Tag Archives: payment

State of the US Cannabis Payment Processing Market: An Interview with Executives at KindTap and Aeropay

By Aaron Green
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Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and traditional payment processors have been cracking down on these offerings as they are often non-compliant with regulations and policies.

Two companies, KindTap Technologies and Aeropay, are addressing the cannabis industry’s payment processing challenges with innovative digital solutions geared towards retailers and consumers.

We interviewed both Cathy Corby Iannuzzelli, president at KindTap Technologies and Daniel Muller, CEO at Aeropay. Cathy co-founded KindTap in 2019 after a career in the banking and payments industries where she launched multiple financial and credit products. Daniel founded AeroPay in 2017 after a career in digital product innovation, most recently at GPShopper (acquired by Financial), where he oversaw the design and development of over 300 web and mobile applications for large scale Fortune 500 companies.

Green: What is the biggest challenge your customers are facing?

Cathy Corby Iannuzzelli, co-founder and president at KindTap Technologies

Iannuzzelli: Our customers include both cannabis retailers and their end consumers. As long as cannabis is illegal at the federal level, normal payment solutions such as debit and credit cards cannot be accepted for cannabis purchases. This has resulted in heavy cash-based sales and unstable, transient work-around ATM payment solutions that can be ripped out with little notice, disrupting the entire business. The lack of a mature payment network to support retail payments for cannabis purchases is a huge challenge for all stakeholders. Cannabis retailers bear the high cost and safety issues of operating a heavily cash-based retail business. Consumers encounter several friction points that require them to change their behavior when purchasing cannabis relative to how they purchase everything else.

Muller: Our cannabis business customers have faced a constantly changing and, frankly, exhausting financial services environment. From the need to move and manage large amounts of cash, to card workarounds, added to the disappointment from legislation around the SAFE Banking Act, these inconsistencies have acted as a roadblock to their potential growth and profitability. Aeropay is in the position to be a stable, long-term, reliable payments partner ready to help them scale their businesses. We believe these opportunities are limitless.

Green: What geographies have got your attention and why?

Daniel Muller, CEO and founder of Aeropay

Iannuzzelli: KindTap’s focus is on the U.S. market where federal policy has created the need for alternatives to traditional payment networks. KindTap is available in every U.S. state where cannabis is legally sold. In terms of our distribution channels, KindTap’s digital payment solution was brought to market during the COVID-19 pandemic when curbside pick-up and delivery became critically important. These channels are where the exchange of cash at pick-up posed the greatest security risk to employees and customers. Our early integrations were with e-commerce platforms focused on delivery and pick-up orders, and our integration partners have strong customer bases in California and the northeast. So, while KindTap can provide its “Pay Later” lines of credit and “Pay Now” bank account solutions anywhere, we have heavier penetration in those regions.

Muller: California, for its established tech culture and how it plays into the cannabis industry – your product simply has to live up to their tech standards to be heard. Also, Chicago, our headquarters, with its newly emerged commitment to financing the cannabis industry and bringing with it a more traditional business approach. In Chicago, you have to have elevated standards of professional practices in any industry you enter. And of course, we love to watch emerging markets like New York and Florida as they head towards adult-use and what shape cannabis and payments will take.

Green: What are the broader industry trends you are following?

Iannuzzelli: We continue to see a strong transition from cash and ATM transactions over to digital payments. Since KindTap has a fully-integrated payment “button” on e-commerce checkout screens, the adoption rate of end consumers to that one-click experience is quite strong. We are also seeing trends of more “express lines” in the retail environment – for those KindTap users who paid online/ahead – and faster/safer delivery experiences to people’s homes since there is no longer the need to collect any payment upon delivery. We are firm believers in the delivery/digital payments combination and a strong increase of that trend as more states allow for delivery.

Muller: The cannabis industry is starting to normalize payments and mirror traditional online and brick-and-mortar. With bank-to-bank (ACH) payments, cannabis businesses can now offer modern customer shopping experiences including pre-payment for delivery orders without the need for a cash exchange at the door, offering the option to buy online pickup in-store and contactless in-store QR scan-to-pay customer experiences. With these familiar and customer-driven options now available, we are seeing widespread adoption, as well as meaningful increases in spend and returning customers.

Green: Thank you both. That concludes the interview!

About KindTap: KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly-regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions. Learn more at kindtaptech.com.

About AeroPay: AeroPay is a financial technology company reimagining the way money is moved in exchange for goods and services. Frustrated with the current, antiquated payments landscape, we believe there is a better way to pay and a better way to get paid. AeroPay set out to build a payments platform that works for all- businesses, consumers, and their communities. Learn more at aeropay.com.

Payment Processing & Consumer Credit: An Interview with KindTap Co-Founder

By Aaron Green
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Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and payment processors have recently been cracking down on these offerings as they are often non-compliant with regulations and policies.

KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions.

We interviewed Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies. Cathy co-founded KindTap after a career in the banking and payments industries where she launched multiple financial and credit products.

Aaron Green: Cathy, thanks for taking the time today. How did you get involved in the cannabis industry?

Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies

Cathy Corby Iannuzzelli: I’ve been in the payments industry for a long time. I was doing some consulting a few years ago for a client in Colorado and that gave me exposure to the issues in cannabis like the fact that you couldn’t have real payments in cannabis. Then, a close family member with health issues turned to medical cannabis when nothing else seemed to work. I was amazed by the difference it made in her life. At that point, I put those two things together and I said, I need to focus on helping this industry get a real cannabis payments solution because I thought it was ridiculous that you had an industry of this size and importance that had been abandoned by the payments industry.

