Can the Cannabis Industry CLIMB to Increased Institutional Investment and Capital Markets Listings?
AuthorSander C. Zagzebski
This morning, 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, could 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. The Cannabis industry could use some encouraging news, and it could come in the form of the CLIMB Act.
What is the CLIMB Act?
The CLIMB Act has as its purpose “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 list of service providers to the industry, including financial service providers. The purpose of this provision is to encourage service providers, including financial services companies, insurance companies, law and accounting firms and consulting companies, to welcome clients from the industry. 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 if at all, which significantly limits institutional support and contributes to increased volatility. The CLIMB Act, if passed, would provide access to U.S. exchanges for qualifying companies, would significantly increase liquidity from institutional investors providing market support and decreased volatility, and would likely provide buoyancy to the entire industry, even smaller operators. Smaller operators all seek either to grow with investment capital to become larger operators or to sell themselves to established larger operators. With cannabis equities trading at or near all-time lows, stronger players have been able to turn to debt for their capital needs while smaller players have had to struggle. Supporting the equity capital markets in such a significant way will inevitably provide a significant boost to the entire industry, including the 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 U.S. capital markets to the growing cannabis industry is a challenge. There is no single statute (other than the Controlled Substances Act itself) or case decision that simply forbids institutional financing sources, service providers, and securities exchanges, as well as other Wall Street market participants from financing, providing services to, or listing U.S. cannabis companies which, if overturned, would give Wall Street comfort that it could support the cannabis industry wholeheartedly. Indeed, many law firms and accounting firms have already started to support the cannabis industry, and a small but budding (pun intended) community of financial institutions have made investments in the industry. Bulge bracket investment banks, large commercial banks, securities exchanges like the New York Stock Exchange and Nasdaq and many other Wall Street market participants have chosen not to open the broader U.S. capital markets, particularly the public equity markets, to the cannabis industry (other than companies with fully legal operations, such as Canadian companies like Canopy Growth Corp. (Nasdaq CGC) and Tilray (Nasdaq TLRY)), because they fear liability for a long list of potential violations for financing or trading in the securities of cannabis companies, including aiding and abetting violations of the Controlled Substances Act and money laundering violations.
The CLIMB Act has two operative provisions. The first prohibits the federal government from taking action against service providers to the cannabis industry, which includes financial service providers (including banks, underwriters, and securities trading), insurers, and other consultants and service providers, for providing services to state legal cannabis companies. The second provision is an amendment to the Securities Exchange Act of 1934 to create a safe harbor for national securities exchanges and Wall Street market participants which states that it will not be illegal for the exchanges or market participants to list or trade in the securities of state legal cannabis companies. These two provisions should give a high degree of comfort to the full range of capital market participants that it is safe to providing financing to state legal cannabis companies and safe to underwrite, list and trade in the securities of U.S. 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. While CLIMB will not itself transform a poorly performing company into an investable opportunity, many sidelined players should begin to feel comfortable playing the game. Several companies 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 U.S. listing should significantly boost their visibility and universe of potential investors, as well as their trading price, and the more viable candidates will see investor interest even before moving to a US exchange.
The CLIMB Act is a welcome piece of legislation which, if passed, would provide a significant boost to the legal cannabis industry, and encourage significant additional investment. We will be following it closely.
The views and opinions expressed in the article represent the view of the authors and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.