SAFE Banking Act Hits a 'Sweet Spot': This Week in Cannabis Investing

A committee vote on the SAFE Banking Act, which aims to improve cannabis companies' access to finance, is expected next week.

marijuana leaf with gavel and american flag
(Image credit: Getty Images)

The SAFE Banking Act is back in focus as senators prepare to take the next step down the long, 10-year path of cannabis federal banking reform. 

Members of the Senate Banking Committee have reportedly reworked key sections of the Secure and Fair Enforcement (SAFE) Banking Act and found a "sweet spot" that allows for a public markup of the proposed bill. More specifically, it appears that pertinent pieces of the act, such as Section 10 and capital markets, are being addressed and the door is open for the bill to leave the committee with a "strong vote."

"[We've] talked extensively about Section 10, and we've made some progress," Democratic Senator Jack Reed of Rhode Island said, as reported by Politico. "I think we've resolved most of the issues we had – and I hope we have so we can get it out of the committee with a strong vote."

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As the legalized cannabis marketplace continues to evolve, the federal government must recognize the industry as there are potentially billions of dollars in capital hanging in the balance. With the committee set to vote on the SAFE(R) Banking Act in less than one week, I am eager to see how the path to fully-fledged cannabis federal banking reform looks moving forward.

Banks back cannabis industry at the state level 

While we wait for both congressional bodies to formally approve the Secure and Fair Enforcement Regulation (SAFER) Banking Act, banks, credit unions and other financial institutions are stepping up to the plate to provide services to legalized cannabis companies. 

The Financial Crimes Enforcement Network reports that a record-high 812 financial institutions worked with legalized cannabis companies in the second quarter, a 5% increase from last year. 

Financial institutions in California, Oklahoma, Washington and Michigan are reportedly leading the way with the highest numbers of suspicious activity reports (SARs), a measurement of cannabis-related financial actions, filed by banks. Even states with little to no legalized cannabis activity like Texas and Kansas have also recorded an increased number of SARs.

It is promising to see record levels of banks supporting cannabis businesses, although in very limited capacity. The American Bankers Association and other financial organizations have consistently advocated for cannabis reform on Capitol Hill. 

"It's an important issue – and it's an extremely frustrating one that we haven't been able to resolve it," U.S. Treasury Secretary Janet Yellen said in 2022 about the bill. "We're supportive of it."

As the Senate Banking Committee prepares to vote on the SAFER Banking Act, many within the industry are eager to take the next step on this long, arduous journey toward reform that would allow capital to be infused into the marketplace.

Individual states continue to drive growth within the legal cannabis industry. A dozen states accounted for a combined total of $1.04 billion in sales during August. 

Michigan led the way with its $270.6 million in adult-use sales and an additional $5.6 million in medical sales. The Wolverine State fell approximately $600,000 short of setting the state's monthly record of $276.8 million from July. 

Similarly, Illinois fell approximately $4 million short of setting its yearly high, but still recorded a promising $165.7 million in sales in August. Massachusetts, meanwhile, was able to hit a monthly record-high of $158 million in adult-use and medical sales. 

"Massachusetts continues to hit record sales even as other states have come online," said Shawn Collins, executive director of the Massachusetts Cannabis Control Commission. "Demand for tested, quality cannabis products remains strong in the region, and consumers shopping in other states have not impacted Massachusetts' success."

Other states that contributed to the $1 billion total include Missouri, Maryland and Rhode Island. The collective success can be attributed to several factors, including price stabilization in key markets. Aggregate pricing may be on a downward trend, but that seems more attributable to high-price markets declining rather than those that have already experienced price compression and are seeing stabilization or price improvement. 

Two years of depressed capex has also helped to align the supply-demand imbalances of the previous cycle. Operators continued to become more intelligent about expanding product offerings, such as value brands. All in all, emerging legal cannabis markets are progressing and there is clearly consumer demand with much more to be met in the future.

New York takes steps for adult-use cannabis expansion

Don't call it a comeback yet, but New York's legal cannabis market may storm back after an arguably failed launch. On Tuesday, September 12, the New York State Cannabis Control Board (CCB) approved a resolution that would allow the state's existing medical marijuana dispensaries to transition to adult use quicker than previously expected. 

Initially, the CCB prohibited medical cannabis companies from competing with new adult-use dispensaries for three years. Thanks to a newly approved resolution, existing medical companies could enter the adult-use market within the next year.

"Today marks the most significant expansion of New York's legal cannabis market since legalization, and we've taken a massive step towards reaching our goal of having New Yorkers being able [to] access safer, regulated cannabis across the state," said Chris Alexander, executive director of the Office of Cannabis Management, in the press release. "The regulations finalized today are the result of robust engagement with stakeholders across the State who submitted thousands of comments. This final package truly represents the values of equity and competition that we believe are central to this market."

Broadening access to participation in the state's recreational marijuana market is expected to expedite the process of opening additional dispensaries at a time when there are a limited number of adult-use retailers across the state. 

This is a welcome step as New York is far behind its potential in many ways, including sales, tax and job creation. The industry will continue to watch these steps, and hopefully more, and their ability to unwind the now entrenched illegal and unlicensed participants statewide. 

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Morgan Paxhia
Contributing Writer

Morgan Paxhia is Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only.  Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.