Ban on SBA Loans for Adult Businesses Not New – But Is It Applicable?

WASHINGTON, D.C. – By now, you’ve probably heard that there’s language in the U.S. Small Business Administration’s (“SBA”) COVID-19 Economic Injury Disaster Loan application which appears to preclude the possibility of adult entertainment businesses applying for such loans.

In the second section of the multiple-page application (which the SBA estimates takes two hours and ten minutes to complete), applicants are required to review and check off a series of statements, all of which must apply to the applicant in order to be deemed eligible for the disaster loan. The fourth of those statements reads as follows:

“Applicant does 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 first thing to note about this apparent prohibition on providing SBA loans to adult businesses is that it’s nothing new.

“The exclusion has been part of the SBA loan requirements for many years,” attorney Larry Walters confirmed to YNOT.

The exclusion appears to have originated in a rule proposed in December 1995, in which the SBA wrote that “having considered the legal precedent and the Congressional mandate, SBA has determined that it may exclude small businesses engaging in lawful activities of an obscene, pornographic, or prurient sexual nature.”

“Under the proposed rule, SBA would not provide financial assistance to small businesses which present live performances of a prurient sexual nature or which derive significant gross revenue from the sale, on a regular basis, of products or services, or the presentation of depictions or displays, of a pornographic, obscene, or prurient sexual nature,” the SBA wrote in its proposed rule. “Thus, an establishment featuring nude dancing, or a book, magazine or video store containing merchandise of a prurient sexual nature would not be eligible for SBA financial assistance if the obscene, pornographic, or prurient activity contributed to the generation of a significant portion of the gross revenue of the business.”

The SBA added that it considered the proposed rule to be “consistent with its obligation to direct its limited resources and financial assistance to small businesses in ways which will best accomplish SBA’s mission, serve its constituency, and serve the public interest.”

“Applicants’ First Amendment freedoms are in no way abridged,” the SBA asserted at the time. “They may still express their views, exercise their freedoms, operate their businesses, and obtain any other aid available to them.”

Asked whether any adult business has ever challenged the ban, neither Walters nor Reed Lee, who sits on the Board of Directors of the Free Speech Coalition and chairs the FSC Legal Committee, knew of any prior litigation concerning the rule.

“I am not aware of any constitutional challenges by adult businesses, although there has been some discussion of potential litigation now that so many adult businesses are impacted by COVID-19,” Walters said.

Lee said he is “not aware of any particular challenges so far,” but added that the FSC “and others are looking into that history.”

Both attorneys noted that while the language on the SBA’s loan application invokes terms used in obscenity law, the prohibition is stated in a way that suggests its scope is very wide and would include businesses that don’t offer anything which is likely to be construed as “obscene” as that term is defined under the Miller test.

“The restriction on loans based on prurient sexually explicit entertainment appears to be unconstitutional as a content-based condition on a governmental benefit,” Walters said. “Prurient speech is presumed to be protected under the First Amendment unless it is obscene. The exclusion is not limited to obscenity but appears much broader.”

Lee added that as a constitutional matter, “things can get tricky when government offers tax breaks or other subsidies to support expression which it wants to promote but withholds those benefits from expression which it does not want to promote.”

“The government could fund a National Endowment for Democracy without also funding a National Endowment for Fascism,” Lee said. “But here, it is hard to characterize the very-widely-available government assistance as any sort of speech-subsidy at all (the airline industry transports, it does not speak); so if any kind of litigation becomes necessary, the usual rule against applying an unconstitutional conditions to a government benefit might well win the day after all.”

Lee added it is “important to note that in constitutional free expression law, which seems to be the issue here, the term ‘prurient’ has had a very, very narrow meaning in Supreme Court cases.”

“For at least half a century, the Court has expressly equated the term with ‘a shameful or morbid interest in sex, nudity, or excretion,’” Lee said. “So whatever metaphorical meaning might have been conjured in the past from the Latin root (‘to itch’) when speaking of ‘prurient’ private love letters or classical poetry, contemporary law has consistently used the terms to narrow restrictions on sexually explicit expression.”

“’Morbid’ means ‘of or pertaining to disease,’” Lee continued, “and contemporary society seems not to consider much pornography as particularly ‘shameful’ anymore. So, it may be that no constitutional problem is presented in the first place, because adult entertainment and pleasure product businesses are not ‘prurient,’ as the law understands that term.”

Like Lee, Walters homed in on the term “prurient” and the specificity of its definition – and the rare use of the term outside obscenity law.

“Few people have encountered the term prurient in ordinary conversation,” Walters said. “However, it is part of the Miller test for obscenity.”

Walters added that in defending obscenity cases, “we would conduct surveys of how many people could define the word prurient or properly use it in a sentence.”

“Not surprisingly, few could,” Walters said. “Courts have interpreted the term prurient to mean a shameful or morbid interest in nudity, sex, or excretion. Adult businesses owners may very well believe that their entertainment does not appeal to a shameful or morbid interest, but a healthy or natural one.”

Lee and Walters both summed up their remarks by emphasizing that the decision on whether to apply for an SBA disaster relief loan is something adult businesses should discuss with their own attorneys.

“Any eligible individuals should consult with their lawyers to evaluate whether their business is excluded by the SBA provision,” Walters said.

“Each adult business thinking about the available federal assistance should certainly consult its lawyers before concluding that these government programs are not open to it,” Lee concluded.