Long-awaited legislation legitimizes marijuana industry

The cash is starting to flow from banks to marijuana business, but it’s never that simple.
Wikimedia Commons/ FinEazy

When Colorado legalized marijuana for adult use, it punched a hole in the wall of prohibition. Since then, the rest of the wall has been crumbling, as different elements of prohibitionist philosophies are challenged and changed. Many times, the falling of one obstacle reveals the next and, brick-by-brick, the wall comes down. But waiting for that progression can feel futile, like banging your head against a wall.

For example, since the moment marijuana became legal, it has been obvious that restricted access to banking posed significant challenges that would undermine the goals of legalization, namely to create a transparent legal market and reduce the amount of crime associated with the black market cannabis trade. Without access to capital or cash management systems, the above-ground industry is forced to deal in loopholes and circumnavigations of the system.

This problem has persisted for years without any significant change. Courts and regulators repeat, over and over again, that cannabis is federally illegal and so banking is not allowable. Just when it seemed the banking problem wall was immovable, it began to give.

Last week the U.S. Senate Appropriations Committee passed a resolution that would allow banks to lend to marijuana businesses so that they could be in better compliance with the spirit of the law (reducing criminal activity) instead of the letter of the law (hard and fast prohibition). The resolution still needs to go to the House and Senate, but passing committee is no small feat and is being celebrated by legalization advocacy groups across the country.

Here in Colorado, the state legislature passed and signed a bill that allows companies to accept capital from out-of-state investors in exchange for minority equity, solving a longstanding cash flow and capital problem for the growing industry.

The bill, SB 16-40, is a rather conservative law in the world of marijuana legislation — most states with legal markets do not have or have significantly less restrictive equity policies. Colorado’s policy dates back to Amendment 64, and its restrictive nature is probably due to a hesitancy in being the first to act against federal law. But not allowing out-of-state capital is posing many problems to the burgeoning industry.

With limited legal access to capital, rumors abound about cash being injected and saved in marijuana business in creative ways. The most common whisper involves larger-than-market real estate deals that mask injections of capital and cash reserves.

Dean Heizer, chief legal strategist of LivWell Enlightened Health and initial author of SB 16-40, attests to these rumors. Before working in the private sector, he says he saw some of these deals first hand.

“The most egregious was in the form of incredibly bizarre and way-over-market-priced real estate deal,” Heizer says. “An out-of-state investor would come in and buy a warehouse or a commercial building — that would be their equity contribution to the overall business. They would then charge stupid high rental rates, like an order of magnitude higher than market, and that’s how they extracted their money out of the business.”

Not only is this problematic because that money is not regulated, but there is no way to know who these out-of-state investors are. Without regulated investments and background checks, there is no assurance that the landlords are not cartel members.

External capital is also attractive to Colorado cannabis businesses for a few reasons. First and foremost because the cost of capital in the industry is pushed extraordinarily high without access to bank loans and with an arbitrarily limited pool of investors.

“Our cost of capital is anywhere between 18 and 25 percent, and it is really hard to build a viable business that has incredibly high federal tax burdens when your capital costs you what your credit card costs you,” Heizer says. “We want to be a business that plays on par with all of the other business as much as possible but can’t do that without reducing that percentage.”

This is important for a company like LivWell, one of the biggest cannabis players in the state, but perhaps more important to the smaller mom-and-pop shops trying to keep pace with rapid growth and ever changing regulations, both of which require frequent dips into capital reserves. This causes major cash flow problems for businesses and can often exhaust capital reserves, inhibiting their ability to compete.

When it came to winning over the Colorado legislature, the most effective argument was keeping Colorado competitive as more states and countries legalize marijuana. Without an option to invest in Colorado, legislators worried that they would forfeit that capital to other states that would accept the cash, unnecessarily putting Colorado’s industry at a disadvantage.

“We need to remain a leader because we are one,” Heizer says. “That was the most persuasive argument, especially in gaining bipartisan support. It allowed the Democrats to hop on to it. The Republicans were behind it from the very beginning because it is just smart business.”

This opinion column does not necessarily reflect the views of Boulder Weekly.