Aaron Green: Can you highlight some of your background prior to entering cannabis?

Corby Iannuzzelli: Throughout my career, I’ve been a banker, I’ve been a payment processing executive and I’ve been a consultant. So, I’ve kind of done it all in the payments and financial services space.

Aaron Green: Why is it that most dispensaries only take cash?

Corby Iannuzzelli: In the US, even though cannabis is legal in many states, it’s still illegal federally. There are big banks and card networks like Visa, MasterCard, etc., who are national, even global companies and frankly, the executives of those companies don’t want to end up in jail for violating national laws. So, they have put cannabis dispensaries on what’s called a “prohibited merchants” list. This means you cannot accept Visa, MasterCard, Discover, American Express, or similar payments as a cannabis business and so it’s forcing the industry to a cash-based solution.

About the only thing you’re seeing that’s not cash in dispensaries are ATMs. But if you think about it, ATMs are machines where the consumer goes and pulls cash out and pays upwards of $5 or more in fees for doing that. They then hand that cash back to the dispensary who then has the costs of having to deal with that cash. The industry is just stuck in a cash-based business until federal legislation changes.

Aaron Green: I’ve been to some dispensaries where they accept credit cards or debit cards. What is going on there?

Corby Iannuzzelli: I’ve heard reports of consumers who’ve been able to use a credit card or a debit card in a dispensary. Sometimes the processor who sold that solution to the dispensary says, “Oh, it’s compliant, I guarantee you it’s compliant.” But if you dig in, that’s not the case. And eventually, Visa or MasterCard figures it out and shuts it down. In some cases, it’s outright fraud where the processor who sold the payment terminal to the dispensary is misrepresenting it as say a doctor’s office rather than a dispensary. There’s no merchant category code in the payment networks that says this is for processing dispensary payments, so they pretend it’s something else until they get shut down.

When they do get shut down, I’ve heard of cases in Las Vegas where it was basically 100% Visa or MasterCard one day and 100% cash the next day. It completely disrupted the whole business. It’s not just the retail store, but the inventories and everything else throughout the business.

“About the only thing you’re seeing that’s not cash in dispensaries are ATMs”

There have also been some cases where you’ll see something called a cashless ATM. In a store, they call it a debit card transaction. It’s really a cashless ATM where the consumer is making what looks to the ATM network like a cash withdrawal in $10 or $20 increments, but the consumer is getting a receipt instead of cash, and they’re turning around and handing that receipt back to the dispensary who then makes a change because the cashless ATM only dispensed in $10 or $20 increments.

Now ATM networks are looking at these cashless ATM transactions to see if they are compliant. Do consumers know the fees that they’re paying? Are these transactions coming in and looking to the network like real cash when it’s not? Cashless ATM transactions are probably the most common thing you see, but that’s being called into question after the Eaze incident where a large company was misrepresenting its terminals. The federal government stepped in and called it bank fraud and the individuals behind it, the executives, are in jail. Since then, the networks are looking at this and saying, what about these cashless ATMs? Are those transactions within our rules, or is there something funny going on here?

Aaron Green: So, to summarize here: you’ve got federal regulations at the national level that says that cannabis banking is not allowed so major institutions are not offering it. Yet you found a way through the regulations and compliance issues. I’m curious can you pull back the curtains a little bit and tell us how you came up with a solutionhere?

Corby Iannuzzelli: Well, we came up with the solution by stubbornly refusing to believe that cannabis payment processing could not be done in a compliant manner. We just said, “there is a compliant way to do this, let’s figure it out.” We took the same components that are out there for the financial services and payments industry and reassembled them in such a way that we do not violate any rules. We do not use any of the Visa, MasterCard, Discover or Amex rails, we built our own network. We have direct contracts with the merchants and direct contracts with the consumers. We control everything and all the funds flow through regulated financial institutions. So, we designed something that looks and acts to consumers and retailers the way Visa and MasterCard look and act when a consumer goes to make a purchase, but they run on a separate set of payment rails and in compliance with banking regulations and state regulations. When you’re looking at the problem from a different perspective, sometimes you can come up with a better answer.

Green: On the consumer side, what does that user experience look like?

Corby Iannuzzelli: Our product is completely digital. The consumer experience starts with integration at the online checkout. When it’s an e-commerce shopping cart and somebody is placing an order, they will see a button called “Pay with KindTap.” The first time they click that button they’re automatically brought to our integrated web app where they do a quick and easy application for our digital revolving line of credit product. If approved, they instantly go back to the checkout screen and their first purchase will just happen immediately, with flexible payment options over time. If the consumer decides they don’t want our KindTap credit and would rather have a pay now-product where we pull the funds from their bank account, then the consumer can do so. So, there is no physical card per se, it’s integrated like PayPal or Affirm at the point of checkout online. For the consumers who use KindTap credit, there is a mobile app where they can see their transactions, view statements, pay their bills, etc.

Additionally, there is a loyalty program for all purchases – KindTap credit or through the consumer’s bank, because we feel very strongly that a lot of the reasons consumers choose to pay with one card over another is the points and the rewards that they get. So, we’re providing loyalty rewards with KindTap so that consumers can get rewarded for that spending with KindTap and it’s better for the retailers.

