Proposed Federal Legislation Could Open Major Exchanges to American Cannabis Companies

By David Wenger

The most promising near-term federal cannabis legislation is the “Secure And Fair Enforcement Banking Act of 2019,” also known as the “SAFE Banking Act of 2019.” Passage of the SAFE Banking Act affording banks that service the cannabis industry protection from federal interference would be an unprecedented catalyst for the country’s fastest-growing industry; a watershed moment toward mainstreaming the industry.

But the SAFE Banking Act can be even more meaningful and impactful for the US cannabis industry, without legalizing cannabis federally.

In opening the full panoply of US banking to the cannabis industry, Congress should seize a golden opportunity to also bring more than $20 billion of US cannabis company market capitalization to the US capital markets by extending the same protections from federal interference to US stock exchanges to list US cannabis companies operating under state-legal regimes.

Federal banking guidance is urgently needed. In 2018, more than $10 billion of cannabis was legally sold in the US. Very little of those funds were deposited in a federally-chartered bank. A large portion of that money was not deposited in any bank. According to the Treasury Department, at the beginning of Q4 2018, only 375 regional banks and 111 credit unions provided some service to the entire US cannabis industry (numbers derived from some 67,000 federal Suspicious Activity Reports (SAR) banks are required to file in connection with cannabis-related activity). The actual number of banks providing full financial services to the industry is far fewer, estimated at only several dozen. Federally-chartered banks are reluctant to service cannabis companies over regulatory and legal concerns. The burdens of filing SARs can be prohibitive for smaller banks.

Without access to banking services, many cannabis companies operate on a cash basis, complicating their books, and creating a risk of robbery which has already led to several deaths. Even when banking access is provided, cannabis companies and their executives and ancillary businesses serving the industry are subject to suddenly-closed accounts, problems with banking transactions, and difficulty with international transfers.

The SAFE Banking Act would solve critical problems for cannabis banking. The purpose of the Act is: “To create protections for depository institutions that provide financial services to cannabis-related legitimate businesses.” The Act provides a “Safe Harbor For Depository Institutions.” (§ 2). Under the Act, a federal banking regulator may not: (1) terminate or limit insurance to a bank that services a cannabis company; (2) prohibit, penalize, or otherwise discourage a bank from servicing a cannabis company, (3) recommend, incentivize, or encourage a bank not to service a cannabis company; or (4) take any adverse action on a loan to a cannabis company (§ 2). Proceeds from a transaction conducted by a cannabis company “shall not be considered proceeds from unlawful activities.” (§ 3). The Act also establishes that banks and their officers and directors “may not be held liable pursuant to any federal law or regulation” for providing financial services to a cannabis company; and protects banks from any associated risks of forfeiture. (§ 4).

Essentially, the SAFE Banking Act would open the full services of the US banking industry to cannabis companies, allaying fears of federal interference. The industry owes a debt of gratitude to its champions in Washington advancing this bill, Senator Jeff Merkley (D-OR) and Representatives Ed Perlmutter (D-CO) and Denny Heck (D-WA), along with all of the bill’s bipartisan co-sponsors.

But Congress should not limit the bill to protecting “depository institutions” providing financial services to US cannabis companies. The SAFE Banking Act as drafted does not mention US stock exchanges. A historic opportunity would be missed if the Act does not also extend protections from federal interference to US stock exchanges to list US cannabis companies. The Act should include a specific provision affording the same protections from federal interference to US exchanges as is being afforded to banks.

The top 10 US cannabis companies have a combined market capitalization exceeding $20 billion. They will only become more valuable as the US legal industry rapidly expands to capture more of the already $55 billion of black-market demand and with many new consumers the legal industry will attract.

Today, that $20 billion in US cannabis company market capitalization has been created in Canada. US exchanges have refused to list US cannabis companies, owing to federal illegality, while the Canadian Securities Exchange has welcomed them, creating enormous value in the Canadian capital markets.

Though US capital markets remain shuttered to US cannabis companies, US exchanges have welcomed Canadian cannabis companies with no US operations. Cronos was the first Canadian cannabis company to list on a US exchange (Nasdaq) in February 2018, followed by Canopy, Aurora, Aphria, Hydropothecary, and CannTrust on the NYSE, and Tilray on the Nasdaq. These seven companies have a combined market capitalization exceeding $40 billion. They benefit greatly from the unrivaled liquidity offered by the US exchanges.

The NYSE and Nasdaq do not have a problem with listing cannabis companies, only with listing US cannabis companies. A puzzling situation has emerged where Canadian cannabis companies with no US operations, paying no US taxes, and having few if any employees in the US benefit enormously from the US capital markets, but multibillion-dollar US cannabis companies like Acreage, Curaleaf, MedMen, Cresco Labs, and Green Thumb Industries, headquartered in the US, employing thousands in the US, and paying millions in federal taxes cannot benefit from our capital markets.

If the SAFE Banking Act will allow JPMorgan, Bank of America, and Citigroup to provide their full range of financial services to US cannabis companies, why should the NYSE and Nasdaq not be able to list those same companies and afford them access to the US capital markets?

Support for federal cannabis legalization is at 66 percent nationally, with more than majority support in every age group, political party, and demographic. The US cannabis industry is poised for exponential growth over the coming years.

Access to banking services and the US capital markets, simultaneously, would be monumentally transformative for the cannabis industry.

Now is the time for Congress to not only provide protections to banks that want to serve the industry, but also to provide protections to US stock exchanges that want to list US cannabis companies, ensuring that the tremendous growth in market capitalization of the US cannabis industry is realized in the US. Even in the absence of federal legality, US exchanges listing US cannabis companies would add enormous value.

Bringing $20 billion of US cannabis company market capitalization to the US to be followed by many more billions as the industry grows — Democrats and Republicans alike could support that. Including protections for US exchanges in the Safe Banking Act could ultimately help to ensure passage of this crucial bill.

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