This is the third of 13 posts describing the impacts of marijuana’s rescheduling. An homage to Phish’s historic run at Madison Square Garden in the Summer of 2017, Budding Trends Baker’s Dozen will address how rescheduling affects various areas of the law and our daily lives. Enjoy the run.
As with almost any other business, access to capital is the oxygen that drives almost everything else; without it, the business cannot afford to do the things it needs to do to be successful. With the recent rescheduling of state-licensed medical marijuana and FDA-approved marijuana products, will the medical marijuana industry finally have broader access to capital through banks and private investment?
The answer is a qualified yes, but with enough asterisks to fill a Phish setlist.
The Core Problem Banks Have Always Had
To understand the potential changes, one has to understand why banks and investors have been so skittish about cannabis in the first place. It comes down to a few intersecting federal legal concerns.
Federal depository institutions — banks, credit unions, savings associations — are subject to federal law and federal regulators. Providing financial services to businesses engaged in federally illegal activity exposes banks to potential liability under federal money laundering statutes, the Bank Secrecy Act, and asset forfeiture laws. Even if a marijuana business was perfectly compliant with state law, its federal illegality previously meant that every dollar deposited, every loan made, and every transaction processed carried legal risk for the financial institution.
The result has been well-documented: Marijuana businesses are operating largely in cash, paying employees in cash, struggling to access basic banking services like checking accounts, and essentially locked out of conventional capital markets.
What Rescheduling Actually Changes
Schedule III status meaningfully reduces — though does not eliminate — the federal legal risk for financial institutions serving state-licensed medical marijuana operators. Here’s the analysis:
The money laundering statutes that have most banks concerned — particularly 18 U.S.C. § 1956 and § 1957 — apply to proceeds of “specified unlawful activity.” Schedule III controlled substances are still controlled substances, and transactions involving their proceeds can still implicate federal money laundering statutes under certain circumstances. This is not a clean bill of health.
However, the practical risk calculus shifts significantly. A state-licensed medical marijuana operator that holds a DEA registration is now operating in a federally authorized framework. The argument that banking such a customer constitutes knowing facilitation of a federal crime becomes considerably weaker when the customer has a federal registration and is operating in compliance with Schedule III requirements.
The 280E tax relief is also enormously significant for the capital question. One of the reasons cannabis businesses have been such unattractive lending targets is that their effective tax rates have been punishing — sometimes exceeding 70% of gross profit — because 280E prevented deduction of ordinary business expenses. A business that can now deduct its cost of goods sold, rent, payroll, and other operating expenses is a fundamentally more creditworthy borrower. Cash flow improves, financial statements normalize, and underwriting becomes more straightforward.
What Hasn’t Changed
Here is where the asterisks come in, and there are several important ones.
- First, the money laundering statutes have not been amended. Schedule III status reduces the risk but doesn’t eliminate it. Banks will still need to conduct careful Bank Secrecy Act compliance, including robust Know Your Customer and Customer Due Diligence procedures for cannabis clients. The guidance framework that FinCEN issued in 2014 — the so-called Cole Memo-era guidance — technically remains in effect but was always considered inadequate by most compliance officers. Updated FinCEN guidance specifically addressing Schedule III medical marijuana operators would go a long way toward giving banks the comfort they need, and that guidance hasn’t come yet.
- Second, the SAFE Banking Act — which would have provided an explicit safe harbor for financial institutions serving state-licensed cannabis businesses — still hasn’t passed Congress. Rescheduling is not a substitute for that legislation, and many bank compliance officers will continue to wait for either SAFE Banking or updated regulatory guidance before meaningfully expanding cannabis banking services.
- Third, adult use/recreational marijuana operators remain in exactly the same position they were before: Schedule I, no federal authorization, same banking desert. This creates a peculiar two-tier market where medical operators may gain meaningful access to capital while recreational operators — who represent the majority of cannabis industry revenue in most states — remain locked out.
- Fourth, institutional investors face their own constraints beyond just legal risk. Many investment funds have charter documents, investment policy statements, or LP agreements that restrict investment in federally illegal businesses. Schedule III status may satisfy some of those restrictions, but fund managers will need to carefully review their governing documents before deploying capital into even Schedule III cannabis businesses.
- Fifth, cannabis businesses that operate in both medical and recreational markets — which describes the vast majority of multi-state operators — will face complex compliance questions about how to segregate their Schedule III medical operations from their Schedule I recreational operations for purposes of banking and investment. This is not a theoretical problem. It is a very practical and potentially expensive one that will require careful legal and accounting guidance.
The Securities Law Dimension
For investors specifically, there is another layer worth mentioning. Marijuana companies listed on U.S. stock exchanges — and there are several, primarily on the OTC markets — have operated in a legal gray zone that has made institutional investment difficult. Schedule III status may make it easier for these companies to uplist to major exchanges such as the NYSE or Nasdaq, which have their own policies about federally illegal businesses. The exchanges themselves will need to revisit those policies in light of rescheduling, and we expect that process to take some time.
Private equity and venture capital investors in the medical cannabis space may find their path to exit considerably clearer post-rescheduling, as the prospect of an IPO or strategic acquisition by a mainstream consumer products or pharmaceutical company becomes more realistic for Schedule III-compliant operators.
Conclusion
For state-licensed medical marijuana operators, rescheduling meaningfully improves the capital access picture in several concrete ways — reduced federal legal risk for banking relationships, dramatically improved financial performance from 280E relief, and a more credible path to institutional investment and public markets. Banks and investors who have been watching from the sidelines have a stronger basis to engage.
But the road from “less risky” to “normal business” is still likely longer than the industry would like. The absence of SAFE Banking legislation, the lack of updated FinCEN guidance, the unresolved money laundering statute questions, and the fractured medical/recreational landscape mean that capital access will improve incrementally rather than overnight.
As Jerry Reed also told us — when you’re hot, you’re hot. The medical cannabis capital markets are getting warmer, but we’re not quite at full temperature yet.
