Let’s face it. America’s cannabis industry is tenuous, at best. Thanks to Attorney Jeff Sessions, the revocation of the Cole Memo leaves states at the will of their State District Attorney’s, instead of being protected by federal guidance. The Cole Memo protected the recreational cannabis industry from federal interference. Now that it has been revoked, uncertainty has spread across the United States.
In addition to the Cole Memo, the fate of the Rohrabacher-Blumenauer amendment was in the balance, or rather unbalance, of Congress. When members of the Senate and House of Representatives were unable to come to an agreement on a budget, the federal government shut down, leaving entrepreneurs on the edge of their seats.
However, even with all of the uncertainty swirling around the federal government, investors are still diving deep and funneling hundreds of millions of dollars into the cannabis industry, expecting exponential growth.
There seems to be one senator that is in agreement for the legalization of marijuana. Senator Rand Paul proposed two budget amendments to the House spending bill that allows for expanding the protection of state-legal cannabis. Marijuana Moment reported that Paul has proposed two different measures which include:
- Defund any attempts by the Justice Department to interfere with either state-legal medical or recreational cannabis
- Prevention of the DOJ from prosecuting banks that serve state-legal cannabis companies
Even with Sessions’ self-proclaimed war on marijuana, companies like Seattle-based private equity firm Privateer Holdings are still investing in the country’s legal marijuana industry. Privateer Holdings recently set a new record by investing $100 million into a round of cannabis-focused funding. Companies such as Tilray, Privateer, and Leafly are forging ahead, even with threats from Sessions. According to Privateer CEO Brendan Kennedy, “We closed a number of investors in the last two weeks. The memo didn’t change anything for us.”
This is good news for the U.S. cannabis industry. However, those who lack confidence in the capacity to survive the multitude of threats, federal prohibition continues to throw up heavy amounts of roadblocks, cutting off legal cannabis’ access to both the American stock markets and proper banking industries. Instead of choosing another industry to back, investors are now looking to Canada, where cannabis will become fully legal by the end of 2018. Canadas stock market will welcome the new industry, just like any other commodity.
Although Kennedy is not scared by Sessions’ actions, he is concerned about the “ability of companies inside the United States to lead this industry globally.”
Privateer is always on the lookout for global opportunities. Outside the U.S., there is less risk and more certainty in opportunities. Kennedy stated, “They’re easier to scale, and we have the ability to partner with real companies – such as pharmaceutical distributors – that we wouldn’t be able to partner with in the U.S.”
The Canadian Security Exchange
With most of the investment opportunities happening outside the United States, company CEOs such as Kennedy see the Canadian Security Exchange (CSE) rising above the NASDAQ or the New York Stock Exchange (NYSE) in the cannabis industry.
“We raised this capital from investors around the United States and around the world, and frankly, we’ll deploy the vast majority of this capital outside the United States,” Kennedy said. “Most of the investment opportunities we’re looking at today are outside the U.S., where the pace of change in many ways seems to be happening at an even faster rate than inside the U.S.”
CNBC reported that U.S. based cannabis company, MedMen, plans to go public on the CSE rather than the NASDAQ or NYSE. With a plethora of dispensaries in California and New York, it is a disappointment to those who want to invest in the U.S. stock market.
CEO Adam Bierman recently told CNBC that there is a brewing excitement around the national legalization coming to Canada this year. He also stated that with the hungry appetite among global investors, the Canadian public markets are luring these investors with the speed of their legalization and ability to invest in the CSE.
He also eluded to an explosive U.S. market, if and when the cannabis industry is allowed to trade on the NASDAQ or NYSE.
“…there is this appetite among global investors to invest in a U.S. play. Specifically, global investors want to invest in a U.S. play that has California exposure. Now is the time where it makes the most sense.”
The Toronto Stock Exchange (TSX) is Canada’s largest stock exchange with over $20 billion in Canadian-based cannabis capital. However, American-based cannabis companies are also represented, compiling over $230 million in capital.
Entrepreneurs and investors are flooding Canada’s cannabis markets due to the current up-and-running international cannabis distribution network. There is also the flourishing local market set to grow even more after legal recreational sales begin later this year.
