Medicinal cannabis is legal to treat for pain, anxiety, sleep disorders, even Parkinson’s or epilepsy. So why are banks, insurance companies and investment funds making it so hard for medicinal cannabis companies to start up and grow?
Josiah Spackman runs Skyman Industries, a small medicinal cannabis start-up in Auckland’s western suburbs. There are a hundred plants in two rooms – one for the babies, one for the bigger plants – with sophisticated heating, watering and LED lighting systems to give optimum growing conditions.
All in all, it’s cost Spackman and his business partner Yuri Pogrebinsky about $200,000 over the past six months to get to this stage, including renting the warehouse, buying the equipment and getting a licence from the Ministry of Health's Medicinal Cannabis Agency - a tough process.
Now the plants are growing, Skyman has a contract with one of the big producers to take as many marijuana flowers as the company can grow. (The flowers are where the good stuff is in a marijuana plant.)
But until less than a fortnight ago, Skyman Industries didn’t have a bank account.
Seven banks turned the company down. They simply refused to offer banking services to an early-stage medical marijuana company, Spackman explains, despite the industry having been legal for three years.
“They said things like ‘Medicinal cannabis is too new. As a corporate entity, we don’t have an appetite for that sort of thing’,” he says. “They said there was a risk we might launder money through our account, despite us providing them with a document saying we were liaising with the Ministry of Health to get a licence.”
Finally, a month after getting their licence approved, and after a quantity of questions and paperwork, ASB agreed to give the company a checking account.
Not a credit card, not an overdraft facility, certainly no business finance.
Just a checking account. But at least Spackman and Pogrebinsky no longer have to run all their business purchases through their personal bank accounts, a practice that has created an accounting nightmare as well as a credibility issue with suppliers.
They also can’t get an insurance company to give them directors liability insurance, meaning they could be liable for the costs of law suits taken against them, even if they were acting in good faith.
They have stopped even thinking about a bank loan or, perish the thought, an investor to help grow the business.
It’s just not going to happen, Spackman says. In his experience, institutions or individuals with money on the line aren't going to touch a medical marijuana start-up with a barge pole.
“Even with the checking account, banks were saying ‘medical cannabis is too new, as a corporate entity we don’t have appetite for that sort of thing’,” Spackman says. “They saw a risk we might launder money through the company, despite providing them with evidence we were liaising with the Ministry of Health for licensing.
“[Now we have a bank account] we would love to get a loan to expand and maybe we will be able to broach the subject, but I’m not holding out any hopes. I would love to be able to show a potential funder our business plan, our purchasing contract. But it seems although medical marijuana is legal, people don’t know it’s legal.”
Major barrier to lower prices
Chlöe Swarbrick, Green Party Spokesperson on Drug Law Reform and marijuana advocate, says Skyman’s experience isn’t unusual.
“Banking and insurance are a major barrier to entry to companies trying to start up,” she says. “Having to make all your outlays from your personal bank account makes the accounting burden so much higher, and not being able to access funding means it’s hard to get to economies of scale.”
And that lack of choice and lack of scale is part of what’s keeping the price of legal cannabis so high, Swarbrick says.
“Medicinal cannabis is not accessible nor affordable for far too many New Zealanders. Despite becoming legal in 2020, the stringent regulations which wedge a literal weed into a pharmaceutical framework contribute to the reality that 94% of medicinal cannabis users are forced to get access through the black market.
“My work investigating what things are like for those trying to enter the industry has exposed some rather bizarre barriers that prevent more supply coming online, in turn driving down legal price and access. One of those things is access to establishment of bank accounts.”
Swarbrick says she has written to banks and insurance companies and talked to Health Minister Andrew Little but hasn’t been able to get much understanding of why medicinal cannabis companies are being treated very differently from other start-ups.
“The minister says he isn’t aware of any problems.”
Medical cannabis 101
It’s perhaps not totally surprising bankers and insurance companies are confused. Cannabis has been illegal in New Zealand a long time - since 1927, in fact. And recreational cannabis is still illegal, after Kiwis voted by a small margin (50.7 percent to 48.4 percent) against legalisation in a non-binding referendum in October 2020.
But medicinal cannabis is different. Legislation passed in 2019 allows companies wanting to grow, manufacture or supply medicinal cannabis products to do so - as long as they have a licence issued by the Ministry of Health’s Medicinal Cannabis Agency.
The most common use for medical marijuana is pain control, according to the Harvard Health blog.
In the US, 37 states have made medicinal cannabis legal over the past 25 years, starting with California in 1996. Over the past decade, 18 of these states have also allowed recreational cannabis use.
And one of the fastest-growing demographic using medical marijuana is middle aged and older people, presumably because that’s when pain might start becoming a problem. “While marijuana isn’t strong enough for severe pain (for example, post-surgical pain or a broken bone), it is quite effective for the chronic pain that plagues millions of Americans, especially as they age,” Harvard blog writer Peter Grinspoon says. “Part of its allure is that it is clearly safer than opiates (it is impossible to overdose on and far less addictive).
