Cannabis banking is stuck in no man's land
Plus, Wall Street retrenches, New York's new rules, and mental health.
Good morning everyone,
This was a particularly newsy week in cannabis-world so you’re all getting Cultivated on Sunday morning. We’ll go back to our regular Thursdays, but I wanted to see how people like a weekend send — let me know your thoughts.
If it works, it works!
I’m trying to figure out a proper workflow for reporting, writing, producing, and promoting this newsletter each week all on my own so bear with me.
It may make sense to do it multiple times per week instead of one big newsletter. Again, would love to hear your thoughts, so please reach out.
And in the interest of keeping things a little, erm, quicker than previous editions, I’m going to skip the preamble and get right to it.
💡What’s the big deal?
What happened: The Senate Banking Committee held its first hearing on the SAFE Banking Act, a bill that would free up banks to work with cannabis companies, on Thursday morning.1
Why it matters: It’s the first time the cannabis banking bill has received a committee hearing in the Senate, though dedicated Cultivated readers know that the bill has passed the House multiple times.
🌿 Jer’s take
I wanted to move on from the cannabis banking discussion this week, but I couldn’t help myself. Sorry.
If the hearing reflects what most Republicans and general voters think about cannabis, we’ve got a serious problem.
This time was supposed to be different, many big investors in the cannabis industry and the cannabis Twitterati class told me, some quite breathlessly.
I’m still not sure where enough Republican votes are coming from, based on Sen. Tim Scott’s and other comments at the hearing, but I’d like to be wrong.
For what it’s worth, the market agrees: You could see the sell-off in pot stocks in real-time as the hearing was happening.
And the fact that Kevin Sabet, who runs the anti-legalization Smarter Approaches to Marijuana, is still given a pulpit to spew what is at best a disingenuous and biased interpretation of the scientific and policy literature around legalization and at worst completely non-factual testimony should say all you need to know.
My friend Marc Hauser put it this way in his newsletter yesterday (with apologies about the yiddishisms):
Look, I got a ton of criticism, some very pointed and personal, over last week’s Cultivated for needling the progressives who maintain that pushing for the SAFE Act ahead of broader social justice-focused reform means kowtowing to the evils of capitalism.
To them, anything less is immoral and I don’t think they’re going to change their minds based on this newsletter.
But they’ve got a point. In an ideal world, I’d be on their side and fully agree with them. (Well, not about the personal attacks but there were some good arguments. Productive disagreement is useful.)
And concerns that the bill is a handout to relatively deep-pocketed corporations, who already have access to banks, are totally valid.
Pragmatism versus idealism, a perfect world it is not
But back to my central idea: Pragmatism should never be mistaken for morality, especially in politics.
I harp on the progressive strategy because frankly I want their vision to win, I just don’t think it will under this Congress. Republicans are, despite a few isolated examples, opponents of legalization and that’s the reality advocates have to work under.
Of course we all want broad legalization, but with this Congress, we’re not going to get it.
Banking is one of the few, achievable federal cannabis reforms. The rest is wishful thinking.
I thought Cat Packer, the former director of LA's department of cannabis regulation, had compelling testimony — and she presented some common-sense changes to SAFE Banking that both progressives could get behind and Republicans could probably hold their nose and vote for.
Whether they’ll end up included in the final version of the bill is a different story, but her asks seemed, at least to me, to be practical versus grand-standing.
Put succinctly, she said:
I also liked hearing from Ademola Oyefeso, of the United Food and Commercial Workers Union, who stressed in his testimony that the utmost goal of legalization should be to create, good-paying, stable jobs for communities most impacted by the War on Drugs:
More generally, combining SAFE with the HOPE Act — which would support states expunging cannabis-related records with grants — is a pretty good compromise on both sides. Even Chuck Schumer said as much, and he remains quite hopeful it will pass.2
It gives Republicans what they want, by helping small businesses without full legalization, and gives Democrats a win on expungement and social justice. In theory, this is a bill that can and should pass.
