On one of the ugliest days of sleet and rain in recent memory, it was bright for some: NJ Gov Phil Murphy signed three legal weed bills into existence Monday Morning.
After weeks of debate over taxes and penalties for those under 21, legal marijuana passed twenty minutes before the deadline to set legalization rules- Murphy’s movement to legalize pot in the Garden State nearly ran out of time.
But shortly after the Senate came to an agreement, Murphy put pen to paper. Recreational users can possess up to six ounces of marijuana without legal consequence. Users under 21 will be in civil trouble if caught, using a three-strike, no-fine warning system.
The new law also decriminalizes underage alcohol use and halts the police’s ability to stop kids if they smell like pot- they can only give out warnings. Past Marijuana convictions and charges have been made easier to expunge, with comments from the ACLU that this is just the beginning of fair and legal drug culture in the Garden State.
Rec users will have to wait until Murphy sets up the Cannabis Regulatory Commission, and for NJ’s 13 medical marijuana dispensaries to ramp up production and open their doors. The current grower market in NJ can just meet the demands of the state’s 100,000 medical consumers according to NJ.com, and as the only state to legalize in the entire DC-NYC metro area, there will be at least a slight uptick in demand.
Experts still think that new stores could open in late 2021. Until then, Murphy can at least finally say he met his goal to legalize pot in his first 100 days- three years later.
“Starting immediately, those who had been subject to an arrest for petty marijuana possession, an arrest that may have kept them from a job or the opportunity to further their education,” Murphy said. “Will be able to get relief and move forward.”
One chill result from the 2020 election was the legalization of recreational marijuana in New Jersey for adult use. In a 2-1 victory, Option One on New Jersey ballots passed, paving the way for a regulated environment for recreational use, possession, and cultivation in the Garden State.
Time to legalize it. pic.twitter.com/157WC7qgof
— Governor Phil Murphy (@GovMurphy) October 28, 2020
Before the vote, Gov. Murphy showed support
We did it, New Jersey!
Public Question #1 to legalize adult-use marijuana passed overwhelmingly tonight, a huge step forward for racial and social justice and our economy. Thank you to @NJCAN2020 and all the advocates for standing on the right side of history.
— Phil Murphy (@PhilMurphyNJ) November 4, 2020
The amendment was billed as not only a chance to increase tax revenue but as civil rights reform. Advocates argued that prohibition laws disproportionately harmed minority communities.
The change was initially put before the legislature in 2017 but failed to pass by 2019. A bipartisan supermajority put the choice up to the public referendum. Appearing in Willingboro on Tuesday, long time advocate of legalization, Gov. Phil Murphy, spoke on voting day in last-minute support.
“I got to supporting it first and foremost due to social justice,” Murphy said. “We inherited when I became governor the largest white, nonwhite gap of persons incarcerated in America, and the biggest contributor to that was low-end drug offenses.”
New Jersey was one of four states with legalization on the ballot, and all succeeded, bringing adult use to Arizona, Montana, and South Dakota as well. After Tuesday, more than 111 million Americans- a third of the country live in a state where recreational marijuana is legal.
Blue = Legal
Dark Green = Legal for medical use
Light Green = Legal for medical use – limited THC content
Grey = Prohibited for any use
D = Decriminalized
Cannabis legalization advocates, like Doctors For Cannabis Regulation (DFCR), saw the day as a significant victory for industry and social progress. Dr. David Nathan founded DFCR in 2015, where he serves as president of the board. Dr. Nathan stood up and spoke out against the prohibition of marijuana 11 years ago and said he was one of the first accredited mainstream physicians to do so.
“I’m not a medical cannabis physician, I’m a psychiatrist who sees how much damage cannabis prohibition does compared to the drug itself,” Dr. Nathan said. “I’ve really been given the platform to speak up, but at the same time, it was hard to get colleagues to speak up on an issue.”
After working for NJ United for Marijuana Reform, Dr. Nathan founded DFCR to create an organization to facilitate physicians who wanted to get involved at a national level. The success of Tuesday’s vote demonstrates how far legal cannabis advocation has come, from a resounding no to a majority yes.
“A lot of doctors who understood cannabis prohibition as a tragedy and a mistake were concerned about what their peers would think about them if they spoke out,” Dr. Nathan said. “Now we’ve got a group of highly respected physicians organized and advocating strongly, not just for legalization but much more importantly for effective regulation.”
Dr. Nathan sees the NJ amendment as a significant chance for improvement in public health. Despite legalization, it is unclear how the new law will go into effect. Per the amendment, the state will create a regulatory framework and tax the sale of marijuana at 6.625%, but implementation is up for debate.
Legislators still have to agree on how a new Cannabis Regulatory Commission will function. The state will also have to choose how decriminalization, possession limits, growing limits work, and forgiveness of past marijuana crimes.
