The green rush is upon us. According to a recently released report from Marijuana Business Daily titled "Marijuana Business Factbook 2017," legal marijuana sales -- this includes recreational and medical pot -- are slated to grow by 30% in 2017, about 45% next year, and catapult a total of 300% between 2016 and 2021 to north of $17 billion in the United States. This rapid growth has marijuana stock investors flocking into the industry, businesses scurrying to open up shop, and even has select governments scrambling to find ways to generate tax and licensing revenue off of cannabis.
For instance, Colorado, which was one of the first two states to legalize adult-use cannabis back in 2012, wound up selling slightly over $1.3 billion in legal weed in 2016. This more than 30% rise in year-over-year legal sales translated into almost $200 million in tax and licensing revenue for the state. Colorado has apportioned a good chunk of this tax revenue for its educational system, as well as law enforcement and in-state drug-abuse programs.
Federal law keeps the marijuana industry from thriving
Yet in spite of the pot industry growing like a weed, U.S. federal law provides a veritable glass ceiling that makes life exceptionally difficult for marijuana-based businesses. Keep in mind that, despite 28 states having legalized medical cannabis and eight states legalizing recreational pot, federal law still lists marijuana as a schedule I substance.
This means it's on par with heroin and LSD, has no medical benefits, and is entirely illegal. The only saving grace for the marijuana industry has been the Rohrabacher-Farr Amendment, which essentially prevents the use of federal funds to prosecute businesses that are abiding by their state's laws on medical and/or recreational weed.
But being listed as a schedule I substance means a world of additional disadvantages. For starters, running clinical trials involving cannabis is extremely challenging given its scheduling. Weed-based companies also face pretty sizable tax disadvantages because IRS tax code 280E disallows businesses that sell federally illegal substances from taking normal corporate-tax deductions. And finally, marijuana companies have a hard time obtaining basic banking services, since most financial institutions could be prosecuted for dealing with cannabis businesses under a strict interpretation of the law.
And don't expect this scheduling to change anytime soon. The U.S. Drug Enforcement Agency (DEA) in August of last year had the opportunity to review cannabis for rescheduling, but ultimately chose to keep its categorization the same.
Furthermore, the appointment of Jeff Sessions as Attorney General all but squashed any hope of federal change. Sessions, while in the Senate, was an ardent opponent of marijuana, and has made his feelings about the drug well known.
Sessions wants to go after medical marijuana businesses
Don't think for a moment that a little thing like not receiving any federal funding to go after marijuana businesses is going to stop Sessions. According to a letter that was first obtained by Massroots.com and verified by The Washington Post, Sessions sent a letter in May to Congressional leaders requesting the repeal of the Rohrabacher-Farrr Amendment so that he may lean on federal law to trample state's rights and prosecute businesses that deal with medical marijuana.
Here's what Sessions had to say about the Rohrabacher-Farr Amendment:
"[It would] inhibit [the Justice Department's] authority to enforce the Controlled Substances Act. I believe it would be unwise for Congress to restrict the discretion of the Department to fund particular prosecutions, particularly in the midst of an historic drug epidemic and potentially long-term uptick in violent crime. The Department must be in a position to use all laws available to combat the transnational drug organizations and dangerous drug traffickers who threaten American lives."
The request to undo Rohrabacher-Farr is one that Sessions is unlikely to win. A recent Quinnipiac poll found 93% of respondents supported the idea of legalizing medical marijuana nationwide, meaning rolling back the ability of states to grant access to medical cannabis could cause an uproar among voters.
Similarly, President Trump pledged support for the right of states to choose whether or not they want to allow their residents access to medical cannabis during his campaign. It seems unlikely that he'd allow Sessions the opportunity to prosecute medical weed businesses after publicly taking the position he did.
Another issue is that Sessions' argument regarding "an historic drug epidemic" doesn't entirely hold water. While there are still plenty of tests left to be run on the risks and benefits of marijuana, an interesting correlation noted by researchers in Health Affairs last year found that opioid prescriptions issued under Medicare dropped in states that had legalized medical cannabis. Considering there were 20,101 opioid-related overdose deaths in 2015 and zero weed-based overdose-related deaths in 2015, the arrow is pointing toward the possibility of marijuana offering some relief to the opioid epidemic, not an exacerbating factor as Sessions suggested in his letter to Congress.
Marijuana stocks can breathe a (partial) sigh of relief
Considering that there's bipartisan support for Rohrabacher-Farr in Congress, Sessions' request to go after the medical marijuana industry seems highly unlikely to be approved. That's good news for businesses focused on medical marijuana products, such as Southern California-based Medical Marijuana, Inc. (MJNA -5.56%), which has investments in nutraceutical and medical cannabis businesses. Medical Marijuana, Inc.'s bread and butter are cannabidiol (CBD)-based products -- cannabidiol is the non-psychoactive component of marijuana -- which Sessions would have cracked down on.
It's also good news for drug developers focused on using cannabinoids from the cannabis plant. For example, GW Pharmaceuticals (GWPH) has produced stellar results from multiple late-stage studies for CBD-based oral medication Epidiolex as a treatment for two rare types of childhood-onset epilepsy. Taking away Epidiolex from future patients, assuming it's approved by the Food and Drug Administration, would remove a drug that significantly reduced seizure frequency in Dravet syndrome and Lennox-Gastaut syndrome patients.
On the other hand, Sessions being unable to prosecute medical marijuana companies doesn't clear up the industry's primary issue of marijuana remaining as a schedule I substance. Tax and banking issues aren't going to suddenly disappear, and chances are that most marijuana stocks are going to continue losing money. For the time being, your best bet is to keep your money far away from marijuana stocks.