Green: On the retailer side, what does that experience look like and what is your business model?

Corby Iannuzzelli: We are not going store by store doing integrations, rather, we’re integrating with various software, delivery and e-commerce providers. That gives us broad reach and ability to expand rapidly in various state markets where cannabis is legal. Once a merchant says “yes, I want to be a member of the KindTap Merchant Network,” then we work to get them set up on our platform in a matter of days. The merchants receive continuous support from our success team, marketing co-investment and a depth of analytics reporting. We made the entire process and ongoing operations streamlined and frictionless for both merchants and consumers.

Aaron Green: What are the benefits of moving from cash to credit type of payments?

Corby Iannuzzelli: On the retail side, there are the obvious benefits of not having all the security, safety and theft issues associated with operating a physical cash business. Consumers very often don’t carry cash anymore, except when they’re making a cannabis purchase. There are a lot of hidden costs to retailers because payments are not just about moving money from the consumer to the business.

“I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out.”Payment options – or lack thereof – can shape where people shop, how much they spend and what they buy. It’s a proven science how consumers make impulse purchases. If you’re a cash-based business in cannabis, and you’re trying to get somebody to make an impulse purchase, and they walked in with $100, then you can’t get them to spend more than $100, no matter how creative your marketing is! The consumer is limited by how much cash they have in their bank account or in their pocket at that point in time. So, it’s really about the upsell that comes with the bigger basket sizes that retailers experience when you move from a cash-based business to credit and suddenly, the merchant doesn’t have to deal with long lines of consumers on payday when the store was beyond slow two days before. Now the consumer can spread purchases with the thinking, “I’d rather not be the one standing in that line on payday. I’m going to go Wednesday [instead of Friday] because I have KindTap credit so I can budget and manage my cash flow throughout the month rather than around my paydays.”

So, we think that the lack of an efficient and effective payment system for cannabis is holding back sales. We all focus on how much the industry is growing. KindTap thinks about how much faster it could be growing if it was supported by a decent payment system.

Aaron Green: What are some other cash-only markets you are looking at?

Corby Iannuzzelli: We are laser-focused on the cannabis ecosystem and bringing a compliant credit and loyalty-based digital payments solution to cannabis merchants and customers and rewarding those stakeholders for accepting/using KindTap. Additionally, we are planning to extend the KindTap Merchant Network so that consumers can use/earn our loyalty points with other goods and services they’re purchasing that are adjacent to cannabis or that are important to the cannabis consumer. That’s the direction we’re going.

Aaron Green: Today people can receive gas points for spending with their credit card. Now with KindTap, you can spend to get cannabis points?

Corby Iannuzzelli: That’s exactly right.

Aaron Green: What in either cannabis or your personal life are you most interested in learning about?

Corby Iannuzzelli: Personally, I am most interested in seeing breakthrough technologies in climate change. We’re going to need to correct this situation and I’m reading about collecting carbon dioxide from the air and burying it in the earth and things like that. I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out. Certainly, it’s going to take a lot of smart people and a lot of investment, but I really look forward to watching them do their stuff and hopefully taking us out of this nightmare situation that we’re heading into if we don’t make some changes.

Aaron Green: Thanks Cathy, that concludes the interview.

Corby Iannuzzelli: All right, thanks Aaron!

A Q&A with George Mancheril, Founder & CEO of Bespoke Financial

By Cannabis Industry Journal Staff
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Bespoke Financial was the first licensed FinTech lender focused on the legal cannabis industry. Founded in June of 2018, Bespoke offers four types of lending products: Invoice financing, inventory financing, purchase money financing and a general line of credit. With just over two years of originating loans to clients, they have benefitted from being a first mover in the cannabis lending space.

George Mancheril is the founder and CEO of Bespoke Financial. He has over fourteen years of experience in finance, with a special focus on asset-based lending, off balance sheet financing of commercial assets and structured credit. Following a stint with Goldman Sachs, he worked at Guggenheim Partners Investment Management’s Structured Credit Group in Los Angeles where he worked on structuring esoteric asset financing for a variety of commercial assets including airplanes, container leases and receivables.

Since 2018, Mancheril and his team at Bespoke Financial have deployed over $120 million in principal advances without any defaults and across eleven states. We sat down with Mancheril and asked him about the history of his business, how it’s been received so far and how the past few years of financial activity in the cannabis sector might shape the future.

Cannabis Industry Journal: What is Bespoke Financial in a nutshell?

George Mancheril: Bespoke Financial is the first licensed FinTech lender focused on the legal cannabis industry. Bespoke offers legal cannabis businesses revolving lines of credit that address the top problem in the industry – lack of access to non-dilutive, scalable financing to capitalize on growth opportunities and improve profitability. Due to the federal illegality of cannabis, traditional banking institutions cannot work with our clients even though these operators are working within the legal regulatory framework of their state. Bespoke solves this problem for businesses across the cannabis supply chain along with ancillary companies affected by the lack of access to traditional capital markets.

CIJ: How does your company help cannabis businesses?