All of which will be figured out and are necessary to the fair implementation of the passage of the amendment, Dr. Nathan said.
But those changes may come fast. NJ, like many states, is hurting during the COVID recession. Last month New Jersey officials approved a budget that is set to borrow $4.5 billion from the Federal Reserve to plug pandemic-sized holes in state spending.
Basing estimates on Colorado’s experience after legalizing cannabis in 2014, the state legislature predicts NJ could see tax revenues of up to $126 million a year from recreational sales.
“According to the Colorado Department of Revenue, retail cannabis sales, excluding medical cannabis, totaled $1.2 billion in calendar year 2018,” The report said. “Assuming New Jersey experiences similar per capita sales of recreational cannabis as Colorado, total retail cannabis sales for New Jersey could reach $1.9 billion, yielding sales tax revenues of up to $125.6 million annually at the current 6.625 percent sales tax rate.”
With such high revenues, some suspect New Jersey to lead the way for other northeastern states; income will spur jealous neighboring Pennsylvania and New York to legalization in competition.
“If this gives both Pennsylvania and New York a push, that would be great,” Dr. Nathan said. “I do think it’s going to have an impact, now that there will be a state right in the middle of the Mid Atlantic that is going to have regulated sales.”
But even with tristate legalization, the cannabis industry faces a problem with funding.
Most firms in cannabis supply chains- from growers to dispensaries- are small businesses that suffer from a lack of access to bank funding. Because marijuana is an illegal Section 1 drug like Heroin on a federal level, banks and venture capitalists have their hands tied when it comes to credit. But with Tuesday’s victories for legalization, federal regulation is closure to changing.
“I think that each state that adopts, sends a stronger message to the federal government,” Dr. Nathan said. “The voters in those states are giving resounding victories to the notion that cannabis should be de-scheduled not rescheduled, and then regulated.”
deBanked has been following the SAFE Banking Act since it passed in the House last year, a piece of legislation that hopes to address cannabis banking problems by allowing legal pot firms to open banking deposit accounts.
The law was bundled into the HEROES act with the rest of business aid projects, stuck between the GOP-controlled Senate and the blue House since the summer. Depending on the Senate’s layout when ballots are fully counted, financial institutions that have left pot companies de-banked may be-danked.
This week a selection of cannabis associations and lobbying groups wrote to House leaders encouraging them to include the SAFE Banking Act in the next coronavirus relief bill. If passed, SAFE would allow cannabis companies to set up and access bank accounts. Introduced to the House in March 2019, SAFE went through Congress in September and has since been held up in the Senate.
Deemed as an essential service, cannabis dispensaries have stayed open during the pandemic, with many reporting a boost in revenue.
“The cannabis industry lacks access to banking services that could eliminate cash transactions and minimize virus transmission,” the letter states. “In 2019, it is estimated that sales of cannabis in the United States topped $12 billion – the vast majority of which were cash transactions. Previously, this situation created an unnecessary public safety risk and undue safety burden on state and local tax and licensing authorities who must receive and process large cash payments. Now, as recent reports show that viruses can live on cash for up to 17 days, the public safety concerns of this cash-only system compound.”
And as worries about contagion rise, so to do concerns about crime, with some dispensaries reporting an increase in burglaries during the pandemic. The hope is that with access to banking, less cash will need to be kept on premises, reducing the risk of theft.
“It’s only getting worse,” said Morgan Fox, a spokesperson of the National Cannabis Industry Association. “At the beginning there was a real spike of crimes against cannabis dispensaries in a number of states, and I have a lot of fear that that’s going to get even worse now. And then on top of that are all the health and safety concerns with cash forcing people to actually touch money; and because it has to be in person, it makes social distancing more difficult.”
At the beginning of April House Speaker Nancy Pelosi said that she wanted SAFE included in the next coronavirus relief bill, that second package has come and gone but perhaps a third time might be the charm for cannabis companies.
One gauge of the commercial excitement over legal weed, medical marijuana and cannabis’s byproducts could be witnessed at the Las Vegas Convention Center in early December where the Marijuana Business Conference & Expo was overflowing with 31,523 attendees.
Appealing to that audience—roughly the population of Juneau, Alaska—were more than 1,300 exhibitors who hailed from 79 different countries and touted products and services as varied as advancements in crop cultivation, medicinal breakthroughs, and innovative consumer products like marijuana-laden pastry.
That’s some 30% more than the 1,000 vendors who packed into the Central Hall in 2018 and about double the 678 who were showing off their wares in the smaller North Hall two years ago, reports Chris Day, vice president for external relations at Denver-based Marijuana Business Daily, which follows the cannabis industry and sponsored the Las Vegas trade show.
