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Bank on It: The SAFE Banking Act Won't Pass in 2020

By Sean Williams - Feb 22, 2020 at 9:51AM

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A popular cannabis banking reform measure looks destined to die in the Senate.

The legal marijuana industry has grown by leaps and bounds in a relatively short period of time. Worldwide sales of cannabis more than tripled between 2014 and 2018, and Wall Street believes they'll essentially quintuple, at minimum, by 2030. This means long-term investors in pot stocks still have an opportunity to bask in the rewards of the green rush.

But this isn't to say that there won't be growing pains or a steep learning curve for the industry to contend with, especially in the most lucrative marijuana market in the world by sales: the United States.

A black silhouette outline of the United States, partially filled in by baggies of cannabis, rolled joints, and a scale.

Image source: Getty Images.

Marijuana's Schedule I classification is a major impediment in the U.S.

As you're likely well aware, marijuana firmly remains a Schedule I substance at the federal level. This means it's considered illicit, prone to abuse, and isn't recognized as having any medical benefits. In spite of this classification, it hasn't stopped 33 states from legalizing medical marijuana since 1996 or kept 11 of those states from also approving the consumption and/or sale of adult-use weed since 2012.

Although the Obama and Trump administrations have taken a hands-off approach to state-level cannabis regulation, it doesn't mean that the U.S. pot industry is set up to succeed.

For example, profitable U.S.-based businesses that predominantly rely on marijuana to generate revenue are subject to Section 280E of the U.S. tax code. Though this tax code was implemented in the early 1980s to stop drug smugglers from writing off their "business expenses" on federal tax returns, today it's responsible for not allowing cannabis companies to take normal income-tax deductions, save for cost of goods sold. The result is that profitable pot companies are paying very high effective tax rates.

The other problem with the Schedule I classification is that cannabis companies typically have limited or no access to basic banking services. Since banks and credit unions report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created agency, these financial institutions fear possible criminal and/or financial penalties for providing basic banking services to marijuana businesses. As a result, most U.S. pot stocks have struggled to find traditional (i.e., nondilutive) forms of financing.

A cannabis leaf lying atop a neat stack of one-hundred-dollar bills.

Image source: Getty Images.

The SAFE Banking Act looks to shake up the cannabis industry

Knowing that these impediments are in place, and understanding that the vast majority of the public appears to be in favor of legalization, a number of lawmakers in Congress have introduced legislation that's designed to protect the cannabis industry and allow it to flourish.

Easily the most standout piece of legislation, thus far, is the Secure and Fair Enforcement (SAFE) Banking Act. The SAFE Banking Act was introduced in July and is designed to completely protect financial institutions in states that've chosen to legalize weed from the possibility of federal prosecution. In other words, if the SAFE Banking Act were to become law, banks and credit unions would be free to offer loans, lines of credit, and checking accounts to marijuana businesses without the fear of facing criminal or financial penalties from the Justice Department.

What's most notable about the SAFE Banking Act, aside from it being the first stand-alone piece of cannabis legislation to reach a congressional floor for vote, is that it passed in an absolute landslide in the House of Representatives in September. Although Democrats hold a majority in the House -- Democrats have a more positive view on cannabis than Republicans -- the final vote of 321 in favor of the SAFE Banking Act to 103 opposed demonstrates that this is an issue that can transcend the political aisle.

Furthermore, major financial institutions are already providing access to basic banking services, even if it is on a piecemeal basis. Online journal American Banker found that 34% of medical cannabis companies in Massachusetts had an account with one of the United States' four biggest money-center banks between June 2015 and September 2016. In fact, a little more than half of all medical pot operators in Massachusetts had an account with Bank of America over this time span. The demand is clearly there from cannabis businesses and banks. It's merely up to the Senate to act.

A judge's gavel next to a handful of dried cannabis buds.

Image source: Getty Images.

Sorry, folks, but the SAFE Banking Act has no chance of passage in 2020

Unfortunately, the Republican-led Senate doesn't view the SAFE Banking Act to be a necessary game changer.

For one, Senate Majority Leader Mitch McConnell (R-Ky.) has made it pretty clear that stand-alone cannabis legislation won't reach the floor for vote. McConnell has also made efforts to block cannabis reform riders from being added to other bills or proposals. With the exception of hemp or cannabidiol (CBD), McConnell has no intention of reforming the marijuana industry.

The bigger roadblock, though, might just be Sen. Mike Crapo (R-Idaho). Crapo is Senate Banking Committee Chairman, which essentially gives him and his committee the first say on the SAFE Banking Act in the Upper House. Back in December, Crapo tore into the SAFE Banking Act and offered up a proposal of his own that would, effectively, render it useless. Crapo suggested that banking provisions be provided only to those businesses that retail products containing less than 2% tetrahydrocannabinol (THC), the cannabinoid that gets users high. This would remove practically all pot businesses from being eligible to access basic banking services.

Additionally, Crapo received a letter this past week that was signed by 12 GOP lawmakers in the House who opposed the SAFE Banking Act. These Republican lawmakers called on the Senate and its Banking Committee Chairman to think long and hard about the impact cannabis has on adolescents, the health of consumers (e.g., the recent vape-related health crisis in the U.S.), and the effect it can have on drivers.

While it's possible a political shake-up in Congress could tilt the pendulum in favor of Democrats or Independents in the upcoming election, it doesn't appear as if the SAFE Banking Act has any chance of passage in 2020 or while the 116th Congress is in session.

A large cannabis dispensary sign in front of a retail store.

Image source: Getty Images.

Some U.S. pot stocks have been lucky, but financing remains a major concern

As for the companies behind this proposed legislation, a few have gained access to much-needed capital. But when taken as a whole, financing remains a big concern for U.S. cannabis businesses.

On the bright side, both Curaleaf Holdings (CURLF -3.79%) and Cresco Labs (CRLBF -2.65%) were able to secure nondilutive funding.

Curaleaf closed on a $300 million loan in January, which was actually upsized by $25 million from $275 million due to investor interest. Curaleaf currently has more open dispensaries than any other multistate operator and will expand its reach to 19 states once the all-stock acquisition of Grassroots closes.

Meanwhile, Cresco Labs tapped a senior secured loan totaling $100 million last month, with a mutual option to double the loan amount to $200 million. Cresco recently closed on its all-stock purchase of Origin House and wants to put its capital to work in core cannabis markets, such as California and Illinois.

However, these success stories in accessing traditional financing have been far from the norm. Multistate operator MedMen Enterprises (MMNFF 0.17%) looks to be running on fumes. After losing almost $232 million on an operating basis in fiscal 2019, MedMen announced in December that the final $115 million in financing (of an original $280 million) offered to the company by private equity firm Gotham Green Partners could no longer be accessed. In recent weeks, MedMen has confirmed that it's attempting to pay off some of its vendors with its own common stock.

Without access to basic financial services, MedMen's story could become quite common for U.S. pot stocks and privately held cannabis businesses.

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