Canadian Marijuana Prices Drop
Statistics Canada released a report that claims nearly 5 million Canadian cannabis users spent almost $4 billion on marijuana in 2017. This number includes legal and illegal sales. However, experts predict that the illegal marijuana sales market will shrink considerably in the years to come. A cultivation boom has meant that the retail price of marijuana has decreased significantly. The average price of a gram of marijuana in Canada has dropped $1.00 (CAD) in the last year.
Even with the price drop, industry experts predict that there will still be a hefty profit to be made in Canada. As production grows and consumer spending increases by 6% per user per year, the future of Canada’s cannabis industry looks profitable for investors.
Investors in the U.S. are looking for changes in federal cannabis laws that will ultimately allow for the fledgling cannabis market in the U.S. to grow to its full potential. There is a great opportunity for investors to make enormous profits, but only if the federal government gets out of the way and finally removes all barriers to funding the cannabis industry. However, with Sessions’ recent actions, it does not appear that it will be soon.
For centuries, people have turned to alcohol products to unwind after a long day, to celebrate with friends, and to mark special occasions. Now that legal cannabis has entered the scene, the alcohol industry’s dominance over the recreational market may be coming to an end. Cannabis industry analysts and business leaders suggest that cannabis may hold the keys to the kingdom, representing a vast opportunity for profits and continued growth among recreational users as an alternative to alcohol products.
Competitive Advantages of Cannabis
Nine U.S. states and the District of Columbia have passed recreational marijuana legislation in the past three years. More states are putting the finishing touches on their own legislation, and the country of Canada is expected to have recreational cannabis legalization laws on the books in the coming months. This groundswell of support for recreational weed has industry analysts excited about the recreational markets springing up across the country.
Alcohol is typically consumed only as a beverage. Cannabis, on the other hand, lends itself to a variety of products, including smoking the cured flowers, creating tinctures, edibles, beverages, and vaping liquids. This versatility provides a strong competitive challenge to alcohol’s dominance on the recreational scene. One industry analyst suggests that cannabis meets more consumer demands and satisfies consumer motivations better than alcohol ever could, and believes that as the commercial cannabis industry grows, its biggest players may even target alcohol producers for acquisition.
Another potential competitive advantage on the recreational market is a belief that cannabis is safer than alcohol. Users of recreational marijuana believe that it does not impair them in the same way that consuming alcohol might. This belief is especially prevalent among younger users, a potent demographic in recreational cannabis and alcohol markets. Whether cannabis is safer than alcohol is up for debate, but those who tend to believe in this may prefer recreational weed over alcohol products, helping to spur growth in a fast-growing market.
Threat or Opportunity?
Many alcohol producers are eyeing the emerging recreational cannabis market as a threat, as cannabis represents an alternative to alcoholic drinks. The cannabis industry’s profit pool is massive, approaching the entire amount of the alcohol industry’s profit over the past three to five years. As more states and Canada adopt legalization legislation, the profit potential is sure to increase dramatically. Industry estimates suggest that the recreational market for marijuana alone will account for $40 billion in sales by 2020; if more states join the legalization initiatives taking shape, that profit may soar to unexpected highs.
The fact remains that consumer motivations and needs are similar between those who use cannabis and those who use alcohol products. Based on the aforementioned competitive advantages of the legal cannabis market, however, cannabis can meet needs that alcohol makers simply cannot approach. Still, the smartest companies on both sides of the recreational market are seeing consumer demand as an opportunity, rather than a threat.
In many cases, such as in Canada and in several U.S. states where legalization legislation has passed, the alcohol control board oversees the commercial cannabis industry. This gives both markets a bit of uniformity when it comes to regulation, helping to pave the way for lucrative partnerships. Some alcohol companies have invested heavily in licensed cannabis producers, both as a means of getting a piece of the profits as well as to expand market offerings.
There will always be overlap in the customer base between alcohol and cannabis, so these partnerships could create synergies that can be leveraged, producing products that meet consumer demands no matter what their recreational preferences are. Alcohol companies are exploring the marijuana market for new beverage ideas and perhaps even the development and production of nutraceutical products. Both alcohol and cannabis producers are also looking at other strategic partnerships across markets, including cosmetics, pharmaceuticals, food, and beverages, just to name a few. The goal is to improve market penetration, and partnership suggest a path forward for all of the major players in these ever-growing markets.
