Marijuana Business Magazine July 2019

July 2019 | mjbizdaily.com 63 By contrast, states that have been more difficult for finding banks include Arizona, California and New Mexico, Bricken said. California’s rules are relatively new, “and some of them are still playing out, relative to transparency and accountability. There’s still a lot of bad behavior,” Bricken noted. “So, financial institutions (in California) have more fear regarding their ability to meet the FinCEN guideline expectations in taking on these accounts.” PUT YOUR BANK AT EASE Marijuana businesses seeking bank accounts need to op- timize their internal controls, financial recordkeeping and external reporting. What do banks like to see in terms of internal controls? “Segregation of duties, where the person depositing the cash is not the same person handling the cash at the register. You have an independent person doing the bank reconciliations. You have someone checking the cash receipts against the cash that’s received,” Rosen said. And while hiring new staff to meet these demands doesn’t hurt, smaller businesses can get by with existing employees. “It doesn’t have to be a skilled accountant. It could be one administrative person who counts the cash at the end of the day, who’s separate from the cashier themselves. There might be a third person—possibly the owner—that reconciles and posts the cash receipts and other revenue streams to the books of original entry at the company.” In addition, businesses seeking out banks will have better luck with state-chartered rather than federally chartered financial institutions because they “think more locally,” Rosen said. STEEP FEES Because of the work required of financial institutions to service the marijuana space—banks often are required to hire new compliance employees, buy new recordkeeping and reporting software, etc.—marijuana executives should expect to pay fees that are far higher than the fees mainstream companies pay. According to one report in early 2018, for example, a Maryland bank charged a cannabis client $1,750 per month. Rosen expects those fees to come down, perhaps in a few years. “As the cannabis companies generate more revenue and it becomes more accepted, I think those fees will be driven down by the volume of the transactions,” Rosen said. Just as raising capital in the marijuana industry today is different than it was a year ago, the differences will be even more profound in the next year or two— especially if the U.S. Congress approves cannabis- friendly banking legislation. The most notable proposal is the Secure and Fair Enforcement Banking Act (SAFE Act), which would give banks the federal government’s blessing to serve state-legal marijuana businesses. If the SAFE Act were to pass—and that’s no sure bet—the cost of capital would tumble for cannabis companies, predicted Cresco Labs Chief Financial Officer Ken Amann, who’s helped the Chicago multistate marijuana operator raise $250 million. While the cost of capital is a little lower than in recent years, it’s still common for companies to be charged loan interest rates of roughly 8%-12%, said Brent Johnson, CEO of the Hoban Law Group in Denver. Amann from Cresco said that while interest rates have come down, they are still about two or three times higher than in other industries. Passage of the SAFE Act, he predicted, could drop the cost of capital to the 5%-6% range. Passage of the SAFE Act would significantly reduce the risk of federal interference in the cannabis industry and make marijuana companies a much more palatable bet to more investors. If the SAFE Act passes, “there’s going to be a flood of capital, which will lead to one good thing and one bad thing,” predicted Abner Kurtin, the CEO of Boston- based Ascend Wellness, a multistate marijuana company that raised $55 million in February. “First, valuations are going to go much higher for assets because the supply of assets stays fixed and the demand for assets goes up tenfold. On the negative side, that’s going to make it much harder for players like me and other early adopters to find bargains and assets to build our companies at attractive prices, because we’ll be competing with much larger pools of capital.” Like the rest of the marijuana industry, raising capital is in its earliest iterations, and money is moving quickly. “There’s so much more (money) coming in. There are so many more venture capital funds. In two years, we’re going to be awash in money,” said Sheri Orlowitz, a former prosecutor for the U.S. Department of Justice who founded Artemis Capital, a cannabis-focused private equity firm inWashington DC. “Everyone is having the conversations now,” she said. “The private equity funds, banks, hedge funds.” – Omar Sacirbey SAFE Bets on the Horizon