What could banking reform do for Canada?

When asked by panel host Joshua Reynolds, president of CapitalNow Cannabis, about how the SAFE Banking Act could impact Canadian players, one financial advisor said this policy would free up investment capital.

“Canadians and Americans have been competing for the same pool of capital for a very long time,” noted Nawan Butt, portfolio manager at Purpose Investments.

“It's Canadians that have really propped up this industry on a global basis. And right now, we have Americans competing for the same pool of (limited) capital."

Due to current US federal laws against the drug, all US multi-state operators trade on Canadian exchanges; this has meant companies in the two countries have had to square off for capital markets attention.

“When Canadians and Americans are not competing for the same pool of capital anymore, and capital in Canada becomes more available for Canadian players, we'll see a lot better financing conditions for smaller players,” the Purpose Investments expert said during the discussion.

The opening of capital Butt described was echoed by Phillip Shum, director of listings development at the Canadian Securities Exchange (CSE).

Shum said meaningful reform in the US would make it so “more Canadian financiers (jump) to the table because they are now less worried about getting sanctioned by US authorities.”

The CSE executive added, “That potentially could help us here in Canada as well.”

A more streamlined understanding of US and Canadian cannabis opportunities would offer clarity to a market that has struggled to keep expectations in check. Canadian operators listed on senior US exchanges have routinely seen high trading volumes due to news about reform below the border.

“A rising tide will lift all boats and provide greater access to capital, more eyes on the space, more confidence in the space and will help terms and availability of capital,” Peter Graham, managing director of investment banking at Echelon Capital Markets, told the audience.

Despite that excitement, several experts have told INN that the roadmap for big-name Canadian cannabis companies into the US is murky at best.

Banking changes wouldn't have immediate effect, banker says

During an earlier panel at the Lift Expo, Allen Benjamin, managing director and national team lead of cannabis and emerging industries at the Bank of Montreal (TSX:BMO), was asked if the enactment of a policy like the SAFE Banking Act would change his perspective on cannabis investments.

Benjamin isn’t against the market at the moment, but said his firm does not evaluate deals with US operations.

The Canadian bank analyst commented that even if the bill were to become law, the market would not see an immediate shift in approach from bigger banks.

“It's not a quick switch where it passes and all of a sudden lenders can start (doing deals in the US). From a capital markets perspective, it makes things easier,” he said.

“There'll be a lot more access to capital from that perspective.” More mature deals, such as senior debt from bigger banks, would still take some time.

US policy remains tricky to predict

Following US President Joe Biden’s win of the White House in 2020, cannabis observers expected reform to be addressed at some point — maybe not right away, but certainly at some point during his tenure.

However, as the midterms loom in 2022, some have grown frustrated with the lack of progress from Democrats.

“Democrats had high hopes that, particularly during the first years of the Biden administration, there would be greater support from the administration to get this done,” John Kagia, chief knowledge officer at cannabis research firm New Frontier Data, previously told INN.

The outlook is gloomy for meaningful policies to address the banking and financial needs of cannabis players, or to allow Canadian players to leverage their expertise into entering the vast US marketplace.

Dan Ahrens, managing director and chief operating officer at AdvisorShares Investments, previously told INN he expects to see a piecemeal approach to cannabis reform in the US.

“There’s a lot more support for some type of federal reform for cannabis really coming from both sides of the aisle, more than at any point in the past,” said Ahrens, who also manages two cannabis exchange-traded funds.

US reform could allow bigger player entry

It is widely expected that significant cannabis reform in the US could open the possibility of bigger investments and partnerships from consumer packaged goods (CPG) players.

While a few cannabis players have made deals with diversification-hungry alcohol and tobacco companies, several experts have pointed out that the wait-and-see status of US legalization or policy reform is impacting major entries from large CPG players.

“They also want to enter on their own terms,” Shane MacGuill, global lead of nicotine and cannabis with Euromonitor International, told INN.

Investor takeaway

Politics continue to play a key role in the development of the cannabis market, a fact investors have been well aware of for years now. Particularly in the US, the investment community continues to wait for changes to affirm the opportunity surrounding state market operators and companies pining for US exposure.

The long-running possibility of US reform bringing stability into Canada may offer some relief to the market losses seen in recent years by players across the board.