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 the cash out of the cannabis industry. As medical and recreational cannabis becomes more widely tolerated by states, the industry facilitating the sales of cannabis has grown exponentially. The amount of money also has increased in lockstep with the expansion of legal cannabis throughout the States. The significant hurdles of accepting payments without federal banking protection created an environment where cash was the most efficient means of exchange. It led to companies routinely using armored cash carriers, even paying their employees and taxes in dollar bills.
The SAFE Banking Act aims to change that dangerous model. It will allow FDIC compliant banks to deposit, insure under the FDIA and even invest money coming from legal cannabis businesses, and their ancillary service providers like landlords and SaaS companies. This will significantly change how the industry operates and has far-reaching implications for the business community at large.
Industry Implications
The most obvious benefactor of the Act will be the banks which have not been willing to service the Cannabis industry without some sort of federal protection. If the Act passes, they will be able to lend and bank a new industry without worrying about federal legal intervention. However, the institutions that have enjoyed wildly high interest rates on financings in the cannabis industry will see their business model’s 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. Because the Act does not 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. Because cannabis is still a scheduled drug in the eyes of the Federal government, and bankruptcy remains the domain of the federal government, cannabis companies cannot file for bankruptcy in the US. This leads to artificial restrictions in 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.
However, the Act will provide many benefits to the cannabis industry that may off-set any of its 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 salary in cash. Further, the Act will allow insurance providers to insure cannabis businesses, their assets and their inventory.
The Act will change the entire landscape of the legal cannabis business. Time will tell if all of those changes will be beneficial. In the meantime, industry operators can look to lawyers like those at Ion Law to provide guidance on the steps to take to maintain compliance with all new laws and regulations as they are enacted.
