Here's how the largest and most powerful Wall Street banks are cautiously opening their doors to the potentially $80 billion US cannabis industry
- Some of the largest Wall Street banks are starting to sniff around the cannabis industry, despite THC being federally illegal.
- Goldman Sachs, JPMorgan, and Credit Suisse have helped cannabis-related SPACs go public in the US and have advised existing clients on cannabis-related deals, though they are careful to stay on the right side of US federal law.
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As cannabis reform becomes one of the most hotly-debated topics in Congress, some of the largest Wall Street banks are slowly dipping their toes into the industry.
The chief psychoactive component of cannabis, THC, is illegal under US federal law despite being legalized in some form in 33 states. Most federally chartered US investment banks won't raise money or advise on deals for companies that are actively violating federal law, no matter how attractive the growth prospects of the industry are.
Still, the banks are starting to figure out how to serve cannabis companies and develop relationships within the nascent but expanding industry, in part in a bid for first-mover advantage if or when the market opens up thanks to changes in federal law.
Credit Suisse and Citigroup have each led US IPOs for companies that are looking to invest in FDA-approved cannabis therapies or technology that supports cannabis companies. JPMorgan and Goldman Sachs have helped existing clients with cannabis-related deals, though their clients don't sell or cultivate THC themselves. And BNY Mellon is providing services to a US-listed cannabis ETF.
None of the banks would comment for this story.
For large banks, the fees they have so far generated from cannabis deals are marginal, according to the data provider Dealogic. But that's set to change if the US legalizes cannabis at the federal level, says Steven Miller, a due diligence expert at Thomson Reuters, who expects a "green rush," if that happens.
Big banks will be "falling all over each other to get into the market," Miller said.
The cannabis industry - and all of its constituent parts, including pharmaceuticals, recreational products, industrial hemp, and ancillary software and services - could become an $80 billion industry by 2030 if the federal government legalizes the drug, according to the investment bank Cowen.
The SAFE Banking Act could be the first crack in a 'floodgate' of capital to enter the cannabis industry
Congress, for its part, is working on it, and the 2020 elections could create an opening as well.
Most Democratic candidates for president support full-scale legalization, including frontrunners like Sens. Elizabeth Warren and Bernie Sanders. Former Vice President Joe Biden is perhaps the least supportive, though he has voiced support for limited medical marijuana legalization.
The Trump administration hasn't supported federal legalization but has also allowed states to proceed with their own legalization efforts.
In September, the House of Representatives, which has a Democratic majority, passed the SAFE Banking Act by a wide margin. It was the first standalone piece of cannabis legislation to pass the chamber.
The bill would specifically prohibit federal regulators from terminating or limiting a bank's deposit insurance coverage or charter for working with cannabis businesses in states where the drug is legal, allowing cannabis businesses to open up checking accounts, credit lines, receive loans like any other legal business.
It would also, according to some experts, allow THC-touching cannabis companies to list on US exchanges and access deeper capital markets than what's available in Canada.
While the bill is now in the Republican-controlled Senate's hands - and is far from a done deal - it would be the first crack in a "floodgate" of capital that would flow toward the cannabis industry if the US federal government fully removes cannabis from the Controlled Substances Act, said Peter Dugas, the managing principal of consulting firm Capco's Washington DC-based regulatory intelligence group.
"It's going to be a very competitive marketplace like we've never seen once that happens," Dugas said.
But even if the SAFE Banking Act passes, it will primarily free up state-chartered institutions like credit unions - who might be more willing to do business in riskier areas in order to grow more quickly - in states where cannabis is legal to serve the growing industry, experts say. Federally-chartered banks like Goldman Sachs and Bank of America are likely going to wait for full-scale legalization.
"The big banks are focused on getting derisked," Miller said. "They're not taking on any more risk. It's all about limiting risks rather than focusing on huge potential upside."
Advising cannabis clients boils down to how much risk a financial institution is willing to take on. And doing due diligence on clients in an industry that operated illicitly for decades is an ongoing challenge, something only the most sophisticated banks are capable of, Dugas said.