“In December, 2019,” Day declares, “we did not have to turn people away because we expanded. We had enough room for exhibitors but we needed both halls.” Unable to resist a boast, he adds: “We’ve been the fastest-growing trade show in the country three years running.”
One face in the December crowd was seasoned financial broker Scott Jordan, the Denver-based managing director of the Alternative Finance Network. He was occupying a booth accompanied by two attractive female models in fetching T-shirts emblazoned with the message: “How much would you borrow at zero percent?”
The young ladies’ arresting appearance and the message worked to the extent that “it got people talking,” Jordan says. As for the zero-interest rate, it’s not exactly free money. “I’ve got a product that puts together a line of credit,” he explains, “and after they receive the line of credit, it charges them a fee.”
As a broker, Jordan does the spade work of poring through a cannabis business’s financial statements and business model before he tees up a deal—typically between $250,000 and $750,000—to “a cadre” of 35 lenders in 10 states. He’ll ascertain whether the best funding option should be structured as equipment leasing, a working-capital loan, a revolving line of credit, project financing, or a real estate loan.
One recent cannabis deal that Jordan midwifed involved a “post-revenue, pre-profitability” manufacturing and processing company headquartered in Colorado. The financing, which closed in April, 2019, involved a pair of four-year term loans: one for $400,000 to refinance existing machinery, and a second for an additional $500,000 to acquire new laboratory equipment. Both credits carried interest rates in the “mid-teens,” he says, and were secured by the equipment.
Once the debt financing was in place, the manufacturing operation was “fully functioning,” Jordan reports, paving the way for the company to raise $30 million in venture capital financing. Jordan argues that “even if they pay a 10-20 percent interest rate, it’s better to preserve equity and finance through a normal type of loan. If you need an extraction machine or packaging equipment,” he adds, “why give up equity if you can finance it through debt?”
Jordan’s reasoning appears to sit well with clients and funders alike. Since 2014, he has brokered 85 transactions worth $33 million. He reckons that two out of three deals that he takes to funders meet with success. “My best year was 2015 because there were only a few competitors and I was the only guy on the block,” he says.
As the country steadily decriminalizes and legalizes pot, however, early market entrants like Jordan no longer have the cannabis business all to themselves. Thirteen states have legalized recreational marijuana for adults. These include California, Colorado, Oregon, Washington and Nevada in the West; Illinois and Michigan in the Midwest; and Massachusetts, Vermont and Maine in the East. Hawaii and Alaska permit it and, if you’re over 21, you can legally grow, smoke or ingest weed in the District of Columbia, but it cannot be sold commercially.
An additional 24 states have approved medical marijuana. While research on cannabis’s medicinal properties remains thin—largely because of objections by federal law enforcement—it is being prescribed for a range of maladies, including cancer, glaucoma, epilepsy, Crohn’s Disease, multiple sclerosis, nausea, and pain. [“The marijuana plant contains more than 100 different chemicals called cannabinoids,” according to WebMD. “Each one has a different effect on the body. Delta-9- tetrahydrocannabinol (THC) and cannabidiol (CBD) are the main chemicals used in medicine. THC also produces the ‘high’ people feel when they smoke marijuana or eat foods containing it.”]
Industry data assembled by MJBizDaily reflects both the broad acceptance of legal cannabis use and its increasing commercial popularity. U.S. revenues from legal weed and its byproducts are expected to clear $16.4 billion this year, a 40% growth rate over the $11.75 billion in estimated revenues for 2019. The legal cannabis industry now employs about 200,000 persons in the U.S., about the same number as flight attendants (120,000) and veterinarians (80,00) combined.
For more evidence that the cannabis market is hot look no further than the state of Illinois, where recreational marijuana went on sale Jan. 1, 2020. The Prairie State’s governor also pardoned some 11,000 citizens with criminal records for possession and the sale of low levels of marijuana.
“We’re showing that sales were close to $3.2 million on the first day of 2020,” says MJBiz’s Day. “Illinois is the big story right now,” he adds. “Anytime a new state opens up in the market, you’re seeing enormous pent-up demand and enthusiasm.”
Even as the cannabis industry takes giant strides toward public acceptance, the plant continues to face hostility from the U.S. federal government, which has criminalized its use for 80 years. Marijuana remains classified by the Drug Enforcement Agency as a Schedule 1 drug, keeping company with heroin, LSD and Ecstasy.
That designation has also made it hard for the cannabis industry to engage in simple financial transactions, much less obtain financing. “Despite the majority of states’ having adopted cannabis regimes of some kind, federal law prevents banks from banking cannabis businesses,” Joanne Sherwood, president and chief executive at Citywide Banks, a $2.3 billion-asset bank headquartered in Denver, testified to Congress last summer. “The Controlled Substances Act,” added Sherwood, who is chair of the Colorado Bankers Association, “classifies cannabis as an illegal drug and prohibits its use for any purpose. For banks, that means that any person or business that derives revenue from a cannabis firm is violating federal law and consequently putting their own access to banking services at risk.”
