Few industries are creating a buzz with investors quite like legal cannabis. According to research firm ArcView, the North American legal weed industry grew sales by 33% in 2017, to $9.7 billion, and it's estimated to grow at an average annual rate of 28% through 2021. Should ArcView's projection prove accurate, we could be talking about nearly $25 billion in legal pot sales in North America by the end of 2021.
Last year, Mexico legalized medical marijuana, and just 10 days ago, Canada's Senate voted overwhelmingly in favor of the Cannabis Act, which would legalize recreational marijuana for sale to adults by September or October.
The U.S. federal government has stood firm on cannabis
However, things are very different in the United States. Even though 29 states have passed broad-based medical marijuana laws since 1996, cannabis firmly remains a Schedule I drug at the federal level. This classification means it's entirely illegal, considered to be highly prone to abuse, and has no recognized medical benefits.
A Schedule I classification means no shortage of disadvantages for U.S. businesses involved in the legal weed industry. As an example, companies that sell a federally illicit substance aren't allowed to take normal corporate income-tax deductions, assuming they're profitable. This could lead to an effective tax rate of as much as 90%!
Furthermore, financial institutions want next to nothing to do with marijuana businesses operating in the United States. Even with the prospect of prosecution appearing slim, banks fear criminal and/or monetary penalties if they offer basic banking services to marijuana companies. This makes gaining access to capital quite the challenge for pot-based companies.
Marijuana companies even have had to worry about Attorney General Jeff Sessions, who has been on a crusade of sorts to halt or slow the expansion of cannabis at the state and/or federal level. Last year, Sessions unsuccessfully tried to get the Rohrabacher-Farr Amendment repealed. This is a rider voted on by the House and Senate with each federal budget since 2014 that disallows the Department of Justice from using federal dollars to prosecute medical marijuana businesses operating in legal states.
Sessions, however, was successful in rescinding the Cole memo on Jan. 4, 2018. The Cole memo was written by Deputy Attorney General James Cole under former President Barack Obama and designed to guide legalized states on how best to avoid federal interference. The rules outlined in the memo pretty much required states to keep weed away from adolescents, as well as keep grown cannabis within the confines of their borders. By rescinding it, Sessions opened the door for state-level prosecutors to bring charges concerning a marijuana-based violation of the Controlled Substances Act against businesses and/or individuals.
In short, marijuana businesses constantly operate in a state of fear that the federal government (or Jeff Sessions) could clamp down and reverse more than two decades of growth and progress. But that could soon change.
No, your eyes aren't deceiving you: The GOP aims to protect medical cannabis businesses
As reported by Forbes earlier this week, the Republican-controlled Senate is including a provision in the base funding legislation for the U.S. Department of Justice (DOJ) in fiscal 2019, which begins Oct. 1, 2018, that would protect medical marijuana businesses from federal prosecution. This is essentially the same thing the Rohrabacher-Farr (also known as Rohrabacher-Blumenauer) Amendment does now, but it would not require a vote in the House and/or Senate in order to be included in the federal budget as it needed in the past.
This Justice Department rider was first introduced by the House Appropriations Committee in May and was included by the Senate Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies earlier this week, making it practically a lock to appear in the final fiscal 2019 budget that's sent to the desk of President Trump.
This is particularly noteworthy given that, in September 2017, the House Rules Committee blocked a vote on the Rohrabacher-Blumenauer Amendment in an effort to keep this rider out of federal budget discussions going on at the time. It wound up being subsequently included in the Senate's proposal. With both houses of Congress now offering more concrete protections for the medical marijuana industry, it would appear that lawmakers are finally siding with the majority of the American public, which has a favorable view of marijuana.
It also is an eye-opener, given that Republicans have a considerably more negative view of marijuana (as a whole) than Democrats or Independents. An April poll from the independent Quinnipiac University found that just 41% of Republicans favored legalizing marijuana nationally compared to 55% who opposed such an idea. However, when Quinnipiac specifically asked about medical marijuana, 93% of respondents favored the idea of a physician being able to prescribe it, including 86% of self-identified Republicans.
Don't get too excited about change just yet
Though this looks to be a notable step forward in protecting states' rights, I'd caution enthusiasts and pot stock investors from getting too excited about change.
To begin with, simply including the rider in the DOJ's base funding legislation doesn't protect recreational marijuana or adult-use businesses. Even though we're only talking about nine states that have legalized adult-use weed in some capacity, there's still a small chance -- as long as Jeff Sessions is Attorney General -- that the federal government could change its tune on pot. Translation: There's still plenty to worry about if you're a cannabis business operating in the United States.
Another issue is that this rider doesn't necessarily represent a step forward in legalizing marijuana. Yes, it provides added protections for medical marijuana businesses, but when it comes to broader-based legalization (i.e., adult use), Republicans tend to be mixed or modestly negative on cannabis. Even with bipartisan legislation being considered -- known as the STATES Act, which would uphold the right of states to regulate their own cannabis industry -- Republicans have made their stance on marijuana crystal clear in recent years.
In sum, this is a solid step forward for the medical cannabis industry in the U.S., but it's not of any particular help to the recreational marijuana industry or U.S.-based marijuana stocks, in general.