George Mancheril, Founder & CEO of Bespoke Financial

Mancheril: Bespoke Financial offers 4 lending products – all are structured as a revolving line of credit but each allows our clients to access capital in a unique way based on their specific needs. Our Invoice Financing product, allows businesses to borrow capital against their Accounts Receivables in order to manage general business expenses, particularly if the borrower’s business growth is slowed due to a long cashflow conversion cycle. Inventory Financing and Purchase Money Financing allow our clients to finance payments to their vendors, which helps our clients achieve economies of scale by increasing their purchasing power. Lastly our general Line of Credit allows for the most flexibility for our clients to utilize our financing by either financing payments made directly to vendors or drawing funds into the client’s bank account to manage business expenses.

CIJ: I know the company is only a few years old, but can you tell me about your company’s success so far?

Mancheril: [Clarification, Bespoke was founded in June 2018 so we’ve been around for 3 years but we now have over 2 years of originating loans to clients.] Bespoke Financial has benefitted by being a first mover in the cannabis lending space as the first licensed lender specifically addressing the financing needs of cannabis operators, starting in early 2019. Over the past 2 years we have developed and refined our proprietary underwriting model to identify over 50 active clients spanning the entire cannabis supply chain. Since inception, Bespoke has deployed over $120 million in principal advances without any defaults to date and expanded our geographic footprint across 11 states. Our growth and success highlights our company’s expertise in structuring financing solutions which address the unique capital needs of cannabis companies.

CIJ: Can you discuss how the recent M&A activity, current and recent market trends, as well as the pandemic has affected your company’s growth?

Mancheril: The cannabis industry overcame a variety of challenges presented by the COVID-19 pandemic, ending the year with record sales in both new and existing markets. The support from state and local governments, evidenced by the industry’s essential business designation and the easing of regulations, coupled with increasing consumer adoption of cannabis combined to increase the industry’s demand for capital throughout the pandemic. Bespoke was well positioned to partner with cannabis companies across the supply chain and was proud to help our clients thrive during this pivotal period.

Jeeter was able to grow sales over 1,000% within the first year of working with Bespoke

Coming into 2021, the cannabis industry and investors shared a very positive outlook for the future based on the previous year’s experience and expectations of material easing of federal regulation. While M&A activity in the industry has increased over the past 6 months, the overall consensus has been that both the frequency of exit opportunities and the corresponding valuations will continue to increase as federal decriminalization opens new sources of capital and materially changes investors’ valuation assumptions. In general, we’ve seen cannabis companies focused on both capitalizing on the increasing opportunity presented by the industry’s organic growth and maximizing the benefits of future regulation changes by utilizing the resources and capital currently available to increase revenue, expand into new markets, and work towards profitability. All of these factors have further compounded the industry’s demand for financing and we expect to see continued growth in our lending activity in line with the industry’s growth.

CIJ: Who has been your most successful client?

Mancheril: We have a handful of cases studies and client success stories here on our website. One of the most exciting growth stories we have seen has been our client DreamFields whose in-house brand, Jeeter, is now the #1 pre-roll brand in the state of California. Prior to working with Bespoke, the brand was not ranked in the top 25 but was able to grow sales over 1,000% within the first year of working with us and achieve the #1 spot in their product category.

2020 Financial Trends for the Cannabis Industry

By Melissa Diaz
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The past year has been another strong year in cannabis. Investors continued to pour money into the burgeoning industry — surpassing 2018 investment totals in just 40 weeks — and new markets opened up for recreational and medical cannabis. And following the passage of the 2018 Farm Bill, CBD has proliferated and become one of the hottest health supplements in the country.

But as the year winds down, the industry appears to be poised for a more challenging shift in the new year, as once-heady expectations for some big companies don’t pan out and some states clamp down, rather than loosen up, certain regulatory hurdles.

Here are some financial trends to keep an eye on in cannabis over the next year:

Finding New Capital Investment Will Be Tougher

After an initial investment boom in recent years, cannabis investors are realizing not everything colored green turns to gold. With public cannabis companies not performing as well as hoped and restrictive tax laws still plaguing the industry, investors are growing more cautious when it comes to cannabis. Add in other macroeconomic trends that are pointing to a global economic slowdown, and 2020 is shaping up to be a tough year to find cannabis capital.

Image: Flickr

That’s not to say funding will completely dry up, but operators and business owners must be aware that investment deals that perhaps closed in a matter of days in previous years, likely will take weeks or months while investors dig deeper into books and perform higher levels of due diligence before inking a deal. This means cannabis businesses must carefully plan and watch their cashflow and pursue fresh capital or investment earlier rather than later.

Expect More M&A and Consolidation

With the green rush reaching a crest of sorts, reality is setting in for some smaller cannabis operators. Expect to see more consolidation with smaller dispensaries and cultivators being bought up and absorbed by the big kids. More limited capital and investment options coupled with continued regulatory and legal uncertainties mean unsustainable operating costs for independent and smaller operators, which means the only way to survive may be to sell to a larger player.

New Markets & Regulations

The new year brings new states opening up to recreational or medical cannabis sales, as well as newer or altered regulations in existing markets. Cannabis firms must keep an eye on these new markets and regulations to best determine whether they plan to expand or not.

How stringent or lenient regulations are written and executed will determine the size and viability of the market. One state may severely limit the number of licenses it issues, while others may not put any limit. For example, Oklahoma issues unlimited licenses to grow hemp at $1,500 a piece. While that sounds promising for smaller hemp producers, it also could potentially lead to an oversaturation in the market. On the flip side, a more restrictive (and costly) licensure structure could lead to a far more limited market where only the industry’s largest players will be able to compete.

