With marijuana being classified as a Schedule I drug under federal law, state-licensed cannabis businesses are cut off from accessing capital financial institutions such as banks.
This leads to the question of how economic storms like the one caused by the recent failure of Silicon Valley Bank, a unit of SVB Financial Group (NASDAQ:SIVB), can affect the cannabis industry.
Even though SVB is not known for funding cannabis companies — roughly 10% of all U.S. banks and approximately 5% of all credit unions provide cannabis banking, according to analysts' estimates — it did provide services to ancillary businesses, explained Morgan Paxhia, who co-founded cannabis hedge fund Poseidon Investment Management along with his sister Emily Paxhia.
Emily will bring her vast industry expertise to the Benzinga Cannabis Capital Conference as the event's Honorary Chair this coming April 11-12 in Miami Beach.
A "risk-off mentality" will likely lead to banks being "more restrictive with lending," he said according to Reuters.
SVB's collapse affected other banking players such as First Republic Bank (NYSE:FRC), Charles Schwab Corp. (NYSE:SCHW), U.S. Bancorp (NYSE:USB) and JPMorgan Chase & Co. (NYSE:JPM). A recent study suggested that nearly 200 American banks can potentially face a similar destiny if their depositors suddenly decide to withdraw funds.
"What this crisis means is probably the duration of the capital tightness in our space (will continue) because we're seeing a risk-off mentality," Morgan said. "We're expecting banks to become more restrictive with lending and that's going to have implications."
Paxia has some reservations in terms of investors as well.
"It's incredibly hard raising capital in cannabis, but we now think (opportunities to secure new capital) are even lower as investors are cautious," he said. "Primary investors in cannabis are high net worth individuals not institutional capital, and those pools of capital are going into a risk-off mode."
Rachel Gillette, a partner at Holland & Hart, agreed.
"Given they already have slim pickings when it comes to raising capital, nervous investors won't help the situation," she said.
Banking Bill For Weed Industry Put On Hold During Crisis
Moreover, hopes for a revival of the Secure and Fair Enforcement Banking Act in the new Congress are becoming cloudier by the day, with Senate Banking Chairman Sherrod Brown deciding to delay hearings on the bill to shift focus to the bank failures, as reported by Crain's New York Business.
"I want to do SAFE Banking," Brown said, adding that he had discussed the issue with Majority Leader Chuck Schumer. "But this is clearly more important. It doesn't mean long-term delay, but it means delays a couple weeks."
Brown, together with his chamber colleagues Cory Booker (N.J.) and Jacky Rosen (Nev.), earlier joined Sen. Jeff Merkley (Ore) and Schumer to ponder about their next move and how to advance SAFE Plus, a set of marijuana proposals through the bipartisan legislature.
Is Finance Sector Giving Up On Cannabis?
In the meantime, it seems that financial services companies are one by one giving up on cannabis, with Euroclear being one of the latest to stop supporting trades of cannabis stocks. One of the world's largest financial clearing houses collaborating with the majority of the 50 largest banks worldwide, informed investors about its decision in December.
Credit Suisse Group AG (NYSE:CS) was the first to tell customers it would no longer execute transactions in shares of cannabis companies with U.S. operations, followed by JPMorgan's similar move in 2021.
Benzinga Cannabis Capital Conference
The most successful cannabis business event in the world, the Benzinga Cannabis Capital Conference, returns to Miami for its 16th edition.
This is the place where DEALS GET DONE, where money is raised, M&A starts, and companies meet investors and key partners. Join us at the Fontainebleau Miami Beach Hotel in Florida on April 11-12. Don’t miss out.
Secure your tickets now. Prices will surge very soon.
Photo: Courtesy of gerald by Pixabay