“This is an area where few other options exist, and those that do are highly sedating. Patients claim that marijuana allows them to resume their previous activities without feeling completely out of it and disengaged.
“In particular, marijuana appears to ease the pain of multiple sclerosis, and nerve pain in general.”
High-profile New Zealand trade union leader Helen Kelly was a strong advocate of medicinal cannabis for pain relief in the final months of her life, after being diagnosed with lung cancer in 2015.
Medicinal cannabis is also FDA-approved for the treatment of some seizures, and a University of Auckland study in 2020 suggested it might be ease anxiety.
A Guardian report last week showed anxiety was the reason given for 16 percent of medicinal cannabis prescriptions in Australia, and 5.7 percent of prescriptions were for sleep disorders. However, the scientific evidence is still inconclusive for both, the article said.
New Zealand and medical marijuana
There are now 43 medicinal cannabis licence holders, according to reporter Chris Keall, writing in the New Zealand Herald. “They range from big players like Biolumic, Rua Bioscience, Helius Therapeutics, Puro (which recently scored a $13 million government grant as part of a $32m funding package) and NZX-listed Cannasouth (market capitalisation $43m) to more bootstrap operations like Skyman.”
Medicinal cannabis could become “as successful as our wine industry in the near future” – Agriculture Minister Damien O'Connor
Last month, the Government announced it was putting $13 million through the Sustainable Food and Fibre Futures fund, to help Marlborough-based company Puro Ltd fast-track the establishment of an organic medical cannabis industry in New Zealand.
Announcing the funding, Agriculture Minister Damien O’Connor said given the right support, medicinal cannabis could become “as successful as our wine industry in the near future”. The potential economic benefit to New Zealand from the Puro Ltd project alone could be $236 million by 2032, O’Connor said.
“Now is the perfect time to grow this high-value industry, as international demand for medicinal cannabis takes off while New Zealand is amid an export boom.”
Tell that to the banks, the insurance companies and the potential investors, Chlöe Swarbrick says. It’s not just medicinal cannabis newbies like Josiah Spackman having problems with financial services.
Zoe Reece is a pro. A New Zealander by birth and an engineer by training, Reece spent two years as director of engineering at US-based Curaleaf, then a relatively small start-up by US standards, but now the world’s largest cannabis company by revenue.
“When I started we had 16 facilities in six states and while I was there we expanded to 83 facilities in 16 states.”
When New Zealand regulations around medical marijuana started to change in 2018, Reece decided to come home. She set up Ora Pharm in July 2019.
For Reece, getting a bank account wasn’t a problem. The first company she approached, ASB, was happy to bank the company, including a company credit card.
But getting insurance cover was another matter.
Contents insurance wasn’t a problem, but directors’ liability and product liability insurance were. As far as Reece knows, there is no insurance company in New Zealand prepared to offer product liability insurance to a medical marijuana company - she’s had to work through a broker in Australia who has found insurers in Europe and North America.
A spokesperson for the Insurance Council of New Zealand confirms what Reece has found. He said he had contacted members but hadn’t found any offering insurance to medicinal marijuana companies.
“I think this might be indicative of the issue you raise in that this isn’t the type of business that’s being written within New Zealand.”
Investor reluctance
Ora Pharm has 110 acres of land in North Waikato, and is growing cannabis out of greenhouses, with a plan to expand to outdoor cultivation.
But expansion needs money - and that’s proving very difficult, Reece says. The company got about $1 million in seed funding in mid 2020, but now it needs another $8 million as part of its plan to move from cultivation to extraction - isolating the various compounds in the cannabis flower, taking them out, and turning them into therapeutic products.
“Cannabis has a similar reputation as Bitcoin - it isn’t seen as a real industry. There has been a lot of misinformation or misunderstanding." – Zoe Reece, Ora Pharm
Finding investors for the business has been tough.
“Cannabis has a similar reputation as Bitcoin - it isn’t seen as a real industry. There has been a lot of misinformation or misunderstanding about what it can do, and how it can help.”
Part of that comes from the 2020 referendum, when the anti-marijuana lobby was strong, and medicinal and recreational cannabis messages got mixed.
“Different groups didn’t present the medicinal cannabis industry as it should be,” Reece says.
Reece says one of the problems is that under the Financial Markets Conduct Act 2013, every managed investment scheme has to have a statement of investment policy and objectives, or SIPO.
Many funds’ SIPOs state they won’t invest in drugs, guns or potentially illegal activity, and medicinal marijuana ends up on the wrong side of these restrictions.
“I’ve had a lot of feedback from investment companies with SIPO requirements where they are saying to me: We don’t know your cannabis isn’t going to end up on the black or grey market, so we can’t invest in you.