But it doesn’t reflect the reality of cannabis politics right now. It still could pass, but the wind is not at the SAFE Act’s back at the moment.
Consider the Republicans:
Sen. Tim Scott complained during the hearing that (in his view) progressives are forcing financial institutions to de-bank legal industries like firearms and oil & gas, so why are we even talking about cannabis in the first place?
Sen. Steve Daines — the Republican champion of the SAFE Banking Act — has said, in unequivocal terms, that he’s against legalization but feels the SAFE Act is as far as he’d go.
Republican senators also killed a bill that would free up research into cannabis and cannabis-derived compounds for treating pain and PTSD in veterans.
This is how Republicans think about cannabis. They killed a bill that would ostensibly help veterans. Full stop.
Is it really worth holding out a sliver of hope that they’ll come to their senses and vote for a progressive version of legalization?
So, why all the infighting on the pro-legalization side? Why are there so many groups, from trade lobbies, to advocates, to companies themselves, advocating for different things rather than aligning on a sensible, small-scale policy that actually has an outside chance at becoming law?
The status quo is good for some cannabis businesses
Herein lies the broader point: The status quo is good for some businesses but it’s terrible for others.
She rightly pointed out that without broader decriminalization, much of the same problems that SAFE is trying to fix would remain.
But she also argued, in a lot of words, that SAFE shouldn’t pass at all because of aforementioned problems.
It’s quite convenient that her business exists and continues to get customers because there is no federal protections for banks that work with the cannabis industry. If the SAFE Act passes, Dama Financial would suffer — even though it is a cannabis business, albeit one that doesn’t sell joints.
While some say institutional investors are a bogeyman waiting on the sidelines of cannabis because of federal illegality — Sabet, the anti-legalization advocate, thinks pension funds want to hook kids on flavored THC vapes or something3 — the fact is, it’s a good thing for small businesses, particularly social equity license-holders, to have more sources of capital available and cheaper money to grow.
The bigger, publicly traded cannabis companies, who already fought for their turf, would love to have predictable, long-term investors and more stable stock prices.
At the same time, it’s true that AB InBev, Amazon, JP Morgan, or Altria, or whatever giant from whatever industry, would have the capacity to come in and dominate cannabis relatively quickly if they could.
They could do that by scooping up existing companies at relatively low prices, or they could burn the cash to do it themselves.
The jury is still out on whether the SAFE Act would be the catalyst that lets Wall Street and Fortune 500 companies flood into the industry, but it certainly wouldn’t hurt.
For better or worse, this is how the system works. You can accept the reality and wield it to your advantage, or, well, we’ll all get nothing.
🗽 Spotlight on New York
What happened: A lot happened in the New York cannabis-world this week. To that end:
A group of CAURD license-holders signed a letter outlining their frustration with the state’s cannabis regulations.
The Office of Cannabis Management, the state’s chief regulatory agency, released its long-awaited draft rules.
Cannabis trade groups took more shots at regulators, regulators took more shots at each other, and everybody’s mad about something, as Brad Racino reports.
Why it matters: I’m not going to waste more words discussing New York’s mess of a legalization rollout.4 You already know about the problems, I know about them, and the regulators sure as hell know about them.
I haven’t had time to read through the full 336-page document but I did command + F for the good parts, and two things stood out to me:
Expanded rules for on-site consumption at dispensaries, cultivation facilities, and dedicated lounges.
Allowing the existing medical cannabis operators — the publicly traded cannabis firms known as multi-state operators or MSOs — to open consumer stores sooner — by December 29 of this year, for a $5 million fee.
Let me know in the comments or in the Cultivated Substack chat about what stood out to you. I’ll read through the full package next week.
🕺 People moves
What happened: Wall Street is retrenching from the cannabis industry.
Some of the top sell-side analysts left their firms or were reassigned in recent weeks, and it’s a broader sign of how investment banks are thinking, or not thinking, about cannabis.