"As of now, most financial institutions are very leery and concerned about engaging in cannabis-related activity," says Dugas. "The complexity around it is that you have to both understand federal as well as state laws. And it's more than just federal law as it relates to the Controlled Substances Act and money laundering. You have to look at the FDA and their related activity to really understand the full scope of the landscape and how they would advise any related business."
For what it's worth, Dugas says he has a large number of clients - specifically banks - that have asked him about engaging with cannabis. "We've been hesitant because, at this point, it's even us assuming the risk related to our advice and counsel," says Dugas.
For now, most of the fees from cannabis-related deals flow to Canadian investment banks as cannabis is legal in Canada. Canaccord Genuity, with headquarters in Vancouver and Toronto, has so far dominated cannabis-related investment banking, but investor sentiment toward the industry has soured somewhat as Canadian Securities Exchange-listed cannabis companies that sell or cultivate THC in the US - known as multistate operators in industry parlance - have seen their share prices tumble and struggled to close M&A transactions.
But for some midsize US banks, like Cowen, gaining a foothold in the industry before bigger players come in is worth both the legal and financial risk. Cowen has started covering both Canadian and US cannabis companies and the bank has built out dedicated teams to pursue deals. There are a few boutique firms located who advise on cannabis deals as well, including ELLO Capital and North Point Advisors, among others.
From Credit Suisse to Goldman Sachs, Wall Street wants a piece of the cannabis pie
It's clear that Wall Street wants a piece of the action, either through advising existing clients on deals with Canadian cannabis companies or by taking cannabis-related companies public in the US. It's a way to get some exposure and learn about the industry while staying onside of federal regulations.
In August, Credit Suisse became the first bulge bracket investment bank to lead a US cannabis IPO, when it acted as the sole bookrunner on Silver Spike Capital's $250 million public offering on the NASDAQ, through a SPAC.
At the time, Silver Spike's CEO, Scott Gordon, told Business Insider that the cannabis industry is "approaching its moment of institutionalization."
"What we're trying to do is stay a little bit ahead of the curve so that when it does happen, we're operational and we're not chasing it," said Gordon.
A Credit Suisse spokesperson declined to comment to Business Insider.
After Business Insider reported on talks high-level Citigroup executives held about working with cannabis companies in March, the bank made its first foray into cannabis, leading Bespoke Capital Acquisition Corp's $350 million IPO in August, another cannabis-related SPAC. The bank's Canadian arm handled the deal, according to a note from Viridian Capital Advisors, a New York City-based cannabis advisory firm.
In December, JPMorgan Chase provided financing for the tobacco giant Altria's $1.8 billion purchase of an equity stake in Canadian cannabis producer Cronos Group.
And BNY Mellon started providing custodial services to a cannabis ETF (the aptly named AdvisorShares 'YOLO') in April, Business Insider reported, potentially solving one of the biggest pain points for large institutional investors like BlackRock to get into cannabis.
A spokesperson for BNY confirmed to Business Insider at the time that the bank was working with the ETF and said that it met "our internal governance requirements."
Goldman Sachs has also been poking around the space. Last year, the bank advised its existing client - Constellation Brands - on its landmark $4 billion investment into Canadian cannabis behemoth Canopy Growth. The bank has pulled in $32 million in fees from cannabis-related investment banking, according to the data provider Dealogic.
The bank is also working to take GenCanna, a Kentucky hemp-and-CBD company, public in the US. Hemp and hemp-derived CBD were legalized after President Trump signed the Farm Bill into law in December.
A Goldman Sachs spokesperson declined to comment to Business Insider.
To Scott Hammon, a partner at the accounting and advisory firm MGO, Goldman's push into hemp could be a sign that banks feel more comfortable pursuing a cannabis strategy around CBD, rather than THC.
"Some of the investors that were playing in THC have reallocated some or all of their portfolios to CBD," says Hammon. "It's less bumpy, and there's a much clearer path to federal legality."