When establishing a cannabis business in a state that has passed medical and/or recreational cannabis legislation, or expanding an existing business to operate in that industry, business owners and investors need assurances of financial security and protection. While federal lawmakers have made some progress in this area, financial security in the legal cannabis food and beverage industry is still not airtight.

Historically, banks have refused to accept deposits from known cannabis businesses. However, now that cannabis is legal in some form in the majority of U.S. states, the playing field has changed, and federal legislators are seeking to update their stance on financial protection of legitimate cannabis businesses.

Safe Passage

In September 2019, the House of Representatives passed the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The SAFE bill is designed to create protections for depository institutions that provide financial services to legal cannabis-related businesses and service providers for such businesses. However, this legislation has stalled in the Senate. This continues to put any business with connections to cannabis—regardless of its legal status at the state level—at potential risk.

Establishing safe, reliable, accountable financial security for companies that have made investments into the cannabis food industry has widespread support from the banking community. According to a position statement from the American Bankers Association: “The rift between federal and state law has left banks trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action. While ABA takes no position on the moral issues raised by legalizing marijuana, the growing number of states that allow its sale and use raises practical issues that must be addressed. ABA believes the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use. Those banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows.”

ABA notes that the SAFE Banking Act is “a solid starting point for discussion” and that it looks forward to working with policymakers to find solutions that provide “the legal and regulatory certainty banks need to best serve their communities.”

Hemp Inroads

As we have seen elsewhere in the legal cannabis industry, the passage of the 2018 Farm Bill and its concessions for cannabidiol (CBD) derived from hemp have started to pave some inroads for legislative change.

“Some financial institutions appear willing to work with the CBD food and beverage industry provided companies can confirm the CBD is sourced from hemp that complies with the 2018 Farm Bill, which in some cases means obtaining an outside legal opinion on the ingredient that includes this sourcing documentation,” says Rend Al-Mondhiry, partner, Amin Talati Wasserman, LLP, Chicago. “However, some banks and payment processors will not provide services for the CBD food and beverage industry, citing FDA’s current opinion that CBD is not a permissible food or beverage ingredient. It’s also possible financial institutions could require that companies only sell in states that expressly allow the sale of CBD-containing food and beverages, but we haven’t seen that yet.”

Insurance Matters

“In the past year, there appears to be more insurance providers offering coverage for the CBD food and industry,” says Al-Mondhiry. “However those that are willing to provide coverage often use very qualified language.” As a result, she notes that such policies might not end up providing meaningful coverage. It’s important to retain legal consultation when seeking to protect your legal cannabis business.

However, the areas related to financial protection of legal cannabis businesses are starting to grow. “We have a few insurance companies that will write businesses with THC and/or CBD products,” says Kathy Francis, life sciences insurance manager, Specialty Insurance Partners LLC, Colorado Springs, CO. “If ingestible, the minimum premiums start at $6,500.” She notes that the application process is highly detailed. “We do a narrative to introduce the company to the insurance underwriter so they better understand what is to be insured.”

It’s important that companies developing and producing legal cannabis foods and beverages for the medical and recreational markets understand that—even in the absence of federal regulatory oversight—they carry the same legal liabilities as mainstream, traditional CPGs. As such, they need to protect themselves, including from potential claims related to product liability and recall.