House Passes the SAFE Banking Act

On September 25, 2019, the Democrat-controlled U.S. House of Representatives passed the SAFE Banking Act by a vote of 321 in favor and 103 opposed. As we’ve previously posted, the Act would prohibit federal bank regulators from penalizing financial institutions that provide services to state-legal cannabis businesses and will result in greater access to financial services for the cannabis industry. Given the 91 Republicans who voted in favor, it appears that cannabis banking reform may be poised to become a bipartisan issue, although only time will tell.

The Act will now move on to the Republican-controlled Senate, where commentators agree that passage is far less certain. Historically, Senate Majority Leader Mitch McConnell has publicly opposed cannabis even while supporting the legalization of hemp. In any event, even if ultimately adopted, the protections granted to financial institutions under the SAFE Banking Act will only apply to state-law compliant cannabis customers, so it will continue to be vitally important for financial institutions to adopt robust marijuana-related business compliance policies and procedures and engage in continuous monitoring of cannabis customer compliance with relevant state laws.

Mainers May Be Hot to Invest in Marijuana, but Out-of-State Money Is Still a Necessity

The website patch.com has posted a report that Maine is the no.1 state for marijuana investments. This doesn’t mean that Maine has the most investor dollars in marijuana, but just that Maine investors are more interested on average in marijuana stocks than investors in other states. I took interest in this report because it brings us back to our concerns over Maine’s restrictions on out-of-state investment in marijuana businesses. Sure, a high percentage of Maine residents are interested in the pot sector, but there just aren’t that many Maine investors compared to other states, and even fewer high-dollar investors. 

Starting a sophisticated marijuana business takes a lot of capital and banks are lending to this sector, so investment is needed. By necessity, the bulk of this investment needs to come from out of state to really jumpstart Maine’s adult use sector. Overly restrictive laws that prohibit this investment will only stifle the industry.

Adult Use Residency Rules Are Bad Business

If you saw our previous post on the residency requirements in the proposed adult use rules, you know that they severely restrict the ability of non-Maine residents to own equity, operate, or exert “more than minimal influence” over a Maine cannabis business. Putting aside the legality of the rules (and the legality of the residency requirement in the statute, which may also be questionable), these residency rules are bad business and will harm Maine’s burgeoning cannabis industry.

Maine cannabis companies do not qualify for bank loans or other traditional sources of financing. The typical way cannabis companies raise capital is through equity investment and, for many companies, at least some of their equity investors live out of state. It is also customary in the industry to have management or consulting agreements in place with companies from other states who have expertise in an area of processing, cultivation, or product development that your company does not have, with royalties paid to consultants in return for their time and expertise. In addition, many cannabis companies are beholden to private lenders for equipment loans or leases. The expansive residency rules go far beyond the statute’s mandate to have 51% of owners be Maine residents, and would arguably prohibit or severely restrict Maine cannabis companies from having or entering into any of the foregoing arrangements. And existing caregiver and dispensary operations may be required to rethink their ownership structures and contractual relationships before entering into the adult use market, as DHHS has historically allowed consulting and management agreements with out-of-state vendors.

The legislature created residency requirements focusing on ownership, rather than control, because this allows outside investment to come into Maine in certain forms so long as it does not upset the 51% residency requirement. This balance is necessary to the growth of Maine’s cannabis industry. Other states have taken restrictive approaches to outside investment when they launched their adult use cannabis markets, only to loosen these restrictions down the road. Oregon initially required 51% of a cannabis business to be owned by two-year residents but repealed the requirements in 2016. According to the Cannabis Association Executive Director, Amy Margolis, the residency requirement was a failure because it stifled investment and hurt Oregon business owners. Margolis said: “[f]or every five people who came into my office, three or four of them were looking for capital, and they couldn’t find it here in Oregon. It became clear that unless people could reach outside the state for investment money, we weren’t going to have a very successful market.” Colorado similarly loosened its residency requirements to allow for out-of-state investment. We shouldn’t disregard the hard lessons learned by other states.

Prohibiting out-of-state investments for cannabis companies will only result in reduced investment into the Maine economy and will result in Maine having an industry that’s less competitive than states with more lenient or no residency requirements. A less healthy industry means fewer jobs for Maine people, fewer choices for Maine consumers, and an industry susceptible to falling behind other states. This is why the legislature struck a balance and did not effectively prohibit outside investments in Maine cannabis businesses. The Office of Marijuana Policy Department of Administrative and Financial Services should not substitute its judgment for that of the legislature and slow the growth of Maine’s adult use marijuana industry before it even starts.