Partial ownership of growing cannabis companies and their incredible profitability may also help struggling alcohol producers to weather downturns in their own markets. In the current landscape, industry analysts are seeing alcohol companies purchasing partial or total stake in some of the largest commercial cannabis companies. It is expected that as the cannabis market grows, the reverse will be true: cannabis firms snapping up alcohol companies in merger and acquisition strategies. This shift is expected within the next three to five years.
Finally, consumer goods personnel — particularly alcohol business executives — are in great demand by the cannabis industry. Consumer goods and alcohol executives have the skillsets that smart cannabis businesses need to thrive; the market is filled with great business ideas but little in the way of executive experience. Injecting seasoned business executives into the mix will strengthen the companies that employ such personnel, helping to create stability in an ever-fluctuating market. Alcohol executives, for their part, have many commonalities with the cannabis market’s needs, including marketing and promotional strategies, production efficiency initiatives, and automation, all of which will bring consistency and quality into the commercial cannabis industry. The future of partnerships between alcohol and cannabis companies may be several years away, but early moves suggest that these partnerships will work to create a flourishing, robust market economy.
Hemp production has soared in the past year. The number of licensed producers and acres of cultivation space in the top 10 hemp-growing states grew by 140 percent. The number of licensed hemp producers rose from 609 in 2016 to over 1,200 in 2017. Additionally, the number of acres licensed for hemp cultivation also rose from 16,377 acres in 2016 to almost 40,000 acres in 2017.
States such as Kentucky, Colorado, Minnesota, Nevada, New York, North Carolina, North Dakota, Oregon, Tennessee, and Vermont are the top 10 hemp producing states in the U.S.
The Reason for the Spike in Production
Increasing acceptance for hemp and cannabidiol (CBD) oil, in addition to relaxed state level regulations allowed U.S. hemp production to surge in 2017. This increase is only the beginning for the fledgling hemp industry in the United States.
Since full-fledged hemp cultivation is still illegal at the federal level, the plant that produces hemp and CBD oil can only be grown in states that have an established hemp program. There are still lingering questions about the legality of hemp-based extracts, such as CBD oils. Farmers are also still learning the optimal growing processes. It is unclear the demand for products made from hemp grown in the U.S. However, CBD which is derived from hemp is soaring in popularity.
Brightfield Group, a cannabis research firm, estimates that the demand for hemp-based products will increase from $291 million in 2017 to over $1.65 billion by 2021. This increase in demand has prompted U.S. farmers who have grown more traditional crops to look into growing hemp as a replacement for lower-valued crops such as cotton or alfalfa.
Certain states have shown support to the fledgling industry by allowing more growers into their hemp programs and relaxing regulations to acreage limits. States that have shown increases in hemp production are set to cash in on the bull market of the next few years.
More than half of the United States hemp production occurred in Colorado. Even though Kentucky has more licensed acres, Colorado has more acres in production, farmers who grow the crop, more CBD processors, and more opportunities for selling hemp plants. Colorado was the first state to legalize recreational marijuana and in 2012, farmers began to grow the crop for cultivation.
Due to Kentucky’s well-suited growing climate, former tobacco farmers are taking a strong interest in hemp. The state’s willingness to experiment and invest in hemp processing and growing makes Kentucky a leader in the hemp growing industry. Kentucky has the most acres authorized for growing hemp in the nation at 12,800 acres. However, only 3,200 acres were planted in the bluegrass state.
With a well-established network of hemp processors and growers, along with a new testing regime, Oregon has grown in its position in the hemp industry. With new laws on testing requirements that have been passed in 2017, Oregon hemp products have the same testing regulations as marijuana. This means that all hemp products that come from Oregon will be food-grade quality and pesticide and contaminant tested.
As a future leader in hemp, North Dakota has more than 3,000 acres in active production. However, North Dakotas cold climate and recent drought have limited hemp’s potential to thrive. In addition to the natural determents to growing hemp in the state, high production costs and expensive seed costs that are higher than typical row crops, do not help entice farmers to grow hemp.
Since 2016, Minnesota has allowed farmers to grow hemp. In fact, there is an abundance of wild hemp from World War II-era crops. With a climate similar to Canada, varieties already grown in the neighbor to the north are a natural fit for the state. Unfortunately, no hemp farmer has reported a profit as of yet. Processing delays, legal confusion, and natural pests make growing hemp difficult for many farmers.