And despite the herculean efforts by the cannabis industry to soften its image, obtaining financing from traditional sources like pension funds, insurance companies and university endowments remains a daunting proposition as well, says David Traylor, senior managing director at Golden Eagle Partners. His four-person, boutique investment fund, which makes equity investments in up-and-coming cannabis companies, relies on wealthy individuals and family offices for the bulk of its funds.
“Capital is hard to come by for this industry,” Traylor says. “From day one, most venture capitalists have been staying out of it. It’s still illegal in many states and their limited partners are endowments like Harvard and Yale, which see marijuana as the antithesis of education.”
Sarah Sanger, chief financial officer at Oak Investment Funds, a real estate investment firm based in Oakland, says: “There’s a great deal of economic activity in California but it’s stymied by the lack of financing and difficulty with changing regulations. It provides an opportunity for really expensive debt from private investors willing to do due diligence.”
That absence of establishment financing has opened up a plethora of opportunities for alternative funders, and not just in agriculture and plant cultivation. While agriculture represents the bedrock of the industry there is no downstream product, of course, without the cannabis leaf— growing and harvesting cannabis is just one stage of the industry’s life cycle.
MJBiz’s Day notes, for example, that that the legal cannabis industry is regulated for safety, so growers must show that “the flower has no molds or contaminants.” That means that crops are subject to rigorous testing and decontamination, which requires both materials and expertise. To process the leaf and develop “infused products” by extracting cannabis-based oils entails the purchase and deployment of costly technology. Packaging and labeling along with tracking systems that, Day says, “are stricter than in other places” are also key components of the farm-to-market supply chain.
Meanwhile, in an ongoing effort to appeal to a fresh cohort of customers, Jordan notes, the cannabis industry continues to develop innovative uses for the plant. “There are so many applications and new products that keep appearing, like ice cream with marijuana, vaporizers, inhalers, and syrup,” he says. “Now, there are mints—something I hadn’t seen before—and different ways to ingest the product and get high and not look like a druggie.”
Jordan Fein, chief executive at Greenbox Capital in Miami, says his firm prefers to fund downstream companies selling cannabis products. “We do agricultural lending but it’s less attractive and harder to qualify the business. It’s not as tangible as a retail business which will have a website and product reviews. The same goes for edibles.”
Recent Greenbox Capital deals in 2019, Fein says, included one with merchant cash advances of $80,000 and $60,000 in growth capital to a Colorado dispensary. The operation put the money to work adding two retail outlets during the year, he says, bringing to four its total number of storefronts. In addition to cannabis flower, the dispensary sells “edibles, tinctures, lotions, and wax concentrates,” Fein reports. Both short term cash advances require regular ACH payments.
Greenbox Capital also made a $135,000 cash advance to a cannabis-testing laboratory in Southern California in August, 2019 for the purchase of sophisticated equipment. The company, he says, is doing $140,000-a-month in revenue and cashflow is strong and on the rise.
“Greenbox is always interested in higher risk deals,” Fein says, noting that banking services remain off limits to legal cannabis firms. “But we fund them for the same reason we fund lawyers and auto sales—things that most others will not do. There’s nothing wrong with risk,” he adds, “as long as you clearly assign a proper value to the deal and price to it.”
Steve Sheinbaum, a New York broker and chief executive at Circadian Funding, has unabashedly climbed aboard the cannabis bandwagon. “The market is exploding and it’s attractive to lenders because it’s a product people can put their hands on,” he says. “If I’m dealing with a grower, I can leverage real estate and usually there’s equipment. If they’re producing, there’s inventory and I can look at the income statement to see what kind of cash flow the business is generating.”
He recently brokered a $10 million loan for a licensed grower and distributor of medicinal marijuana in New England with monthly revenues of $3-$4 million. The credit bore a 17% annual percentage rate and a six-year maturity, he says. The deal was brought to Circadian by a private equity investor who was looking to grow the enterprise tenfold. The deal, which was interest-only, was secured by a second position on real estate and a lien on the borrower’s license. “The lender was comfortable with the interest-only loan,” Sheinbaum explains. “They can refinance in six years.”
In another recent deal, Circadian arranged an unsecured merchant cash advance for $300,000 to a Pacific Northwest technology company developing specialty, point-of-sale software for the cannabis industry. The firm showed monthly revenues of $300,000.
“It’s not federally permitted for cannabis firms to take payments from Visa, Mastercard or American Express,” Sheinbaum explains. “But this technology company is using debit or credit cards to pay for cryptocurrency which is stored on a prepaid card which customers can then use to purchase cannabis.”
