New Jersey Law Journal

More than two years after Gov. Phil Murphy signed into law the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (CREAMMA), which legalized the recreational use of cannabis for those aged 21 and over, the legal cannabis market is finally beginning to take shape in New Jersey. There are currently 45 cannabis dispensaries operating in the state, 33 of which are licensed to sell cannabis for recreational (non-medical) purposes.

Over 1,000 more cannabis businesses and microbusinesses, including cultivators, manufacturers, retailers, and testing laboratories, have been awarded either conditional or annual licenses by the Cannabis Regulatory Commission (CRC), and intend to open for business in the coming months. It is no doubt an exciting time to be a cannabis entrepreneur in the Garden State; on the other hand, the cannabis industry is complex and evolving quickly, and new cannabis businesses are grappling with unique legal and financial challenges not seen in other industries.

Among them is a lack of access to traditional and secure financial services. Fearing potential penalties and asset forfeiture by federal banking regulators, most financial institutions have steered away from cannabis all together, leaving state-licensed cannabis businesses with limited options when it comes to opening checking accounts, borrowing money, and accessing other banking services. According to the American Bankers Association, about 11% of all United States banks and about 4% of all credit unions provide banking services to cannabis businesses.

Those that do are generally lending to large, established multi-state operators (MSOs). As a result, many smaller operators have been forced to operate exclusively in cash. This is not only a major public safety concern, as cash intensive businesses generally attract violent crime, but it curtails the ability of federal regulators to monitor things like money laundering and tax evasion. Moreover, without access to traditional financing, smaller operators often need to rely on friends or family members for funding, or resort to high-interest, sometimes predatory loans. These issues are exacerbated by the high startup costs involved in navigating the rigorous licensing process and securing suitable real estate, which is a precondition for any category of CRC application.

While the New Jersey Legislature passed a bill (N.J. Legis. Assemb. A. 4263. 2022) in 2022 which aims to protect financial institutions from reprisal from state agencies for transacting in cannabis, its enactment in the shadow of federal prohibition has not offered any real comfort to banks and has hardly impacted the New Jersey cannabis market overall.

Cannabis companies are at an even further disadvantage when it comes to taxes. Under Internal Revenue Code Section 280E, cannabis-related entities are considered illegal drug traffickers, and are therefore not permitted to deduct ordinary business expenses from their federal tax filings. This led to an additional $1.8 billion in federal taxes paid by cannabis entities compared to non-cannabis entities in 2022 alone. New Jersey operators were also barred from taking advantage of basic deductions on their state taxes until the current tax year, as New Jersey recently became the 20th state to decouple Section 280E from its state tax code.

The financial difficulties encountered by cannabis businesses are a direct consequence of the federal government’s categorization of cannabis as schedule I drug under the Controlled Substances Act, and the ensuing, ever-increasing divide between federal and state cannabis laws. Although there has been some discourse among politicians, including President Joe Biden, on the rescheduling or removing cannabis from schedule I (the latter of which would arguably cure many of the problems described above), the federal government is not particularly close to passing such extensive reform. Instead, Congress members have focused their attention on a more concentrated, more passable law, which has very recently gained momentum on Capitol Hill: the Secure and Fair Enforcement of Banking Act (SAFE Banking Act).

By now, anyone doing business in cannabis should be familiar with the SAFE Banking Act. It has been introduced by Congress on eight different occasions as standalone legislation or as inclusions to other legislation, most recently on April 26, 2023, as a bipartisan, bicameral standalone bill co-sponsored by Sen. Jeff Merkley and Sen. Steve Daines. The goal of the SAFE Banking Act is to create a safe harbor for financial institutions providing banking services to state licensed cannabis businesses. Specifically, the bill would prevent federal regulators from:

  • Prohibiting, penalizing or discouraging a bank from providing financial services to a legitimate state-sanctioned and regulated cannabis business, or an associated business (such as a lawyer or landlord providing services to a legal cannabis business).
  • Terminating or limiting a bank’s federal deposit insurance primarily because the bank is providing services to a state-sanctioned cannabis business or associated business.
  • Recommending or incentivizing a bank to halt or downgrade providing any kind of banking services to
    these businesses.
  • Taking any action on a loan to an owner or operator of a cannabis-related business.

The bill is widely supported within the cannabis and banking industries. In a letter to congressional leadership, the American Banking Association described it as “urgently needed,” advocating for “swift passage by Congress.” However, each prior iteration of the bill passed the House of Representatives before dying on the Senate floor, largely due to opposition from Democrats who have yearned for more comprehensive cannabis reform with an emphasis on social equity and criminal justice for those wronged by the war on drugs. It is no coincidence that the current bill has an expanded social equity component, which includes provisions extending the law’s protections to community development financial institutions (CDFIs) and minority depository institutions (MDIs), requiring regulators to track and report data on access to financial services for minority-owned, veteran-owned, and women-owned businesses, and allowing workers with cannabis-derived income to receive federally backed home mortgage loans.

Despite the bill’s past failures, there is certainly room for optimism this go-around. The SAFE Banking Act was the primary topic of discussion at a May 11, 2023, Senate Banking Committee hearing on cannabis—the first of its kind. Senate Majority Leader Chuck Schumer, who, along with Sen. Cory Booker, has pushed for the bill to incorporate more criminal justice provisions such as expungements for low-level marijuana convictions, recently said he was “confident” that some form of the act will be enacted this session. It was also reported that the bill has the 10 Republican votes necessary to advance past the Senate should the Democrats unanimously vote in its favor. One way or another, it appears that the SAFE Banking Act will finally make its way to the Oval Office.

So, what do New Jersey cannabis operators stand to gain from the SAFE Banking Act? At a minimum, it will allow them to operate more safely and effectively, akin to any other legal enterprise, by opening deposit accounts and reducing their cash-in-hand. Moreover, the passage of the SAFE Banking Act means that cannabis businesses will have far greater access to financing than they do now. This should eventually help narrow the gap between “mom and pop” operators and the MSOs currently dominating the state’s legal cannabis market. Some have argued that even if banks become more comfortable lending to cannabis companies, they will shy away from making loans to small businesses in favor of MSOs with a proven track record in what is still considered to be a volatile industry. This is a fair criticism, but lending to any small business is inherently risky; such concerns are not unique to cannabis and should not impede essential reform. The reality is that if the SAFE Banking Act passes, small and microbusinesses, including but not limited to minority-owned and social equity businesses, will have more and better opportunities to raise adequate capital, especially through CDFIs and MDIs. Perhaps more significantly, the “idea” of large financial institutions becoming friends of cannabis will be beneficial to the industry as a whole and should play a role in facilitating further reform.

As more states develop comprehensive legal adult-use cannabis programs, the need for legitimate, regulated and secure cannabis banking has never been more pressing. The SAFE Banking Act is by no means a perfect law, and may only be a small step in the right direction, but passing it now will benefit thousands of businesses, employees and other cannabis stakeholders in New Jersey while momentum toward comprehensive reform continues to build.

Reprinted with permission from the July 18, 2023 issue of the New Jersey Law Journal. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.

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