Image: Cafecredit, Flickr

Cannabis businesses also should keep an eye out for new regulatory hurdles in existing cannabis markets. For instance, California is raising its excise tax on cannabis beginning Jan. 1. That will result in higher costs for both consumers and cannabis companies. High state and local taxes have been a challenge industrywide because they make legal operators less competitive with the illicit market. Also, a proposed rule in Missouri could ban medical cannabis operators from paying taxes in cash. Such a rule would prove problematic for an industry that has had to rely on cash because of federal banking regulations. 

Credit Card Payments

While cannabis businesses may face several new and recurring hurdles in 2020 on the financial front, at least one looming change should make business easier: credit card payment processing. Because of cannabis’ continued banking woes, dispensaries and other plant-touching operations have not been able to accept credit cards. Though federal banking limitations remain in place, in 2020 we will see payment processors introduce new, creative and less expensive ways to navigate current banking limitations that will allow cannabis sellers to take credit cards. Opening up payments in this way will not only make transactions and record keeping easier for customers and businesses alike, it also will attract consumers who don’t use cash.

While some of these trends may prove challenging, in many ways they are signs that the cannabis industry is shifting and maturing as we enter a new decade. Many hurdles remain, but the size and momentum of the industry will only continue to grow in 2020 and beyond.

Marguerite Arnold
Soapbox

Paradox or Paragon? A Non-Techie Look at Blockchain, Cryptocurrency & Cannabis: Part II

By Marguerite Arnold
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Marguerite Arnold

Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.


To read the first part of this series, click here. The Paragon class action lawsuit is likely to shake up two industries – the cannabis world, which has been following this situation at least in the industry press since the company began to raise money – and the ICO space in general. Why? Just the combination of the two topics is a guaranteed conversation starter. In addition, given the focus on whether tokens are securities or not (or whether so-called “utility tokens” are as well, depending on how they are used and sold) far beyond cannabis, this case may well begin to set precedent on the entire subject. Even more worrying for Paragon in particular right now, beyond the federal government, coordinated efforts are underway by both law firms and consumer groups to recruit aggrieved investors as suit plaintiffs. Beyond the United States and far from the Paragon case specifically, banks in Europe have begun to set guidelines on cryptocurrency and ICOs too. It is not routinely hostile everywhere (see Switzerland if not many Asian countries). But the map is now being defined.

The dilemma that Paragon is now facing is also something that has been coming for some time both for the company and others like them – and from both the cannabis investment and crypto coin directions. Digitally astute cannapreneurs take note: Do you really want your dream business used to define precedent as a defendant in a class action? Or targeted by the new SEC cyber unit whose job is to regulate ICOs (and probably “crowd sales” too?). That regulatory glare is coming everywhere. And soon. Globally.In the world of cannabis, in particular, it is also very important to be careful.

If issuing tokens, particularly if you sell them to raise money – no matter what that money will be used for – realize what you are doing. Even if you state to the world that these are not “investment” vehicles” but “utility” tokens. If you sell them, they are by definition, even if not federally litigated and defined yet in the United States, a contract for future worth, services or other benefit. An IOU in other words. As such they are also derivative securities, which is why the regulatory agencies, barely 10 years out of the last global financial meltdown, are now starting to see parallels. So much so, in fact, that SEC Chair Jay Clayton warned in January that any attorneys who are involved in ICOs might be in breach of professional obligations. Other jurisdictions are following suit.

In the world of cannabis, in particular, it is also very important to be careful. Selling (soon to be federally if not internationally regulated) tokens or securities in general for that matter for certain services or products that can be illegal in some jurisdictions is also a space that cannapreneurs are going to find challenging. See the banking problems of the entire U.S. cannabis industry. Same issue.

This is also going to get even more complicated very soon. Particularly in a world of shifting regs and when it comes to “brand creation.” Right now, for example, a crowdfund or ICO (the terms can be used interchangeably, token issue or not) for a “global cannabis lifestyle brand” promoted and sold online is highly problematic just about everywhere. Why? You cannot transport cannabis across state lines in the U.S. Americans and Israelis also still cannot export anywhere. You also cannot sell what is considered “medical” marijuana to a European regulator if it is not GMP certified. It is, according to local definition, most certainly not “medical”. You may also not distribute cannabis online in countries like Germany. And of course, cannabis itself is still federally illegal in many places, including the United States. Issuing a token or security with the intent of engaging in such practices is ill advised at this juncture. No matter what it is labelled.

Those are also situations where investors could legitimately also sue the ICO or crowd sale holder for breach of securities laws or outright fraud.

Beyond the world of banking law, users face other quagmires, depending on your situation and how you use and issue tokens. Or you certainly will in the emerging future. If you use tokens in situations where members “vote” you may also run into other problems. Like civil liberties issues. Poll taxes (where you force people to pay before access to voting or weigh the impact of their votes on financial contributions) is illegal in many jurisdictions and even more specifically certain use cases that may not always be initially obvious. How that plays out in blockchained ecosystems is a discussion of the future, but it is coming. Along with other labour and regulatory issues surrounding the use of “smart contracts.” Which are also known as “utility tokens.” See, it gets confusing. And fast.

