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NJ Cannabis Insider: Three Financing Considerations for Aspiring New Jersey ATC Operators

September 5, 2019

For businesses operating in the cannabis industry, securing capital may seem like a daunting task. Federally-charted money center banks are discouraged from engaging the industry due to current Federal regulations and, of course, because cannabis remains a Schedule I controlled substance. In April 2018, the U.S. Small Business Administration published a Policy Notice clarifying that marijuana businesses, and even some companies that do not actually touch the plant but only service those in the cannabis industry, cannot receive federally backed loans.

Against this backdrop, it may seem impossible to secure capital for your cannabis start-up’s operations – but there are options out there and, perhaps soon, reprieve at the Federal level in the form of the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”), currently working its way through Congress.

Let’s take a deeper dive…

1. Lawyers are your friends

With the rapid expansion of New Jersey’s medical marijuana program, and the recent passage of the Jake Honig Compassionate Use Medical Cannabis Act, there has been an explosion of interest in the medical marijuana industry. I am regularly approached by existing firm clients and even cold callers seeking to invest in cannabis start-ups in New Jersey and beyond. Some are merely curious, but others have real interest and real dollars to invest. In fact, during this most recent application round in New Jersey, we successfully partnered a number of investors with our cannabis clients to strengthen their applications to the State and help ensure, upon licensure, that they have the necessary capital to implement their mobilization plans.

I know from conversations with other cannabis attorneys at peer law firms that they regularly make similar introductions for their clients. Bottom line: speak with your attorney; he or she likely has investors interested in speaking with you.

2. The SAFE Banking Act is coming down the pike

As discussed above, a majority of banks have been unwilling to serve legitimate cannabis operators due to stringent regulatory requirements that create additional administrative costs and introduce significant risk of running afoul of anti-money laundering laws for the financial institution.

The introduction of the SAFE Banking Act aims to remove this aura of uncertainty and consequently paves the way for new business opportunities in the cannabis sector by preventing federal banking regulators from punishing financial institutions that serve compliant cannabis-related businesses and requiring the Federal Financial Institutions Examination Council (“FFIEC”) to develop uniform guidance and examination procedures for financial institutions that serve lawful cannabis businesses.

As of the date of this writing, the Act has cleared a House Financial Services Committee vote 45 to 15, and continues to build bipartisan momentum in the House as it heads for a vote once Congress reconvenes in early September.

This is a very positive and welcome development for the industry and perhaps, one day soon, the days of banks shying away from lending to, or otherwise servicing, cannabis businesses will be a distant memory. However, knowing Washington, it may take some time for the bill to be finalized and enacted. So, in the meantime, how can you make your venture more attractive to existing capital sources?

3. Appeal first to the State, and investors will come

At the most basic level, investors want to invest with a winner. Since, to date, New Jersey’s licensing process has been competitive (and likely will remain so), you should attempt to make your venture attractive to the Department of Health or the soon-to-be-formed Cannabis Regulatory Commission. That means a venture that if not a minority-, women-, or veteran-owned, includes diversity throughout the organization, has strong ties to New Jersey, involves one or more owners with cannabis experience in another state(s), and, perhaps more than anything else, has a “home” in New Jersey.

That last point is important. New Jersey’s towns have not been especially welcoming to medical marijuana businesses. Finding a supportive town, with a property that is outside of a drug free school zone, otherwise complies with the local zoning code and works from a business perspective can be tricky and time-consuming. Investors want to know that you have done the hard work already and have support at all levels from the host municipality. Without that support, a future application will likely be impossible.

If you do not yet have a “home,” the best way to attract investors—and, ultimately, win a license in New Jersey—is to spend the time now, when no application period is open, to find a home for your business and secure local support. The right team of lawyers and government affairs specialists is critical.

Lee Vartan is a member with Chiesa Shahinian & Giantomasi and co-chair of the firm’s Cannabis Practice. Mr. Vartan is a former First Assistant Attorney General in New Jersey where he helped to author the medical marijuana regulations and vet applicants for licensure. Jenny Chung is an associate practicing in the firm’s Cannabis Law, Litigation, White Collar Criminal Defense and Product Liability & Toxic Tort Groups.

This article was originally published in NJ Cannabis Insider's September 5, 2019 issue, which can be
found here.