Formally known as the “Secure and Fair Enforcement Banking Act of 2019,” the SAFE Act passed in the House last night on bipartisan grounds with a 321-103 vote. The Act seeks to ensure a “safe harbor” among other protections for depository institutions that want to engage with state-licensed cannabis companies and their service providers.
The original impetus, which the Act was predicated on, was to take cash out of the cannabis industry. The industry facilitating the sales of cannabis has grown exponentially as the medical and recreational use of cannabis becomes more widely tolerated in many states. The amount of money in the industry has also increased in lockstep with the expansion of legal cannabis throughout the United States. The significant hurdles of accepting payments without federal banking protection created an environment where cash was the most efficient means of exchange. It resulted in companies routinely using armored cash carriers, and even in paying their employees and taxes in physical cash.
The SAFE Banking Act aims to change, what the government considers dangerous propensities of the industry, and industry attempts at thwarting regulation. It will allow Federal Deposit Insurance Corporation (FDIC) compliant banks to deposit, insure, and invest money coming from legal cannabis businesses, and their ancillary service providers like landlords and Software as a Service (SaaS) companies, under the Federal Deposit Insurance Act (FDIA). This piece of legislation could mark what looks to be a paradigm shift that will significantly change how the industry operates and will undoubtedly have far-reaching implications for the business community at large.
Industry Implications
The most obvious benefactors of the Act will be banks that have, up to this point, been unwilling to service the cannabis industry without some sort of federal protection. If this Act is enacted into law, it will open the flood gates and result in a substantial influx of money into industry, as more financial institutions begin lending to and servicing the cannabis industry without having to worry about federal intervention. However, the institutions that have enjoyed wildly high interest rates on financings in the cannabis industry will see their business models fail as larger banks start to enter the industry.
The passage of the Act will also have major implications for cannabis and cannabis related businesses. Since the Act does not actually legalize the sale, processing or growth of cannabis, it fails to fix the problematic lack of allowed credits and deductions from federal tax liabilities that stem from IRC rule 280E. The Act also does not address the federal issue of bankruptcy. Under Federal law, cannabis will remain a scheduled drug. Bankruptcy also remains the domain of the federal government. Thus cannabis companies cannot file for bankruptcy in the US. This problem will continue to result in artificial restrictions on financing, with institutions only lending on a highly secured basis, normally demanding collateral far in excess of what is usually seen in other retail or agricultural industries.
Despite these lingering issues, the Act will provide many benefits to the cannabis industry that may off-set any of its potential shortcomings. If the Act passes the Senate and is signed into law by President Trump, employees of cannabis businesses will be put in a much better position. As it stands, many, if not most, employees of cannabis-related legitimate businesses receive their salaries in the form of cash payments. Furthermore, the Act will allow insurance providers to insure cannabis businesses, their assets and their inventory.
The Act is now headed to the Republican-controlled Senate, where it may be further amended before it gains passage. The bill currently has 33 cosponsors, meaning that a third of the chamber is now formally signed on in support of the Act.
If it becomes law, the Act will change the entire landscape of the legal cannabis industry. Time will tell if those changes will have a net positive or net negative impact on the cannabis industry. In the meantime, industry operators should look to lawyers like those at Ion Law to provide guidance on the steps needed to maintain compliance in the ever-changing legal and regulatory landscape of the cannabis industry.
Ion Law is a boutique law firm based in Chicago focused on business regulatory law in the legal cannabis and healthcare space. The attorneys at Ion Law stand ready to guide cultivators, processors, dispensaries, and service companies through any tribulations that may arise including: state and local licensing and regulatory compliance; mergers and acquisitions; entity formation; real estate procurement, zoning, and land-use; capital raising and financing transactions; taxation (IRC 280E, as well as, all state and local issues); branding; employment; and payments and banking matters.