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Murphy's state bank could solve cannabis business problems, Brach Eichler says

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The legalization of marijuana won’t end all the problems facing the potential cannabis market in New Jersey, but a white paper released by the law firm Brach Eichler, based in Roseland, suggested Gov.-elect Phil Murphy could play a huge role in ensuring the viability of the industry.

The article released earlier this month touched on various issues relating to marijuana legalization and the creation of a cannabis industry including home rule and property taxes, public health, tourism, and banking.

The federal government designates marijuana as a Class I drug, which makes it difficult for national banks to offer loans or financing to cannabis businesses that are considered illegal by the federal government. A memo released under the Obama administration stipulated that banks would have to report activity relating to cannabis businesses to the Financial Crimes Enforcement Network (FinCEN), although that same memo suggested that prosecuting cannabis business owners was not a priority for the administration.

The concern of federal enforcement has had cannabis businesses take an alternate path for financing.

“What’s emerging on the first level is private venture capital has become the funding vehicle for the business,” said Charles Gormally, co-chair for the Cannabis Law Practice Group at Brach Eichler and co-author of the law firm’s white paper.

Gormally said other states with a legal cannabis market have found other solutions to the financing issue, such as California, where Gov. Jerry Brown has taken a hands-on approach to the issue.

“The governor [in California] is approaching banks, credit unions and beginning to facilitate the process,” he said.

Murphy could act as a facilitator for the industry, but his state-bank idea could also provide services to Jersey cannabis businesses. According to Brach Eichler’s white paper: “The Murphy Administration has been advocating for a State Bank which, so long as it truly can exempt itself from Federal oversight, could overcome FinCEN obstacles and build a customer base with an expected $2 billion in deposits.”

The potential revenue from the cannabis industry could benefit New Jersey as a potential source of tax revenue, but the article warns that taxing too highly would be counterproductive.

“Care must be given to make sure taxes don’t drive the price so high that the underground market stays competitive,” said John Fanburg, co-chair for the Cannabis Law Practice Group at Brach Eichler along with Gormally, as well as co-author for the white paper.

The revenue may convince many parts of the state to accept legalized marijuana as part of life, but some municipalities have taken a stance against allowing it in their town. Point Pleasant Beach borough council voted to ban the sale of marijuana, medical or recreational.

“We have an amazing family-friendly town — a tourism town. People come here with their families. They’ve been doing it for years and we want to continue that,” said Point Pleasant Beach Mayor Stephen Reid to Asbury Park Press.

But the opposition may not be permanent. Gormally said towns in Colorado took similar stances but eventually changed their view.

“In Colorado, you had a number of communities that opted out, then as the program unfolded they came back in,” he said.

Gormally said that marijuana legalization is “definitely 2018 business,” but cautioned that it likely won’t come together within the first 100 days of Murphy’s administration.

The profitability of New Jersey’s potential cannabis market has been estimated at around $1 billion. Some estimates have suggested the national market could grow to a $25 billion industry by 2020. Gormally said even those estimates might be conservative, comparing cannabis to the alcohol industry after prohibition, which didn’t necessarily predict markets such as microbrewing, low calorie alcoholic beverages, or California’s Napa and Sonoma counties becoming tourist destinations for their wine valleys.

“It is reasonable to consider that legal cannabis will develop along a similar, but with a more disruptive and accelerated path,” Gormally said in an email.

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Arthur Augustyn

Arthur Augustyn

Arthur Augustyn grew up in Massachusetts and previously covered the video game industry in Los Angeles, city politics in Malibu, California, and local news in Bergen County before working at NJBIZ. He currently covers cannabis, government and tech.

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