Is the SAFE Banking Act Doomed?

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This month, Illinois became the latest state to allow sales of marijuana for recreational use. However, for cannabis companies to succeed and have better prospects of breaking even, there needs to be some kind of progress made at the federal level. Outright legalization isn't likely to happen anytime soon, at least not until there is a more pot-friendly government in place.

The more realistic hope is that a modest change -- one relating to banking -- could at least make things easier for cannabis companies. The SAFE Banking Act looked like it could play an important role in doing just that, and potentially be the catalyst behind a move to legalize pot federally, or at least move it out of its Schedule I classification.

However, it's run into a roadblock, and the prospect of the bill passing could be a long shot.

Strong opposition could deflate the bill's chances

Mike Crapo, chairman of the Senate committee on banking, stated last month that he remains opposed to marijuana legalization both federally and within his home state of Idaho. He's also opposed to the SAFE Banking Act, saying:

Significant concerns remain that the SAFE Banking Act does not address the high level potency of marijuana, marketing tactics to children, lack of research on marijuana's effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system. I welcome input from all interested parties on how to thoughtfully address these concerns.

The U.S. Capitol

There's no easy solution to all those problems. This is an important reminder for cannabis investors about just how significant the barrier is to passing any kind of meaningful marijuana reform in the U.S. Even though the SAFE Banking Act pertains to banking services and doesn't attempt to legalize pot, the debate inevitably has returned to a broader discussion around marijuana and whether it should be permitted. That's why the bill is likely to fail, because of the endless back-and-forth that will likely ensue, preventing a solution from happening.

Republicans have taken a tough stance on drugs in the past, so passing any kind of progressive laws on marijuana was always going to be difficult.

What's perhaps most surprising is that Crapo appeared to be more inclined to get something done on this bill as recently as September, looking to have a vote and to see if the Senate could "thread the needle" on the SAFE Banking Act. He saw a valid reason for the bill: "The impact on the ability of small and large businesses to operate justifies our attention." However, he also suggested that the SAFE Banking Act was a work in progress: "We may craft our own bill or we may work with them to craft any amended legislation."

Unfortunately, with vaping-related deaths headlining some of the dangers of e-cigarette and cannabis use, it's possible that the negative press over the past several months has weighed on lawmakers like Crapo, making them more hesitant to pass any marijuana-related legislation. Regardless of the reason that Crapo has a negative outlook on the SAFE Banking Act, it's looking more and more likely that nothing will change on that front; it's been three months since the bill passed the House.

Cannabis companies need an improvement from the status quo

For U.S. cannabis companies like large multistate operator Curaleaf Holdings (OTC:CURLF), failing to get any progress on banking, or any type of federal reform on marijuana, is bad news.

Curaleaf and other pot stocks have been crashing over the past several months. The SAFE Banking Act could have helped turn things around and inject some much-needed bullishness into the industry. Although the company has some exciting growth prospects ahead, profitability is still a big concern, as Curaleaf has incurred losses totaling $57 million over the past 12 months. Part of the problem is that cannabis companies without adequate access to banking have to employ security guards, and incur cash management expenses that companies in other industries don't face.

Although Curaleaf doesn't specifically outline security-related expenses on its income statement, they're likely to fall somewhere in the company's selling, general, and administrative costs, which totaled $85 million over the past nine months. That's the company's largest operating expense, and it's 58% of its revenue. It has doubled from a year ago, and as Curaleaf continues to expand, that number is only going to go up. For Curaleaf and other cannabis companies to get stronger financially, they need help, and bringing down administrative costs and having access to banking services could go a long way.

In the past six months, Curaleaf's stock has fallen 12% and the Horizons Marijuana Life Sciences ETF has crashed by 53%. Easier access to cash, and to loans and funding from banks, will be critical for pot companies; without those, they'll need to resort to issuing shares to fund future growth, which sends share prices even further down as investors fret over dilution.

Without the passage of the SAFE Banking Act or some other progress in marijuana legislation at the federal level, given current industry conditions, it will be difficult to see a reason to invest in any U.S.-based marijuana stocks.

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