Compared to businesses in other industries, there is no debate that legally operating cannabis-related businesses (referred to herein as “cannabis companies”) are disadvantaged in their efforts to raise capital and thus grow their business. This disparity is especially stark as it relates to cannabis companies seeking to raise debt capital through loan arrangements with financial institutions and private lenders. As a result of the continued federal illegality of marijuana, would-be lenders are hesitant (or, more commonly, outright unwilling) to deploy their capital to cannabis companies for fear of being penalized by federal banking regulators. The primary justifications for assessing penalties on lenders who do transact with cannabis companies are (1) that the proceeds of a loan to a cannabis company inevitably fund “unlawful activity” (i.e., the cultivation, processing and sale of cannabis products) and/or (2) the proceeds deposited by cannabis companies in saving institutions are deemed generated from unlawful activity and are therefore subject to anti-money laundering (AML) regulations.
How Limited Financial Services Affect the Cannabis Industry
The unwillingness of many banks and other financial institutions to provide financial services to cannabis companies hamstrings the companies in a number of ways; most prominently, it (1) limits the financial services available to cannabis companies (i.e., maintaining deposit accounts and providing payment processing solutions) forcing them to hold large amounts of cash on hand, and (2) bars access to loans, which are typically on more attractive terms than the loan arrangements cannabis companies currently have access to.
Cannabis companies (especially retailers) that hold a large amount of cash on hand pose a safety risk to employees and the community at large by placing the business in the crosshairs of a potential robbery. The root sources of this cash heavy condition are (1) the risk of loss associated with depositing cash with a savings institution in light of federal regulators’ view that such cash is the proceeds of unlawful activity, and (2) the inability of cannabis companies to accept credit cards as a result of the limitation of financial services provided to these companies. To combat the public safety risks, cannabis companies must expend substantial resources on security personnel and equipment, cash counting machines and safes. However, these deterrents are less effective against internal theft perpetrated by employees or service providers who are tempted by the accessible cash on hand.
Loans provide a company with access to liquidity more quickly than can be generated solely by its revenue stream. This allows a company to invest in its growth and weather declines in the market. The largest commercial lenders in the market are subject to scrutiny from federal regulators, which causes them to avoid providing any financial services to cannabis companies. These institutions wield such leverage in the commercial loan markets that they can offer their qualified borrowers fair and favorable terms. Currently, cannabis companies have extremely limited access to transacting with these institutions and are forced to fundraise through other means that are often for smaller amounts and on less friendly terms than those available from a large commercial lender. As a result of the cannabis barricade surrounding the commercial loan market, promising cannabis companies are prevented from growing, forced to close their doors, and have their ability to recover from unforeseen events affecting inventory and revenue severely compromised.
Alas, there is hope on the horizon. On April 20, 2021, the House of Representatives passed the Secure and Fair Enforcement Banking Act of 2021 (the “SAFE Banking Act” or the “Act”), which seeks to surgically address the impediments affecting cannabis companies’ access to financial services without legalizing cannabis at the federal level or reforming other federal policies that inordinately disadvantage otherwise legal companies.
Overview of the SAFE Banking Act
The SAFE Banking Act aims to reduce the amount of cash held by cannabis companies and increase public safety by means of making the full range of financial services available to cannabis companies and prohibiting federal banking regulators from penalizing a financial institution for providing such services. As long as a cannabis company is legitimately operating in a state where cannabis is legal under state law (either for medical use, recreational use or both), then financial institutions subject to federal regulation will not be penalized for providing financial services and extending loans to such cannabis companies. This bill dates back to 2019 and has undergone a number of revisions from both sides of the aisle. While previous versions of the bill have attempted to institute broad federal reform of cannabis laws, the Act as passed in the House is a commonsense approach to addressing the issues noted herein and has been met with bipartisan support.
The SAFE Banking Act is an extraordinarily short bill relative to its potential (and monumental) impact on the cannabis industry. The Act includes the following provisions:
- Prohibits federal banking regulators from penalizing banks and savings institutions (collectively, “depository banks”) for providing banking services to cannabis companies, and even goes so far as to prohibit any practices that induce depository banks to avoid providing services to cannabis companies.
- Establishes that proceeds generated by cannabis companies are no longer considered proceeds generated through unlawful activity, removing such proceeds from the purview of AML regulations.
- Protects depository banks from being liable for providing a loan or banking services to a cannabis company, including protection from asset forfeiture, which has previously been suffered by some depository banks that have provided banking services to cannabis companies.
- Prohibits federal banking regulators from requesting or ordering a depository bank to terminate a customer account solely due to such customer’s affiliation with a cannabis company unless there is a valid reason for doing so. Valid reasons include the protection of national security interests and preventing involvement with financing a terrorist organization but do not include merely preventing reputational harm.
The Act does not do any of the following:
- Legalize or de-schedule marijuana; or
- Apply to non-bank lenders or other financial institutions that are not banks or savings institutions.
Additionally, the Act extends to cover legitimate hemp-related businesses, including those in the business of processing, manufacturing, distributing and selling cannabidiol (CBD). Lastly, the Act contains provisions related to increasing social equity, a common component in cannabis-related regulations promulgated at the state and local level. As a part of the Act, federal banking regulators are required to issue annual reports to Congress including data on the availability of access to financial services for minority-owned and women-owned cannabis companies and their recommendations for expanding access to the financial services for such historically disadvantaged businesses.
The SAFE Banking Act removes the disadvantages experienced by cannabis companies as a result of their ostracization in the commercial loan market and provides cannabis companies with the ability to reduce cash on hand through safe and reliable banking services. These simple measures benefit all cannabis companies, their shareholders and their employees.
The bill is currently with the Senate Committee on Banking, Housing, and Urban Affairs. Majority Leader Chuck Schumer is optimistic that the bill will pass in the Senate and be on its way to the president’s desk later this year. While the Act receives bipartisan support in Congress, there are still opponents to its passage.
As the law stands today, cannabis companies are treated as outcasts not worthy of full participation in the American economy, despite being legitimate, compliant businesses that provide employment, tax revenue and comfort to thousands of communities nationwide. The Act is a commonsense measure to ensure that all legal businesses are afforded equal access to the capital markets and a chance to succeed.
- R. 1996, Secure and Fair Enforcement Banking Act of 2021 (April 20, 2021)
- The Cost of Cash for Unbanked Cannabis Businesses, by Anh Hatzopoulos,
- US Congress Passes Cannabis SAFE Banking Act, by Madeline Collie (April 28, 2021)
- What would the SAFE Banking Act actually do for the cannabis industry?, by Reed Smith LLP (June 16, 2021)