While it remains to be seen whether the Secure and Fair Enforcement (SAFE) Banking Act will become law this year, its passage in the U.S. House last week is a major step forward for the cannabis banking reform legislation, which begs the question: If the bill does indeed clear the Senate and earn President Donald Trump’s signature, how can the industry make the leap from cash-only operations to banked businesses?

Eric Berlin and Katie Ashton, who co-head the cannabis group at the law firm Dentons, say that many banks may still be hesitant to serve the cannabis industry, even when the SAFE Banking Act—or any other piece of banking reform legislation, for that matter—becomes law.

Even if reform legislation passes, the administrative burdens that will likely be required for banks to serve a federally illegal industry like cannabis may keep larger national banks from jumping in.

“There are lots of other risks involved that banks are considering,” Berlin tells Cannabis Business Times. “I think there’s some ambiguity in the bill itself—for example, its extension to securities. Banks would have significant burdens doing this because … there needs to be Suspicious Activity Reports (SAR), as well as other reports and due diligence into these businesses. Part of that is a premise to what [businesses] need to do to get set up, which is, in part, responding to those due diligence demands.”

Legislation like the SAFE Banking Act would likely inject capital into the market, Berlin says, which means that businesses need to have good corporate and accounting practices in order to attract investors. Both the capital markets and the banks themselves will perform deep dives into businesses to ensure their funds have been properly accounted for, and now is the time for companies to get their finances in order.

“The due diligence that banks are going to need to do likely will require tidy corporate and accounting housekeeping by these businesses,” Berlin says. “And, in addition to that, the folks who are going to be bringing additional capital into the market are going to want that, as well.”

“If you are hoarding millions of dollars of cash right now, make sure your books reflect where every single one of those dollars was generated from,” Ashton adds. “I do worry that there may be some [amendments] added to the Senate side of this legislation that says, ‘How do we know where all these millions of dollars came from? Is this money laundering?’ That is banks’ No. 1 concern, is anti-money laundering. So, I think that’s going to be a real practical concern [during] that first dump of cash into the system. I think the more you can really have tight records, … the easier it is for banks to get their heads around that, [and] the easier time folks will have establishing accounts and getting that money out of wherever it is that businesses would have had to be storing it, which has obviously been a huge issue.”

Businesses planning to access banking services when the opportunity arises should be having regular board meetings, Ashton adds, and they should ensure compliance with all company bylaws.

With federal prohibition still lending some level of uncertainty to the industry, cannabis businesses who do ultimately secure bank accounts should try to use more than one bank, when possible, and be transparent with those banks, Berlin adds.

“I wouldn’t give up any bank accounts,” he says. “In the cannabis industry, in some ways more than any other place, one is zero and two is one. So, I’m a believer in having some duplication and I would still recommend that. I’d recommend using more than one bank. And, of course, what we always say is to be honest in our actions. Even before or after this, you need to be honest about what you’re doing.”

Smaller businesses in the industry may have more difficulty securing banking relationships than the larger operators when the smoke clears, Ashton adds.

“Much like most things in business, I [think] the larger players will have easier access to the bigger banks as they are looking to jump in and really make their play,” she says. “I think it’s going to be harder still for the smaller guys on the corner to access loans, and I think the account prices are still going to be heavy. But I do think there is going to be some opening up there. I’m curious to see whether the real big national banks jump in on this quickly or not. I could see them taking a few of the biggest players, but I’m just still not seeing them wholeheartedly jump in on this.”

It’s not all bad news, though. Even if some banks hold on to their reservations should the SAFE Banking Act ultimately become law, the move will still advance the industry in a way that hasn’t yet been achieved, Berlin says.

“It reminds me of when [Former U.S. Attorney General Jeff] Sessions rescinded the Cole Memo and everyone took a step back,” he says. “It wasn’t really a wholesale change—it just meant that wherever people’s risk tolerances were, it seemed like they took a step back. With this situation, everyone will take a step forward … in taking more risk and seeing this as one more nail in the inevitable coffin of cannabis prohibition."

