The SAFE Window
Could SAFE Banking Actually Pass Congress in the Next 90 Days?
Today, April 7th, was a big day for the cannabis industry and many may not realize it. This was the last day to register for the Democratic primary for U.S. Senate in the State of New York. There have been rumors that Alexandria Ocasio-Cortez (AOC) might decide to run against Senator Chuck Schumer. With the close of business, we know for certain that Schumer for all practical purposes is unopposed and is a lock not only for the primary but to retain his Senate seat as well.
What in the world does this have to do with cannabis? The House of Representatives has repeatedly passed cannabis reform bills only to have them die in the Senate. As Senate majority leader, Schumer controls what advances, what is voted for and what can be included. In particular, he has held off almost every cannabis reform bill while making everyone wait for his own bill, the CAOA, a kitchen-sink progressive dream that has no chance of passing the very conservative Senate (you need 60 votes to pass filibuster in the Senate).
There has been a vigorous debate among advocates for cannabis legalization whether incremental reform would be the right path forward or whether instead to fight for full legalization. And while attitudes are changing in the Senate, they are not changing fast enough for broad legalization, especially with the 60 votes needed in the evenly divided Senate. Even President Biden, a Democrat, doesn’t seem to be in favor of broad legalization, while many progressives have been quite vocal that anything short of full reform would be terrible and would set back the movement for full legalization for a long time.
And it is the progressives that matter here. Politicians care about being re-elected. And the only thing standing in the way of Schumer getting re-elected was a potential primary challenge by a prominent progressive like AOC. It is in my humble opinion that Schumer has dragged out his cannabis reform bill and delayed it into April to wave a clear progressive flag to ward off any potential progressive run against him (like AOC). He has also held a progressive hard line on other bills such as Build Back Better when smaller more limited bills were possible in December. The New York Times this week published an article basically highlighting how hard Schumer has worked to court progressives. I highly recommend you read the article.
With any fears of a re-election challenge for Schumer in the past, I believe we have a window for passing legislation in the next 90 days that is incremental in nature but would have enormous ramifications to the cannabis industry.
SAFE Banking Act
Because cannabis is Federally illegal, the Federal banking system and most if not all the institutional investment world cannot participate in the US cannabis industry. Credit cards cannot be used in dispensaries and dispensaries must deal in a lot of cash, which leads to robberies and unfortunately, deaths. There have been 67 armed robberies in the state of Washington alone so far in 2022.
This bill generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business. Prohibited penalties include terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related business and prohibiting or otherwise discouraging a depository institution from offering financial services to such a business.
Additionally, proceeds from a transaction involving activities of a legitimate cannabis-related business are not considered proceeds from unlawful activity. Proceeds from unlawful activity are subject to anti-money laundering laws.
Furthermore, a depository institution is not, under federal law, liable or subject to asset forfeiture for providing a loan or other financial services to a legitimate cannabis-related business.
The bill also provides that a federal banking agency may not request or order a depository institution to terminate a customer account unless (1) the agency has a valid reason for doing so, and (2) that reason is not based solely on reputation risk. Valid reasons for terminating an account include threats to national security and involvement in terrorist financing, including state sponsorship of terrorism.
The House of Representatives has passed SAFE Banking six times and each time it has stalled in the Senate, first because of Mitch McConnell and now because of Chuck Schumer.
Most notoriously, the House tried to attach SAFE Banking in November to the NDAA, the must pass annual defense bill, only to have the Senate strip it out later.
When this happened, Representative Perlmutter, a fierce SAFE Banking advocate, threatened to derail the entire defense bill. He was planning to file an amendment to hold up the bill until a meeting with Speaker of the House Nancy Pelosi. After meeting with her, based upon comments he has made, I believe she promised him that she would have his back the next time a bill went to conference (when the House and Senate negotiate on mutually agreed terms for a final bill).
Perlmutter, who announced his plan to file an amendment in the Rules Committee shortly after the next of the negotiated defense bill was released earlier on Tuesday, said that he spoke with House Speaker Nancy Pelosi (D-CA) about pursuing other avenues to force the Senate to finally take up his legislation.
And Pelosi owes Perlmutter from the past. There was a fierce divide among Democrats if she should be Speaker of the House. Back in 2018, Perlmutter brokered a deal that enabled her to remain Speaker of the House. I believe that his relationship with Pelosi is stronger than assumed by investors.
Well, that next bill is here.
Enter America Competes
The America Competes Bill passed the House in February. The main goal of the bill was to fund additional semiconductor production and spend more on cybersecurity. But SAFE Banking was also attached to the bill in the House.
The Senate passed their own version at the end of March.