“They don’t understand this industry is so heavily regulated - there is no more chance of a medicinal cannabis product ending up on the black market than any other pharmaceutical product.”
New Zealand investors seem to be quite conservative, Reece says. “Cannabis is seen as a risky investment.”
Meanwhile, the fact that medical marijuana isn’t legal at a national/federal level in the US, only at state level, is causing problems getting investment where companies have ties with the US.
In addition, Covid restrictions and sheer distance means overseas investors “can’t just drive over and have a look”.
It’s frustrating having to put expansion plans on hold while she waits for investors to get comfortable with her products, but Reece reckons things are starting to change.
“In the US, when medicinal cannabis came to a new state or region, at first there was a lot of stigma, but three or four years later there was acceptance.”
The 55+ age group is the fastest-growing user group in the US and is skewed female, Reece says.
“It’s very common people in the 55+ age group coming up to me saying ‘I use medicinal cannabis, or my mum is using it to help with her cancer or Parkinson’s. They tell stories to friends and family and that starts to de-stigmatise it.”
More and more companies and products are meeting Ministry of Health requirements and being approved by Medsafe all the time, Reece says.
“It’s bringing maturity in the industry. There have been lots of learning curves for companies and also for the regulators, approving different medicines. But the longer the industry goes on, the more acceptance will come not just for the people of New Zealand, but institutions like banks and insurance companies, and investors.
'It's not straightforward'
Porou Tawhiwhirangi hopes so. The former illegal grower is now head consultant and director of East Coast Cannabis Company. His company works with one of the biggest players, Rua Bioscience, but that doesn’t always make dealing with lenders easy.
Tawhiwhirangi says he ran up against problems recently when he tried to buy a vehicle under the company name.
“The finance company hit us with all sorts of conditions - they wanted to see our cultivation contract and then asked for Rua Bioscience’s licence. It felt like a personal issue, not anything legal, just because we had cannabis in the name.
“We had a $40,000 deposit, and wanted to finance the other $25,000, partly in order to build a financial history under the cannabis name. We got let down. We ended up having to do it through our personal account.
Sally King, executive director of the NZ Medicinal Cannabis Council, says banks, finance and insurance companies found accepting cannabis companies challenging, particularly when the legislation first came in.
“I’ve been working with a couple of the banks’ ESG [environmental, social and governance] committees. They had to do due diligence on what medicinal cannabis is, and what it isn’t, and they had to take that through their internal processes.”
King says there’s no reason companies should not be able to get a bank account, although she has also heard stories of people being refused.
“I know it’s not straightforward, and some frontline staff in banks might not know or understand. Still, I hope they are not saying ‘No’ simply because a company is involved with medicinal cannabis.”
Kiwibank was mentioned by a number of the companies Newsroom spoke to as refusing to give start-up cannabis companies a bank account.
The company’s website says “customers will need to provide verified copies that show they are licensed”.
However, the licensing process involves inspectors visiting a company’s finished premises to check it’s ready to start operating. That leaves companies like Skyman in the position of having to go through all the set-up costs needed to get a licence, without a bank account.
Kiwibank spokesperson Kara Tait says start-ups are considered on a case-by-case basis.
“While we could open an account, it’s likely the business would not be able to transact until a licence was confirmed,” she says. “Banks after all need to comply with the law.”
Bank policies versus reality
Other banks contacted by Newsroom said there should be no barriers for companies wanting to open a bank account.
“There are no policy barriers to medicinal cannabis companies opening an account with Westpac,” a spokesperson said.
“These companies are treated like other businesses and are assessed on a case-by-case basis. Any application for a business loan would be subject to a standard credit assessment.”
BNZ said it provided “a range of banking services, including finance, to a number of leading firms in the medicinal cannabis sector".
Meanwhile an ANZ spokesperson said the bank performs additional checks when signing up new-to-ANZ companies in the sector.
“We are aware of the Medicinal Cannabis Agency’s requirement that applicants have a bank account before they can receive a licence. ANZ has a process to accommodate this.”
ASB said it considers commercial lending, overdrafts and credit cards on a business-by-business basis, “so if the customer met our normal criteria, we would approve their lending or credit request”.
“Medicinal marijuana is an emerging industry. Like all start-up industries, there is greater inherent risk when the business model is new and relatively untested. This may be one reason why credit can be harder to obtain for start-ups in emerging sectors.”
Chlöe Swarbrick says banking policies and what actually happens when start-ups approach a branch appear to be at odds at times. “There’s perhaps a bit of a disconnect between apparent policy and practice on the ground, based on the experiences of small licit medicinal cannabis players.
“For others, there’s a ‘case-by-case’ basis precaution that we don’t see applied to other legal business practices,” she says.
The Green Party is pushing for change, Swarbrick says. And so is the Medicinal Cannabis Council.
Sally King is optimistic.
“In due course it will be easier," she says. “People are feeling their way and are more conservative than they need to be.”
