Home Trade industry Can the cannabis industry climb towards increased institutional investment and capital market listings? | Clark Hill PLC

Can the cannabis industry climb towards increased institutional investment and capital market listings? | Clark Hill PLC

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This morning, Rep. Troy A. Carter, Sr. (D-LA) and Rep. Guy Reschenthaler (R-PA) introduced a bipartisan bill called Marijuana Business Capital Loans and Investments Act (CLIMB) which, if adopted and enacted, could provide a significant boost to the struggling cannabis industry. Cannabis stocks, which rose significantly after the 2020 election and peaked in February 2021, have recently been trading at or near historic lows as the industry grapples with growing pains, a lack of access to institutional capital, difficulties in obtaining banking and other standard business services, stubbornly high taxes due to 280E and state and local cannabis taxes, and runaway inflation. The cannabis industry could use some encouraging news, and that could come in the form of the CLIMB Act.

What is the CLIMB law?

The CLIMB Act aims “to provide access to community development, small business, minority development, and any other source of public or private financial capital for the investment and financing of legitimate cannabis-related businesses” , and the first substantive part of the bill prohibits federal agencies from taking action against a list of industry service providers, including financial service providers. The purpose of this provision is to encourage service providers, in particular financial services companies, insurance companies, law and accounting firms and consultancy firms, to welcome clients from the . 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 legal U.S. state-owned enterprises with traditional funding mechanisms and of support for this emerging industry, from which other national industries are currently benefiting. . The more funding sources available to cannabis businesses, the better, especially for entrepreneurs, small businesses, and minority-owned businesses that might otherwise struggle to access capital.

In the second substantive section, the CLIMB Act provides a safe harbor for national securities exchanges such as the New York Stock Exchange and Nasdaq and other securities market participants to list state-legal cannabis operators. which cannot currently be listed in the United States. This would be an important development for the industry. Since cannabis companies cannot list on US stock exchanges, they generally list on the Canadian Securities Exchange and only trade on 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. stock exchanges for eligible companies, significantly increase liquidity for institutional investors providing market support and reduce volatility, and likely provide momentum to the entire industry, even to the most small operators. The smaller operators are all looking to either expand with investment capital to become larger operators or sell themselves to larger established operators. With cannabis stocks trading at or near historic lows, stronger players have been able to turn to debt for their capital needs while smaller players have struggled. Supporting equity capital markets in such a meaningful way will inevitably provide a significant boost to the entire sector, including small businesses that have struggled of late.

Will the CLIMB Act work to provide access to capital and open up US capital markets to cannabis companies that touch plants?

Crafting legislation to provide access to capital for growing cannabis businesses and to open U.S. capital markets to the growing cannabis industry is a challenge. There is no single law (other than the Controlled Substances Act itself) or ruling that simply prohibits institutional funding sources, service providers, and stock exchanges, as well as other participants to the Wall Street market, to finance, to provide services or to list American cannabis. companies that, if overthrown, would give Wall Street confidence that it could wholeheartedly support the cannabis industry. Indeed, many law firms and accounting firms have already begun supporting the cannabis industry, and a small but nascent (pun intended) community of financial institutions has invested in the industry. Bulge Bracket investment banks, large commercial banks, stock exchanges like the New York Stock Exchange and Nasdaq, and many other market players on Wall Street have chosen not to open the broader U.S. capital markets, especially the public stock exchanges, to the cannabis industry (other than companies with entirely legal activities, such as Canadian companies like Canopy Growth Corp. (Nasdaq CGC) and Tilray (Nasdaq TLRY)), because they fear to be held liable for a long list of potential violations for financing or trading in the securities of cannabis companies, including complicity in violations of the controlled substances law and money laundering.

The CLIMB Act has two operational provisions. The first prohibits the federal government from taking action against service providers to the cannabis industry, which includes financial services providers (including banks, underwriters and securities trading), insurers and others. consultants and service providers, to provide 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 exchanges or market participants to list or trade government securities. legal cannabis companies. These two provisions should reassure all capital market participants that it is safe to provide funding to state-legal cannabis companies and to safely underwrite, list and trade the companies’ securities. of US cannabis on US national stock exchanges. .

What will happen if CLIMB is successful?

If adopted, CLIMB should remove many of the barriers that prevent the development of more functional capital markets for the U.S. cannabis industry, and many industry players are likely to see renewed interest from investors. While CLIMB does not by itself turn an underperforming business into an investment opportunity, many sidelined players should start to feel comfortable playing the game. Several companies will be looking to break into the NYSE or the Nasdaq, which should then be possible if these companies also meet the quantitative and qualitative criteria for listing on the stock exchanges, because a listing in the United States should considerably strengthen their visibility and their universe of potential investors, as well as their trading price, and the most viable candidates will see investor interest even before moving to a US exchange.

Conclusion

The CLIMB Act is a welcome piece of legislation that, if passed, would provide a significant boost to the legal cannabis industry and encourage significant additional investment. We will follow it closely.

The views and opinions expressed in the article represent the views of the authors and not necessarily the official views of Clark Hill PLC. Nothing in this article constitutes professional legal advice or is intended to substitute for professional legal advice.