In the cannabis space, liabilities sprout more quickly than even the fastest growing strain.As a result, the first major issue that any cannabis business considering a token generation event (or TGE) will face, no matter whether it is state or federally legit in said jurisdiction, has nothing to do with cannabis but rather rather cryptocurrencies and ICOs – and for right now federal if not international financial law – but look for that to also change as the space develops.

For the present, in most places, token issues where monetary value is assigned or implied are considered securities or even defined outright as currency. Or they will be soon. This means that if you are issuing a new coin for any purpose that you intend to sell for any purpose, including an ICO, especially one that will supposedly be used to pay for goods or services, or even to “assetize” the token to give it a market value (the value of the asset it is assigned), you are now in the federal end of the swimming pool. And federal if not international law is not for novices or sissies much less non-lawyers when it comes to crypto coin. There are great white sharks everywhere in this often-strange digital ocean. That is even before you get to cannabis.

In the cannabis space, liabilities sprout more quickly than even the fastest growing strain.

This is also easy to illustrate – even beyond the concept of an ICO. Say you are a cannabis producer in Colorado – where much of the legal cannabis industry we know today was born. You are in business, have a license and even own your grow space and the acres of real estate that it sits on. But you also want to access additional capital (including that of the international kind) and are, as an aside, overwhelmed by the demands of your cash business. You meet an energetic young blockchain geek who says she can sign you up to her service that will create your white paper, website and even hook you up to one of the several “insta-mint” crypto coin services now available for several thousand dollars (don’t forget lawyer’s fees), plus hiring a good PR firm to manage the ICO process.

Groovy.

You issue your own coins and literally mint them for the sole purpose of assigning each coin to every dried gram of your product that you produce to test the market before potentially holding an ICO. You then “sell” this bud (at wholesale prices) to a dispensary with a wallet that will accept your coin via a smart contract that only releases the funds when the right amount and quality of product is delivered to the dispensary. As a clever marketing technique, you also agree with the recreational dispensary you are working with (who happens to be in Aspen) that you both will also now offer jointly issued coins, at a higher retail price, to any tourist with a medical card or any age-appropriate recreational user who has the ID to prove it, to “pre-buy” their cannabis on the way to après ski and have it delivered, no questions asked, at the hot tub. You advertise the service with a cannabis-friendly ski package operator and travel agent, and voila – customer base is assured. If you have any celebrity friends who are willing to promote it, even better. And why not, while you are at it, do some LinkedIn outreach.

No cash needed either. ID verification happens with coin purchase.

Easy, right? So many headaches solved with one coin to rule them all. Banking issues evaporate along with a lot of work for accountants at both ends of the conversation. And the price of the coin you issue cannot be illegally pumped and dumped because the “price” is set by the state or federal market and/or supply and demand and/or another kind of asset (like a piece of real estate designed to be a startup incubator space for which people also pay entrance fees in your tokens, to enter and use). Then you can offer these “coins” for sale, at those market prices, set by the dried bud you are growing, to anyone, anywhere, to invest in too. Right?

No ICO, even. No problem. After all, you say they aren’t securities but “utility tokens.”

Wrong.

By definition, such activity is illegal in the United States if it has anything to do with the plant for the same reasons the U.S. industry remains a mostly cash-only business. There are several U.S. start-ups trying to construct “legal” payment gateways for the industry right now in the lower 48 plus 2 (see CanPay in Hawaii) and some creative efforts in Europe. However, all of those depend on the willingness of a banking institution on the other end to allow that to happen. See Uruguay if you still remain optimistic about any American efforts right now. Not to mention the newly awoken willingness of the federal DOJ to prosecute for money laundering in a post-Cole-memo world. And that includes you too, California.

But this is an issue that is not just limited to the United States.

In other places, like Canada, Australia, Israel and the Eurozone, legitimate cannabis businesses have bank accounts. And banks are absolutely involved in both the blockchain and crypto space – see Ripple. As a simplified payment gateway, the technology is imminently useful, if still forming. But banking authorities are so concerned about ICOs that they are moving, quietly, to implement policies against them even as they are still accepting cyber currency (in limited ways and via strictly controlled channels).

Given such concerns and divided loyalties, it is unlikely that authorities in Canada will sit this one out, even though (and perhaps because), to date, the most intriguing ideas about cryptocurrency and cannabis have tended to waft from this part of the world lately given what is about to happen this summer.

Most dangerous of all to the budding crypto cannapreneur is Germany – home of legal, public health insurance covering medical cannabis. Banking regulators in Frankfurt, in particular, have taken a dim view of even just regular old crowdfunding. Add a token into the mix and the Germans are even less amused. The persistent rumor in the Fintech community in Frankfurt this March is that German banking authorities are refusing to accept any funds raised during an ICO anywhere. Verboten for any purpose. Why? Even if they know who you are, and all of your investors meet their KYC requirements, they do not know the source of the cyber currency coming from those investors. No dice. And KYC in this instance does not refer to a new brand of cannabis-flavored lubricant. It is a term that means, in the most comprehensive understanding of how it must be used, not only “know your customer” but being able to verify all points of data on a chain. Including the coin issuer, purchase conditions, currency used to purchase the same and “chain of title” downstream. If you are confused by this already, you should not be engaged in an ICO right now.Not all of these models or even the ICOs that use them are scams.