SAFE Banking Act Would Open the Door (Wider) to Cannabis Banking

The Secure and Fair Enforcement (SAFE) Banking Act of 2019 has garnered bipartisan support and may even have a shot at passage. It would not remove cannabis from Schedule I of the CSA, but it would prohibit federal bank regulators from penalizing financial institutions that provide services to state-legal cannabis businesses. Under current federal law, all proceeds of cannabis businesses are unlawful even if the company is operating in full compliance with state law. Federally chartered and insured financial institutions therefore risk sanctions, loss of access to payment systems, cancellation of deposit insurance, and even loss of charters for serving the cannabis industry.

Notably, the SAFE Banking Act would prohibit forfeiture of collateral taken as security for loans to cannabis companies and would prevent regulators from cancelling deposit insurance or otherwise sanctioning banks for providing products and services to state-law compliant cannabusinesses. Maine’s Bureau of Financial Institutions is apparently following the issue. On April 15, 2019, it, along with state banking supervisors from many other states, sent a letter to the leaders of the House and Senate urging the passage of legislation that would create a safe harbor for financial institutions to serve legal cannabis businesses. A group of 33 state attorneys general, including Maine Attorney General Aaron M. Frey, sent a letter on May 8, 2019, urging Congress to enact a federal banking safe harbor to help get cash off the streets and into banks where it belongs. The American Bankers Association also submitted a letter to the Senate in support of the SAFE Banking Act. 

Many people believe this law could be the final push that federally chartered banks need to feel comfortable providing services to the growing industry. If adopted, it would open access more broadly to checking accounts, credit cards, payment systems, payroll services, and loans, and may even help provide some relief to the access to capital issue that so many burgeoning cannabis businesses are presently struggling with.

What’s up with the Residency Requirements in the Proposed Adult Use Rules?

If you’ve looked at the proposed adult use rules, you’ve probably noticed some pretty expansive language limiting the ability of non-Mainers to play really any role in a Maine marijuana business. The Marijuana Legalization Act already requires that every officer, director, manager, and general partner of a marijuana business must be a Maine resident, and requires that “a majority of shares” or “other equity ownership interests” must be held by Maine residents (See 28-B MRS § 202(2)). Now the proposed rules go way beyond these restrictions in statute. 

The statute allows 49% of a business to be owned by non-Maine residents, for example. The rules, though, prohibit any out-of-state person or entity from exerting “more than minimal influence, through direct or indirect financial interest, over decisions regarding the operation of a marijuana establishment.” Whoa. To spin this out a bit: If I’m from Delaware and I own 20 percent of a Maine marijuana business, I’m 100 percent in compliance with the law. But wouldn’t a 20 percent owner necessarily exert “more than minimal influence” over decisions of the business? These rules seem to prohibit what the law allows, which makes the legality of the rules questionable. (More on this in forthcoming blog posts.)

Finally, I’ll just note that the proposed rules give the Office of Marijuana Policy Department of Administrative and Financial Services broad authority to dig, deeply, into the corporate structure and dealings of any applicant or licensed business. Check out rule 2.5.1, which allows the Department to “require additional information to verify that business structures, loans, franchise agreements, royalty agreements and other legal arrangements or anything else regarding true parties of interest, parties of control or other interested parties are not being used to circumvent ownership requirements.” Depending on the Department’s motivation, it can keep digging and digging and withhold a license until its satisfied that residency requirements, etc., are met.

(I am trying not to bury too many legal citations in this blog, to make it digestible, but to spell out the residency requirements explained above, check out section 2.3.1(B)(2) on page 15 of the proposed rules, which states that “no person or entity shall create a party of control to a marijuana establishment license consisting of less than a majority of residents.” Now, check out the definition of "party of control" on page 9 of the rules. This definition is frighteningly broad, as quoted above.)

Welcome to Our Blog (and, What We’re All About)

Welcome to the Cannabis Law and Policy Update! You can expect updates and commentary on a potpourri of marijuana and hemp happenings at the state and federal level. We will be primarily focused on the law (since we’re lawyers), but in the broadest sense. Think everything from court decisions to legislation to regulation to enforcement, with our reactions and some practical advice sprinkled throughout.

At the moment, every week seems to bring some significant development in the world of cannabis law and policy. Maine’s rulemaking process for adult use marijuana is heating up, which means that a (legal) adult use industry is just around the corner; the legality of hemp and CBD is a complete rollercoaster ride; the Legislature is continuing to fix and tinker with Maine’s medical and adult use marijuana laws; and the feds remain curmudgeons all around. We’ll be hitting on specific angles in this arena all the time, so check back frequently and subscribe.