International banking powerhouse JPMorgan Chase & Co. this week informed its prime brokerage clients that the company will no longer allow them to purchase stocks in some U.S. cannabis companies beginning on Monday. The restriction on trading will apply to U.S. cannabis firms that have a “direct nexus to marijuana-related activities” and are not listed on the Nasdaq, the New York Stock Exchange or the Toronto Stock Exchange.
“J.P. Morgan (JPMS) has introduced a framework that is designed to comply with U.S. money laundering laws and regulations by restricting certain activities in the securities of U.S. Marijuana Related Businesses,” the bank wrote to clients in a letter quoted by Reuters.
Under the new policy, JPMorgan will no longer permit new purchases or short positions in such “plant-touching” cannabis business stocks beginning on November 8. Clients who already have positions in the affected companies, however, will be allowed to liquidate their current holdings.
Steve Hawkins, CEO of the U.S. Cannabis Council, said in a statement that “JP Morgan’s move to block its customers from buying securities in fully legal, regulated cannabis companies is beyond disappointing. Publicly traded cannabis companies operate entirely within the law, and the industry is poised for tremendous growth.”
“JPMorgan’s new policy is regressive and at odds with the majority of Americans, who want legal, regulated cannabis. What’s more, it’s self-defeating,” Hawkins added. “The end of federal cannabis prohibition is within site, and the industry is already growing rapidly.”
US Cannabis Stocks Unwelcome On Major Securities Exchanges
Both the Nasdaq and the New York Stock Exchange allow some cannabis companies, including Canadian firms that do not sell marijuana products in the United States, to list their securities. But due to continued illegality of marijuana at the federal level, companies involved in the cultivation or sale of cannabis in the United States are not allowed.
Luis Merchan, CEO of Colombian cannabis cultivator and exporter Flora Growth, says that the change from JPMorgan does not apply to his company, which debuted on the Nasdaq with a May 2021 IPO. But smaller companies listed on over-the-counter markets could take a hit.
“This move by JP Morgan won’t affect Flora Growth or its stock price, as JP Morgan’s statement is aimed at OTC companies that have plant-touching operations in the United States— NYSE and Nasdaq-traded companies such as Flora are not included,” Merchan explains in an email. “Also, Flora Growth does not have plant-touching operations in the United States.”
Morgan Paxhia, co-founder and managing director of cannabis investment fund Poseidon, says that while some plant-touching cannabis companies including multistate operators may see a reduction in trading with JPMorgan’s new policy, other investment opportunities may become more popular.
“There is a potential outcome where this capital gets recycled into the cannabis ETFs that are more broadly accessible since they trade on listed exchanges,” Paxhia says in a virtual interview. “There are ETFs that have exposures to these increasingly harder parts of our market to access, which may appeal to those that still want to invest in cannabis public stocks but are limited by their current brokerage platforms.”
Move Highlights Need For Federal Cannabis Reform
Both Paxhia and Merchan agree that cannabis companies will continue to face challenges raising capital without a change in federal cannabis policy. They point to pending cannabis reform legislation such as the Secure and Fair Enforcement (SAFE) Banking Act as the best chance of ending restrictive policies like the one disclosed to JPMorgan’s prime brokerage clients this week. If passed into law, such reforms could provide a boost to the recently beleaguered sector.
“I suspect that many financial institutions would welcome the opportunity to work with cannabis, but we can’t expect broad banking access or participation without banking reform,” says Paxhia. “The SAFE Banking Act would be a very important step forward, one that should have and could have been done several times over the years. I suspect the cannabis industry would collectively breathe a sigh of relief to end 2021 with SAFE Banking done.”