Outside the Box: The U.S. cannabis industry needs access to the U.S. stock markets

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A customer smells the wares at a marijuana dispensary in California.

In September, the U.S. House of Representatives passed the SAFE Banking Act by a 321-103 margin, with broad bipartisan support. If enacted into law, the bill would be the most monumental federal legislative and policy change for cannabis in U.S. history.

However, the bill falls short because it does not explicitly protect U.S. capital-market activity relating to the cannabis industry. If the bill is not amended to include capital markets, its legislative intent will not be fully carried out.

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First introduced in 2013, the SAFE Banking Act represents a meaningful step forward and well-deserved legitimacy for the cannabis industry. Most financial institutions are currently prohibited from conducting business with U.S. cannabis companies (and often their principals and employees) because cannabis remains a Schedule 1 drug under the Controlled Substances Act.

This bill provides protections from federal enforcement (or a “safe harbor ”) for banks, credit unions, insurers, and ancillary businesses that service the thriving cannabis industry with some 3 million registered medical cannabis patients and millions more customers nationally.

Also read: Marijuana industry’s lobbying hits record as banking bill hangs in the balance

The bill addresses major problems plaguing the industry by ensuring industry access to basic financial services and mitigating public safety concerns arising from operating in an all-cash environment. Owners, employees, patients, and customers will no longer fear physical violence.

Cannabis company owners and employees will no longer be denied access to health and life insurance. Cannabis companies will be authorized for the first time to use electronic payment processing systems, obviating the need to use cash to pay taxes, vendors, and employees. Other unique operational burdens of an all-cash business will fade.

The bill will improve tax revenue collection at the municipal, state, and federal levels. Ancillary businesses that do not “touch the plant” would be freed from the risk of needless business disruptions.

No logical grounds for reasoned opposition exist for the bill’s passage.

Unfortunately, the bill does not address major challenges facing the industry: high cost of capital due to the absence of traditional financing options; significant barriers to entry for small businesses; negligible U.S. capital markets participation; competition from the illicit market; diversion of revenues to cannabis-friendly foreign capital markets; and the listing of cannabis stocks on foreign exchanges with minimal liquidity and less transparency.

Extending the bill’s safe-harbor protection to capital markets activity would protect U.S. investors who currently finance the vast majority of the U.S. cannabis industry. Federal securities laws have been developed on the principle that “sunlight is the best of disinfectants,” creating accountability for corporations and their boards, and fostering, without question, the world’s most robust, sophisticated, and investor-friendly environment to raise and invest capital.

U.S. investors should not be limited to investing in U.S. companies that are forced to list on opaque, inefficient exchanges where participants operate by a different set of rules.

Providing state-legal operators with access to U.S. capital markets will also empower the industry to create products at scale that further meet safety standards at a price competitive with the illicit market (the primary source of the recent vaping injuries and deaths), which will contribute to its eradication.

U.S. cannabis companies employ over 250,000 Americans. They are building nationwide infrastructure and paying hundreds of millions of dollars in taxes.

They should have the same access to U.S. capital markets that their foreign counterparts presently enjoy. Canadian cannabis companies have raised tens of billions of dollars in the U.S. by listing on the NYSE and Nasdaq but have neither U.S. operations nor employees and pay no U.S. taxes.

The bill, as written, will at best lead to widespread industry confusion, which runs counter to the legislative intent of clarifying current uncertainty. This confusion, coupled with the financial industry’s conservative disposition and approach to cannabis, could result in most U.S. financial institutions maintaining the status quo of remaining on the sidelines, until the safe harbor is explicitly extended to capital markets.

The crux of the issue is the limited definition of “financial service” in the safe-harbor provision. This definition excludes capital markets activities such as investment banking, other broker-dealer activity, non-bank direct lending, asset management, custody of securities, and listings on U.S. stock exchanges, thereby limiting the bill’s scope and effect.

Two potential solutions exist: (i) re-define “financial service” more broadly to include SEC-regulated businesses; or (ii), define the (currently undefined) term “ancillary businesses” to include businesses regulated by the SEC.

The SAFE Banking Act is an opportunity for Congress to make historic, transformational bipartisan-supported progress. The measure will enhance public safety by ensuring that basic financial services and insurance products are available to the cannabis industry, which we applaud.

Congress also has a unique opportunity to empower the U.S. cannabis industry and further the bill’s legislative purpose of promoting safety for the industry, its participants, investors, and service providers by explicitly including capital markets.

Until federal prohibition ends, this is the best way to create sustainable opportunities for businesses of all sizes and to foster the safe, responsible growth and development of this budding industry.

Jeffrey Schultz is general counsel of Navy Capital, a hedge fund manager founded in 2017 that invests exclusively in the cannabis industry. David Wenger is an attorney and cannabis industry investor, and a board member and adviser to several publicly held and private cannabis companies. Jeff and David have advocated to Congress on the SAFE Banking Act.