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This newsletter has decided cannabis is more risk than it needs
Paychex, DC gifting
Payroll is an important function for a business. Due to the complexity, a lot of companies will outsource their payroll to a third-party provider. These services provide payroll processing and reporting, as well as ensure compliance with regulations and tax laws.
While usually a hum-drum sector, payroll processors have been in the national spotlight since the collapse of Silicon Valley Bank. The Washington Post ran a story this week on the payroll company Rippling, which had $545 million earmarked for paychecks tied up in SVB. The paychecks were due imminently, so before the bank was bailed out Rippling used $130 million of their own cash to cover some of the payroll, and then managed to raise an emergency funding round of $500 million from investors.
That’s a big headache! Payroll is complex enough, and moving the money should theoretically be the easy part of the job. All of this uncertainty in the banking sector is forcing companies to evaluate their risk profiles and go-forward compliance. Early signs indicate cannabis, while not directly impacted too much by the SVB collapse, is a casualty of the new environment. Here’s Green Market Report on payroll company Paychex’s announcement that they are exiting the cannabis space:
[Chris Lagana, a New York-based marijuana industry consultant and former executive at cannabis payroll firm Wurk] said he’s also convinced that Paychex’s marijuana exit is connected to the failure last month of Silicon Valley Bank, which he described as a “cannabis-friendly” bank when it came to ancillary businesses, such as payroll providers like Paychex.
“(Paychex) did have banking relationships with SVB. I don’t think that’s any secret. And I know they moved most of their cannabis companies through SVB,” he said.
The most likely explanation for Paychex’s pivot, Lagana said, is company leadership simply decided cannabis was one more risk it didn’t need after SVB went under.
Lagana also noted that for a company the size of Paychex – with a $40 billion market cap and $1.3 billion in revenue last quarter alone – the likely millions it gets from the marijuana sector represent “a small drop in the bucket.”
It’s also a reminder that the marijuana business stigma still exists thanks to federal prohibition, Lagana said.
Following the collapse of SVB, it was suggested that commercial banks look to cannabis for deposits and clients. However, in yet another blow to the industry, the Senate Banking Committee pushed back SAFE Banking hearings to prioritize the broader banking crisis. Now, more financial services are pulling out due to the uncertainty.
What will fix the problem? As I wrote before, ‘wouldn’t it be interesting if the collapse of Silicon Valley Bank was the straw that broke the camel’s back for federal legalization?’ It is becoming more and more obvious that the industry will continue to face setbacks, particularly in financial services, in the absence of clear federal approval. Unfortunately, you can’t count on DC to have any sort of common sense when it comes to cannabis.
Although, maybe there is hope! Here’s the Cannabis Business Times on the plan to transition legally ambiguous ‘gifting’ shops to medical dispensaries:
A new law that took effect March 22 will allow cannabis “gifting” retailers in Washington, D.C., to obtain medical cannabis licenses, eliminating a legal gray area that has allowed unlicensed dispensaries to gift cannabis with the purchase of unrelated merchandise, such as a T-shirt, for example.
The Medical Cannabis Amendment Act of 2021 eliminates the cap on the number of medical cannabis dispensaries in the district, allowing the unlicensed shops to apply for licenses.
The law also creates new license types for cannabis retailers, WTOP reported, including an internet retailer license, a courier license for deliveries, and a “safe-use facility endorsement” that paves the way for cannabis tasting events, cooking classes and sales in private outdoor spaces.
I hope New York is taking notes! The act also allows customers to self-certify as medical patients, which eliminates a large barrier to entry for the ‘casual’ consumer. Perhaps a flourishing DC cannabis market will entice lawmakers to take action nationwide.