Add cannabis to this recipe, and every bank in Germany, even the one at the moment who is still more or less openly participating in ICOs, if not the rest of the European financial community, will probably walk. Even if you reach your “hard cap” (the maximum amount you hope to raise) that might be in the tens if not hundreds of millions of euros. In that case, it will probably be even harder to find a bank to accept your business. Worse, you may never raise the amount you hope for. At that point, you cannot go back to traditional venture capitalists – or anyone else – for more money. You are done. You must start over from scratch. If there was an asset of any kind involved (including a license to do business) legally, everyone who holds a coin owns a piece of it. See securities law. This is precisely why you can never raise money again against that asset or with the corporate entity that owns it. Or at least not without a lot of legal fees or begging your peeved investors for more money. Legally, at that point, they could require you to sell all assets associated with the corporate entity holding the ICO. And they probably would. For investors that is the best-case scenario. ICOs for concepts with no assets or strategic partnerships in place at the time of the “token sale,” create many lose-all scenarios for investors.

There are many pitfalls to this world – and not just from the cannabis side.Issuing a “token” that someone has to pay for that acts like cash (even if to buy goods and services in the future from other members of the ecosystem and social community that crypto coins create) that also is vulnerable to market pricing, is another quagmire. In fact, it might be, beyond any techno or financial queasiness about blockchain, the biggest reason that this industry should look, and with considerable caution, at all tokenized and ICO models that also premise their worth on the idea that such coins will inevitably increase in worth over time. There is also anti-cartel, monopoly and market discrimination to consider.

Not all of these models or even the ICOs that use them are scams. There are and will be valuable alt currencies and tokens in the future (even without a cash value assigned). All of the top start-ups in the current ICO space, in fact, are finding unique ways to create a real alternative currency with values attached that are indisputable. And not all of them will succeed.

However, that is not true of the cannabis business at this juncture. The plant, much like cryptocurrency and beyond that, blockchain itself, has not reached mainstream status yet – starting with market economics and regulation that is already international. A pot-based coin, no matter where it is issued and by whom (including a federal government), would run into multiple issues with valuation just because the price of cannabis itself right now is so volatile, not to mention unevenly priced thanks to jurisdictional restrictions and barriers. For that reason, there is no way to issue a “cannabis coin” with global relevance, much less global value.

And that, of course, is beyond the issue of subsequently selling those coins on exchanges that have been repeatedly hacked, fail to give customers access to their accounts, or are, in the case of China, banned outright (which also deemed ICOs illegal last September).

There are many pitfalls to this world – and not just from the cannabis side. Part III of this series will look at some of the biggest opportunities when cannabis integrates with the DLT (distributed ledger technology).

KIND Financial Launches Canadian Payment Solution

By Aaron G. Biros
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KIND Financial, a technology and compliance software solutions provider in the cannabis industry, is launching a new e-commerce and payment processing platform in Canada. According to the press release, they are partnering with a Canadian bank to launch the KIND Seed to Payment platform, which is essentially an e-commerce gateway integrated with their compliance software, KIND’s RegTech platform.

David Dinenberg, founder and CEO of KIND Financial

David Dinenberg, founder and CEO of KIND Financial, says this is an approach to help alleviate the cannabis industry’s banking woes. “We’ve been very focused on a global vision and taking a strategic approach towards solving the cannabis industry’s largest problem – banking,” says Dinenberg. “Not only have we built a broad portfolio of finance and compliance solutions with a high-level of technical sophistication, but we’ve made a strong commitment to security and compliance, which is evident through our partnership with Microsoft.” A little over a year ago, they entered a partnership with Microsoft to utilize their cloud-based solutions for government traceability software.

According to the press release, the software has regulatory and security features built in, such as age and identity verification, which can help companies comply with security and chain of custody regulations. “Our mission is to ensure business and technological growth for all constituencies within the cannabis industry while ensuring full compliance with evolving regulations, and that’s why we’re thrilled to make these services available to our great neighbors in the north,” says Dinenberg. “We understand compliance will be a critical issue for some time to come, but with our solution, all providers and their partners can focus on the job at hand while keeping in line with regulatory mandates.”

KIND Financial has not done much work in Canada previously, but this could be a sign of a greater push for international expansion. “We’re excited to be working in a new country to boost the Canadian cannabis industry in a safe and regulated manner, and we look forward to expanding into other markets overseas,” says Dinenberg. The press release says the new platform is designed to work with different languages and foreign currencies, including the euro and Australian dollar, which could help Canadian producers enter emerging markets.

In addition to their announcement of the KIND Seed to Payment platform, the company also announced they will be rolling out a mobile payment system called KIND Pay, a digital payment option for consumers that will accept Visa and MasterCard. They anticipate that KIND Pay will launch before the end of this year.

NCIA, CCIA Host Fundraiser For Those Impacted By CA Fires

By Aaron G. Biros
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On Monday, the National Cannabis Industry Association (NCIA) sent an email announcing their Cannabis Industry Fire Relief Fundraiser in Santa Rosa, CA on November 6th. Co-hosted by the California Cannabis Industry Association (CCIA), the fundraiser will take place 6:30-9:00 p.m. at the Hyatt Vineyard Creek (170 Railroad St, Santa Rosa, CA 95401). All proceeds from the event will go to the Redwood Credit Union’s North Bay Fire Relief Fund.

According to the announcement email sent on Monday, the North Bay Fire Relief Fund, established in partnership with California State Senator Mike McGuire and The Press Democrat, provides financial support for relief efforts to displaced victims of the fires. Representatives of the fund will also be on hand at the event to take cash donations directly.

