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Law360 (May 4, 2020, 3:47 PM EDT) --
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| William Doran |
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| Logan Bryant |
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| Ryan Krisby |
The CARES Act will rapidly pump unprecedented financial support into American businesses in many industries. But one industry, along with its approximately 300,000 employees, has been left to fend for itself in the face of the pandemic: the legal cannabis industry.
Due to the continued Schedule I status of cannabis under the Controlled Substances Act, cannabis businesses are not eligible to participate in any of the federal relief programs available to keep businesses afloat during the current crisis.
The Small Business Administration, or SBA, the appointed gatekeeper for many of the federal relief funds, was quick to close its doors to legal cannabis businesses, standing firm in its position that "[b]ecause federal law prohibits the sale and distribution of cannabis, the SBA does not provide financial assistance to businesses that are illegal under federal law."[1]
Yet even without this rule, the majority of the relief loans are made by banks, and the cannabis industry continues to suffer from lack of access to banks and banking resources.
Having weathered last year's market value decline, vaping health issues and liquidity crunch, the legal cannabis industry may find the COVID-19 health crisis and resulting economic recession to pose too great of a hurdle without federal assistance.
The legal cannabis industry deserves government support. Cannabis has rapidly established itself as a legitimate, growing and contributing industry, and this has held true during the current crisis. The positive impacts of the legal cannabis industry include:
- Employing over 211,000 individuals on a full-time basis, and 296,000 individuals total with all related areas combined, as of 2019;[2]
- Continuing to hire new employees during a time when many businesses have been forced to lay off employees;[3]
- Aiding more than 3 million patients with medical marijuana prescriptions, as of July 2019;[4]
- Raising substantial tax revenue, with California alone collecting over $1 billion in 2019, and analysts predicting that total potential U.S. cannabis tax revenues could reach $106 billion by 2025;[5] and
- Maintaining a safe, regulated product in legitimate markets, as opposed to the unsafe, and untaxed, black market.
Many states recognize these benefits that the cannabis industry provides, as shown by the fact that most states with medical and recreational cannabis businesses have deemed them essential businesses during the current crisis. Yet, despite this essential status, they are not eligible to receive any help from federal coronavirus funds.
Since the onset of the COVID-19 crisis, there has been an increased call on Congress to open coronavirus aid funds to legal cannabis businesses — and ancillary businesses that work with them.[6] These calls have ranged from Colorado Gov. Jared Polis[7] to U.S. Senate coalitions[8] to leading trade associations.[9]
Most recently, a pair of Democratic congressmen introduced a bill in the U.S. House of Representatives that would make cannabis businesses and their service providers eligible for the bailout programs provided through the SBA.[10]
In a statement regarding the bill, Rep. Earl Blumenauer, D-Ore., said: "Without providing these businesses the relief needed to carry out the recommended public health and worker-focused measures, we are putting these hardworking people — and ourselves — at risk."
While support has begun to rally around the cannabis industry during this crisis, it may be too little, too late. The initial CARES Act funding was significantly oversubscribed, the industry was again left out of the most recent funding increase and there is no guarantee that any more aid will arrive.[11]
Should more funding arrive, Congress has still done nothing to address the already-existing disproportionate financial burdens that the cannabis industry must face day to day when compared to similarly situated industries across the economy.
Our government is taking action to help the country and its economy during this time of need. But if Congress cannot aid the legal cannabis industry with money, there is another, free tool that Congress could employ to help: the Secure and Fair Enforcement, or SAFE, Banking Act.
The SAFE Banking Act — already passed in the House, with substantial support in the Senate — would be an essentially cost-free way to boost the industry or at least remove some arbitrary constraints in this time of crisis.
The SAFE Banking Act
The cannabis industry's access to traditional banking, bank credit and financial services is severely limited. Only a small number of state-chartered financial institutions are willing to take on the enormous record-keeping, reporting and compliance burdens and face the specter of Federal Deposit Insurance Corp. actions for noncompliance or, worse, face federal prosecution.
Access to other essential financial services and ancillary businesses such as insurance and accounting have likewise been limited. Finally, access to credit cards and other electronic payment methods continues to be difficult to impossible for legal cannabis-related businesses and their customers. These issues could be resolved with passage of the SAFE Banking Act.
The SAFE Banking Act of 2019 aims to address the state-legal cannabis industry's lack of access to banking and other financial services. The SAFE Banking Act was introduced by Rep. Ed Perlmutter, D-Colo., on March 7, 2019, with the stated purpose of "increas[ing] public safety by ensuring financial services access to cannabis-related businesses and service providers and reducing the amount of cash at such businesses."[12]
The bill has since passed in the House with bipartisan support. The SAFE Banking Act prohibits federal banking regulators from penalizing depository institutions for providing financial services to cannabis-related businesses (or their service providers) in states where legal.[13]
The SAFE Banking Act further provides a safe harbor from prosecution under the U.S. money laundering statutes and protects loan collateral from forfeiture. These protections should encourage many more financial institutions to open their doors and services to the legal cannabis industry.
Some of the many benefits that would flow from passing the SAFE Act include:
- Access to electronic payment systems, which will reduce public health and safety concerns and lack of transparency that stem from operating an all-cash business;
- Opening doors to banking, credit, loans and financial services;
- Access to insurance and employee-benefit products for cannabis firms and their employees;
- Greater accounting reliability for taxing authorities, suppliers and counterparties; and
- Providing more funding sources for industry growth and acquisition activity.
Turbocharge the SAFE Act by Including the U.S. Capital Markets
As helpful as this all would be, Congress could make the SAFE Act exponentially better, again without spending a dime, by expressly including the U.S. capital markets. The legal cannabis industry suffers from a high cost of capital due to a lack of traditional financing options and little to no U.S. capital markets participation.
