As expected, the SAFE Banking Act has officially been reintroduced in Congress. If this passes, banks and financial institutions will be legally allowed to conduct business with state legal cannabis companies. However, there is one major distinction between this year’s legislation and that of the past few sessions. With Democrats now in control of both houses of Congress, this is the first time SAFE Banking has a genuine chance of becoming law, and would be the largest change to the cannabis business landscape since states started legalizing for adults in 2012.
Cannabis businesses have been deemed essential during a global pandemic by nearly every state in which marijuana sales are legal. The passage of this legislation would only reinforce that the emerging cannabis industry is an essential part of our nation’s economy, and will play a major role in the nation’s attempt to rebuild our economy in the wake of the Covid-fueled downturn.
With so many states having recognized the important role that cannabis businesses play in their economies, it is becoming impossible for the federal government to ignore the tremendous potential that cannabis can play in boosting and elevating the nation’s economy during this challenging time. Passage of this language only reinforces that Congress and the federal government can no longer ignore the many positive benefits of ending cannabis prohibition.
Let’s take a look at the potential real world impacts that this new law may have on cannabis businesses across the country.
New Access To Capital
Just how much a SAFE Banking law would open up new capital sources for the cannabis industry remains unknown. After all, this is a wholly unprecedented situation. Never before has the federal government made it explicitly legal for financial institutions to do business with companies that are explicitly violating federal law. While cannabis companies are legal and regulated at the state level, they remain drug traffickers in the eyes of the federal government for openly violating the Controlled Substances Act by cultivating, producing and selling cannabis, which remains a Schedule 1 substance.
That said, since states began legalizing cannabis for adults in 2012, investors have become increasingly comfortable placing capital in states where cannabis businesses are legal, while the federal government has largely left these companies and investors alone as long as everyone is abiding by strict state regulations.
Despite this, raising capital remains a major challenge in the cannabis industry, since large institutional lenders have stayed almost entirely on the sidelines, as have most smaller banks and lenders. Most high-net-worth individual investors have also stayed away, wary of an industry that remains illegal under federal law with no federal exemption for investment into legally regulated state businesses.
While this new law may not open the floodgate for investment, it could lead to a new steady stream of capital injection in the industry rather than a trickle. More than likely, large institutions like Blackrock and Blackstone will still stay on the sidelines while cannabis remains federally illegal. But there are hundreds of smaller banks, particularly state chartered institutions, that may see this as an opportunity to get in on the ground floor of an industry with huge growth potential before their much larger competitors enter the space.
This would be a huge boon for cannabis businesses, as it could open up much needed sources of capital for companies across the country who have largely had to resort to highly dilutive equity raises, less-traditional real estate sale leaseback and extremely high interest loans to fund their businesses growth. This would allow cannabis businesses to receive bank loans at regular rates for standard Capex and build out costs, just like businesses in every other industry.
Passage of this new law would also be a sign to the many individual investors who have sat on the sidelines, fearful of investing their capital into an industry that remains federally illegal, that it is now safe for them to invest in one of the fastest growing industries in America, with blue sky opportunities not seen since the early days of the internet. Similarly, family offices who have fewer regulatory constraints than financial institutions and who have dipped their toes into cannabis investing in recent years, should feel similarly unconstrained to dive in with this new federal protection in place.
Normalizing The Business Of Cannabis
On the business side, there is little doubt that access to banking services will make the day to day operations of cannabis businesses more manageable, as these companies will now be treated more like every other business in America.
If nothing else, having access to regular banking relationships will clear up one of the bigger operating challenges faced by small to large cannabis businesses alike. Currently in most states, operators may have only one or two banks to choose from, which often charge exorbitant fees for basic checking accounts, and may not have a branch located near the business.
Competition also means companies can choose more conveniently located banks. Currently, the only bank in your state willing to do business with the cannabis industry may be located hours from a company’s dispensary or cultivation facility, requiring the business to keep cash on hand for days or weeks at a time until the bank can arrange an armored car pickup.
In some places, cannabis companies still struggle to find a bank account at all, requiring them to do business in all cash.This creates struggles with cash management, cash storage and paying staff and vendors, all while creating security concerns that come with handling and storing large amounts of cash. Under the new law, the days of cannabis being an all cash business would appear to be over.
Freeing up all banks to accept cannabis business accounts means there will be substantially more competition in the market, lowering administrative fees for hosting accounts to regular rates without today’s cannabis premiums. This should also eliminate the current guidance from the Department of Treasury that banks file quarterly suspicious activity reports for all cannabis business accounts, eliminating a major source of financial overhead for banks and further reducing fees for hosting cannabis business bank accounts.
For multi-state operators, opening up access to national banks would dramatically reduce overhead and streamline financial administration in their businesses. Currently companies that do business across the country need to have a different bank in every state, creating an accounting nightmare and challenges moving funds from one location to another. Access to normal banking means that multi-state operators should be able to find one bank with branches across the country, eliminating the current burdensome and unnecessary financial web of banking relationships.
Finally, this new law may open up access to credit card processing, allowing dispensaries to accept payments like any other retail business and further reducing the amount of cash handling by cannabis companies. A recent study found that 23 percent of all retail transactions in the United States are made by credit card, with an additional 28 percent paid by debit card. These common forms of payment should now be available to cannabis businesses, adding a layer of convenience for customers while allowing them to buy their cannabis products using their payment method of choice. Customers may also buy more during their visits, being no longer constrained by a store’s ATM limit.
The passage of this banking legislation would allow the American cannabis industry to continue to grow and expand, allowing them to compete with their counterparts in Canada who already enjoy the ability to do business unfettered by federal illegality. But this should only be seen as the first step in normalizing cannabis business in the United States. Congress must also address other pressing issues hindering the progress of the cannabis industry, including removing the 280e provisions of the IRS tax code that prevents state legal cannabis businesses from claiming standard business deductions on their taxes, and providing a path to ownership in the cannabis industry for social equity operators and others from communities that have born the brunt of cannabis prohibition enforcement.
As great as all of these reforms will be for the nascent American cannabis industry, Congress’ work must not end until it has finally dismantled cannabis prohibition in its entirety and legalized cannabis use and commerce for all adults. Much like the federal government ended alcohol prohibition largely as a response to the Great Depression, legalizing marijuana federally must be part of the federal government’s response to the Covid fueled economic downturn that we will likely be recovering from for years to come. Congress and the Biden administration cannot afford to allow the United States to miss out on the tremendous economic benefits the country would reap from finally ending the nation’s disastrous experiment with marijuana prohibition.
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