Governor Andrew Cuomo helped establish the hemp industry in New York in 2017 when he invited entrepreneurs to compete for development grants in excess of $5 million. These grants were a first in the nation. Most state programs are funded mostly by feeds paid by farmers, but New York’s decision to invest in promoting hemp cultivation and processing has allowed New York to be a frontrunner in the hemp industry.
For a state once dominated by textile manufacturing and tobacco farming, officials in North Carolina see hemp as a natural fit for farmers. In 2017, North Carolina finished the growing season with more growers, acres, and processors than any other state in the first year of hemp production.
The climate in Tennessee has created a challenge for hemp farmers. High humidity and a 50-plus inch per year rainfall makes it difficult to grow a plant that thrives in an arid climate. However, Tennessee hemp entrepreneurs are trying to develop strains for a damper climate. The state also has no legal restrictions in selling hemp products. The state also permits CBD extraction which is highly valuable.
With the nation’s most lenient hemp regulations, Vermont’s latitude makes it easy for hemp cultivars that were developed in northern Europe and Canada. However, hemp producers may be under an entirely new set of guidelines as the state implements regulations for recreational marijuana.
Nevada hemp farmers are selling their products as quickly as they can produce them. There is a booming demand for flower in CBD production. Prices of up to $350 per pound are being seen for quality, high-CBD varieties. This is almost 10 times what Colorado growers receive for midgrade hemp flower. In addition, Nevada growers are increasing the amount of acreage and processing equipment. Farmers in the state are hoping that they can cash in on the boom before states that have a better water supply and a milder climate overtake the market. Growers in Nevada are also expecting a challenge from California growers, so they are looking for new hemp uses in the industrial markets and animal feed.
Although the market players are still unclear about the future of the hemp industry, industry entrepreneurs and policymakers are forging ahead and hopeful about the industry’s future.
Hemp. It is one of the oldest crops known to man, and it is also one of the most misunderstood plants. Now, New York is expanding its hemp research program.
What Is Hemp?
The cannabis plant has many different varieties. Hemp is often referred to as industrial hemp and contains less than 1% tetrahydrocannabinol (THC), the psychoactive element in marijuana. Both marijuana and hemp are obtained from the same cannabis species, but hemp is genetically different than marijuana, along with chemical makeup and cultivation methods.
What Does Hemp Do?
Hemp is a renewable source for raw materials that is often incorporated into thousands of products. Health foods, organic body care, and pharmaceutical-grade and standardized nutrients called nutraceuticals.
The stalks and fibers are used for producing hemp clothing, construction materials, biofuel, plastic composites, paper, and even more. In fact, the Hemp Industries Association (HIA) estimated that hemp products sold last year in the U.S. topped a whopping $620 million in the retail market. Unfortunately, 100% of the raw hemp materials were imported from other countries.
Farmers have historically used rotation crops to replace CO2 and other nutrients into the soil that regular crops have depleted. Even Thomas Jefferson recognized the importance of crop rotation. Hemp breathes in CO2, detoxifies the soil, and prevents soil erosion. After harvest, the left-over plant material decomposes into the soil and replenishes valuable nutrients. In addition, hemp does not require much water to grow or pesticides to flourish and is much more environmentally friendly than traditional crops.
What Can Be Made from Hemp?
There are a wide variety of items that can be made from the hemp seed, such as:
- Dairy products
- Protein powder
- Body products
- Animal food
The hemp stalk can also be used to make items such as:
- Animal bedding
- Chemical absorbent
- Paper products
What Can Hemp Not Do?
Basically, since hemp varieties contain almost no THC, it cannot get a person high, no matter how much they smoke. The body processes the miniscule amount of THC faster than a person can smoke it. Therefore, there is no way to get high from hemp. Then why is hemp illegal?
Why Is Hemp Illegal?
When the Marijuana Tax Act was passed in 1937, cannabis cultivation and sales were strictly regulated. Several decades later, the Controlled Substances Act of 1970 classified all forms of cannabis as a Schedule I drug. This included hemp. Schedule I drugs are illegal to grow in the United States. Therefore, 100% of hemp used in the U.S. has been imported since 1970. Due to the almost 50-year prohibition on hemp, most Americans do not understand the differences between marijuana and hemp.
Is Hemp Making a Comeback?
