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article imageU.S. cannabis investors need to keep an eye on banking access

By Returns Mag     Mar 11, 2019 in Business
U.S. Federal regulations currently prevent banks from building relationships with cannabis businesses in legalized states.
As investors in the space continue to assess the landscape, the tension between federally regulated banking services and developing cannabis business should be monitored carefully.
According to experts, the costly nature of compliance with federal banking regulations, the unequal nature of banking for cannabis businesses, how banking could provide better transparency into cannabis businesses and how banking will continue to shape the future of the cannabis industry in the U.S. are going to be of particular importance to investors.
Investors must assess risk
Hilary Bricken, an attorney with international law firm Harris Bricken, says the lack of proper banking services for cannabis businesses is causing investors to be wary of engaging in certain types of cannabis investment.
“To investors, they kind of shrink away when they hear those things,” she says. “And you’ll still have investors that have high risk tolerance — to them it’s like Vegas-style money — they’re willing to roll the dice despite these kind of barriers to operation, but it’s institutional money that has no interest in doing the dance with the banks.”
Bricken said that the top question that her firm gets state-to-state from cannabis businesses revolves around how to manage the cash they make. Because cannabis businesses have issues accessing banking services and banks are hesitant to offer services to cannabis business, investors often find themselves in a risky place.
Compliance with current financial regulations a costly endeavour
Andrew Livingston, the Director of Economics and Research for Vicente Sederberg LLC, discussed the limited banking landscape for cannabis businesses.
“It’s not that there’s no banking access, there’s just not enough banking access, which makes it difficult to work with a bank,” he says.
Compliance requirements also add to this difficulty, according to Livingstone.
“It’s costly for banks to work with cannabis companies from a compliance standpoint. Compliance costs money for banks, so there are many large banks that won’t work with cannabis businesses.”
Such an aversion to cannabis businesses on the part of banks is shaping the investment landscape for cannabis, and driving more established institutions towards auxiliary aspects of the developing market for cannabis products. According to Bricken, a larger institution like a bank or a hedge fund “typically invests around ancillary companies, like tech, equipment, real property that support... and service the industry but don’t actually engage in trafficking. In that way, they can still secure banking, and that’s much more attractive to Wall Street money than a bunch of volatile licensees that get their bank accounts closed down every six months.”
Banking access remains a limited, unequal playing field
As the cannabis industry continues to grow, the state of banking related to the space will be affect growth opportunities. Investors should be aware of the nature of banking services being offered to these organizations, and how it might affect their investment over time as policies shift.
Livingston said that, given the limited supply of banks to work with, “in some states you’re only talking about one, two, maybe three different banks that the industry can work with” and that there’s a real impact on cannabis businesses if one of the banks decides to drop accounts or not accept new accounts.
Banks may also charge higher fees for servicing cannabis businesses, according to Livingston, because “the bank has higher compliance costs for dealing with cannabis businesses.”
In addition, smaller cannabis businesses that cannot access financial services to secure small business loans, or don’t have access to a network of friends and family investors or angel investors, can be left out in the cold.
This lack of access, Livingston said, “diminishes the amount of capital available to cannabis entrepreneurs, but it does so unequally.”
According to Livingston, this lack of access disproportionately affects “moderate-to-low-income minorities looking to open up cannabis retail stores”, because those operators are not able to access the same resources that others may be able to.
“Without small business loans coming to equalize that out, you end up with a disproportionate impact on who can own and operate and start up a cannabis business, who can acquire the capital,” said Livingston.
Recently, a proposed bill, the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act), was brought to the Consumer Protection and Financial Institutions’ hearing as a discussion draft. Livingston called it, “as comprehensive as it can be.”
According to a memo from the hearing, the bill seeks to “harmonize federal and state law concerning cannabis-related businesses and allow these businesses access to banking services.”
While he does believe the bill is comprehensive in a sense, Livingston said that bills like this, in general, “can’t force Visa or Mastercard to allow cannabis dispensaries to use their services, [but] hopefully a legal change like this would be seen by their general counsel… and they would say, ‘OK, now we are willing to work with cannabis businesses.’”
Bricken says that while she doesn’t imagine, under the current administration, federal action is going to be taken soon, she does predict that change will eventually have to come from the Treasury.
“What I would predict though, is that Treasury will eventually expand on these guidelines that they issued in 2014,” she said. “So I would imagine that will happen sometime in the future, but under this administration, because it’s not a massive priority, it could be a while.”
Investors deserve transparency, which banking could shore up
Transparency remains crucial for cannabis businesses looking to attract investment.
Bricken said that she tells her clients in the industry “to be as transparent as possible” and “to not pull punches” when it comes to speaking with potential investors. This advice is especially pertinent when it comes to interested investors that must consider the potential legal issues.
“The investor can make an educated decision, especially if they’re very experienced, as to whether or not they want to do this,” said Bricken.
But the potential for mistakes remains. “Unless investors and cannabis business can find financial institutions that are following the guidelines that were released by the Financial Crimes Enforcement Network in 2014, they’re going to be left in the wind with the cash,” Bricken said.
Banking will continue to shape bigger picture for U.S. cannabis businesses and investors
The risk profile of investing in cannabis businesses, said Livingston, is tied in with the federal legal status of cannabis at-large.
As Livingston sees it, if you’re a big investment firm in New York, you care about what the legal and economic risks are. And while larger firms do hold cannabis accounts, Livingston said that those firms possibly only hold Canadian public companies or, as referenced by Bricken, only invest in ancillary companies.
“It’s more about what is the level of risk perceived by the investors on the side of the cannabis industry they’re looking to put money in to,” said Livingston
“Any sort of federal legal changes that push the cannabis industry forward into a world of greater legitimacy, greater legal standing, it will help,” he said. “Regardless of whether or not those changes have anything to do with changing the schedule of cannabis or changing the federal criminal codes on cannabis, even if they’re just legitimizing more the banking side of things, that kind of further indicates to investors where the politics are and where the legal risk associated with investing is.”
Returns Mag brings a fresh perspective to the growing cannabis industry for investors and operators. With original reporting and high-quality curation, Returns Mag will uncover insights for investors, showcase leading operators and share unique perspectives. Sign up for our newsletter now: http://lp.digitaljournalgroup.com/returns-mag.
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