As we are all starting to discover the legal cannabis industry is going to be gigantic. Every year marijuana sales are totaling billions of dollars on the black market which shows consumer demand for cannabis is very strong. Wall Street has projections of $60 billion to $200 billion worldwide in cannabis sales by 2031.
The investment banking industry is banking on the United States growth to potentially account for a third of the global cannabis purchases by the end of this decade.
Schedule I Classification for Cannabis Is the Issue
Cannabis is a Schedule I drug at the federal level making it labeled as having the hazards of abuse, no medical benefits and is illegal is creating problems and worries for cannabis companies across the board.
Even though the federal government is allowing for state-level management, national cannabis operators are developing inessential operations due to its classification status. National companies are having to set up complete verticals in each state from cultivation, processing and retail locations due to the inability to provide interstate transportation of product as it is federally illegal to do so at this time.
The other issue that arises from cannabis being labeled as a Schedule I or II substance businesses is exposed to 280E issues with the IRS tax code. 280E was implemented in 1982 to make sure drug dealing businesses were not able to write off business expenses on their income tax returns, disallowing cannabis businesses to make deductions for corporate income tax. It is possible cannabis companies could be facing an income tax rate of over 75%.
Due to this fine aspect, American cannabis businesses have extremely limited access to standard financial services, which includes everything from opening checking accounts to lines of credit and loans. Many credit unions and banks continue to fear potential criminal and financial repercussions from Financial Criminal Enforcement Network (FINCEN) which leads cannabis companies to primarily work with cash, leading to growth and security concerns.
Financial Services Access is Improving
As the cannabis movement spread across the United States we are starting to see financial institutions beginning to provide financial services. From 2014 to the middle of 2018 the number of financial institutions has quadrupled from 100 to over 400 and almost doubled by 2019 with just over 725 banking institutions.
With only 8% of all banking institutions providing financial services to the cannabis industry, only the largest banks have begun to participate in supporting cannabis companies such as Citigroup, Wells Fargo, Bank of America and JPMorgan Chase. Of the four large banks, Bank of America was the most accommodating to medical cannabis companies.
Leveling out for Banking Services
Due to a stunted growth towards the end of 2019 many banking institutions are waiting for vote results of the SAFE Banking Act in late September which ended up passing with a 321-103 vote in the House.
The SAFE Banking Act would allow banks and credit unions in legal states to begin to provide banking services to the cannabis industry without the fears of criminal or financial wrongdoing. As per Senate Majority Leader Mitch McConnell, all cannabis reforms will not reach the Senate floor for the vote. Keeping this in mind it is unlikely that banks across the board will be able to provide banking services to American cannabis companies.
Financial institutions are required by law to file Suspicious Activity Reports (SARs) as per the guidance provided by the Obama administration. Regulatory paperwork is the potential cog in the pipeline for the decreased number of financial institutions in the cannabis industry.
Accessibility to Financing is a Big Issue for Cannabis Companies
American cannabis companies are the real losers with very limited access to standard banking services. Many cannabis companies are having to turn to distinctive financial measures to survive and strengthen their finances.
As an example of what’s to come Cresco Labs went towards sale-leaseback agreements with Innovative Industrial Properties to help Cresco’s purchase of Origin House to improve its cash flow position. In this case, Cresco would sell one or more of its properties to Innovative Industrial Properties which is currently a cannabis real estate investment trust (REIT) in exchange for cash which was worth about $33 million.
Some of the different types of cash infusion that we will see in the cannabis industry over this next year will be amended acquisitions, sale-leaseback agreements or convertible debt issuances.