In 2014, the US Farm Bill passed for that year allowed states that already have industrial hemp legislation in their state to grow industrial hemp for research and development purposes. States such as Kentucky, Colorado, and Oregon are conducting hemp pilot products.
Now, New York’s hemp research program is almost doubling from 2,000 acres to more than 3,500 acres. The state has earmarked $650,000 in their budget for a hemp processing plant in addition to $2 million for a state-run hemp seed certification program.
Governor Andrew Cuomo announced that, under the state’s Industrial Hemp Agricultural Research Pilot program, more than 60 new businesses and farms have already received hemp research permits, with another 18 companies registered to process the hemp crops.
The governor released a press release stating, “There is renewed interest in industrial hemp production and processing throughout the country, and with our strong grower community and innovative researchers, New York is in a great position to lead.”
New York’s state Department of Agriculture and Markets Division of Plant Industry is currently accepting applications for proposed hemp research in fiber and food on a continuous basis. Gov. Cuomo announced last year a $5 million Industrial Hemp Processors Grant Fund. He is in favor of providing farmers an alternative crop.
“By providing an alternative crop for our farmers, industrial hemp has the potential to change the landscape of our agricultural economy, create jobs, and drive growth across the Southern Tier and throughout New York,” Cuomo stated.
In 2017, two thousand acres of hemp were cultivated under New York’s state program. Consumer, industrial, and medical products made from hemp accounted for around $600 million in sales yearly in the Empire state.
With a push to legalize cannabis on the federal level and with many states already legalizing medical and recreational cannabis, it is just a matter of time before hemp makes a strong comeback as a viable crop for farmers to grow.
Hemp Research in the United States
Industrial hemp research has been underway in a number of foreign countries for over a decade. The U.S. is far behind in its efforts. The National Hemp Association is partnering with public and private research institutions in the U.S. to help get out their findings as soon as they are published. Currently, hemp research includes uses of hemp for:
- Battery development
- Construction materials
- Paper products
- Body products
- Intensive research into nutraceuticals
The National Hemp Association represents:
- Hemp farmers
- Hemp processors
- Hemp manufacturers
- Start-up businesses in the hemp industry
- Entrepreneurial endeavors
- National and international industries who recognize the benefits of hemp as an ecologically-friendly and versatile material
New York’s Industrial Hemp Pilot Program
For New York residents interested in becoming a research partner with the New York State Department of Agriculture and Markets to conduct studies in the food and fiber areas, visit their website at https://www.agriculture.ny.gov/PI/PIHome.html.
They are currently accepting applications for:
- The Industrial Hemp Program Application
- The Industrial Hemp Processor Registration
- The Industrial Hemp Affiliated Research Grower Registration
Currently, the NYS Department of Agriculture is not accepting new applications for cannabinol-related research proposals.
With so many states coming on board to conduct research, hemp may become the new cash crop for farmers across the country.
Once again, the federal government stands in the way of businesses in the marijuana industry that operate in states where marijuana is legalized. In January, the Internal Revenue Service (IRS) issued new policy updates totaling over 280 pages. In this extensive policy update, buried deep inside, there is a ban on future nonprofit organizations who lobby for the marijuana industry. For advocacy groups trying to change federal cannabis laws, life could get a lot harder.
The IRS hid inside the 280-page policy update a provision that declares that the agency will no longer acknowledge any tax-exempt applications for an organization “whose purpose is directed to the improvement of business condition…relating to an activity involving controlled substances…which is prohibited by federal law regardless of its legality in the state in which such activity is conducted.”
The Obama-era Department of Justice policies that protected the marijuana business have essentially destroyed. The IRS policy change can just two short days before U.S. Attorney General Jeff Sessions revoked the Cole Memorandum that protected marijuana industries from federal prosecution.
Rachel Gillette, a Colorado-based cannabis attorney, stated that the IRS’s new policy is not shocking. “It’s another example of the IRS’ punitive policies towards the cannabis industry.”
Another professional involved in the cannabis industry, California accountant Jerry Chin stated that the policy change is, “an interpretation of what the IRS sees in its own rules and regulations.”
Chin added, “What the IRS is saying is, if your trade association’s main purpose is the advocacy of a Schedule I substance, then we’re going to deny your application for that fact alone.”
