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FUNDING ZONE RULE

March 26, 2018

 

Funding cannabis business ventures are “cash only” undertakings. Major financial institutions are prohibited from funding and do not participate with cannabis-based enterprises. Even when the proposal is fully funded, banks don’t get involved. The issue is the FDIC. Since 1933 most banks carry the FDIC seal that symbolizes the safety and security of the nation's financial institutions. The result: all deposits are insured against loss. FDIC insured banks with their deposits are backed by the full faith and credit of the United States government. At issue is the existential risk for banks to get involved until the federal government modified its policies and amended the federal tax codes.

 

Internal Revenue Service Code, Section 280E deals with businesses that are associated with “trafficking” substances that in Schedule I and Schedule II of the Controlled Substance Act. Since cannabis remains listed as a Schedule I substance at the federal level, the IRS applies Section 280E to most state-legal cannabis companies, preventing them from deducting ordinary business expenses from their total income. The IRS has determined Section 280E applies to licensed, regulated cannabis businesses acting in full compliance with state marihuana laws and federal guidelines. The compound factors of FDIC and IRS are conspiring to block banks for lending money to the cannabis space.

 

At present, the cannabis industry is undercapitalized, while becoming a major commercial factor.  Even cannabis is illegal in most of the country, Americans spent $6.7 billion on recreational cannabis in 2016. The graph below proves an astonishing point:

 

 Courtesy of  Edwin Kye – Seeking Alpha Dec. 27, 2017 8:57 AM ET

 

 

 

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