The tech company had been struggling to find money and Sheinbaum took satisfaction in a deal announcement that went out in an e-mail to the industry. “Funding complicated deals is what gets our blood flowing,” Sheinbaum wrote. “Anyone can get a restaurant or dentist funded. No one needs help with that.”
Manny Columbie, a Miami-based senior funding manager at H&J Capital Group, an Orlando firm, reports funding agricultural and dispensary businesses in California, Colorado and Washington State. In the Evergreen State, he says, he recently provided funding to a woman who owned a marijuana-themed café connected to a cannabis dispensary. The deal went through after examining her recent bank statements and two years of federal tax returns.
“The best thing about lending to people in this industry is their ability to repay,” Columbie says. “They’re never lacking in funds.”
He provided more detail on a deal currently in the works involving a physician in Irvine, California, with an 800-plus credit score from the rating agency Experian and personal tax returns showing $2 million in annual income. The doctor, Columbie says, has been making transdermal patches infused with THC in addition to his medical practice and needs specialized equipment to lower his manufacturing costs to 55 cents per patch. The patches sell for $40-$60 apiece, Columbie says, depending on the THC content.
If the deal goes through and is approved by H&J’s credit committee, the physician would likely be extended a $350,000 loan with a 10-year maturity secured by the Chinese-manufactured equipment. Factoring in the doctor’s excellent credit and other positives, the interest rate on the credit could be as low as 5%-7%.
While the environment for legal cannabis seems to grow more favorable by the day, market participants urge funders to remain circumspect. One remaining fly in the legal cannabis ointment has been the persistence of an illegal black market. Estimates are that as much as 60% to 80% of the marijuana market in California is illicit, says Craig Behnke, an equity analyst at MJBiz.
Law-abiding businesses must also contend with overbearing regulators and high taxation. The California Department of Fee and Tax Administration recently jacked up its excise tax on cannabis to 80%, effective on Jan. 1, 2020.
And the state’s constabulary isn’t helping matters either, notes Sanger of Oak Funds. “There are going to be a lot of operators that end up being losers because of the regulatory environment,” she says. “Law enforcement is using all of its resources to make sure legitimate businesses are following the rules instead of clamping down on black market activity. That makes it harder for legitimate retailers to make money because people are still shopping in the black market.”
The recent collapse of the shares of publicly traded Canadian cannabis companies, which some blame in part on the illicit competition from the black market, also stands as a cautionary sign. Last August, the Motley Fool listed ten “Pot Stocks”—including Canopy Growth and Aurora Cannabis, both of which are listed on the New York Stock Exchange—that together lost a stunning $20 billion in market capitalization.
The drubbing that heedless investors have taken in the Canadian stocks reminds analyst Behnke of the debacle in dotcom stocks back in 2001-2002, but with a big difference. “The dotcoms were a brand-new invention and people had no idea how big the Internet companies would be,” he told deBanked. “But cannabis has been around for a thousand years. I feel like it was a shame on investors and the companies. This shouldn’t have happened.”
National Business Capital & Services Expands into Cannabis Funding with CannaBusiness Financing SolutionOctober 15, 2019
Today National Business Capital & Services (NBC&S) announced it has begun serving cannabis companies. Through its new program, CannaBusiness Financing Solution, NBC&S is now accepting applications for loans starting at a minimum of $10,000 from firms in the industry that are over one year old.
“The CannaBusiness Financial Solution will allow business owners to seamlessly obtain the capital they need, and allocate funding toward either hiring new employees, purchasing inventory, marketing strategies, or any other business need right away, without government regulations hindering growth opportunities or having to give up equity,” explained NBC&S President Joseph Camberato. “We’re not a bank and the lenders we work with aren’t banks either, so it falls into a different area of commercial lending.”
CannaBusiness is available in the 33 states where cannabis is legal, be it for medicinal or recreational uses, as well as in Canada.
“It’s a rapidly growing space, no pun intended,” joked Camberato when asked about the differences in funding cannabis companies compared to the industries NBC&S has served in its 12 years of business. “It would still be underwritten, just like one of our normal businesses. But we’re definitely going to want to know a little bit more about the business and understand what exactly they’re doing, how they’re operating, and exactly what are they’re focused on.” They’ll also examine if the business is in compliance with state laws. Qualifying cannabis companies must be in business for at least 1 year, with a minimum of $10K in monthly revenue. There is no minimum FICO score requirement.
While it’s not the first funder for cannabis companies, NBC&S views the move as a step in the right direction to “get ahead of the curve” according to Camberato. “We’re living through a modern-day prohibition, I think in 20 years we’ll look back on it and talk about it with our grandchildren and be like, ‘wow’ … I don’t think people realize how big of a deal this really is, but it is a business and it is another industry that has bloomed in front of us, again no pun intended. I think it’s fascinating that we get to witness this and that we’re really at the forefront of it and helping folks get the funds they need to grow.”
