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Cannabis Industry: The Latest Takeaways

Last week, several members of Seyfarth’s cannabis practice attended CannaVest West and the Cannabis Business Summit & Expo.  Industry expert panels discussed market trends, private equity, venture capital, family offices, and banking, as well as commercial real estate, which I had the opportunity to moderate.

Of interest to TBT readers, a few key takeaways from the event include:

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Last week, several members of Seyfarth’s cannabis practice attended CannaVest West and the Cannabis Business Summit & Expo.  Industry expert panels discussed market trends, private equity, venture capital, family offices, and banking, as well as commercial real estate, which I had the opportunity to moderate.

Of interest to TBT readers, a few key takeaways from the event include:

Investment Opportunities – many industry experts accept as a given the fact that institutional capital will remain on the sidelines until marijuana is legal at the federal level.  Institutional investors perceive too much legal risk and are prepared to wait.  Many professional investors in the industry expect a market correction at some point in the near future and point to the recent declines in the value of a number of public Canadian cannabis companies.  This leaves an opening for private equity funds, venture capital funds, private investors and family offices, many of which can take more entrepreneurial risk and are not as constrained in the current regulatory environment.  Given how rapidly the industry is changing, most panelists thought it best for first time investors, even sophisticated investors, to leave it to the experts and invest through various types of funds or other vehicles such as REITs.  There was a real “don’t try this at home” attitude among the panelists.

Legal and Regulatory – uncertainty and confusion is anticipated to continue until the federal government passes legislation and the states figure out appropriate regulatory frameworks.  On the federal level, there are several bills working their way through the US House of Representatives to address legalization, banking, medical research and criminal justice–most notably the SAFE Act which would provide a safe harbor for cannabis banking.   However, one speaker predicted that the SAFE Act would not pass in the next twelve months and suggested that nothing would pass the Senate before the 2020 elections.  At the state level, regulators are still trying to understand various aspects of the industry and either fix what they got wrong or learn from the mistakes of the states that legalized cannabis a few years ago.

Banking – here, too, experts caution that there won’t be advancements until the feds legalize.  One cannabis banking expert made a very interesting observation about the SAFE Act, which many see as a panacea to much of the industry’s current lack of access to banking.  She said that even if the SAFE Act passes, the banking situation will not improve because banks are focused on the Bank Secrecy Act, which is not adequately addressed by the SAFE Act.  In discussing how a marijuana related business could get access to the banking system, she warned against unnecessarily complicated business structures (for example, three holding companies between the operating entity and the owner).  Bankers see such structures as an opportunity for mischief and may be reluctant to accept the companies as customers.

Real Estate – cap rates are compressing.  The days of finding an abandoned warehouse that an owner is willing to practically give away for pennies are over.  Prices are being driven higher by cannabis users of real estate, professional investors and speculators, and the lack of banks and other institutional lenders are allowing entrepreneurial lenders to dominate the market, translating to higher costs of lending too.

Hemp and CBD – have caused even more confusion for bankers and regulators, not to mention the marketplace.  One can’t assume that because hemp is now legal at the federal level, it will be easier to bank.  The Food and Drug Administration is beginning to flex its regulatory muscles and state laws continue to be a patchwork of confusion as states prohibiting growing, processing or selling hemp or hemp products try to catch up with federal law.  Finally, as long as states seize interstate shipments of hemp (Idaho, you know who you are), growers and processors may be reluctant to bring their product across state borders.

In short, the conference emphasized the fact that the cannabis industry is still young and has yet to establish banking, legal, regulatory and market norms.  Readers with any questions can contact me at sjutkowitz@seyfarth.com.

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Article

The Challenge Of Building Credit In The Cannabis Industry

Businesses need funding to grow. Securing funding isn’t as easy as a walk down to the local bank, however. To receive a loan or a line of credit, a business must demonstrate a financial history record that portrays how trustworthy it is with money. No …

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Businesses need funding to grow. Securing funding isn’t as easy as a walk down to the local bank, however. To receive a loan or a line of credit, a business must demonstrate a financial history record that portrays how trustworthy it is with money. No one is going to lend to a stranger. So, how do you demonstrate good credit? In particular, how does a cannabis business demonstrate credit when credit companies shun the industry?…

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Arizona

The Year in Weed: 2020 Edition

Welcome back to The Year In Weed, our annual roundup of cannabis-related stories.  As usual, we’ll adopt Dave Barry’s Year in Review format and look at stories month by month.  Last year, I predicted that “…much will happen in 2020.”  Little did I know in December 2019 just how true that would turn out to be.  Whether you think … Continue Reading

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Welcome back to The Year In Weed, our annual roundup of cannabis-related stories.  As usual, we’ll adopt Dave Barry’s Year in Review format and look at stories month by month.  Last year, I predicted that “…much will happen in 2020.”  Little did I know in December 2019 just how true that would turn out to be.  Whether you think that 2020 was the worst year ever, or only the worst year in your lifetime, no one is sorry to turn the page on the past 12 months.

