When Federal and State laws collide, doing business is complicated and fraught.  In this article, Riemer and Braunstein LLP commercial finance attorneys Lon M. Singer and Lyle P. Stein explore the background, evolution, and emerging landscape applicable to financing  industry – with practical guidance for the cannabis1 both the lending and legal communities.

Background
Legal Conflict In 1976, Peter Tosh sang “legalize it, and don’t criticize it.”2  As of this writing, the vast majority of states allows medical and/ or recreational marijuana usage.  Indeed, only three states – Idaho, Kansas, and Nebraska – currently do not allow use of cannabis in any manner.  At the same time, under federal law marijuana remains classified as a Schedule 1 substance under the Controlled Substance Act – the same classification applicable to heroin and LSD.3  Not surprisingly, federallyregulated banks and financial institutions, and to a lesser extent even private debt funds, struggle to understand whether and how they can or should play a role in funding the activities of this multi-billion dollar domestic industry.4 

Compounding the challenge, banking institutions have been loath even to accept deposits and provide customary cash management services to a business whose revenue stream flows from legally murky, brackish waters -- where state and federal regulation and jurisdiction do not smoothly blend.  This has been true despite the general eagerness of banks to augment depositary holdings in the wake of post-Covid bank failures and the contemporaneous runs on several institutions other than the “too big to fail” money center banks (which benefitted from a perceived flight to safety).

Consequently, banks have been sitting on the cannabis sidelines for several years.  Private debt, subject to less regulatory oversight and perhaps less fixated on reputational risk, sometimes found high-yield opportunities too good to resist.  But even where private debt stepped up, the cannabis industry routinely paid more for debt capital than the application of traditional underwriting principles would have required for a different industry vertical.

This dynamic did not, however, apply uniformly throughout the often-integrated North American finance market.  In Canada, marijuana use (both medical and recreational) was legalized in October of 20185, although laws around the lawful manufacture, distribution, and use of cannabis products vary among the several Canadian provinces.  Accordingly, for several years both banks and private debt lenders have dabbled to varying degrees in the Canadian loan market in favor of licensed cannabis growers, processors, distributors, and retailers.

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