Jumping off from the politically charged word of ‘prohibition,’ NBC&S’ Vice President of Marketing, T.J. Muro, noted that he believed cannabis legislation to be one of the few issues that can be bipartisan, saying, “Out of everything today in our political climate, I think it’s the one thing that has unified people in the political parties. The liberal side appreciates the cultural influence and significance there, and then on the more conservative side it’s the tax revenue.”
The upcoming Senate vote on the SAFE Banking Act will put this theory to the test. The bill, which would allow the cannabis industry wider access to banking, has already passed the House.
Last month the House of Representatives passed the SAFE Banking Act, which provides for the lifting of red tape preventing cannabis companies from accessing banks and lenders.
Currently, such businesses are unable to make use of these financial services as regulators have put an outright ban on such dealings given cannabis’s federal Schedule 1 drug classification.
Having been approved 321-103, the House vote appeared bipartisan with almost half of the voting Republicans being in favor of SAFE. However, this is just the first step for the bill, as now it will be passed onto the Republican-held Senate, and then if it is approved there, the president’s office. With Republicans having demonstrated split attitudes towards legalization it is unclear which way the vote will go.
Regardless, the victory in the House has been celebrated by cannabis advocates and lobbyists alike. Talking to NBC, Platinum Vape President George Sadler described the vote as “a blessing.” While Aaron Smith, the Executive Director of the National Cannabis Industry Association, said that “it’s incredibly gratifying to see this strong bipartisan showing of support in today’s House vote … We owe a great debt of gratitude to the bill sponsors, who have been working with us to move this issue forward long before anyone else thought it was worth the effort … This bipartisan legislation is vital to protecting public safety, fostering transparency, and leveling the playing field for small businesses in the growing number of states with successful cannabis programs.”
For now though, no date has been set for the Senate vote on SAFE. With this version having been introduced by Senators Cory Gardner (R-CO) and Jeff Merkley (D-OR), and the Banking Committee Chairman Mike Crapo having recently asserted that cannabis banking legislation is being considered by his chamber, it appears as if this second round of voting may also benefit from bipartisan support.
Turning a New Leaf: Banking Committee Chairman Says It’s High Time for New Cannabis Company RegulationsAugust 19, 2019
Recent years have seen a surge of popularity for the legalization of cannabis movement across the United States. Beginning with the normalization and legalization of the herb for medicinal use, and then the outright legalization of it in California, Colorado, Oregon, Nevada, Alaska, Michigan, Vermont, Massachusetts, Maine, Washington, and D.C., most states now support legalization in some form (ie. medicinal use being allowed, or at very least access to CBD products) with the exception of three.
According to Kris Krane, Co-founder and President of 4Front, a leading multi-state cannabis company, and contributor to Forbes, support for legalization has steadily increased 1-2% each year since the 1970s, with the recent state-wide legalization legislation bumping those figures up. But while support amongst the populace as well as within certain corners of the government has grown, infrastructural support that is regulated by politicians has lagged.
Specifically, since their legalization, cannabis companies have been unable to open bank accounts due to strict federal restrictions. As a result, cannabis companies, the majority of which being small businesses, have a harder time paying employees, vendors, and taxes; find it tough to acquire start-up capital; struggle to finance themselves in the face of unforeseen expenses; and are subject to the increased security risks that come with holding onto high quantities of cash. As well as these repercussions, such federal hurdles lead to many cannabis companies receiving finance via equity investments, to which Krane says, “the owners of cannabis businesses own far less of their companies than they would in any other industry.”
Viewed alongside the growing attitude to “legalize it,” such financial handicapping paints a picture of the industry that is all smoke and no fire. Krane described the situation as “one of the greatest challenges for cannabis businesses today,” but the tide may be turning.
Idaho Senator Mike Crapo (R), who is the Chairman of the Senate Banking Committee and who has historically been an ardent opponent of legalization, appears to have changed his tune on the matter. When asked if legislation would be required to end the barriers faced by cannabis businesses, Crapo responded “I think so, yeah.”
The comment came after Crapo surprised his peers by holding a committee hearing on allowing cannabis businesses to access banks. Which seemed in opposition to his initial anti-legalization view as well as starkly unaligned with his state’s stance, Idaho being one of the three aforementioned states in which all cannabis-related products are outlawed. Nevertheless, Crapo continued on in the opposite direction of his previous convictions after the hearing, saying, “I think all the issues got well vetted. We now need to, I think, move forward and see if there’s some way we can draft legislation that will deal with the issue.”
Conveniently, such legislation is in the works. The SAFE Banking Act of 2019, put forward by Congressman Ed Perlmutter (D), seeks to solve the issue by lifting the red tape surrounding cannabis companies’ lack of access to banking. Support for the bill is growing, and as proven by Crapo, further support could come from unlikely places.
