Buoyed by wide-scale public support, legislation to legalize and properly regulate cannabis in the U.S. on the state and federal level continues to gain steam. So why are commercial and investment banks moving in the opposite direction? And what are the risks to U.S. companies and workers who are trying to build out this high growth, CPG (consumer packaged goods) sector? As a result, the U.S. retail investor has become collateral damage.
The passage of the 2018 Farm Bill, which legalized the cultivation and sale of hemp and hemp derived CBD, signaled federal acceptance and expansion of the cannabis marketplace in the United States. Republican Majority Leader Mitch McConnell’s endorsement of the legislation and continued support is a further testament to Washington’s growing embrace of the cannabis industry. And recently, the House of Representatives passed its version of the SAFE Banking Act, which would give cannabis companies access to the U.S. banking system including retail banking, credit card processing and access to institutional lending (as opposed to dilutive convertible debt financings).
So it comes as a surprise that an influential U.S. commercial bank would take a step to thwart the efforts of Americans to invest in legal cannabis companies with U.S. operations.
Bank of New York Mellon Corp., one of the largest custody and clearing banks in the world, announced earlier this month it would stop accepting positions(custody) or trading with U.S. marijuana-related businesses, a decision which would restrict trading of popular cannabis companies that are listed on Canadian exchanges, but have U.S. operations. Canadian-listed firms without U.S. operations would still be able to be traded.
BNY Mellon’s head-scratching decision has moved in the opposite direction of the thrust of U.S. public opinion. A Gallup poll conducted in 2018 found that 2 out of every 3 Americans support legalizing marijuana, while key 2020 swing states including Nevada and Michigan have adapted to voters' concerns by legalizing recreational cannabis use.
The only way to provide lasting relief for U.S. investors in cannabis is with legislation from Washington.
Currently, if you’re a U.S. company that employs Americans and provides legal cannabis products to Americans, you have to publicly list your shares on the Canadian Securities Exchange, without the benefit of U.S. Securities and Exchange Commission oversight.
Currently, if you are a U.S. retail investor you must do cross-border trades in order to invest in cannabis stocks with all of the capital and fees flowing right out of Wall Street to Bay Street in Toronto. But more importantly, the protection of US exchanges and securities laws are also missing.
It also means that America’s homegrown multi-state operators have to raise capital in Canada where there are major constraints on capital and prohibitive costs to the companies and to investors. Almost every deal/listing in Canada carries dilutive warrants that are ultimately cashed in once professional stock short-sellers drive share prices down. The result is that shares of almost every U.S. multi-state operator are down over 60% from their yearly highs, mostly at the expense of the retail investor who is the primary investor in these deals because large institutions are still restricted from investing in the sector.
Moreover, professional investors operating actively-managed or fixed portfolios of cannabis stocks are unable to invest in some of the highest growth cannabis companies — even though they are operating in states where what they do is totally within the law.
At a time where we are hearing chatter about restricting Chinese companies from listing their shares in the United States, this BONY Mellon decision serves to actually restrict U.S-based operators and investors in the cannabis industry at home.
The U.S. cannabis marketplace is one of the largest and most heralded emerging industries in American history. And unlike other nascent sectors, it’s a 100% American-made story. Because traditional credit and/or lending has not been made available to the marketplace due to marijuana’s antiquated and misguided classification as a Schedule 1 drug – along with heroin – the only meaningful way to access capital has been via a reverse merger go-public strategy in Canada.
The SAFE Banking bill now awaiting debate in the Senate is a historic piece of legislation that will open the door to broader financial and legal reforms. But it’s currently missing a key component that would allow for the movement of American, multi-state operators to the U.S. capital markets, with oversight by U.S. regulatory agencies. Such a provision would provide safe harbor to U.S. exchanges while allowing investment banks and pension funds to invest in U.S. cannabis operators compliant with state and federal laws.
Capital in an exciting, profitable and socially-beneficial industry shouldn’t just be flowing north to Canada. It should stay in the U.S. so that when Americans invest in this space, they can do so with confidence.
Tim Seymour is CIO of Seymour Asset Management and CNBC Contributor/Fast Money Trader, and Portfolio Manager of the Amplify Seymour Cannabis ETF.
Brady Cobb is CEO of Bluma Wellness, a U.S. multi-state cannabis operator, and a long-time advocate of efforts to reform U.S. cannabis laws.