Further Hurdles for Hemp and Cannabis Startups; Financial Institutions now require Attorneys

Over the past several months, financial institutions including banks and e-commerce platforms, have been requiring their cannabis clients to provide additional proof from an attorney that testifies the legitimacy of a cannabis company when applying for bank accounts and credit lines. Despite federal legalization being a seemingly endless legal battle, entrepreneurs are still fervently entering the cannabis industry. According to research published by Bank of America BAC, cannabis sales reached $25 billion in 2021. While it’s recommended to have an attorney from day one to establish operating agreements and prevent re-filing later on, many brands save costs in the first year by avoiding legal consultation. Banks requiring a “Legal Opinion Letter” have made it impossible for cannabis companies, even those just starting out, to operate without an attorney.

What Is An Attorney Open Letter?

In regard to opening an account with a financial institution, An attorney opinion letter is an official letter drafted by an attorney on behalf of a client to a financial institution or third-party that attests to the business practices of the client as being compliant with state and federal law. The attestation includes, but is not limited to, compliance with THC limitations, third- party testing, packaging/labeling compliance and age-verification procedures. This process can range anywhere from $2,000 to $10,000, depending on the size of the company – only adding to business costs and furthering the limitations of starting a cannabis company.

An attorney could need a few days or weeks to complete the analysis and provide an adequate letter. This requirement adds additional hurdles for cannabis brands already battling red tape and changing policies in their flagship state. These letters may also result in a business having to implement protocols and procedures that may not be required by law to do business with the financial institution or third-party service provider, increasing already high business costs.

The Gray Area

A financial institution or third-party service provider such as an e-commerce platform, will require more procedural safeguards than the law more often than not. For example, many require the attorney to attest that the company is using geographical limitations on its sales and shipping platform to ensure that hemp and CBD products are not being purchased and shipped into states that have not approved hemp and CBD sales.

However, not all attorneys specialize in cannabis law. As Attorney Opinion Letters verifying the legitimacy of cannabis companies become common practice, there’s the potential for new brands to consult friendly or familiar attorneys who may offer them a deal but may not know all the regulations and policies for their state or county; where in states like California, regulations can differ from county to county.

By requiring a legal document from an attorney attesting the validity of a brand's practices, financial institutions are passing off the vetting process to attorneys they hope are better acquainted with local and state regulations. This has essentially made it impossible for cannabis brands to operate without an attorney in the early stages.

Financial institutions like Wells Fargo and JP Morgan Chase have entire departments dedicated to internal vetting and risk assessment; this is a necessary cost of doing business. Requiring an Attorney Open Letter to open an account outsources risk management to attorneys and passing off the financial cost to small cannabis businesses who face surmounting costs to starting a compliant consumer cannabis company.

The current system of outsourcing risk assessment puts attorneys in an odd position. In this case, cannabis companies are the client, not the bank. Lawyers have an ethical obligation to their client: we cannot disclose information that could legally hurt a client and client permission is required on everything divulged by an attorney. That said, an attorney can withhold information but will face severe repercussions like sanctions, Bar hearings or losing their license for misrepresentation.

Longevity

Whether or not attorney opinion letters are an eternal roadblock for businesses looking to break into the cannabis/CBD industry is yet to be determined but attorney-client privilege is essential. To create a situation where attorneys vet and report on the compliance of their clients to aid them in obtaining necessary access to business banking puts that privilege in jeopardy. Not many other businesses require such an analysis in order to open a standard business bank account.

This new policy from banks and e-commerce platforms only pushes back the start line for those without startup capital, investors or a blank check from mommy and daddy. While financial institutions creating pathways for hemp and cannabis brands is a sign of the future cannabis market, this is an inappropriate and overly burdensome hurdle for businesses just trying to open a business bank account.