The banking industry has been reluctant to get involved in the cannabis sector, but a move by Bank of Montreal (BMO) could be an industry game changer.
On Jan. 17 Ontario-based Canopy Growth Corporation (TSX: WEED) issued a press release announcing that Bank of Montreal-owned BMO Capital and GMP Securities had underwritten a $175 million stock sale of more than five million shares which is valued at $34.60.
The Bank of Montreal is the first of Canada’s “Big Five” banks to finance a publicly traded company in the cannabis space.
U.S. Role in Canadian Cannabis Banking
As one of the largest banks in Canada, BMO took a significant risk by doing this deal with Canopy. Many of BMO’s counterparts in the Canadian banking sector have been avoided participating in the cannabis industry because many do business in the United States where marijuana is federally illegal.
The larger Canadian finance sector became even more afraid of investing in cannabis when U.S. Attorney General Jeff Sessions rescinded the Obama administration’s Cole memo-signaling that the U.S. would begin cracking down on cannabis businesses-even those operating legally under state law.
Marijuana in the Canadian Finance Sector
Canada’s pending legalization of recreational marijuana has sparred a green rush in the financial sector. Smaller financial companies like GMP Capital Inc invested in the industry early on and had seen the benefits of those initial investments. According to Reuters, GMP Capital and Cannaccord have “surged as much as 67 percent and 110 percent respectively since November 2017, when marijuana stocks started to take off.”
Companies in the cannabis space have been waiting for the larger and more established banks to invest in the business. The move by BMO is seen as the “canary in the mine” for other larger Canadian financial institutions to get involved with the budding marijuana business. However, some remain hesitant to enter the marijuana economy.
After the announcement of the BMO-Canopy deal, institutions like the Bank of Nova Scotia told the National Post, “we must balance that with our commitment to effectively manage all business risks.”
Support from the larger banks is seen as another way to legitimize the cannabis industry which has been stigmatized for its black-market beginnings. Many in the industry believe that more deals similar to the Canopy announcement will pop up before July when the country goes recreational.
This potential wave of large financial institutional funding could offer more opportunity for investors as well as the ability to negotiate a better stock rate for the marijuana industry.