Cannabis Stocks on a Slight High After Passage of SAFE Banking Act
Pot investors can exhale.
After the House passed the SAFE Banking Act by a majority of 321-103 on Wednesday, shares of multiple pot stocks received a bump of roughly 2-4% as investors hoped the legislation would make doing business easier for pot companies in the U.S. The bill, introduced by Rep. Ed Perlmutter (D-CO), provides regulatory cover for banks to transact with cannabis-related businesses (this safe harbor would only apply to states where cannabis is legal). The bill will now move to the Senate.
Investors seemed optimistic that the approval could lead to a domino effect—including more U.S.-backed investing, said Matt Hawkins, managing principal at Cresco Capital Partners, to Fortune. “This is a big hurdle to overcome,” Hawkins said. “It makes it a lot easier to get banking services that are really required to operate a business at all.”
He also thinks there will see a “heavy influx” of cannabis-related IPOs registrations on the NASDAQ and NYSE because the bill would further solidify and add credence to the viability of the marijuana industry.
The cannabis industry raised nearly $13.8 billion in financing in 2018, according to Viridian Capital Advisors, an advisory firm for the cannabis industry. Most of those investments stemmed from legislation changes in Canada and at the state level in the U.S., which gave investors more confidence in backing pot companies.
Cronos Group gained 3.6% in after-hours trading Wednesday while Aurora rose 2.9% and Canopy Growth added 2.8%. Tilray also increased 1.5% before markets opened Thursday. Aurora and Cronos traded down slightly on Thursday, while Tilray and Canopy were up slightly at the close. That said, the industry has not fared well in the past year with investors despite the injection of capital from VC firms and big tobacco and alcohol companies. The ETFMG Alternative Harvest ETF, which tracks pot stocks, has fallen more than 16% year to date. The ETF is heavily weighed with some of the major players in the industry, including Aurora, Tilray and Canopy Growth.
The expectation is that the bill will pass the Republican-controlled Senate but will face some pushback which could delay the implementation of the bill until after 2019.
The National Cannabis Industry Association is “cautiously optimistic” that the bill will be passed this year, spokesman Morgan Fox said to Fortune. Most of this confidence comes from the association’s trust that politicians will view this as a public responsibility. “The longer we delay, the more small businesses and marginalized communities will be impacted because of lack of access to funding,” Fox said.
However, others are worried the bill won’t receive enough support in the Senate right out of the gate. Joshua Horn, a lawyer and co-chair of the Cannabis Law practice at Fox Rothschild, anticipates some senators might delay action because of the negative stigma surrounding marijuana still, especially at the federal level.
“The biggest challenge is getting the more-conservative Republicans to sign up for it,” Horn said. Senate Majority Leader Mitch McConnell has gone on record in the past voicing his opposition to marijuana and could keep the bill off the Senate floor if he chooses not to bring it to a vote.
But Hawkins and Fox think the overwhelming support from Republicans in the House is a good indicator on how it will fare in the Senator after 91 Republicans voted for it in the Democratic-controlled chamber. “This sends a strong signal to McConnell that this is a bipartisan bill and, quite frankly, a bipartisan issue,” Hawkins said.
Banks in the past have shied away from the cannabis industry out of fear of facing repercussions from federal regulators. Marijuana is still considered a Schedule I drug under U.S. law despite it or one of its derivatives—CBD oil for example—being legalized for medical or recreational use in 39 states as of this month.
Cannabis as a cash business
Cannabis companies have had to operate largely as a cash business, opening them up to higher risks of robbery and forcing people with indirect ties to the industry to lose banking services or face federal sanctions.
CEOs of marijuana-based businesses have had to weather safety and security risks with handling exorbitant amounts of cash, including John Lord, CEO of LivWell Enlightened Health, who testified before the Senate Banking Committee in July about the pitfalls from operating as an all-cash business.
“At one point, I rented out a former bank to use as a vault to store cash; another time, I had no choice but to walk into the IRS in Denver with more than $3 million in cash in order to pay federal taxes,” Lord said. “Imagine running a business with hundreds of employees and having to make all payments, including payroll in cash. It is difficult, and frankly, it’s dangerous.”
The act has also received support from the American Bankers Association who view the lack of regulatory control at the moment detrimental to the banking industry. The organization lauded the House for its support of the bill that is a “significant step forward for public safety, transparency and common sense,” according to a statement.
More must-read stories from Fortune:
—Airbnb plans huge IPO in 2020, continuing push by tech companies to go public
—What’s the difference between a recession and a depression? Here’s what history tells us
—Why the next recession may feel very different than 2008
—Why the repo market is such a big deal—and why its $400 billion bailout is so unnerving
—Apple Card: Here are all the credit card’s 3% cash back benefits partners
Don’t miss the daily Term Sheet, Fortune’s newsletter on deals and dealmakers.