Groups Affected by the IRS Change
There has already been one nascent marijuana trade group affected. The New Jersey Cannabis Industry Association (NJCIA), which celebrated its one-year creation in January, was denied an IRS determination letter for its application for tax-exempt status. The organizations president, Hugh O’Beirne, had fought back-and-forth with the IRS for months before the final decision came down.
It first appeared as if O’Beirne’s hard work was paying off as the conversation between the IRS and NJCIA was moving along with the IRS asking the organization for “further details on our application,” according to O’Beirne.
Then, at the “eleventh hour,” he was informed by the IRS of the procedural rule change and told that the IRS would not be issuing those types of letters to “your type of company.” All of this happened within 7 days of the procedural rule change announcement.
Whether other newly formed trade associations have been denied determination letters or tax-exempt status is unclear at this point. The IRS has not responded to requests from various publications. Additionally, since the policy change is so new, there is a great deal of confusion of how this change will affect the cannabis industry or organizations that are associated with the industry.
The Effect to Established Groups
There are no answers for current, long-standing marijuana advocacy groups wondering if their tax-exempt status will be revoked or whether the policy change applies only to organizations initially applying for tax-exempt status. Experts are not in agreement on that point.
The National Cannabis Industry Association (NCIA) has been registered as a 501(c)6 nonprofit organization since 2010. They feel as if they are a target for the IRS. For the NCIA, taxes owed to the IRS would total $210,000 for 2017 revenue received if not for the tax-exempt status.
Chin, who has been working with the cannabis industry since 2012, estimates that this type of cost could affect all marijuana nonprofit organizations under the new federal policy. His estimates for NCIA are based on their $3 million in revenue less $2 million in deductible business expenses for 2017.
He believes that there is the “distinct possibility” that the IRS may use the new policy to revoke the tax-exempt status previously granted to organizations like the NCIA. Unfortunately, the IRS has the ability to review the status of any organization and revoke it based on policy changes.
However, Henry Wykowski, a San Francisco based attorney, who serves as NCIA’s general counsel disagrees with Chin. He believes that the IRS does not have the power to remove an organization’s tax-exempt status except under limited circumstances and that the new policy is just another kick to the shins to the marijuana industry.
He believes that in order for the IRS to remove any tax-exempt status, an organization must “run afoul” of their tax-exempt obligations. He also believes that the new policy does not apply to any entity that may have already received a determination. He added that if the IRS revokes NCIA’s tax-exempt status that the organization could sue the IRS in U.S. Tax Court.
There is currently no clarity on whether the IRS will implement the new policy retroactively. Ed Bartlett, a Boston-based tax attorney stated, “The IRS would have to rule specifically that an organization no longer qualified for tax-exempt status. Until that happens, existing organizations should continue to function as tax-exempt entities.”
The IRS could potentially use the new policy to target groups already granted tax-exempt status. This could affect groups that work indirectly with the cannabis business and are not directly involved in the production aspect, such as Marijuana Policy Project (MPP) or Americans for Safe Access.
Hundreds of marijuana organizations that currently have tax-exempt status are potential targets if policy is interpreted to include state chapters of national nonprofits dedicated to reforming cannabis laws.
Companies such as NCIA are “prepared to fight” if the IRS tries to remove their tax-exempt status. Aaron Smith, executive director of NCIA, stated that he has not heard from the IRS about the policy change.
If nonprofit organizations lose their tax-exempt status, their profits will be tax, leaving fewer dollars to advocate for law changes. However, this is the worst potential outcome, according to industry insiders. Chin noted that a trade group that loses or is never issued tax-exempt status is subject to a 21% federal tax on any profits.
Even if the IRS decides to deny groups that have yet to receive tax-exempt status, it will still harm those particular groups’ effectiveness and credibility. With 21% less dollars to spend on advocacy, the groups will not be able to truly operate as nonprofits and complete the work expected of their members.
The commercial cannabis industry has faced many challenges over the past decade. From legal wrangling and ever-shifting regulations to fierce competition and uncertainty in the market, cannabis businesses have had to remain flexible as profits soar. One of the biggest challenges influencing the legal cannabis industry has been that of banking, or rather the difficulty in finding banking services that will serve cannabis-based businesses.
