Take it to the Bank: Marijuana Businesses Are Playing it SAFE

Is this the writing on the wall? In what looks to be the biggest step forward toward the ultimate legalization of marijuana on the federal level, the U.S. House of Representatives just passed the Secure and Fair Enforcement Act, or SAFE Banking Act, a critical step toward clearing the way for cannabis-related businesses to operate outside a cash-only world. Congresspeople voted in favor of the bill 321-103, which, remarkably, included nearly half of the Republicans that cast a vote.

Suffice it to say, this is great news for everyone aboard the “reform our nation’s marijuana laws” train. But the celebration should be kept in check. The legislation now moves on to the Senate, where those in the know suggest that passage appears to be much less likely, at least in its present form.

That being said, momentum is definitely trending in the right direction, and it certainly feels like the SAFE Banking Act—or something very much like it—actually becoming law is not an “if” but a “when” proposition. And its importance cannot be overstated.

The law as passed in the House seeks to create protections for depository institutions (such as banks and credit unions) that provide financial services to legitimate marijuana businesses (i.e., those acting within the auspices of state law). That would be a welcomed event for players in the cannabis industry who, until now, have been largely barred from opening bank accounts or obtaining loans because their financial institutions deemed the risk of penalties and federal enforcement actions for servicing them too high. While marijuana still remains illegal pursuant to federal law through the Controlled Substances Act (CSA) (21 U.S.C. § 811), it seems increasingly likely that legalization—and big business—is just around the corner.

But What About the States?

In states that have legalized cannabis for medical and/or recreational use—a list that is ever expanding—cash is king. And that is because, up until now, federal banking laws have severely restricted access to financial services for companies, startup or otherwise, in the pot biz. This spells real trouble for several reasons, not least of which is that entities maintaining large amounts of cash on hand for payment of expenses, including employee salaries, are ground zero for crime (can you say theft and money laundering?). 

This is why passage of the SAFE Banking Act in the House and—hopefully, in the near future—a sister bill in the Senate is such a big deal. If the SAFE Banking Act becomes law, credit card processors can get in on the marijuana action, and with that the legal cannabis industry—operating despite the prohibitions of the CSA—would no longer endure on an all-cash island. But it gets even better. Opening up the banking system, as the SAFE Banking Act aspires to do, would allow what the pending legislation defines as “cannabis-related legitimate businesses” to avail themselves to lending (for both operational and real estate purposes), facilitate necessary anti-money laundering protections, and so much more.

SAFE but Not Sorry

As of this writing, more than 200,000 people work for state-legal marijuana concerns. Clearly, the business is booming, and by passing a law permitting depository institutions to legally interact with related companies, the sky would be the limit. If enacted, the SAFE Banking Act—or similar legislation—would reduce barriers to entry, thus expanding the cannabis sector even more. The move would also open the door to ancillary businesses that could benefit from what would be exponential growth in the marijuana space as a result of banking reform. One great example: owners and management of cannabis businesses could use outside vendors to handle employee payroll and other tasks that, to this day, continue to be processed in cash.

The Power of Legitimacy

The Senate’s embrace of the SAFE Banking Act would bring order and real legitimacy to an industry that, in the current landscape, finds itself in something akin to the Wild Wild West, having to skirt and work around applicable federal prohibitions. It is fair to say that with such a law on the books, cannabis-related businesses operating legally under state law could, to a large degree, breathe easy on the federal level to the extent banks and credit unions (and their officers, directors and employees) could offer and perform financial services that would no longer subject them to federal scrutiny. And with that, the needle would no doubt move in the direction of an eventual—maybe even imminent—change to federal drug laws, legalizing cannabis nationwide. We can only hope Republicans in the Senate follow the lower house’s lead.

Megan Penick is a partner and dynamic business lawyer at Michelman & Robinson, LLP, a national law firm with offices in Los Angeles, Orange County (California), San Francisco, Chicago and New York City. She handles commercial transactions, such as corporate and financing deals, for cannabis-related companies, small and mid-cap corporations and financial institutions. Megan can be contacted at mpenick@mrllp.com or (212) 730-7700.

Stephen Weiss is also an M&R partner. He specializes in mergers and acquisitions, corporate and securities law, and capital markets financing transactions for a varied client base, including businesses in the cannabis space. Stephen can be contacted at sweiss@mrllp.com or 310-299-5500.

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