Feds Take Steps to Increase Hemp Producers’ Access to Capital

The Department of Treasury released new guidance yesterday that makes it much easier for banks to serve hemp producers. This comes on the heels of the USDA interim rules governing hemp nationwide. 

Basically, the new guidance says that banks no longer need to file ‘suspicious activity reports’ with Treasury for hemp producers since the crop is now largely legal under federal law. Suspicious Activity Reports (or SARs) are a fairly burdensome regulatory requirement for banks that require a great deal of diligence. This new guidance not only reduces the regulatory burden; it also reduces legal exposure banks may face by working with clients in the hemp industry. This should mean a greater willingness on the part of federally chartered banks to work with hemp producers, which, in turn, will result in greater access to capital.

This is also important because of likely trickle down effects. Insurers, for example, will likely become more eager to work with the hemp industry as access to capital increases.

Of course, banks will still need to ensure that their clients are complying with state and federal laws governing hemp, and will need to conduct necessary diligence to avoid banking illegal marijuana operations with products containing THC in excess of 0.3%. In addition, banks will need to remain cautious about clients who work with CBD in food products given the FDA’s hostility to that practice.

All in all, I see this as another positive step in the long game toward broader legalization.

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.