In an ironic twist driven by current laws, Canadian cannabis companies have raised substantial dollars in the U.S. by listing on the NYSE and Nasdaq, but many of these companies have no U.S. operations and pay no U.S. taxes. In contrast, U.S. legal companies cannot raise capital on Wall Street, and are forced to seek funding from limited, costly private sources, or by selling shares on foreign exchanges with minimal liquidity and low transparency.
Extending the SAFE Act's protection to capital markets activity would protect U.S. investors who currently finance the vast majority of the U.S. cannabis industry, and would empower state-legal operators with greater funding to create more jobs and safe, regulated products.
This proposal is not new. Just in November 2019, Jeffrey Schultz, general counsel of Navy Capital Green Management LLC, advanced these very points.[14] American legal cannabis firms should have equal access to American capital markets.
To fix this, Congress should modify the SAFE Act's definition of "financial services" to include securities exchanges, broker-dealers, private investment funds and similar firms, or clarify that the term "ancillary businesses" includes these essential capital market participants.
The Time to Act Is Now
Passing the SAFE Banking Act, in theory, should be easy to do. Since its passage in the House — 321 votes in favor and 103 opposed, a bipartisan vote across 229 Democrats, 91 Republicans and 1 Independent — the bill has stalled in the Senate Banking Committee.
In spite of this, many advocates for the bill continue to urge and push the Senate to pass the SAFE Banking Act and expand banking access for legal marijuana businesses.[15] More recently, House Speaker Nancy Pelosi indicated her desire to see further COVID-19 legislation including provisions finally allowing cannabis businesses to broadly access banking services.[16]
The benefits that would be unlocked with the passage of the SAFE Banking Act are aligned with the nature of the stimulus packages provided to date.
First, state and local banking institutions are the intermediaries in providing the funds under the SBA's Paycheck Protection Program. The SAFE Banking Act would provide banks with greater ability to accept legal cannabis deposits, therefore extending their ability to make more loans and continue to assist U.S. businesses across all industries.
Second, passing the SAFE Banking Act would help put more Americans back to work. As previously mentioned, the cannabis industry employs nearly 300,000 people. However, operating on almost an exclusively cash basis hinders a company's ability to hire. Opening access to standard financial services would permit U.S. cannabis companies to continue to hire in a market where many U.S. workers have been displaced as a result of COVID-19.
Finally, fewer cash transactions means fewer opportunities to come in contact with coronavirus contaminates simply by preventing people from touching cash.[17]
Passing the SAFE Act is a cost-free way to help the U.S. economy now by allowing banks to make more loans under current aid regimes, creating more jobs in a hemorrhaging job market and infusing the markets with more cash.
Taking action would not only stabilize the cannabis industry during the COVID-19 pandemic, but it could boost the industry during the economic slowdown the U.S. will endure on the other side of this crisis.
Businesses across the United States are looking to the federal government during these uncertain and trying times. To date, virtually none of these monumental relief efforts have been directed to cannabis businesses.
The SAFE Banking Act provides Congress with a cost-free option of buoying the legal cannabis industry by loosening some of the financial impediments that the product's federal status currently imposes on state-legal businesses. Congress should take quick action to pass the SAFE Banking Act, giving cost-free aid to one of the few essential industries whose cries for help have so far gone unanswered.
William Doran is a partner, and Logan Bryant and Ryan Krisby are associates, at Benesch Friedlander Coplan & Aronoff.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.sba.gov/sites/default/files/resource_files/SBA_Policy_Notice_5000-17057_Revised_Guidance_on_Credit_Elsewhere_and_Other_Provisions.pdf.
[2] https://www.cnbc.com/2019/03/14/the-marijuana-industry-looks-like-the-fastest-growing-job-market-in-the-country.html.
[3] https://squarmilner.com/covid-19-cannabis/.
[4] https://www.mpp.org/issues/medical-marijuana/state-by-state-medical-marijuana-laws/medical-marijuana-patient-numbers/.
[5] https://newfrontierdata.com/cannabis-insights/cannabis-taxes-generate-106-billion-create-1-million-jobs-2025/.
[6] https://www.law360.com/cannabis/articles/1268350/pot-trade-orgs-push-to-be-included-in-future-covid-19-relief?nl_pk=dfb76d4c-bd73-42c8-aa0b-1bd455daf0b9&utm_source=newsletter&utm_medium=email&utm_campaign=cannabis&read_more=1&attachments=true.
[7] https://www.forbes.com/sites/tomangell/2020/04/13/colorado-governor-asks-congress-to-let-marijuana-businesses-get-coronavirus-aid-funds/#49d4560b1300.
[8] https://www.marijuanamoment.net/eleven-senators-push-to-let-marijuana-businesses-access-federal-loan-programs/.
[9] https://www.marijuanamoment.net/marijuana-industry-groups-ask-states-for-coronavirus-relief-loans-that-feds-wont-provide/.
[10] House Bill Would Unlock COVID Relief for Cannabis Industry.
[11] https://thehill.com/homenews/senate/494600-mcconnell-democrats-feud-over-state-aid-amid-coronavirus.
[12] H.R. 1595, § 1.
[13] Section 4(a) of the bill.
[14] https://www.marketwatch.com/story/the-us-cannabis-industry-needs-access-to-the-us-stock-markets-2019-10-31.
[15] https://www.lexology.com/library/detail.aspx?g=4bede6fe-8cd2-46dc-9379-58b445a125a8.
[16] https://www.marijuanamoment.net/pelosi-wants-marijuana-businesses-included-in-next-coronavirus-relief-bill-congressman-says/.
[17] webmd.com/lung/how-long-covid-19-lives-on-surfaces" target="_blank">https://www.webmd.com/lung/how-long-covid-19-lives-on-surfaces.
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