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Panel: Legal, Finance, and Community Engagement Professionals Servicing the Cannabis Industry Talk Creative Solutions for Finding Funding

Key Takeaways:

  • The cannabis industry in Michigan is booming, bringing in more than $3 billion in sales since the beginning of the regulated market.
  • Finding traditional funding for cannabis businesses is difficult because it is still federally considered a Schedule I drug; however, there are creative legal solutions to overcome this challenge, including the Cannabis Safe Harbor and SAFE Banking Act.
  • Nontraditional funding opportunities, such as Eaze, help cannabis businesses with grants and low-interest loans.
  • Being licensed and creating a robust compliance program are essential for finding funding.

In December 2021, sales of cannabis in the adult-use market in Michigan hit a record. According to the state of Michigan, there were more than $135 million in recreational cannabis purchases and about $33 million in medical marijuana sales.

“The cannabis industry in Michigan is booming,” said Jeffrey Schroder, founding member and co-founder of the Cannabis Industry Group at Plunkett Cooney. “Michigan has now exceeded $3 billion in cannabis sales since the beginning of the regulated cannabis market.”

Schroder joined a panel of two other professionals engaged in the cannabis industry on Jan. 13 during the Detroit Regional Chamber’s webinar, CannaBusiness: Find Your Funding. Moderated by Chamber Chief Operating Officer Tammy Carnrike, the panel also included:

  • Susan Cobello, Commercial Relationship Specialist, Public Service Credit Union
  • Jennifer Lujan, Director, Social Impact, Eaze

Creative Solutions for Overcoming Funding Challenges

Although the cannabis industry is doing so well, there are still challenges legislators and business owners are working to overcome. Finding funding to open a business in the industry is one challenge.

One of the main reasons for this challenge is because marijuana is still looked at on the federal level as a Schedule I drug, which is not accepted for medical use and is considered high potential for abuse. It’s in the same category as heroin, LSD, and mushrooms.

However, according to Schroder, there are creative solutions and reforms to assist with overcoming this.

(Click here for tips for finding funding as a women entrepreneur in the industry.)

Cannabis Safe Harbor

One of the creative solutions is the safe harbor that the U.S. Congress has adopted for businesses that operate legally in a state where medical and adult-use cannabis is legal.

“Congress has the power of the purse. Congress funds the Department of Justice every year, including the FBI and U.S. Attorney, and they have in their appropriations bills that fund that department that told them, ‘You cannot prosecute individuals or businesses in states that are operating legally under their state law licensing system for cannabis.’ It’s what we call a safe harbor,” Schroder said.

While the safe harbor gives a bit of reprieve for legal businesses in the industry, it is not a permanent solution and can change. Congress has to go through the appropriations process every year, and the risk of the safe harbor not being included remains. In addition, Schroder shared a caveat: if someone makes an allegation against a legal business that they’re doing something outside the scope of their license, the federal government can still investigate you.

“[But] the reality is, the federal government has limited resources. The immediate ex-U.S. Attorney for the Eastern District of Michigan stated publicly that it wasn’t a priority for his office to do this,” Schroder said, “That’s just a little bit of comfort when they say it’s not a priority.”

SAFE Banking Act

The second creative solution Schroder mentioned is the SAFE Banking Act. This gives protection to financial institutions to allow them to provide traditional banking and financial services to cannabis businesses without the threat of being investigated and prosecuted.

“Under the current laws, theoretically, if a financial institution provided banking to a cannabis business and they were using that business for some other money laundering scheme or other illegal scheme, then the bank potentially has liability there,” Schroder said. “This SAFE Banking Act would remove a lot of that potential liability for the banks and allow the financial institution system to service all these traditional banking services.”

This includes banks like Public Service Credit Union (PSCU), a full-service credit union. According to Cobello, the SAFE Banking Act would better position financial institutions like PSCU to do business, although PSCU provides loans to cannabis businesses already. Their loans are just more conservative, which protects them but provides less than ideal terms to borrowers.

“The terms given by cannabis lenders are more expensive and may look less attractive than traditional funding and business lending because of the additional legal risk present and the imbalance for the demand for funding and available capital,” Cobello said.

As of September 2021, the SAFE Banking Act has received much bipartisan support and has been passed through the House of Representatives five times. Nevertheless, it is having difficulties getting through the Senate. According to Schroder, there are three reasons why:

  1.  The Senate typically moves slower than the House.
  2. Some ultraconservatives do not want to “open the door to further legalization of marijuana.”
  3. Some legislators feel like the SAFE Banking Act is a half-measure, and they want to hold out for a more comprehensive solution, including decriminalizing cannabis at the federal level. At this point, the SAFE Banking Act would be rendered obsolete.

The Marijuana Opportunity Reinvestment and Expungement (MORE) Act was recently passed out of the House Committee, and this would address the last point against the SAFE Banking Act by removing the federal prohibition on cannabis. It would also work to expunge crimes related to cannabis and create a federal tax and social equity programs.