In April 2018, the Bank of Springfield, servicing most of the state of Illinois’ medical cannabis companies, announced that it would close the accounts of those businesses by May 21, 2018, leaving them with an uncertain banking future. This is just one of many examples where banks are pulling back or eliminating service to the growing cannabis industry. This is in stark contrast to industry analysts suggesting that more banks are willing to extend services to cannabis-based business operations. Which is correct? In this article, we will explore the state of banking and the cannabis industry, providing information and thought to this complex subject.
Illinois Medical Cannabis and the Bank of Springfield
Why the sudden shift in banking status for the medical marijuana businesses serviced by the Bank of Springfield? This turnaround is the direct result of the U.S. Department of Justice and Attorney General Jeff Sessions announcing that the DOJ was revoking the so-called “Cole Memo”. The Cole Memorandum was issued by the DOJ’s Deputy Attorney General James Cole in 2013. In the memo, the Justice Department set a policy of not enforcing federal marijuana laws in states where medical and/or cannabis legalization legislation had been passed unless such enforcement was deemed critical to federal safety priorities. In other words, prosecution of marijuana-related crimes in legal states was to be left to those states unless flagrant federal violations also occurred. In January 2018, newly-appointed Attorney General Jeff Sessions moved to rescind the Memo, potentially paving the way for increased federal enforcement of marijuana crimes.
As soon as this revocation was announced, it had a chilling effect on legal cannabis businesses. Already operating in a legal gray area, this shift in legal status immediately encouraged allied companies to rethink their outreach to cannabis businesses. The Bank of Springfield stated that customer protection was of the highest priority for the banking firm, and by continuing to serve businesses operating in uncertain legal status, this represented an undesirable level of danger for other customers. Banks in other states followed suit. Luckily for a few of the medical marijuana businesses in Illinois, other banks were available to serve a handful of dispensary customers, but for the most part, cannabis operations in the state are operating on a cash-only basis.
Banking and the Cannabis Industry
Since legal marijuana legislation first began to be passed in the United States, cannabis companies have had a difficult time with securing banking services. Services used by the industry include merchant accounts, payment processing, and even savings accounts. Many business owners would open accounts with local banks or even large regional/national banking chains, only to have their accounts closed when the banks discovered a connection to the cannabis industry. This was particularly prevalent among the large banks like Wells Fargo and Chase, which have valid concerns about extending services to marijuana producers and retailers, fearing that their actions would be seen as money laundering by the federal government.
Because of the lack of availability in banking services, the legal cannabis industry is cash-heavy. When thinking about cash, it is important to remember that the industry generates tens of billions of dollars in revenue – large retail operations and dispensaries had so much cash on hand that storing and transporting it became difficult. It is not uncommon for marijuana businesses to pay their taxes and licensing fees in cash, sometimes to the tune of $100,000 or more. Large operations may require the services of an armored courier to move money. Of course, having to rely on cash also means that legal cannabis operations must have security systems in place to prevent robberies, thefts, and violent crimes.
To create a workaround to the lack of suitable banking services, several cannabis businesses have established shell companies or holding firms, then routing all transactions through these companies, which the banks see as legitimate. Still others may use personal bank accounts, depositing cash and then using their own accounts to pay employees and vendors with wire transfers. Both of these methods are shady at best and deeply unethical at worst.
Hope on the Horizon?
The legal cannabis industry has pushed for several reforms in recent years, including a nationwide referendum on establishing legality, pushing for rescheduling of cannabis under DEA guidelines, and calling for banking reform.
Canada’s experiences may pave the way for U.S. based businesses to gain legitimacy. Canada passed a sweeping nationwide law allowing for medical marijuana in 2017; in 2018, the country is expected to complete passage of legalization for recreational marijuana. In that country, legal cannabis businesses enjoy a wide slate of banking services. Canada’s legislation and experience could serve as a model for U.S. lawmakers hoping to create similar federal reforms.
In the meantime, industry analysts suggest that more banks are extending services to legal cannabis businesses, particularly in the medical sector. A report in early January 2017 produced by the Financial Crimes Enforcement Network showed that 340 banks were providing services to marijuana operations; by September of the same year, that number rose to 400, split fairly evenly between banks and credit unions.
Bipartisan support for clarity in banking regulations regarding doing business with legal cannabis operations has spurred the creation of bills. So far, none of the proposed bills have been scheduled for hearings, but many people within the industry applaud lawmakers’ efforts to finally pave the way for secure and widely-available banking services for the ever-expanding legal cannabis industry.