On July 1, 2021, the state of Connecticut legalized adult-use marijuana. Shortly thereafter, one of Green Check Verified’s financial institution partners reached out and asked how that would impact their existing cannabis banking program for medical marijuana-related businesses (MRBs). In fact, we’re often asked what financial institutions should expect when a state legalizes marijuana or expands an existing program – both by those actively banking the industry and those that aren’t. While every state program has its own unique characteristics, we can offer a broad strokes analysis of what you can expect once marijuana is legalized in your state based on lessons from other states that have gone through the process.
The first thing to know is that passing legislation to legalize marijuana – either solely for medical purposes or for adult-use – is only the first step. What you have on day one is the statute that provides the general outlines of the program, but the regulations — the actual day-to-day rules — still have to be written. A statute lays out at a high level framework for the program like the kinds of licenses that will be available (cultivation, processing, labs, dispensaries, delivery, etc) but not the information a person would need to actually apply for one (i.e. what a person needs to include with their application and when they’ll be able to submit it to the state). Just the process of writing the regulations can take months because some form of commission needs to be established by the state, a new regulatory agency needs to be staffed, and rules will have to be written and approved before the licensing process even begins.
In the meantime, residents of the state are faced with a paradox: marijuana may be legal (whether for patients or all adults), but there’s no way for them to legally purchase it. That’s not only because there aren’t yet any licensed dispensaries or retail locations, but also because there isn’t as of yet any legally-cultivated marijuana. That’s why one of the first license types made available is for growers —after all, legal sales can’t begin without legally-grown marijuana. Even if cultivation licenses were awarded on the day marijuana is legalized, there’s a general consensus that it takes three to five months to grow and harvest the first crop of marijuana.
If you’re in a state with a brand new medical program you can expect it to take the better part of six months before cannabis products are available for sale to patients.
However, in an adult-use state it’s possible that the timeline can be collapsed by a few months if existing growers and producers are allowed to make their existing medical products available to new adult-use retail facilities. After the growers licenses, the processor and testing licenses come next, with dispensaries and/or retail facilities coming last.
Regardless of the license type, the application process is extraordinarily expensive — in some states the application fee alone is $1 million or more. MRBs need some form of account where they can park these funds and ultimately send them to the state. In fact, some states even require MRBs to demonstrate that they have a certain amount of funds available to them in a bank or credit union account as part of the application process, so you can expect to be approached by businesses looking for a place to park large amounts of cash. You’ll probably also see large incoming wires into the account but no debits until the entire amount is transferred to the state all at once. If you learn what the fees are in your state, you’ll quickly be able to identify whether new business accounts are being opened for prospective marjuana licenses based on their balances. These hopeful business owners don’t usually have issues opening accounts for this purpose, but they often lose them once they’re awarded a license and they start depositing funds in a pattern that identifies them as an active marijuana business. I would suggest that opening accounts at this point is actually a great way to dip your toes in the marijuana banking waters. This approach allows you to get familiar with customers before they actually become an MRB, and that can help you decide whether you want to move forward with them once they are licensed.
This is not to say that you won’t see marijuana-related activity in your market until licenses are granted. Almost immediately after legalization you can expect to see a run on commercial real estate. All of the brand new cannabis businesses will need space to grow, process, test, and sell marijuana products so even before they are licensed you’ll see confident business people with access to private capital snatch up warehouses, land, and buildings suited for dispensaries and retail facilities (former banks being particularly desirable because they already have vaults in place). These business people are savvy enough to know that speculators are going to swoop in and charge extraordinary “marijuana markups” for prime real estate, so even before they start the application process they’ll try to reserve their space. You’ll see a flurry of buying and leasing activity at unusually high price points. The real gamblers in the group will purchase property and land even before marijuana is legalized.
If your state has recently enacted new or expanded marijuana legislation, then it’s time to (re)visit the institution’s stance on cannabis banking. As summarized above, there will be opportunities to build new commercial relationships, both on the depository and lending front, but there will also be new requirements you’ll need to navigate. Most importantly, your institution will need to develop and/or update its procedures for monitoring account activity throughout your portfolio to ensure your policy statements on cannabis are being enacted. This applies to institutions that choose to actively serve those in the cannabis industry, as well as those that choose not to, so it’s important to weigh both the costs and benefits of either approach. At Green Check, we help institutions navigate the cannabis banking landscape by offering a suite of advisory services along with an automated compliance management system specifically designed to help reduce the time, cost, and risk associated with cannabis banking. We’d be happy to help you wrap your arms around your state’s program and discuss the risks and opportunities that may present to your institution. Get in touch with us by contacting firstname.lastname@example.org.