Last week, several members of Seyfarth's cannabis practice attended CannaVest West and the Cannabis Business Summit & Expo. Industry expert panels discussed market trends, private equity, venture capital, family offices, and banking, as well as commercial real estate, which I had the opportunity to moderate.
Of interest to TBT readers, a few key takeaways from the event include:
Investment Opportunities – many industry experts accept as a given the fact that institutional capital will remain on the sidelines until marijuana is legal at the federal level. Institutional investors perceive too much legal risk and are prepared to wait. Many professional investors in the industry expect a market correction at some point in the near future and point to the recent declines in the value of a number of public Canadian cannabis companies. This leaves an opening for private equity funds, venture capital funds, private investors and family offices, many of which can take more entrepreneurial risk and are not as constrained in the current regulatory environment. Given how rapidly the industry is changing, most panelists thought it best for first time investors, even sophisticated investors, to leave it to the experts and invest through various types of funds or other vehicles such as REITs. There was a real "don't try this at home" attitude among the panelists.
Legal and Regulatory – uncertainty and confusion is anticipated to continue until the federal government passes legislation and the states figure out appropriate regulatory frameworks. On the federal level, there are several bills working their way through the US House of Representatives to address legalization, banking, medical research and criminal justice–most notably the SAFE Act which would provide a safe harbor for cannabis banking. However, one speaker predicted that the SAFE Act would not pass in the next twelve months and suggested that nothing would pass the Senate before the 2020 elections. At the state level, regulators are still trying to understand various aspects of the industry and either fix what they got wrong or learn from the mistakes of the states that legalized cannabis a few years ago.
Banking – here, too, experts caution that there won't be advancements until the feds legalize. One cannabis banking expert made a very interesting observation about the SAFE Act, which many see as a panacea to much of the industry's current lack of access to banking. She said that even if the SAFE Act passes, the banking situation will not improve because banks are focused on the Bank Secrecy Act, which is not adequately addressed by the SAFE Act. In discussing how a marijuana related business could get access to the banking system, she warned against unnecessarily complicated business structures (for example, three holding companies between the operating entity and the owner). Bankers see such structures as an opportunity for mischief and may be reluctant to accept the companies as customers.
Real Estate – cap rates are compressing. The days of finding an abandoned warehouse that an owner is willing to practically give away for pennies are over. Prices are being driven higher by cannabis users of real estate, professional investors and speculators, and the lack of banks and other institutional lenders are allowing entrepreneurial lenders to dominate the market, translating to higher costs of lending too.
Hemp and CBD – have caused even more confusion for bankers and regulators, not to mention the marketplace. One can't assume that because hemp is now legal at the federal level, it will be easier to bank. The Food and Drug Administration is beginning to flex its regulatory muscles and state laws continue to be a patchwork of confusion as states prohibiting growing, processing or selling hemp or hemp products try to catch up with federal law. Finally, as long as states seize interstate shipments of hemp (Idaho, you know who you are), growers and processors may be reluctant to bring their product across state borders.
In short, the conference emphasized the fact that the cannabis industry is still young and has yet to establish banking, legal, regulatory and market norms. Readers with any questions can contact me at sjutkowitz@seyfarth.com.
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