Will the SAFE Banking Act Get Passed in 2022?

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At Poseidon, we've long been proponents of the SAFE Banking Act, legislation that will improve cannabis companies' access to finance. The importance of SAFE lies more in what it represents for small businesses and possible changes at the federal level.

The SAFE Banking Act is an unsophisticated bill that should have passed a long time ago. Somehow even with bipartisan support, Congress is struggling to get it done. After missing out on getting attached to last week's defense budget during the lame-duck session, SAFE's remaining opportunity to pass will be with the omnibus funding package before the year's end.

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This bill was not meant to be a comprehensive reform, but it was an important step forward in recognizing the risks that small businesses are facing in the industry. We also saw the benefits of increased liquidity because it would expand the potential capital pools. Sadly, many businesses will not survive this challenging period in the legal cannabis industry regardless of the SAFE Banking Act passing. However, the long-term benefits are very real, and we want Congress to support cannabis banking as many American voters do.

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Taxes Cause New York Legal Cannabis Prices to Soar

The state of New York is off to a rocky start with its adult-use marijuana program. In addition to the challenges of the retail rollout and supposed funding mechanism, the state has also set a stiff tax rate. Green Market Report shared data from the New York State Bar's cannabis law section estimating that legal recreational cannabis will be sold at prices almost twice as high as what is sold by unlicensed dealers. With all of New York's taxes factored in, a legal eighth of cannabis flower will likely cost over $75.

"It just creates a scenario where small businesses, women- and minority-owned businesses, really struggle to compete," said Jason Klimek, tax lawyer and author of the white paper on New York's cannabis taxes. "That's really what it comes down to: allowing these entrepreneurs to compete against a very, very entrenched illicit market."

As we have seen in California, markets with strong illicit sales and high taxes struggle to thrive. The logical mind would think that new states would learn from the mistakes of previous adult-use cannabis programs in other states, especially when applied to their regulatory structures and tax rates. There are 20 other markets to look at, yet New York is setting examples of what NOT to do. We continue to see border states like New Jersey and Connecticut benefiting from the bad decision making in New York.

New York Announces its Cannabis Delivery Regulations

Adding to the chaos in New York is a new regulation that was approved, which permits cannabis delivery via bike, scooter, vehicle or by foot. The new regulation requires payments to be made online ahead of time, and no cash transactions will be allowed. It is still unclear how consumers will pay online without SAFE banking legislation.

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"We thought while we wait for some of these locations to come online, while people take the time to find space, we should give everybody an opportunity to get started on retail delivery," said Axel Bernabe, chief of staff of the Office of Cannabis Management.

Our initial read is negative and continued poor decision making by New York. It takes sensible regulation, taxation and licensure, with plenty of case studies. This surprise move feels rushed, and the implications will be seen in time. Like any state, we want to see a thriving legal cannabis market in New York. We want to see capital flowing into the industry, but capital wants to be treated well – something we all long for after a tough bear market in the cannabis industry.

TerrAscend Reduces Debt in Deal with Canopy USA

Good management teams will continue to drive forward regardless of the negative headwinds in the macroeconomic world, such as those covered above. Marijuana stock TerrAscend (TRSSF) and Canopy USA – a U.S. holding company of Canopy Growth (CGC) – have entered into an arrangement where Canopy USA will convert CAD$125.5 million in TerrAscend debt to exchangeable shares at CAD$5.10 per share. This is a significant deleveraging event for TerrAscend as it has now retired $120 million of debt in recent weeks.

"Canopy USA continues to be a trusted investor and partner. We thank them for their continued support as they increase their conditional ownership in the Company," said Jason Wild, executive chairman of TerrAscend in a press release. "This transaction, combined with a recent $30 million pay down of our Michigan loan, materially improves our balance sheet and reduces annual interest expense by approximately $10 million."

The team at TerrAscend has taken another positive step forward with their announced transaction with Canopy USA. Reducing debt and the subsequent benefits to cash flow by cutting the interest expense is meaningful for TerrAscend. Their balance sheet has seen considerable improvement, a big success in any environment and especially noteworthy in the current market.

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Morgan Paxhia is Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only.  Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.