Federal legislators introduce bipartisan CLIMB Act

On June 23, cannabis industry insiders were disappointed to learn that the SAFE Banking Act, a proposal to permit legal cannabis companies easier access to the banking system and banking services that has passed the U.S. House of Representatives six times, would once again be stalled in the Senate. That same day, however, Representative Troy A. Carter, Sr., D-La, and Representative Guy Reschenthaler, R-Pa, introduced a bipartisan bill called The Capital Lending and Investment for Marijuana Businesses (CLIMB) Act which, if passed and signed into law, would far exceed the SAFE Banking Act in terms of scope and would give a significant boost to the struggling cannabis industry. Cannabis stocks, which increased significantly after the 2020 election and peaked in February 2021, have lately been trading at or near all-time lows as the industry struggles with growing pains, a lack of access to institutional capital, difficulty in obtaining banking and other standard business services, stubbornly high taxes due to 280E and state and local cannabis taxes, and surging inflation. To the extent industry stock indexes reflect a broader trend, the Cannabis industry could use some encouraging news on the federal policy front, which could come in the form of the CLIMB Act.

WHAT IS THE CLIMB ACT?

The stated purpose of the CLIMB Act is “to permit access to community development, small business, minority development and any other public or private financial capital sources for investment in and financing of cannabis-related legitimate businesses,” and the first substantive portion of the bill prohibits federal agencies from taking action against a long list of service providers to the industry, including most notably banking, brokerage and other financial service providers. Leveling the financial playing field is the primary focus of the CLIMB Act. In the press release accompanying the bill, Saphira Galoob, Executive Director of the National Cannabis Roundtable, said “the CLIMB Act is critical because it provides state legal American businesses with traditional funding and support mechanisms for this emerging industry, which other domestic industries currently enjoy. The more financing sources available to cannabis businesses the better, particularly for entrepreneurs, small and minority-owned businesses that may otherwise face challenges in obtaining access to capital.”

In the second substantive section, the CLIMB Act provides a safe harbor for national securities exchanges like the New York Stock Exchange and Nasdaq and other securities market participants to list state legal cannabis operators that currently cannot list in the United States. This would be a significant development for the industry. Because cannabis companies cannot list on US exchanges, they generally list on the Canadian Securities Exchange and trade only on the OTC markets in the US. This significantly limits institutional support for US cannabis companies and contributes to increased volatility. If passed, the CLIMB Act would provide access to US exchanges for qualifying companies, would likely significantly increase liquidity from institutional investors providing market support and decreased volatility, and would likely provide buoyancy to the entire industry, even smaller operators that are not yet listed. After all, smaller operators all seek either to grow with investment capital to become larger operators or to sell themselves to established larger operators. Supporting the equity capital markets in such a significant way should inevitably provide a significant boost to the entire industry, including many smaller companies that have been struggling as of late.

WILL THE CLIMB ACT WORK TO PROVIDE CAPITAL ACCESS AND TO OPEN US CAPITAL MARKETS TO PLANT-TOUCHING CANNABIS COMPANIES?

Crafting legislation to provide capital access to growing cannabis companies and to open US capital markets to the growing cannabis industry is a challenge, because there is no single statute (other than the Controlled Substances Act itself) or case decision that expressly forbids financing, providing services to or listing US cannabis companies and that, if overturned, would give Wall Street comfort that it could support the cannabis industry wholeheartedly. In fact, a growing group of institutional and quasi-institutional investors and service providers have already started to work with cannabis companies. That said, bulge bracket investment banks, large commercial banks, securities exchanges like the New York Stock Exchange and Nasdaq and many other established Wall Street market participants have chosen not to open the broader US capital markets, particularly the public equity markets, to the cannabis industry (other than to companies with fully legal operations, such as Canadian companies Canopy Growth Corp. (Nasdaq CGC) and Tilray (Nasdaq TLRY)), because they fear potential liability for aiding and abetting violations of the Controlled Substances Act as well as money laundering and other federal laws. This widespread fear of potential liability seems to have left most of the traditional Wall Street players waiting for others to make the first move.

The CLIMB Act has two operative provisions, which taken together should give significant comfort to even the most hesitant Wall Street general counsel. The first of these two provisions prohibits the federal government from taking action against service providers to the cannabis industry, including banks, brokers, insurers and others in the financial industry. The second of the two provisions is an amendment to the Securities Exchange Act of 1934 which states that it is not illegal under federal law for stock exchanges and other securities market participants to list or trade in the securities of state legal cannabis companies. These two provisions should give complete comfort to all relevant capital market participants that it is safe to provide financing to state legal cannabis companies and to underwrite, list and trade in the securities of US cannabis companies on US national securities exchanges.

WHAT WILL HAPPEN IF CLIMB IS PASSED?

If passed, CLIMB should remove many of the roadblocks preventing the development of more functional capital markets for the US cannabis industry, and many industry players will likely see renewed interest from investors. A number of Canadian listed companies likely will seek to list on the NYSE or Nasdaq, which should then be possible if those companies otherwise meet the quantitative and qualitative listing criteria of the exchanges, because a US listing will likely boost their visibility and increase the universe of potential investors, and the more viable candidates will likely see investor interest even before moving to a US exchange. To the extent the increased access to capital helps support trading prices, it is likely M&A activity will increase significantly and a more traditional IPO pipeline will likely then develop as well.

CONCLUSION

The CLIMB Act is a welcome piece of legislation which, if passed, would likely provide a significant boost to the legal cannabis industry and encourage significant additional investment.

Sander C. Zagzebski is an attorney and co-chair of the Cannabis Industry Group