What does the SAFE Banking Act Mean for the Cannabis Industry?
One of the main changes on the horizon that many in the cannabis industry are eagerly anticipating is the passing into federal law of the SAFE Banking Act, which seems more likely now that it made it through the US House of Representatives. Should it pass into law, the SAFE Banking Act would open the way for financing cannabis businesses by banks and streamline the state and federal regulations regarding financing cannabis businesses – but what does the SAFE Banking Act mean for the cannabis industry?
What is the SAFE Banking Act of 2019?
The SAFE Banking Act of 2019 is a bill in the US Congress to resolve the financing issues faced by legal, licensed cannabis companies as they try to raise capital. Because the federal government has fallen behind the states regarding its laws governing and regulating the cannabis industry, there are some discrepancies between the state legislation and federal law.
One of these discrepancies regards banks and the limitations to the amount of business they can do, with an industry that is considered illegal on a federal level. Banks are currently unable to offer financial services like credit and underwriting of credit instruments like bonds, which are mainstream financing tools in other industries in the United States.
First introduced in 2017 and then again in 2019, the SAFE Banking Act would make it legal for banks to conduct financial services for cannabis companies, particularly in providing credit facilities. Additionally, it provides a regulatory framework for banks to follow when doing business with cannabis companies, which is currently missing. This would not only ease the day to day liquidity concerns of the cannabis companies, thus helping to solve the continuing existential crisis cannabis companies face without access to financing.
In a press release issued by the House Committee on Financial Services on March 26, 2019, committee chairwoman, Representative Maxine Waters (D-CA), remarked, the SAFE Banking Act “addresses an urgent public safety concern for legitimate businesses that currently have no recourse but to operate with just cash.”
How would the SAFE Banking Act Impact the Cannabis Industry if it Passes?
Currently, cannabis companies finance all operations with the cash reserves they have on hand, unable to raise debt from banks or any other institutional lenders. This setup presents several challenges that would all be alleviated by passing the SAFE Banking Act of 2019. Some of these challenges that would be overcome include;
As mentioned above, access to liquidity is a big problem for cannabis companies. Most other companies in the developed world rely on their cash at hand and other assets to facilitate the business’s operating costs and use credit from banks and other regulated lenders to expand and grow their businesses. Cannabis companies are struggling to finance operations and expansion with just the cash they are generating from sales. This lack of liquidity is a big turnoff for investors and partners alike.
The SAFE Banking Act would change this for cannabis companies and give them the expansion and growth opportunities offered by access to institutional debt. If the SAFE Banking Act passes, the cannabis industry would finally match the growth and profitability that many anticipated when the industry was just getting started.
The passage of the SAFE Banking Act would also represent an increase in the regulation facing the cannabis industry, much needed for the industry. Because all the states have gone their way with their cannabis laws, there is no regulatory homologation across the different states. As a result, businesses find it hard operating across the various states.
This increase in federal regulation would be welcome for businesses seeking to expand to other states because they will have a federal roadmap to follow. This saves many resources for companies that currently have to navigate each state like an individual country with its own rules.
What does the SAFE Banking Act mean for the cannabis industry?
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