The U.S. marijuana industry is growing like a weed. The legal cannabis market in the U.S. is slated to grow by 45% in 2018, and by an aggregate of 300% between 2016 and 2021 to approximately $17 billion, according to a 2017 report from Marijuana Business Daily titled "Marijuana Business Factbook 2017." Despite Canada being on the verge of recreational legalization by this summer, it's still the U.S. market that offers the greatest sales potential and long-term value to marijuana stocks and businesses.
It's not hard to understand why these sales figures are exploding higher, either. Fully 64% of respondents now favor the idea of legalizing pot nationwide, according to an October 2017 poll from Gallup. This represents the highest reading in the 48 years Gallup has surveyed Americans on their perception of cannabis.
By a similar token, an overwhelming 94% of Americans support the legalization of medical marijuana, compared to a minuscule 4% who oppose the idea, according to an August 2017 survey from the independent Quinnipiac University. The thought here is that strong support like this might be enough to pressure politicians into altering their stance on pot, and perhaps ultimately changing its Schedule I categorization at the federal level.
As a result, 29 states have given the green light to medical cannabis since 1996, while voters in eight additional states have OK'd recreational pot since November 2012.
In a legal gray area, these two provisions have protected the pot industry for years
Despite this, marijuana remains a Schedule I drug according to Capitol Hill, meaning it's entirely illegal and has no recognized medical benefits, with a high potential for abuse.
This bifurcation between state-level legalization and federal law has long been a legal gray area that's left the future of the U.S. marijuana industry uncertain for years. Only two rules have protected states from the federal government choosing to enforce the drugs' Schedule I status and effectively putting an end to the legal cannabis experiment in the United States: the Rohrabacher-Farr Amendment (also known as Rohrabacher-Blumenauer Amendment) and the Cole memo.
The Rohrabacher-Blumenauer Amendment disallows the Department of Justice (DOJ) from using federal dollars to prosecute marijuana businesses operating in states that have legalized cannabis in some capacity. It's a provisional piece of legislation that has to be included in each and every federal spending proposal in order to be put into law. In other words, if Congress doesn't include it in future federal spending bills, the DOJ would be free to use federal dollars to prosecute marijuana businesses.
The other umbrella protection derives from the Cole memo, which is named after former Deputy Attorney General James Cole, who served under President Obama. The memo outlines a subset of rules that states must follow if they want the federal government to maintain a "hands-off" approach. These rules include ensuring that adolescents don't have access to cannabis, that marijuana grown within a state stays in that state, and that drivers who are under the influence of cannabis are dealt with harshly.
These rules have allowed the U.S. pot industry to flourish... until now.
Jeff Sessions officially declares war on the marijuana industry
On Thursday, Jan. 4, Attorney General Jeff Sessions, an ardent opponent of cannabis who's suggested that "good people don't smoke marijuana," announced in a one-page memo that he was rescinding the Cole memo after a long review process.
This shouldn't come as a complete shock given that U.S. Deputy Attorney General Rod Rosenstein had this to say over the summer about the Cole memo:
We are reviewing the policy. We haven't change it, but we are reviewing it. We're looking at the states that have legalized or decriminalized marijuana, trying to evaluate what the impact is. And I think there is some pretty significant evidence that marijuana turns out to be more harmful than a lot of people anticipated, and it's more difficult to regulate than I think was contemplated ideally by some of those states.
That's [the Cole memo] been perceived in some places almost as if it creates a safe harbor, but it doesn't. And it's clear that it doesn't. That is, even if, under the terms of the memo you're not likely to be prosecuted, it doesn't mean that what you're doing is legal or that it's approved by the federal government or that you're protected from prosecution in the future.
The move by Sessions won't necessarily open the door for the DOJ to prosecute marijuana businesses. The Rohrabacher-Blumenauer Amendment, assuming it continues to be included in future federal spending bills, will ensure that the federal government is unable to devote federal dollars for prosecution purposes. However, it does open the door for prosecutors at the state level to use their discretion to levy charges against marijuana businesses going forward, such as by taking into account the seriousness of a crime.
Said Sessions, according to the one-page memo:
It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission. Therefore, today's memo on federal marijuana enforcement simply directs all U.S. Attorneys to use previously established prosecutorial principles that provide them with all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country.
Marijuana stocks get throttled
While the move by Sessions doesn't mean the end of the U.S. marijuana industry, it could certainly make things more difficult, especially in states that side with Sessions' view on pot or have conservative-leaning state Attorneys General. Republicans have tended to have a far less favorable view of marijuana than Democrats.
It also effectively eliminates any chance the marijuana industry had of gaining easier access to basic financial services, such as a checking account, and a fairer corporate income-tax rate. Marijuana businesses are unable to take normal corporate income-tax deductions as a result of selling a federally illegal substance, per Section 280E of the federal Internal Revenue Code.
The result of the Cole memo being rescinded was a broad-based shellacking of marijuana stocks:
- Canopy Growth Corp. (NYSE:CGC): down as much as 19%
- Aphria (NASDAQOTH:APHQF): down as much as 22%
- Aurora Cannabis (NYSE:ACB): down as much as 19%
- MedReleaf (NASDAQOTH:MEDFF): down as much as 21%
- Medical Marijuana, Inc. (NASDAQOTH:MJNA): down as much as 32%
- Axim Biotechnologies: down as much as 22%
- OrganiGram Holdings:down as much as 16%
- Supreme Cannabis Co.: down as much as 21%
Interestingly enough, you'll note that a majority of the stocks that were hammered are Canadian-based growers. Why would Canadian stocks be clobbered, you might wonder? It has to do with the U.S. market having greater long-term sales potential than Canada, as well as the eventual hope that companies like Canopy Growth, Aphria, Aurora Cannabis, and MedReleaf could export their product to the U.S. one day, or consider opening commercial grow farms in the United States. Rescinding the Cole memo and essentially declaring war on the U.S pot industry takes that hopeful scenario off the table for now.
Then again, this aforementioned quartet of stocks, which has the potential to control about half of Canada's legal weed market share, won't be hurting for opportunities. Canadian Prime Minister Justin Trudeau is aiming to legalize recreational pot by July 2018, which has the potential to generate up to $5 billion in added annual sales when fully ramped up. Furthermore, growers like Aphria and Canopy Growth are able to export their dried cannabis to countries that have legalized medical cannabis, such as Germany.
Today's decision is really a blow for those marijuana companies that are based in the U.S. and are only now growing their nascent international operatons, like Medical Marijuana, Inc. The legalization of medical cannabis in Mexico in June 2017 will help its business, but this decision from Sessions could be a clear blow to its cannabidiol business in the United States.
I fully expect this to be a drawn-out affair between Sessions and the marijuana industry. But make no mistake: the first punches have been thrown.