The collapse of Silicon Valley Bank, a subsidiary of SVB Financial Group, has created a ripple effect on various industries. One of them is the cannabis industry, which is facing challenges in accessing capital and raising funds due to the bank’s failure. The repercussions of this crisis are expected to continue for an indefinite period, affecting lending, investor sentiment, and legislation relating to the marijuana business. Here’s a closer look at the impact of Silicon Valley Bank’s failure and what it means for the cannabis industry.
Challenges in securing capital for cannabis companies
The cannabis industry has always faced challenges in accessing capital and raising funds due to the legal status of marijuana as a Schedule I drug under federal law. Banks and financial institutions hesitate to offer loans or banking services to cannabis businesses to avoid risks of legal and financial repercussions. However, some banks, including Silicon Valley Bank, offered services to ancillary businesses related to the marijuana industry. This created an ecosystem that helped cannabis companies function and flourish despite the limitations.
However, the recent failure of Silicon Valley Bank has led to a “risk-off mentality” among other banks and financial institutions, leading them to become more restrictive with lending. This situation has made it even harder for cannabis startups, small businesses, and entrepreneurs to secure the necessary capital to fund their growth and expansion plans. Investors, including high-net-worth individuals who have been the primary source of capital for cannabis companies, are becoming cautious and risk-averse due to the economic uncertainty.
Delayed legislation for cannabis banking
The Secure and Fair Enforcement Banking Act (SAFE Banking Act) aims to provide a solution to the banking challenges faced by the cannabis industry by allowing state-licensed marijuana businesses to access banking services. The bill has received bipartisan support in Congress, and many stakeholders believe that passing it would be a significant step towards legitimizing and boosting the cannabis business. However, the recent economic crisis caused by Silicon Valley Bank’s failure has led to delays in convening hearings for the SAFE Banking Act. Senate Banking Chairman Sherrod Brown has decided to prioritize addressing the bank failures before shifting focus back to the bill.
The delays in the progress of the SAFE Banking Act have frustrated many in the cannabis industry, who are eager to access banking services like any other legitimate business. The longer the delays, the more challenging it becomes for cannabis entrepreneurs and businesses to function and compete in their respective markets. If the bill fails to pass in the new Congress due to the ongoing crisis, it could mean the end of the cannabis banking initiative and a significant setback for the industry in the long run.
Financial services companies giving up on cannabis
Besides the challenges faced by cannabis companies in accessing banking services and raising capital, they are also facing another setback. Several financial services companies are gradually withdrawing support for trades of cannabis stocks, citing legal and regulatory risks. These companies’ decisions are another example of how the legal status of marijuana at the federal level is affecting the industry’s growth and development. Credit Suisse and JPMorgan have already informed their customers that they will no longer execute transactions in shares of cannabis companies with U.S. operations. Euroclear, one of the biggest financial clearing houses, has also stopped supporting trades of cannabis stocks.
The withdrawal of financial services companies’ support for the cannabis industry is a significant blow, as it limits the industry’s access to legitimate investment options and capital markets. Cannabis companies are increasingly finding themselves dependent on private investors and venture capital firms, which can be unpredictable and costly.
The future of the cannabis industry
The cannabis industry’s future looks uncertain in the face of the current economic crisis caused by Silicon Valley Bank’s failure. While the industry has shown resilience and strength in the face of many challenges, the ongoing crisis could be a turning point. The lack of access to capital, banking, and financial services could slow down the industry’s growth and limit its potential. However, the industry’s stakeholders are optimistic that they can overcome these challenges through innovation, collaboration, and perseverance.