Fellow Republican, Senator Cory Gardner, explained that “merely having the hearing on marijuana banking issues was a ‘historic moment in the Senate’ … It shows that this isn’t just a regional issue, but a national issue that needs to be addressed … There was some criticism that the Republican attendance wasn’t there, but if they wanted to blow it up they would’ve been there. So I look at that as sort of an acknowledgment that this is now just a status quo issue and not something that they’re going to try and interfere with.”
While on the other side of the aisle, Senator Catherine Cortez Masto (D) said that she “would like to see it as a positive step forward. I support doing something in this country for these states that have legitimized marijuana businesses … I have always been concerned about potential money laundering or crimes that are sort of around these all-cash businesses. By having a financial system, it helps.”
Still, despite there being bipartisan support for the SAFE Banking Act the question of Mitch McConnell looms. Being the Senate Majority Leader, McConnell has influence over which legislation reaches the Senate floor for debate. And while McConnell may have borne the title of “Cocaine Mitch” with pride before, the narcotics-tinged buck stops there as the Kentuckian has gone on record saying he would not support the legalization of cannabis.
Interestingly, McConnell is a proponent for the legalization of hemp. Saying that hemp is “a completely different plant than its illicit cousin,” McConnell’s view is born from his state’s agriculture-intense economy. “Everything from clothing to auto parts” can be made from hemp – a sentiment once isolated to communes, is now being publicly uttered by one of the most conservative contemporary Republicans.
Nevertheless, Kris Krane remains an optimist about future legislation as “there seems to be a growing consensus that cannabis banking reform is necessary,” likely due to worries over security. Crapo’s change of mind “represents a growing awareness among federal legislators that blocking cannabis businesses from accessing banking services is a security concern, and even members who may not support overall cannabis reform are increasingly willing to help resolve the banking issue. It is looking more and more possible that the Safe Banking Act [sic] could become law in the next year.”
Authored by Josh Herndon of Global Legal Law Firm
It seems that we are constantly being bombarded by news of the growing industrial hemp and cannabidiol (more commonly known as “CBD”) industries. Indeed, industrial hemp (and products derived therefrom, such as CBD) is now legal, and these industries have experienced substantial growth that is expected to continue into the foreseeable future. As such, the businesses in these industries seem to be ideal candidates for merchant cash advances (an “MCA”, or “MCAs”), as such businesses seem more than capable of repaying an MCA.
However, businesses in the industrial hemp and CBD industries are still subject to federal law, and their ability to sell their product can be impacted by enforcement of federal law by federal agencies. MCA funders partnered with such businesses may be harmed by if those businesses are unable to generate the sales needed to repay MCAs. Nevertheless, the possibility of an enforcement action by a federal agency doesn’t mean that all activities in which a business in the industrial hemp and CBD industries could engage would be a violation of federal law. Indeed, there are industrial hemp-related and CBD-related business- activities that likely would not violate federal law.
In sum, MCA funders considering MCAs to businesses in the industrial hemp and CBD industries need to be aware of all risks associated with such MCAs before making an informed decision about whether to make such MCAs.
Background Regarding The Industrial Hemp And CBD Industries.
A fast-growing, sustainable and inexpensively produced plant, industrial hemp is a variety of cannabis sativa L. that contains less than 0.3 percent plant chemical delta-9 tetrahydrocannabinol (more commonly known as “THC”). Unlike marijuana (which, like industrial hemp, is derived from cannabis), which is cultivated to yield psychoactive THC, industrial hemp yields more than 25,000 oil and fibrous products that are embraced by farmers as a hedge against lower-value soy, cotton and alfalfa crops.
Industrial hemp was legalized late last year pursuant to the Agricultural Improvement Act of 2018 (also commonly known as the “Farm Bill”). Related thereto, production of industrial hemp skyrocketed in 2018, with 112,000 acres licensed for cultivation, 3,546 cultivation licenses issued, 78,176 total acres cultivated, and 40 universities conducting research.
Numerous products are derived from industrial hemp including CBD, which is an oil-based product that has uses as a nutritional supplement and food additive In fact, seventy-eight percent of all industrial hemp grown in 2018 was for CBD. The market for CBD has exploded, and is expected to continue exploding. According to the Brightfield Group, industrial hemp-based CBD sales hit $170 million in 2016, and it is anticipated that a 55% compound annual growth rate over the five years thereafter will cause the market for industrial hemp-based CBD to crack the billion-dollar mark.
In addition to legalizing industrial hemp, the Farm Bill also guarantees that industrial hemp and industrial hemp-derived products can be imported, exported and transported from state to state like any other crops. The Farm Bill also allows industrial hemp businesses to access insurance and banking.
The FDA And Its Role With Respect To The Industrial Hemp And CBD Industries.