Colorado Gov. Jared Polis signed H.B. 19-1090 into law this past summer, opening the door for outside investment and ownership opportunities in the state’s cannabis market, and Diego Pellicer is in turn launching an M&A strategy to take its business to the next level.

The company, which primarily functions as a cannabis brand and development company, has announced letters of intent to purchase a series of yet-to-be-named assets in Denver: a 3,300-square-foot retail store, a 2,287-square-foot cannabis-infused product manufacturing facility and two cultivation facilities with a total of just under 30,000 square feet of grow space.

“We have a series of assets that we are pursuing currently, both the ones we’ve announced and ones that are still in the pipeline,” Diego Pellicer CEO Ron Throgmartin told Cannabis Business Times. “We’ve been patiently waiting for the Colorado market to open up business to publicly traded companies, which we are on the OTCQB. We’ve had very close ties in the marijuana industry … in Colorado but we’ve never, until the recent passage of H.B. 1090, had the opportunity to directly profit from the sale of marijuana, and this is a major shift for Diego Pellicer.”

Until now, Diego Pellicer has operated as a retail development and branding company.

“We’ve wanted to make sure to protect our shareholders, that we allow the market to properly mature, and we did not want to be the first public company that tried to cross those boundaries due to the uncertainty,” Throgmartin said. “We have waited, and we have seen other public companies cross that line, so to speak, and directly profit from the sale of marijuana in states where it was permitted. … We were very excited when Colorado announced its initiative to pass laws to allow public company ownership and it was well-accepted by us because we’d been anxiously awaiting to evolve our business model to include direct profiting from the sale of marijuana.”

The provisions in H.B. 19-1090 allow publicly traded corporations to hold Colorado cannabis business licenses, and qualified private funds based elsewhere in the U.S. may now invest in Colorado cannabis businesses and hold more than 10-percent equity. The law goes into effect Nov. 1.

RELATED: How a New Colorado Law Opened the Door to Medicine Man Technologies’ Acquisition Spree

Although Diego Pellicer must withhold the names of its acquisition targets and wait to formally submit its applications with Colorado’s Marijuana Enforcement Division (MED) until Nov. 1, it has been very involved in the rulemaking process as regulators have drafted regulations to implement the law, and the company moved quickly in entering into its letters of intent.

“Now, from this point forward, we will evolve into contracts as we approach Nov. 1,” Throgmartin said. “The MED set the date of Nov. 1 as the official date that they will accept change of ownership … packages, and those packages will include extensive applications on the company and its primary shareholders and officers for vetting by the Marijuana Enforcement Division, as well as the entity that’s being acquired and the terms of that acquisition, along with the contracts.”

Photo courtesy of Diego Pellicer

Throgmartin has been immersed in Colorado’s cannabis industry since 2009 and has formed strong business relationships over the past 10 years, which have been the foundation for Diego Pellicer’s acquisition spree.

“I’ve acquired a significant amount of relationships and contacts with peers and industry leaders, as far as I’m concerned, and through those relationships and business dealings is how we selected our acquisitions,” Throgmartin said. “And it was important to us that the acquisitions that we targeted were of like mind as Diego Pellicer, and what I mean by that is that they carry the same kinds of standards that Diego Pellicer represents—the customer service, customer pricing, steadfast respect of regulations and compliance, and a laundry list of [other] priorities needed to be met for us to agree on what we thought was a suitable acquisition, and we’ve accomplished that.”

The company has approximately five other assets it hopes to acquire, in addition to the letters of intent that have already been announced. Each deal takes time, Throgmartin said, as the company works through the regulatory details.

“People outside of Colorado or outside our industry don’t fully understand the nuances that exist and the steps that we have to take,” he said. “It’s outside the norm of a normal business. Obviously, if we were acquiring coffee shops, we wouldn’t have to jump through the hoops that have to be jumped through, but it’s expected in an industry … that’s still federally illegal. It’s our primary focus to make sure we adhere to state laws in the states [in which] we operate, with an eye on federal guidelines to make sure that we put the company in the best possible position we can to prosper.”