Schroder cautioned that the likelihood of more comprehensive reform like the MORE Act passing both House and Senate right now is not favorable and is probably a little farther in the future. This is because of the additional nuances of it, such as interstate commerce, which decriminalizing cannabis on the federal level would allow.

“In Michigan, we have a growing industry that supports a lot of local farmers. We have a lot of small growers in Michigan, craft growers – they have 500 plants, 1,000 plants – and they can only sell in Michigan. That’s the restriction of your Michigan license. It’s its own market. You cannot bring this stuff across state lines. That [the MORE Act] would open the door to that,” Schroder said, “But what would that do to the small growers in Michigan who have invested a lot of money and have a lot of clientele here in Michigan? Would it open the door to multimillion-square-foot massive grow somewhere in the country that would maybe hurt the small and midsize growers that have been established in all these states?”

Nontraditional Funding Sources

While the legal system works on these reform measures, Schroder pushed nontraditional sources as one of the top options for now. For example, partnering with others interested in the cannabis industry to secure certain elements, such as real estate or equipment.

“Nontraditional sources of funding are being pursued by most of the operators. You have a lot of partners coming together, [and] a lot of entrepreneurs forming partnerships and bringing investment capital to these CannaBusinesses in Michigan,” Schroder said.

One nontraditional funding source is available through Eaze, one of the largest cannabis delivery marketplaces in the nation. Eaze offers Momentum, a national cannabis business accelerator that provides grants to already licensed businesses or those in the process of applying for licenses but are beyond the concept phase.

Eaze accepts 10 businesses for each cohort, providing them a $50,000 grant with no equity taken. They also get 12 weeks of curriculum taught by industry experts throughout the country, ranging from legal and compliance, marketing, and data and analytics. The businesses also get paired with Eaze mentors and access Eaze business services during the 12 weeks. At the end of the program, each company pitches itself to investors, retailers, and strategic partners.

According to Lujan, Eaze focuses on helping and sustaining small businesses and identifying the barriers of entry for underrepresented entrepreneurs, specifically social equity. They are also looking at the communities harmed by the war on drugs and seeing how they can best support them.

Lujan said they try to find other ways to support the businesses that aren’t accepted into Momentum, whether they are not developed enough or are too far along. For example, they may share other grant opportunities, which many private companies are starting to provide, in addition to very low-interest loans.

“You also have a lot of other investors who are looking at funding companies, specifically a lot of social equity investors,” Lujan said. “That’s really interesting to see that this trend is starting to come up. You don’t really see that as much in other industries, but it’s really nice to see that companies are really starting to build this out as part of their social impact or social equity programs.”

And none of these social equity programs are the same. Social equity is different everywhere based on state and municipality requirements. If businesses want an adult-use license in Michigan, they have to submit a social equity plan as part of their application. According to Schroder, many communities also require it as part of the local license and permit process.

“It’s [social equity] important because it’s about a new industry that’s being created and expanded and ensuring that everyone has an opportunity to get involved,” Schroder said. “Typically, it’s making a commitment to give job opportunities to local residents, giving back to the community – not just the turkey giveaway at Thanksgiving but being part of that community – and also making sure that your business doesn’t impact the community in a negative way.”

Considering social equity is also important because of the disproportionate effects cannabis has had on minority communities.

“Cannabis prohibition over the decades has disproportionately affected persons of color and persons of lower income, and now that this is being accepted as a legal product, we have a responsibility as a society to ensure that they’re taking part in this and receiving a lot of the benefits because it’s a changing government policy that’s allowing this to happen,” Schroder said.

Traditional Funding Sources

Despite nontraditional funding opportunities being the most sought after in the cannabis industry currently, for those who want to pursue traditional funding options, Cobello offered advice for how to go about it. Her main tips are to be prepared, be sure that you understand the cost of the total project from start to finish, and know the amount of cash flow you’ll have available before the business becomes profitable – and do all of this before speaking with a lender. It’s important to have this information because lenders look for specific things from qualified borrowers:

  • The strength of the borrower and guarantors
  • The amount of borrower liquidity, existing equity, and collateral (Cobello said lenders typically look for 30% and more of the total project)
  • Experience of the group needing the lending
  • How well the borrower can articulate their plan and instill confidence in executing it

“If you are new to cannabis business, I suggest that you find someone successful in the business and spend some time with them, if possible. Also, if you have a partner with more experience, be sure to let the lenders know that as well,” Cobello said. “It really helps to invest the time on the front end and be prepared before meeting with the lender.”

Schroder echoed Cobello’s advice and shared that getting licensed and making sure you have a robust compliance program are the initial steps cannabis businesses should make before looking for funding. This helps assure banks that a company has all its checks and balances in place because, according to Schroder, “the bank is putting its neck on the line.”

Being upfront with the bank is also very important.

“Don’t walk into the local bank branch and tell them you’re starting a new farming or agriculture business and beat around the bush about what you’re really trying to do,” Schroder said.

Thank you to Plunkett Cooney for sponsoring CannaBusiness: Find Your Funding.