What happened

Shares of Canopy Growth (CGC -4.29%), Green Thumb Industries (GTBIF -9.25%), and Cresco Labs (CRLBF -6.98%) rallied big on Wednesday, up 16.3%, 6.2%, and 7.4%, respectively, as of 1:37 p.m. ET. While the broader market was rallying in a risk-on mood, cannabis stocks outperformed.

Not only have "risky" cannabis stocks been beaten down as inflation has given way to rising interest rates, but cannabis stocks specifically have also had to endure longer-than-expected delays in cannabis reform. Therefore, any glimmer of hope on reform could lead to big upward moves. 

On Wednesday, it looked as if the full decriminalization bill that has been making its way through the Senate will finally get a hearing, and possible introduction after a year of delays.

So what

Today, the Senate Judiciary Subcommittee on Crime and Terrorism scheduled a hearing for July 26 entitled, Decriminalizing Cannabis at the Federal Level: Necessary Steps to Address Past Harms.

The subcommittee chairman is Cory Booker, the New Jersey Democrat who is also a co-sponsor of the yet-to-be-introduced Cannabis Administration & Opportunity Act (CAOA) decriminalization bill. So the thinking is that the hearings will serve as a precursor to the long-awaited introduction of the CAOA in the Senate.

Although the bill was released in draft form a year ago, the sponsors have repeatedly delayed introduction in order to solicit feedback and try to get Republican colleagues on board. Of note, the House has already passed its own legalization bill called the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, so it is highly likely that decriminalization will pass both houses if the Senate succeeds.

The delay has been quite frustrating for cannabis advocates and U.S.-based cannabis companies. Since cannabis is federally illegal, even those companies operating in fully legal states have to deal with a lack of access to capital and banking services, increasing their interest and overhead costs.

Moreover, these companies are taxed at incredibly high rates, since section 280e of the IRS code states that federally illegal drug businesses can't deduct most operating expenses for tax purposes. Since cannabis companies are pretty much taxed on their gross margin, it's hard to make any real profits. Thus, U.S.-based cannabis companies have been forced to dilute shareholders or take on high-interest debt in order to grow, and if they decide not to grow, they risk losing market and mindshare in key states.

Decriminalizing cannabis at the federal level would be a huge deal for all U.S.-based cannabis companies. While Green Thumb and Cresco Labs are U.S. multi-state operators, Canada-based Canopy has an arrangement to buy U.S. operator Acreage Holdings (ACRH.F 1.08%) on the condition cannabis is legalized at the federal level.

Now what

Many are skeptical that a full decriminalization bill can surmount the 60-vote filibuster hurdle, but it looks as if a decriminalization bill will at least get introduced in the next couple of weeks. Meanwhile, the House has already passed cannabis banking reform in the form of the SAFE Banking Act, and some House Democrats have pushed the Senate to scrap decriminalization and pass that banking-only bill before the November midterms.

Still, Senate Majority Leader Chuck Schumer, the New York Democrat, has refused to take up the SAFE Banking Act this year, in hope of passing a broader decriminalization measure. And next week's hearing could pave the way for the broader bill to be introduced.

Of note, the banking bill wouldn't take care of section 280e and the tax issues, but it would relieve some of the interest and overhead costs for U.S. cannabis companies.

Even though the CAOA might get a hearing and a vote, it still seems like a long shot for passage, given Republican opposition to decriminalization and social justice provisions likely to make their way into the bill.

Yet even if the CAOA is introduced but doesn't pass, Democrats could use the vote as fodder for campaign messaging in the midterm elections, given that polls show nearly 70% of Americans favor legalization at the federal level.