP “was a program principally designed to help American workers rather than specific types of businesses.”

Historic Ineligibility Rules

The SBA loans expert adds that the federal agency’s “use of its historic ineligibility rules for PPP has been challenged in courts throughout the country, with some ruling for borrowers and others upholding the SBA’s restrictions,” and quotes one court’s opinion that “Congress did not pick winners and losers in the PPP,” but rather provided “support to all Americans employed by all small businesses that satisfied the two eligibility requirements.”

“PPP was designed to get money out the door quickly and worry about qualification issues later,” Adams writes. “Lenders were required to perform minimal, to no, due diligence at the time of loan closing, relying instead on the borrower’s certifications. It is now, at the time of loan forgiveness, when many borrowers will be told for the first time that they weren’t eligible for a loan to begin with and must immediately repay the money. “

Adams calls this scenario “especially punitive since these borrowers will have already paid out their funds to American workers, consistent with the act’s purpose and Congress’ intent.”

“The SBA can and should refrain from applying its ineligibility rules at the time of loan forgiveness,” he concludes. “It should leave the policy decisions to Congress and avoid picking and choosing the winners and losers at the time of loan forgiveness.”

To read Derek Adams’ “Leave Ineligibility Rules Out of PPP Forgiveness Decisions,” visit the Washington Business Journal.