Cannabis Musings - December 7, 2022

Friends – just a quick note about the SAFE Banking Act. Long-time readers of these Cannabis Musings know that I’ve been a deep pessimist for years about the likelihood of its passage. I’ve said time and again, as recently as about a week ago, that the entire state-legal cannabis industry exists as a matter of grace of the Federal government. Indeed, the Department of Justice could change its mind tomorrow and shut the entire thing down, but so far it hasn’t for somewhat vague-ish but kinda rational reasons, and that’s unlikely to change any time soon (not legal advice!).

However, just because the Federal government is allowing a multi-billion-dollar industry to thrive (okay, maybe that’s the wrong word given the industry’s current struggles) doesn’t mean that it has to, or is going to, make life easy. To date, it seems to me like the unstated message has been “you get what you get and you don’t get upset, so don’t be a schnorrer.” I’m reminded of this fact as I’ve followed the recent chatter and breathless expectations about the SAFE Banking Act being added to the National Defense Authorization Act by the Senate in order to get it passed, and watched the industry’s deflation in real time once news broke that, once again, Senate Minority Leader Mitch McConnell is opposed to adding SAFE to the NADA.

Now, there’s plenty of blame to go around for SAFE still not being passed by the Senate. In my opinion, this is a bipartisan failure. And who knows – maybe SAFE will still be introduced and pass on a standalone basis during the lame duck session. My point, however, is that, anytime we think that something might happen at the Federal level that might benefit the cannabis industry, we should go back and remind ourselves of the Peanuts trope of Lucy repeatedly convincing Charlie Brown to try to kick the football.

A larger question still remains for me about whether SAFE is really the prize that the cannabis industry wants (or needs). Years ago, I heard former Attorney General James M. Cole (the author of the “Cole Memorandum”) ask the same question about SAFE, so I can’t really take credit for this thought, but his theory was, if Congress were to actually pass SAFE, then the chances of Congress doing anything else for the cannabis industry for a long time would drop significantly. I particularly agree with this realpolitik perspective on Congress and cannabis, and I think it’s still mostly true, although certainly public opinion has changed in the years since he made that comment, and cannabis is much more in the political discussion. Nonetheless, I’m still of the opinion that SAFE doesn’t really do that much, and the industry should be more focused on lobbying for more useful change.

We discussed my thoughts on why SAFE is kinda useless a while back, but because I can’t repost that particular Cannabis Musings without potentially incurring the wrath of a certain ex-employer of mine, I’ll reiterate my general point that it only would protect “depository institutions” (banks and savings associations), federal and state credit unions, and insurance companies providing certain lines of business with State-compliant cannabis businesses, and protect ancillary businesses from violating federal money laundering rules. That’s it.

Now, there’s quite a bit of focus (particularly on #Cannabis Twitter, if you’re a shumuck like me and actively follow that chatter) on the safety aspects of reducing the amount of cash handled by dispensaries, which may be true if the credit card companies were to allow payments based on SAFE, which isn’t guaranteed. Nor is “uplisting” certain, meaning that the Nasdaq and NYSE would allow US cannabis companies to list their stocks for trading. Even if uplisting were to occur, you’d still need to see major trading clearinghouses and custodians allowing trade clearing and custody (critical functions in stock trading). Most importantly, you’d really want to see pension guidelines change to allow for investment into US cannabis stocks – only would then significant institutional capital potentially flow into the space.

To me, the more interesting provision in SAFE is the protection for ancillary businesses. Risk of being prosecuted for money laundering tends to be the primary concern of companies doing business with cannabis, so if SAFE were to provide an exemption, that could potentially open up a host of ancillary services to the industry. Moreso, we could see some significant M&A activity from outside providers, such as major SaaS companies buying up (with inexpensive capital) cannabis software companies for the relationships and contracts, porting customers to existing platforms.

Now, you may be wondering “But Marc, if SAFE provides a money laundering exemption for ancillary businesses, wouldn’t, say, the Nasdaq be considered an ancillary business?” The answer to that question is “I don’t know! Remember, I never give legal or investment advice in this free newsletter, but it’s an interesting question! You should ask a practicing lawyer that one.”

It would be nice if the Senate were to step up and pass SAFE before the end of this term. If not, I really think the industry should cut its losses and refocus on the recent momentum towards legalization. Otherwise, it’ll never learn its lesson about that football.

© 2022 Marc Hauser and Hauser Advisory.None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.Subscribe to Cannabis Musings at hauseradvisory.com.