So let’s get this “Goodbye and Good Riddance to 2020” party started.

High hopes characterized January, when it looked as if both New York and New Mexico would legalize adult-use cannabis this year.  Neither of them did.

In February, marijuana was a topic of conversation at the Democratic Presidential debates.  Ideas ranged from legalization on  day one (Sanders) to decriminalization and expungement (Bloomberg).  How the Biden administration will proceed is an open question.

And then came March, the beginning of the COVID Times.  In many states, cannabis stores and dispensaries were considered essential businesses.  That allowed them to remain open, which was good, as federal relief money was not forthcoming.

In April, South Dakota (more on the Mount Rushmore State later!) legalized hemp, despite the governor’s lack of enthusiasm.  Massachusetts decided that medical dispensaries could remain open, but recreational shops had to close. This was the beginning of a months-long saga.  Virginia decriminalized marijuana.  And Montana (more on that state later too!) was just one of several states facing problems with signature collection.

Which brought us to May.  The FDA cracked down on CBD companies making bogus claims about their products.  Senator Mitch McConnell (R-KY) objected to including cannabis banking in federal relief programs.  Republicans would use marijuana legislation as a talking point against the Democrats all year long.  Recreational shops reopened in Massachusetts.

And so on to June, the month of graduation celebrations, parties for Dad and summer vacations.  Just kidding – it’s 2020, so none of that.  What did happen?  The United Nations began the process of rescheduling cannabis.  A legalization campaign began in South Dakota.

July brought us news of legalization advocates in Arizona submitting enough signatures to put cannabis on the November ballot.  Pennsylvania’s Governor and Lt. Governor emerged as legalization supporters.  One place there was no call for legalization was the Democratic Party platform.

I’d call them the dog days of August, but in 2020, they’re ALL dog days.  Arizona’s legalization initiative made it on to the ballot.  The DEA released an interim hemp rule that the industry hated.  A lot.

With the crisp autumn air of September came the possibility of medical marijuana in Nebraska.  Spoiler alert: it didn’t happen.  Cannabis farmers suffered losses in the wildfires, their troubles compounded by their lack of insurance.  And the DEA’s hemp rule brought on litigation.

As homeowners set up candy chutes for trick-or-treaters in October, Vermont legalized marijuana sales, to start in 2022.  Maine, which legalized in 2016, started sales this month.  The DEA hemp rule continued its unpopularity.  Montana’s ballot initiative survived its many challenges, bringing the numbers of states voting on marijuana to five

And we all know what happened in November.  There was an election, and the winner was weed.  All five states where marijuana was on the ballot voted in favor.  Sure, one of them was the reliably blue New Jersey, and newly purple Arizona, but the others were South Dakota, Montana and Mississippi.

Which brings us, at long last, to December.  The United Nations voted to reschedule cannabis. New Jersey passed legalization legislation, but the Governor didn’t sign it.  On the federal level, both the House and the Senate passed marijuana research bills, but neither of them became law.   And the House voted for the MORE Act, which would remove cannabis from the Controlled Substances list.  That didn’t become law either.

So finally, we come to the end of 2020.  It’s been our pleasure to bring you the news each week, even if so much of it this year was about COVID.  Let’s all hope for better things in 2021!

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banking

Exclusion of the Safe Banking Act in Coronavirus Relief Doesn’t Mean It Won’t Pass in 2021

Despite best efforts by the U.S. House of Representatives in 2020, provisions related to the Safe Banking Act were not included in the $900 billion Coronavirus relief bill passed on Monday in the U.S. Congress. Supporters of the banking reform legislat…

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Despite best efforts by the U.S. House of Representatives in 2020, provisions related to the Safe Banking Act were not included in the $900 billion Coronavirus relief bill passed on Monday in the U.S. Congress. Supporters of the banking reform legislation included, among others, a group of bipartisan Attorneys General, state treasurers, and a majority of the members of the House. Unfortunately, those opposing any form of marijuana policy reform prevailed, and depending on the outcome of the Georgia Senate race in January, those same leaders may continue to impede reform efforts if the Republicans retain control of the U.S. Senate.

Nevertheless, the cannabis industry and financial institutions serving or considering serving the cannabis industry remain hopeful that the Safe Banking Act may still pass in 2021 when the President-elect Joe Biden is in office and if Pennsylvania Republican Pat Toomey becomes the new chair of the Senate banking committee. In an interview with Politico, Senator Toomey said that he is “sympathetic to the idea that people who are involved in the cannabis industry—in an entirely legal fashion, in the state in which they operate– ought to be able to have ordinary banking services.” Toomey will become the chair … Keep reading

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