Business
Opinion: Finance reform for the marijuana industry – don’t bank on it
Federal banking reform for compliant businesses is an obvious next step in the evolution of the marijuana industry.
Today, there are 39 U.S. states that have legalized cannabis for medical purposes and 21 that allow its recreational use, with combined sales projected to reach $38.8 billion in 2023.
The cannabis industry should, in theory, have the same access to loans, deposits and credit cards that all other industries have.
And considering its legacy of illegal cultivation and sale, having all that hot cash floating around unaccounted for is insane, right? Right!
Tough choices
But not so fast.
Despite repeated attempts in Congress to pass banking and tax reform for the cannabis industry, there has not been legislative consensus or the political will to get it done.
The typical alphabet soup of legislation from both sides of the aisle in the U.S. Senate and House of Representatives – SAFE, MORE, CAOA – haven’t been able to pass, despite multiple attempts to get such measures approved.
And the results of the recent midterm elections don’t portend any immediate breakthroughs.
So, what’s a hard-working compliant marijuana company to do to get the capital it needs to establish, cement and expand its business?
Raising additional equity is the obvious answer, but doing so is increasingly difficult and dilutes the ownership interest of the founders and insiders.
Borrowing from “friends and family” is an option, but that is usually capped at less than $1 million, unless you know Elon Musk.
Go to one of the real estate investment trusts (REITs) that are awash in cheap capital from the public markets for a sale-leaseback or other financing?
Good luck, unless you are one of the top 20 multistate operators.
Approach your local credit union or savings and loan associations for a “market-rate” loan?
Ain’t gonna happen – unless you have valuable, unencumbered real estate or substantial personal assets to pledge.
Another way
But there is a fifth way – borrow from one of the nonbank specialty finance companies that have emerged to specifically service the capital needs of the cannabis industry, especially for small and midsize enterprises.
These companies, with specific cannabis expertise, have stepped up to fill in the gap where banks will not (or cannot) tread.
These nonbank lenders fall into several categories:
- Trade finance.
- Equipment leasing.
- Working capital finance.
- Real estate finance.
Most such lenders are monoline – they provide financing in only a single or related sectors – but a few provide whole-enterprise solutions that can finance several areas of need in a cannabis business.
These specialty finance platforms generally fall into two broad groups: asset-based lenders and cash-flow lenders.
Asset-based lenders take a security interest in assets owned by the borrower.
While these pledged assets are typically hard assets such as real estate, equipment and inventory, they can (and often do) include soft assets, such as the state-issued marijuana licenses and receivables.
At closing, the lender will file a mortgage lien and/or a uniform commercial code (UCC) statement in each state where the collateral resides, which alerts the world that it has a first-lien perfected security interest in the collateral and that any other lender would be second in priority.
The second category, cash flow-based lenders, look solely to the cash flow of the borrower to provide the source of repayment to the lender.
Generally, payments into the borrower, whether B2B or B2C, are locked-box so that the lender has access to the money before the borrower to satisfy the required interest and principal repayments.
In many cases, these loans are month-to-month, and the borrower can pay off the loan at any time.
It’s not easy
Many potential borrowers believe that specialty finance is very expensive, but this perception is based on misinterpretation of the circumstances.
Very expensive as compared to what?
- First, all cannabis finance is expensive for all borrowers in the industry, and it will remain so even after some form of banking reform is implemented on a federal level. The risk inherent in a new industry is always priced into financing rates. In addition, the state-by-state regulatory and tax scheme – which is likely to remain no matter what federal initiatives are implemented, as tax receipts to the states are the driver for legalization – makes the cannabis industry structurally inefficient and extremely complex, resulting in higher costs of everything, including money.
- Second, specialty finance companies are generally borrowers themselves, and they do so on a spread lending basis, so every time the Federal Reserve raises interest rates, the cost to the lender goes up and lending rates follow. That is the way of capitalism.
- Finally, even the biggest cannabis companies are paying more than they let on in their news releases. The face interest rate cited in the news releases generally does not reflect the actual cost of capital.
To paraphrase President John F. Kennedy’s remarks in 1962 in connection with America’s ambition to be the first nation to land on the moon, we do it not because it is easy, but because it is hard.
Cannabis lending is hard, damn hard!
So, while you wait for the federal government to legalize marijuana and provide access to more lending sources, consider the cost of not borrowing to grow your cannabis business today.
The calculation is always that the cost of capital is more than offset by the expected increase in revenues or decrease in costs.
And time is money, so as you wait to hit the bid on your next financing, your competitors are expanding their cultivation sites, adding a gummy machine to their processing facility or opening that third retail location.
So, federal banking reform in the long run might lower borrowing rates, but in the meantime, I wouldn’t bank on it.
Source: https://mjbizdaily.com/nonbanking-finance-options-for-the-cannabis-industry/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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