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NextGen Magazine

 
 

Federal Cannabis Legalization Will Happen Eventually; Until Then, Investors Beware.

By:
S.J. Steinhardt
Published Date:
Nov 29, 2023

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Despite the drops in the value of cannabis-related stocks since early 2021, its potential legalization could lead to a boom in the industry, experts told CNBC.com.

“Legalization of cannabis is inevitable,” said Jaret Seiberg, a policy analyst at TD Cowen. “It’s just a question of how bumpy the next several years are going to be.”

Medicinal cannabis use is legal in 38 states, and 24 states, three territories and the District of Columbia now allow recreational use among adults. More than half of Americans now reside in states where cannabis is legal, and 70 percent are in favor of legalization, a recent Gallup poll reported.

A big roadblock for cannabis firms is its continuing classification as a Schedule I narcotic, which prevents U.S.-based businesses from transporting their product across state lines. That illicit status also makes it difficult for cannabis firm to secure financing and investments from major financial institutions.

But changes are in the offing; in August, the U.S. Department of Health and Human Services (HHS) made an official recommendation to the Drug Enforcement Administration (DEA) to move cannabis from its status as a Schedule I controlled substance to Schedule III. Such a move could lead to the availability of federal tax deductions and credits.

On the legislative front, the Secure and Fair Enforcement Regulation (SAFER) Banking Act, was passed by a Senate committee in September. If passed, the legislation would allow cannabis businesses to access regular banking services. An earlier version of this legislation, the SAFE Banking Act, passed the U.S. House of Representatives six times since it was introduced in 2013, most recently in 2021. The new House Speaker, Mike Johnson (R-La.), opposes marijuana legalization, however, having called it a “gateway drug,” Politico reported.

But investors still must bet that nationalized legalization will lead to a boom in cannabis stocks. One cannabis executive urged caution.

“There’s still time to get in, but not all companies and markets are created equal,” Brady Cobb, founder and CEO of Sunburn Cannabis, told CNBC.com. Some firms went into major debt hoping to grow across multiple states, leaving themselves in a financially precarious position, especially if there are delays to legalization, he said.

Potential investors may need to do extensive research to pick the winners once legalization occurs, but they need to bear in mind that the “the vast majority” of the industry consists of companies that are dependent on reform. “A lot of these things are not going to make it,” Morgan Paxhia, founder of Poseidon Investment Management, told CNBC.com.

“It won’t be weeks or months” for true reform to happen, said Seiberg. “This is measured in years. Court cases take time. Legalization isn’t close to advancing on Capitol Hill. And rescheduling is important, but creates new headaches that don’t get to you to full legalization.”