Among the notable departures:
Pablo Zuanic left Cantor Fitzgerald.
Jon DeCourcey left BTIG after about nine months to become the head of investor relations at cannabis firm Ayr Wellness.
Cowen — fresh off of its acquisition by TD Bank — said it would pull out of the US cannabis sector entirely.
Vivien Azer, who led cannabis coverage at Cowen, will still cover macro trends in cannabis but will focus her coverage on consumer companies.
Why it matters: Cantor Fitzgerald and Cowen were two of the biggest banks in cannabis. It’s a bit odd not hearing Azer and Zuanic on earnings calls anymore. (“Great quarter guys, but….”)
What a shift from the heady days of 2018 and 2019, when everyone on Wall Street was trying to figure out how to get relatively de-risked exposure to cannabis.
The broader story here is that after the bubble burst, most serious institutional investors do not see publicly traded cannabis stocks as real investible assets.
🌿 Jer’s take
The days of me getting taken out to lunch by bankers who peppered me with questions about the industry’s major players are over.
I’m not crying for bankers who lost money, or lost future opportunities to make money. They’ll be fine.
But the sector does benefit from research analysts who provide insight into how companies are strategizing, and reveal how they do and don’t make money.
At the end of the day, I’m personally far more supportive of small-scale, craft cannabis brands who don’t exactly need Wall Street in the first place rather than a slew of mostly failed Canadian mega-cultivators.
But it’s still a telling sign of how far cannabis has fallen off the radar.
Again, more available capital and long-term investment is a good thing for a burgeoning sector, particularly one that needs real regulatory changes to exist at all in the first place.
📜 Policy moves
What happened: The New Hampshire Senate killed a legalization bill on Thursday.
But Republican Gov. Chris Sununu said on Friday that he’d support a legalization framework that’s focused on “harm-reduction” over profits and would sell cannabis through state-run stores like the state’s famed tax-free liquor sales.
Why it matters: The New Hampshire state motto is “Live Free or Die.” Some state senators did not take that to heart.
Plus, the state is surrounded by states with legalized cannabis. It’d be silly to leave all that potential tax revenue on the table, and the governor clearly sees that.
🧪 Science & research
What happened: Two new studies looking into the impact of cannabis potency —mainly defined as THC percentage — on mental health were released in the past few weeks:
Why it matters: Increase in legal cannabis potency and the associated impacts on mental health are one of the key arguments that opponents of legalization harp on.
Like anything else, there’s a kernel of truth to this but the actual evidence is far more mixed.
The psychological impacts of cannabis range from “cannabis use disorder” (which, put simply, is an amorphous definition of cannabis overuse), to depression, schizophrenia, psychosis and other more severe problems.
It’s important research to get right to help inform better policy, and it’s crucial to communicate the results truthfully.
The Danish study, similar to a lot of ongoing cannabis research, suffers from a correlation/causality problem: The authors freely admit that they assume causality in the conclusion.
They say that one-fifth of the studied cases of schizophrenia (!) among young males could be averted by treating cannabis use disorder early.
But again, while this data can be read as troubling, correlation does not assume causality. The jury is still out and much more research is needed.
The second study revealed a murkier picture: The authors found a weak association between cannabis potency and anxiety, and no association between high potency cannabis use and “psychosis-like symptoms”.5
But the study comes with its own issues, outside experts not involved with the study told me.
For one, participants self-reported cannabis potency. Second, most of the study participants also smoked tobacco products near-daily.
😎 One cool thing
I went to the opening party for Gotham’s first store in Wednesday night — the space looks amazing, everyone should check it out!
It’s a swanky store right off the Bowery that just so happens to carry cannabis, not the other way around. It’s refreshing.
Congrats to my friend Joanne Wilson for working through some major hurdles and getting it open. I’m pretty excited to start doing some shopping there.
📚 What I’m reading
European cannabis legalisation moves into the slow-dopey lane (The Economist)