The fundraiser will have sponsorship opportunities and host committee sponsoring for companies looking to participate. All of the money raised from sponsorships will be donated to the same relief fund.

According to Lindsay Robinson, executive director of CCIA, this is an opportunity for the cannabis industry to help the community rebuild. “The devastation caused by the Northern California wildfires are unmeasurable, yet the sense of community and humanity displayed in this tragedy reminds all of us of our commonalities and not our differences,” says Robinson.  “I’m hopeful this event will raise much needed funds to help our friends and neighbors rebuild. The cannabis industry is here to help.”

When we reported on the wildfires impacting communities and cannabis businesses, we provided a link to a fundraising campaign specifically designed to help victims in the cannabis community. Citing federal laws prohibiting dealing with controlled substances, the payment processor of that campaign, WePay, refused to actually give the $13,000 raised to the victims. This is just one reason why this NCIA & CCIA fundraiser is so important. This gives those in the cannabis industry who want to help an effective route to do so, knowing their money will immediately go to help the victims.

Hezekiah Allen, a confirmed speaker at the November 6th fundraiser and executive director of the California Growers Association told reporters last week they are hopeful that the $13,000 will actually be given to the victims, but are unsure if that’ll be the case. “We’ve got folks who have needs who we would like to start like to start helping,” says Allen. “We’re still hopeful that they’ll process those payments. We’re waiting with fingers crossed.”

For tickets, sponsorship opportunities and more information please go online and register for the event or make a donation here.

Harborside, CanPay Announce Partnership, Launching Debit Payment System

By Aaron G. Biros
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CanPay, a debit payment solution for the cannabis space, announced today their partnership with Harborside, the largest medical dispensary brand in the United States. The partnership will allow Harborside’s more than 200,000 patients to use a mobile debit app when purchasing cannabis through their delivery service, instead of bringing cash.

For deliveries, patients would use the CanPay app on their device “to generate a secure, single-use payment token that includes no personal identifiable information,” according to the press release. A Harborside delivery employee scans the token and the money is transferred from the patient’s checking account to Harborside. This allows for delivery employees to make less cash transactions and affords patients the luxury of not having to take out cash to get their medicine.

Harborside, founded in 2006, is recognized as the largest nonprofit cannabis dispensary in California, and the United States. They were reportedly the first dispensary to lab test their products. Being an advocate for patients and their safety, they offer a variety of free health and wellness services. “It’s important to us that we stay on the forefront of patient care and access to the products our community needs to improve their quality of life,” says dress wedding, co-founder of Harborside. “CanPay enables us to continue delivering on those goals by normalizing the payment process for our patients and staff.”

CanPay launched last year in November and has since expanded to over 50 dispensaries and six different states. The premise of their system is a secure and safe transaction for customers or patients of dispensaries. “To ensure privacy and security, all purchases are made using non-identifiable, single-use, and random payment tokens generated in the CanPay App,” reads the press release. CanPay is currently serving businesses in Washington, California, Colorado, Maine, Florida, and Oregon.

Dustin Eide, CEO of CanPay

“Patients who rely on cannabis for preexisting medical conditions should not have to be inconvenienced or have their safety put at risk by a cash-only model,” says Dustin Eide, chief executive officer of CanPay. “Delivery is a mainstream solution and payments should be able to keep up with the industry. By partnering with Harborside, we are providing their patients the benefits of more secure, transparent transactions.” According to Eide, their service is compliant with federal medical cannabis policy and guidance. “CanPay’s service operates under compliance programs built around the Cole Memo and FinCEN Guidance issued by the Department of Justice and the Treasury, respectively, and updated on Feb. 14, 2014 which provided guidance to financial institutions on the conditions with which they can provide banking services to the state regulated cannabis industry without incurring federal action,” says Eide. “Also, CanPay utilizes the Automated Clearing House (ACH) network to affect our services in full transparency. While Visa and MasterCard have established clear rules prohibiting cannabis transactions on their networks, the ACH network relies on the individual financial institutions to determine what type of transactions may occur.” Because of that, Eide says, there’s no need to hide transactions, unlike services that use Visa or MasterCard that require using an obscure legal entity name or a financial intermediary’s name.

According to Dustin Eide, CanPay is designed to be a long-term solution for the cannabis industry’s cash transaction woes. “At approximately 2% fees to the dispensary (and no cost to the consumer), CanPay will be a low cost payment service compared to Visa and MasterCard when they do enter the market, which we’ve been told by our contacts at the companies that this won’t be until federal law changes,” says Eide. He thinks that when MasterCard and Visa begin working with cannabis businesses, they will charge higher transaction fees in the 3-4% range, given the high-risk nature of the market. “CanPay’s challenge is to gain sufficient breadth of coverage with dispensaries and adoption among cannabis consumers to be able to offer that value on a wide scale prior to Visa and MasterCard’s entry into the market.”

Looking to the future, Eide hopes the partnership with Harborside will lead to more business. “CanPay couldn’t ask for a better partner to enter into the California cannabis market, which is expected to top $20 billion by 2020, than Harborside, one of the world’s most respected and well-known cannabis organizations,” says Eide. “It is an honor to be chosen by Harborside, who has their pick of services for the cannabis industry, to facilitate their cashless delivery payments and enhance the safety and convenience of purchasing medicine from Harborside for both their patients and their employees.”