Specifically, the Senate voted 68-28 to substitute the text of H.R. 4521, the America COMPETES Act of 2022, with the text of the Senate’s U.S. Innovation and Competition (USICA) of 2021. It then voted 68-28 to approve the amended bill, sending it back to the House. The House is expected to reject the substituted legislation and request a Senate and House conference to reconcile the differences.
It is my belief that when America Competes goes to conference where the House and Senate duke it out over what gets included and what gets added, that the House will fight for SAFE and that America Competes will not advance as legislation unless the Senate includes SAFE. And with no worries about a progressive challenge, Schumer should not feel pressure to hold the line. And therefore, I think we have better than even odds that SAFE can pass in the next 90 days.
What Does SAFE Mean to the Cannabis Sector?
Remember that 96% or more of the investment world cannot invest in U.S. cannabis companies that “touch the flower.” Whether due to compliance departments, fear of being accused of money laundering or finding a custodian to hold the stocks (most investment banks will not hold or let you buy cannabis stocks). This all changes if SAFE passes.
But it is not just equity investment dollars that will flow, it should also enable a flood of debt financing dollars and credit costs should plunge. Even the best cannabis companies must borrow at 7-9% interest rates, much, much higher than other normal companies. Equally important is that SAFE probably also allows credit cards to be used in dispensaries for the first time.
And depending on the regulations, it could also allow a path to NYSE and NASDAQ listing, index inclusion and the massive passive capital fund flows.
In other words, it could transform a capital constrained industry that trades at backwater exchanges overnight.
But there is another important point as to why SAFE is important and it is part of my bull thesis on the cannabis giants. Right now the only cannabis companies that have access to capital are the large companies. I wrote a whole post about it.
But investors who have been trading cannabis stocks on legislative movements are missing a very important point: the longer it takes for legalization and the slower the legislative process takes, the better it is for the leading US public cannabis companies. Why? Because unlike their smaller competitors, they are the only ones with access to capital. This means they can grow, solidify footprints, invest in their infrastructure, acquire smaller competitors, and gain size and scale advantages.
There are hopes that New York and New Jersey can get social equity and minority business owners a seat at the table in the new cannabis industry. But this is impossible without access to private capital and without SAFE or change in allowing private capital into the industry, NY and NJ social equity businesses simply have no chance. Based upon sources in DC, it is my opinion that Chuck Schumer or New Jersey’s Cory Booker know this and understand this much more than is commonly appreciated.
Probability That SAFE Passes in the Next 90 Days
I estimate the probability is at about 60-65% a SAFE Banking bill or SAFE Banking plus some social justice bill is passed in the next 90 days. Nothing is a sure thing, especially in politics. And investors have gotten burned in the past, like when SAFE Banking was not attached to the final version of the NDAA.
But the next 90 days are about as good a window as SAFE has ever had, with the Senate leader no longer feeling the pressure of a re-election challenge, a House advocate in Perlmutter, who supposedly has the backing of the Speaker of the House and a bill in America Competes, in which SAFE Banking is attached to.
There is also a chance that there is a bill that combines SAFE with a social justice bill like the HOPE Act, which helps fund state level expungements and is co-sponsored by AOC. This kind of “SAFE Plus” has a chance of garnering enough progressive and conservative support but avoids full-fledged legalization.
The House sponsor of a bipartisan marijuana banking bill revealed on Friday that conversations have been happening behind the scenes with Senate leadership about amending his legislation in a way that more specifically addresses equity issues to win their support. Rep. Ed Perlmutter (D-CO) made the comments to Marijuana Moment just hours before the House passed the Secure and Fair Enforcement (SAFE) Banking Act for the sixth time as part of a large-scale bill.
I would also note that based upon what I am hearing from DC, there has been tremendous pressure being applied from multiple different sources from social equity license holders to the banking industry for Senate Democrats to get behind SAFE banking.
Lame Duck Window
If nothing happens in the next 90 days and my theory is wrong, there is one more window before the end of the year and that is in the lame duck session, after the midterm elections. When politicians no longer worry about elections and several politicians are on the way out, there will be another shot at passing SAFE.
Summary
The cannabis sector has been in a brutal bear market for a year and hopes have been dashed before, but I believe there is a window to pass SAFE Banking in the next 90 days that could radically alter the investment landscape.
In my cannabis portfolio, I have stocks growing quite fast that trade at 4-5 times this year’s EBITDA and 3 times next year. If the investment world can suddenly participate in this sector and there is a path to listing on the NASDAQ and NYSE, cannabis stocks will go through an exercise of price discovery that may be shocking to some people. What will happen when trillions of investment dollars that have been excluded from investing in a $100 billion sector suddenly can invest in stocks that trade $2 to $5 million worth of volume a day? What will be fascinating to watch is that I don’t think there will be any sellers.
So, buckle up or should I say strap in, because the next 90 days could prove to be a stunning political reversal for the cannabis industry.