Although the Farm Bill legalized industrial hemp, industrial hemp and CBD businesses do not have carte blanche to take whatever actions they want with respect to their products. That is because the United States Food and Drug Administration (the “FDA”) is responsible for protecting and promoting public health through controlling and supervising food safety, tobacco products, dietary supplements, prescription and over-the-counter pharmaceutical drugs, cosmetics, animal foods and feed and veterinary products.
The FDA has stressed that although industrial hemp is no longer an illegal substance under federal law, it will continue to regulate cannabis products under the Food, Drug, and Cosmetic Act (the “FD&C Act”) and Section 351 of the Public Health Service Act. That means that any cannabis product (such as CBD) that is marketed with a claim of therapeutic benefit, regardless of whether it is hemp-derived, must be approved by the FDA before it can be sold. In fact, the FDA has specifically cited deceptive marketing practices as one of its chief concerns, and it has clearly established that selling unapproved products with a therapeutic claim is unlawful.
The FDA has also confirmed that the addition of CBD to food products and dietary supplements is unlawful, even if the CBD is derived from industrial hemp. The FDA’s rationale is that CBD is an active ingredient in FDA-approved drugs, and its addition to the food supply and dietary supplements is illegal under the FD&C Act.
Recent FDA Actions Involving The Industrial Hemp And CBD Industries, And The Impact On Those Industries.
The FDA recently, and dramatically, showed how it will exercise its authority over industrial hemp and CBD products on March 28, 2019, when it (along with the Federal Trade Commission) issued warning letters to three businesses who sell CBD products alleging false, unfounded, unsubstantiated, and egregious health claims about (without sufficient evidence or FDA approval) their products’ ability to limit, treat or cure. The three businesses had advertised a range of CBD-containing supplements, and boasted the ability of those supplements to effectively treat diseases (including cancer, Alzheimer’s and fibromyalgia) and “neuropsychiatric disorders” in both humans and animals. The FDA threatened the three businesses with product seizures, injunctions and sales proceeds reimbursement.
The above actions by the FDA understandably sent shockwaves through the industrial hemp industry, and those actions underscore the risks faced by industrial hemp and CBD companies. For instance, virtually all CBD products that make health and wellness claims, or are deemed a food or drug, are potentially subject to scrutiny from the FDA because such products are mostly sold over the internet and enter the “stream of interstate commerce”. However, it is such health and wellness applications, and food and beverage infusion, that makes CBD and other oil-based hemp derived products attractive to the consumers who are the target market of CBD companies. As such, industrial hemp companies that sell CBD products almost inevitably invite FDA scrutiny as a result of their efforts to market their products to their customers, and potentially imperil their ability to sell their products to those customers.
A Cautionary Tale For MCA Funders.
Although the industrial hemp and CBD industries seem to be ideal markets for MCA as a result of their past and anticipated future growth, the recent actions of the FDA described above highlight the very real perils faced by businesses in those industries. At first glance, businesses in those industries seem to be ideal candidates for repaying MCAs because of what appears to be bountiful future sales. However, product seizures and/or injunctions ordered by the FDA obviously could prevent businesses in those industries from selling their product and generating receivables from such sales. An MCA funder partnered with such a business would obviously be harmed if the business couldn’t generate the receivables needed to repay an MCA.
Fortunately, there are circumstances under which businesses in the industrial hemp and CBD industries can likely operate without fear of an enforcement action by the FDA. For instance, the FDA allows cannabis and cannabis-derived products to be introduced into interstate commerce where it approves such products (such as with the FDA’s approval of Epidiolex, a seizure medication containing CBD, in 2018). Moreover, the FDA has identified three lawful hemp derivatives (including hulled hemp seeds, hemp seed protein, and hemp seed oil) that can be marketed legally as long as they are not promoted with a therapeutic claim.
Based on the above, the circumstances under which an MCA funder should, or should not, make an MCA to a business in the industrial hemp and CBD industries can be very confusing. MCA funders need an insight into the industrial hemp and CBD industries, and the very real risks faced by those industries as described above, before making MCAs to businesses in those industries.
Fortunately, competent legal counsel versed in the MCA industry, as well as the industrial hemp and CBD industries, can provide such insight, and legal advice related thereto. As a practical matter, an MCA funder should not make an MCA to a business in the industrial hemp or CBD industries without first getting advice from such legal counsel so that the MCA funder can fully understand the risks involved in making such an MCA, and the circumstances in which such an MCA should, or should not, be made.
Mr. Herndon is an attorney at the Global Legal Law Firm, whose attorneys are well recognized as top industry experts. Mr. Herndon works in the compliance field helping electronic payment processing companies avoid getting fined, arrested, violate rules, or get sued from internal or external threats. Mr. Herndon is also involved in litigation in the payments space, including defending and pursuing electronic payments companies.