Diego Pellicer’s original goal, Throgmartin added, was to one day become a national—and perhaps even international—fully integrated cannabis company.

“Obviously, that is a lofty set of goals that, in our current environment and political structure, are difficult to achieve,” he said. “You have to be patient and you have to achieve them as these opportunities arrive. … Our intent is, when the smoke settles, that Diego Pellicer is a fully integrated, national cannabis company. … We want to make sure that we can control the product and the customer from seed to sale.”

Even with its newly acquired cultivation space, Diego Pellicer will not be able to produce enough cannabis to completely self-sustain its sales, Throgmartin added—but that is part of the plan.

“We don’t want to say to our customers when you come to Diego Pellicer, we’re going to offer you the best product that we produce,” he said. “We’re going to go out and seek the best product that’s available, and at that particular harvest, it may not be what we harvested. So, we will go out and we will find the best available product in the market, whether we’ve grown it or not, and make sure it’s available on the shelves and available to our customers.”

The added cultivation space will, however, give the company more control over product quality and pricing, Throgmartin said.

“Our goal is not to produce cannabis in a surplus,” he said. “Our goal is to supply enough of our own production of cannabis to guarantee and have some control over quality and pricing because … the wholesale market fluctuates a lot. As you look at the landscape of the cannabis industry in Colorado with the laws that exist currently, you can be just a retailer with no production at all. Those retailers are, in my opinion, at a disadvantage because they’re susceptible to market changes and wholesale pricing. They’re susceptible to quality that’s available in the market to be purchased by wholesale. We at Diego believe that it’s important to have enough of our own production in the vertical integration to weather the sharp movements in the market, and that way it guarantees the customer consistent product, consistent pricing, no matter what exists in the market.”

The same concept applies to the company’s newly purchased manufacturing facility, Throgmartin added: “We want to make sure that we have a base and controls over the quality of our concentrates and edibles that are produced, that we have some sort of control of our destiny in the market, no matter which way the market may swing, [but] not to the extent that we’re forcing our products on the shelf and making that the only product that’s available to the customers. We will continue to seek out and purchase and procure the best concentrates and edibles in the market."

FORT LAUDERDALE, FL, Oct. 2, 2019 /CNW/ - PRESS RELEASE - HeavenlyRx Ltd., a global hemp and CBD company, has entered into a signed letter of intent (LOI) to acquire the top-ranked national CBD brand, PureKana. Under the agreement, HeavenlyRx will acquire a majority ownership stake from the company's founding members with the acquisition expected to close by the end of 2019.

Standing alongside HeavenlyRx's high ethos and quality standards, PureKana – located in Scottsdale, Ariz. – is a rapidly growing CBD brand and company with a large consumer base that leans toward a young and active demographic. Their robust line of ultra-concentrated hemp CBD products are non-GMO and fully derived from organically grown hemp without the use of genetically modified organisms and can be used in foods and nutritional additives. Once harvested, their hemp is carefully processed and undergoes extraction and quality testing, creating a rich, ultra-concentrated CBD oil which is infused in their product lineup that spans oils, capsules, topicals, gummies and pet products. Legal in all 50 U.S. states, PureKana's products meet the highest standard of excellence and all safety requirements as put forth by the Food and Drug Administration (FDA).

PureKana, led by Founder and CEO Cody Alt, has consistently accelerated its revenue growth year after year, and expects to continue this trend. Currently, the majority of PureKana's sales come from online and ecommerce. In the coming year, however, the brand with HeavenlyRx's strategic selling capabilities plans to expand into major retailers and other retail environments.

"PureKana has grown into one of the most important brands in the CBD industry," said HeavenlyRx CEO Paul Norman. "With a dynamic entrepreneur and business leader like Cody Alt leading the helm, his vision to bring PureKana into the mainstream is a great fit for HeavenlyRx. PureKana's powerful online presence when combined with our reach to distribution into mainstream channels will create a leading player in the marketplace."